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Credit card deal may aid consumers

By Andrew Martin
New York Times / October 5, 2010

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Consumers may see more discounts for using cash instead of a credit card under a tentative deal disclosed yesterday by the Justice Department and the credit card companies Visa and MasterCard.

The proposed settlement, which is subject to court approval, came after a two-year investigation into rules imposed by Visa, MasterCard, and American Express that often prohibit merchants from steering customers toward cash, checks, or other payment types that avoid transaction fees.

“We want to put more money in consumers’ pockets, and by eliminating credit card companies’ anticompetitive rules, we will accomplish that,’’ the attorney general, Eric H. Holder Jr., said at a news conference.

The Justice Department filed a lawsuit against Visa, MasterCard, and American Express yesterday. But while the government had already worked out a settlement with Visa and MasterCard, American Express said it would fight the claim.

Every time a consumer uses a prepaid card, debit card, or credit card to make a purchase, the card network charges the merchant a swipe fee, usually a penny or two for each dollar spent.

The size of the swipe fee varies depending on the risk of nonpayment and the reward points tied to the card. Therefore, fees are generally lower for debit cards and higher for credit charges in which the consumer promises to pay later. The fees are even higher when the credit card being used is linked to a rich rewards program.

Last year, those fees, which are divided between payment networks and the banks that issue their cards, cost merchants $35 billion, the Justice Department said.

“The companies put merchants and consumers in a no-win situation: Accept our card, pay our fees, and don’t even think about trying to get a discount,’’ Holder said.

Under the terms of the proposed settlement, merchants could offer consumers an immediate discount or rebate for using a particular type of payment, a particular credit card network, or a low-cost card within that network.

That may give merchants an incentive to steer consumers toward paying with cash or with no-frills credit cards without rewards programs because the swipe fees for those options are lower.

The settlement also allows merchants to post the cost of using different types of payments.

The settlement, however, does not allow merchants to levy a surcharge on credit and debit payments beyond the cost of the transaction, as some merchants had sought.

American Express vowed to fight the lawsuit, saying the settlement deal gave an unfair advantage to Visa and MasterCard. Edward P. Gilligan, the vice chairman of American Express, said the company had spent billions to build an affluent customer base and to differentiate itself from Visa and MasterCard.