Visa, MasterCard and 13 of the country's biggest banks have agreed to pay $7.25 billion to settle accusations by retailers that they engaged in price-fixing on credit card transaction fees.
The settlement, on behalf of about 7 million retailers, could be the largest antitrust class-action settlement in U.S. history and is expected to alter the price structure around the plastic cards that are a central feature of U.S. commerce.
- "Retailers Win $7.25B in settlement over credit card fees" Businessweek 07/15/2012
This is obviously a pretty big deal. The defendants in the lawsuit included:
- Bank of America (BAC)
- Wells Fargo (WFC)
- Capital One Financial (COF)
- JPMorgan Chase (JPM)
- Barclays Financial (BCS)
- Citigroup (C)
- Visa (V)
- Mastercard (MA)
Impact on Investors in the Financial Sector
With consumer credit jumping steeply in May, credit card companies like Visa Inc, Mastercard, Discover Financial Services (DFS), American Express (AXP), and Capital One Financial have looked to be in pretty good shape. But the lawsuit settlement obviously impacts the scenario.
Visa took the biggest share of the blow at $4.4B. While they do not believe the settlement will impact current guidance, they'll be taking a $4.1 billion litigation charge this quarter:
For the quarter ending June 30, 2012, Visa intends to record a litigation charge of approximately $4.1 billion, which will increase its total FAS 5 reserve for the litigation covered by the Retrospective Responsibility Plan from $285 million to approximately $4.4 billion, to reflect the Class Plaintiffs' Settlement Agreement and management's current estimate to resolve the Individual Plaintiffs' claims.
Based on ~814M shares outstanding for Visa, the litigation charge amounts to a little over $5.03/share.
Initial market reaction to the settlement was largely positive for the two credit card companies involved:
Visa and MasterCard stock both jumped in after-hours trading. Visa climbed 2.8 percent, and MasterCard rose 3.7 percent.
Based on market reaction and the guidance from Visa, it doesn't seem that the credit card companies will be adversely affected by the decision. Part of this is because the processing fees will be passed on to the consumer, as I'm about to analyze.
Impact on Investors in the Retail Sector
The more potent question, actually, is how the settlement will affect retailers like Walgreens (WAG), Kroger (KR), and Safeway (SWY). Since these are some of the retailers who filed the suit, you'd think the decision is beneficial for them, right?
Not necessarily. One of the key results of the settlement is that retailers can now charge customers using credit cards a little extra to recoup credit-card processing fees:
The ability to charge more for credit cards is likely to set up a tricky dance for merchants, which may risk angering customers if they start charging more for such transactions.
Daniel Fisher, senior editor at Forbes, has a pretty persuasive case for why retailers that choose to do so might be making the wrong decision:
Retailers looked at that fee income they were shipping upstream to the credit-card companies without asking themselves: Is that worse than no sale at all?
Why Investors Should Stay Away From Retailers Engaging In Surcharging
Americans have become addicted to credit cards, with average household credit card debt north of $14,000. The "why" is pretty simple: credit cards are more convenient than cash. While it's hard to quantify the exact amount of cash the average American carries around, anecdotal reports suggest that the average wallet stash is well below $200.
This could well be a problem for retailers that choose to surcharge for using credit cards. Since a family of four can easily top $200 a week just on grocery expenditures, it's hard to imagine that Americans will suddenly switch to carrying hundreds of dollars in cash.
Research from online retailers show that surcharges have a surprisingly high psychological impact, and that effect could easily carry over to brick-and-mortar retailers. Personally, if I didn't have enough cash on hand and was faced with a surcharge, I'd cut all nonessential items that I don't need immediately out of my purchase to avoid the surcharge. Such an action might mean I never end up buying the item at all -- or I might end up buying it on a later trip to a different retailer. I wouldn't be alone in this course of action, and it's one that would definitely negatively impact retailers choosing to add a surcharge. As Netflix (NFLX) and Procter & Gamble (PG) both found out recently, consumers are not very fond of price increases. I believe Daniel Fisher is right when he asserts that retailers might initially make a little income from the surcharges, but they risk losing sales in the long run.
Since I believe most Americans will gravitate towards retailers that don't charge consumers for using a credit cards, I would recommend taking a hard look at retailers in the next few months. Major low-cost retailers like Walmart (WMT) and Target (TGT) may be hesitant to charge customers for using credit cards for fear of losing their cost-focused clientele. If other retailers like Kroger and Safeway do indeed enact credit card surcharges, I think it would only benefit companies like Walmart that choose not to.