Visa, MasterCard bow to regulators, but will consumers benefit?

Federal regulators reached a deal last week with Visa and MasterCard over how the credit card giants treat merchants. That might seem at first glance like the kind of thing that doesn’t affect ordinary consumers.

But it could have significant implications for how you shop and the prices you pay at the cash register.

“It could give consumers the best deal possible, instead of what banks would like to see charged,” said Pamela Banks, senior policy counsel at Consumers Union.

The federal government’s proposed settlement, which still requires approval by the U.S. District Court in New York, followed a two-year Justice Department investigation into rules imposed by credit card issuers that prohibit merchants from steering customers toward payments with cash or checks that avoid transaction fees.

Such fees can run about 5% of a credit card purchase — a cost that many retailers include in the prices they charge.

Under the settlement, Visa and MasterCard would no longer impose such a requirement on merchants that take their cards. But American Express says it will fight to maintain the status quo. More on that in a moment.

For consumers, the deal with Visa and MasterCard potentially means stores, restaurants and other businesses could offer discounts for certain forms of payment — 5% off, say, if you pay in cash and thus allow the business to avoid the fee that accompanies payments with plastic.

It could also introduce some much-needed competition into the card market by compelling issuers to lower transaction fees in a bid to woo merchants into favoring their cards.

If a Visa card, for example, came with a 1% transaction fee while Card XYZ came with a higher fee, the merchant might offer a discount for using the Visa card.

“For the first time in history, the Visa and MasterCard stranglehold prohibiting price competition on cards is being broken,” said Henry Armour, head of the National Assn. of Convenience Stores. “With price competition on cards, consumers and small businesses win.”

Well, businesses large and small could win if they channel customers to cheaper payment methods and then pocket the extra profit. Consumers win only if businesses pass along their savings in the form of lower prices or discounts.

This is the gray area of the settlement. There’s nothing in the deal as it stands that would require merchants to lower prices for customers.

At this point, it’s only wishful thinking on regulators’ part that consumers will get a taste of any savings that accrue.

“The settlement seems rife with problems,” said Linda Sherry, spokeswoman for Consumer Action, an advocacy group. “We really have to see how it plays out.”

One of her chief concerns is that Visa and MasterCard, which together account for about 70% of the card market, would be able to muscle rival plastic aside by cutting sweetheart deals with merchants to favor their cards.

Sherry thinks this is why Visa and MasterCard agreed to settle the Justice Department’s lawsuit.

“If I want to pay with AmEx, but the merchant says I can have a discount for paying with Visa, that’s not fair,” she said.

I’m not so sure about that. If Visa can offer better rates to merchants to boost business, so can AmEx. Isn’t that what a competitive marketplace is all about?

For its part, AmEx isn’t pleased that Visa and MasterCard have come to terms with the feds. It says it will keep fighting the Justice Department’s lawsuit and defending its right to prohibit merchants from directing customers to cheaper payment methods.

“You should be able to choose whatever card you want,” said Christine Elliott, an AmEx spokeswoman. “We expect merchants not to discriminate against our customers.”

Questions of discrimination notwithstanding, it would seem that AmEx is also seeking to preserve a system that allows it to get away with absurdly high transaction fees. A $1,000 purchase with an AmEx card might be accompanied by a $50 fee, even though it costs no more to process such a transaction than it would to handle a $10 purchase.

The ideal solution (for consumers anyway) would be for card issuers to charge a flat fee to process transactions, based for the most part on their actual cost of closing the sale. Banks steadfastly refuse to say how much this really is, but consumer advocates say it’s likely not more than a few cents.

The real potential of the settlement with Visa and MasterCard is that, by introducing some true competition into a market that’s gone without for decades, it could lead to an overhaul of the plastic business.

The next step for regulators is to determine how much it really costs to process credit card purchases, and to then pressure issuers to charge a fair price for their service. That, in turn, would hopefully prompt businesses to price their goods accordingly.

A pipe dream? Maybe. But if you’d asked me a year ago whether I thought Visa and MasterCard would bow to the inevitable, I’d have asked what you were smoking.

David Lazarus’ column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to david.lazarus@latimes.com.