Payments Update: Interchange, Late Fees & Capital One's Merger

Payments and controversy didn’t take a summer vacation this year.

Here are four controversial matters, three of which The Financial Brand covered earlier this year, and where they stand now:

Interchange Class Action Suit Likely Going to Trial After Judge Nixes Settlement

Nearly 20 years after it began, a major lawsuit in which a group of merchants and associations sued Visa, Mastercard and six major banks over card swipe fees, now appears headed for trial after all.

A much-heralded settlement between the parties that was announced in March, got torpedoed by the federal judge in the case in late June. LINK to story

The case is generally designated as In Re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation. In an opinion running 88 pages issued in early July, Margo Brodie, chief judge of the federal Eastern District of New York, suggested that taking the case to trial could result in a better deal for merchants.

Among Brodie’s criticisms of the proposed settlement was that it benefited smaller merchants to the detriment of larger merchants. Earlier, the judge had given both a preliminary indication and definitive indications at different points in June that she would not be approving the proposed settlment.

Multiple merchant associations had come out against the proposed settlement after it was announced. The National Retail Federation, for example, branded it a “backroom deal.”

Judge Brodie noted, however, that “the Court does not agree with objectors’ contentions that the Settlement is ‘essentially worthless,’ ‘meaningless,’ or provides ‘no benefit'” quoting from merchant group reactions — only that it would give the largest merchants the least benefit while the sheer size of their claims would be the most valuable.

Some of the merchant groups have used the settlement as a rallying point, to encourage passage of the Credit Card Competition Act, S. 1838, commonly known as “Durbin II,” pending in Congress.

In a related development, the judge extended the deadline for filing claims in the case by 180 days, after giving an earlier extension.

The new deadline is Feb. 4, 2025, which suggests that the case would not go to trial earlier than that date.

CFPB Credit Card Late Fee Case Still Percolating in the Federal Courts

The credit card late fee rule that was finalized back in March by the Consumer Financial Protection Bureau remains on hold, thanks to an eleventh-hour decision by the U.S. District Court for the Northern District of Texas on May 10 to grant a preliminary injunction and stay of the rule.

The CFPB rule, currently in limbo, would generally cap monthly credit card late charges at $8, a level many in the card industry say fails to cover costs and to provide a deterrent to consistent late paying.

Higher fees could, theoretically, be charged if the card issuer can prove that cardholder lateness costs more than $8 apiece would cover. The rule is part of the Biden administration’s assault on “junk fees” in banking and other industries that serve consumers. (Officially the rule would only apply to between 30-35 large issuers, but analysts say smaller issuers would have to fall into line to remain competitive.)

The case has been a legal bouncing ball. In its short life there have been attempted shifts in jurisdiction for the case between the northern district and the U.S. District Court for the District of Columbia. One question mark was resolved in mid-May, when the Supreme Court determined that the CFPB’s funding methodology is constitutional after all.

Currently, the case resides in the Texas district court. In separate developments, the CFPB has filed motions on jurisdiction and the current stay of the rule.

On Aug. 19, in a brief, the bureau attacked the banking groups’ effort to keep the case in Texas by including the Fort Worth Chamber of Commerce as one of the plaintiffs. It urged dropping the chamber from the suit — which would also facilitate moving the case back to the Washington, D.C., district court.

A few days later, on Aug. 22, the bureau filed another motion urging the Texas court to lift the stay. It was responding to the banking plaintiffs’ brief calling for the continuation of the stay on the late-fee rule.

One point of controversy about the rule was that it was to have gone into effect in May. Historically changes to rules that involve the Truth in Lending Act become effective on Oct. 1 of a given year. The bureau argued that this practice doesn’t apply because no significant change would be required in the type of disclosures that would be made to consumers.

“The Rule may change the amount issuers can charge, and therefore the amount they must disclose under preexisting disclosure requirements, but it leaves the disclosure requirement itself — to accurately disclose late fees in a specified manner — unchanged,” according to the bureau’s brief … Changes to what credit card companies can charge consumers may come from many different places, not just Bureau regulations.”

Beyond that, the bureau argued that even if the plaintiffs’ point was valid, it would mean an Oct. 1 effective date, “not the indefinite postponement Plaintiffs apparently seek.”

Following a hearing on the motions in the Texas court before Judge Mark Pittman in late August, veteran consumer financial law attorney Alan Kaplinsky, at Ballard Spahr LLP, said this on LinkedIn:

“The bottom line: We are still a long way away from a ruling on the legality of the CFPB’s late fee rule.”

How Big Is Big? White Paper Scrutinizes Proposed Capital One-Discover Merger

The proposed acquisition of Discover Financial Services by Capital One, announced in mid-February, has drawn its share of vitriol. The deal has to be approved by both the Federal Reserve and the Office of the Comptroller of the Currency in an atmosphere over the course of the Biden administration that has not favored large financial services mergers.

The Capital One-Discover deal is big enough and unusual enough that the Fed and the OCC held a mid-summer hearing soliciting input, with top officials of the companies present.

Among the many testifying during the day-long hearing was Maxine Waters, California Democratic member of Congress and ranking minority member of the House Financial Services Committee. Waters spoke of her concern that both consumers and merchants would pay more for credit cards and other services once the companies combined. Something that sets the deal apart is that Capital One, already among the top card issuers, would not only be acquiring the Discover Card base but also the company’s payments network.

“The CFPB has shown that while the largest card issuers have grown in market share, they have charged consumers higher interest rates and annual fees compared to those charged by smaller issuers. This has resulted in consumers with cards from the big issuers paying $400 to $500 more annually than those with cards from smaller issuers,” Waters testified. “Unfortunately, small issuers are community banks and credit unions that serve small areas not easily accessible for most consumers and this merger will leave consumers with fewer national options.”

Waters also expressed concern about swipe fees that would be charged to merchants once the deal is done.

“The Fed and the OCC must stop rubber stamping mergers,” Waters concluded.

A few days after the hearing, a private think tank, the International Center for Law and Economics, issued an interesting analysis of the deal pointing out some positives.

One concerns payment network competition. The U.S. has four networks: Visa, Mastercard, American Express and Discover. However, the paper points out that Discover is a very small player — it accounts for 4% of payment volume.

Both commentators and government officials have called Visa and Mastercard a duopoly. “Capital One may be able to use its innovative culture and marketing savvy to leverage Discover’s card network and allow it to compete more successfully,” the paper says. One strength that Capital One would add to the Discover network is anti-fraud capabilities, according to the analysis.

On the issue of size, the authors acknowledge that the combined banks would be the sixth-largest in assets in the U.S. However, the paper notes that “it would hold only 3% of all domestic assets, a trivial amount compared to industry behemoths such as JPMorgan Chase, Citibank and Bank of America.”

The paper also posits that the deal would introduce “cost savings and other synergies” that could result in better competition among large players in both banking and in payments networks.

The authors point to the pending Credit Card Competition Act, which would force diversity in payments networks for merchants, “the merger would do exactly that sponsors of that act claim to desire: foster more robust competition in the payment-card-network space.”

“Critics of the merger, by contrast, have failed to articulate any tangible harms to competition or consumers from the merger beyond reflexive ‘big is bad’ rhetoric,” according to the paper.

Retailer Cash Back Controversy: Another Side of the Coin

In recent weeks, the Consumer Financial Protection Bureau further stirred the pot with a study about how Americans are paying “tens of millions of dollars in fees” for obtaining cash back at retail point of sale.

The study, released in what newspaper folks used to call the “dog days” of the news cycle, had populist appeal. It spawned headlines like: “Retailers Rake in Millions from Cash-Back Fees” and “Paying Money to Get Your Own Cash.”

“These cash-back fees are occurring against the backdrop of bank mergers, branch closures, and prevalence of out-of-network ATM fees that have reduced the supply of free cash access points for consumers,” CFPB said in a news release.

The bureau’s study consisted of an analysis of eight large retailers: Dollar General, Dollar Tree/Family Dollar, Kroger, Albertsons, Walgreens, CVS, Walmart and Target. The first three charge fees for cash back. The bureau estimates that the three merchants are collecting over $90 million in fees annually.

The Merchants Payments Coalition turned the study into an anti-banking message.

“The CFPB’s report shows most merchants provide cash back to customers at no charge, and that means they are taking losses in order to provide this valuable service. Those who are charging a fee do so because they must pay exorbitant fees to credit card companies and banks,” said Doug Kantor, a member of the coalition’s executive committee and general counsel at the National Association of Convenience Stores.

Added Kantor for the coalition: “We should always be clear that the source of the problem with consumer fees on any card transaction is the banking and credit card industry.”

Where does the buck actually stop?

Banks and credit unions themselves pay for cash handling. Over 8,000 depository institutions use Federal Reserve cash handling services and the rest use correspondent banks. Fees apply beyond a basic level of free service.