For years, Visa and Mastercard rules have said that if a merchant doesn’t add a surcharge for all credit card transactions, including those made with another card company such as American Express, then they couldn’t impose a surcharge on Visa and Mastercard cards either. American Express rules, in turn, disallowed surcharging unless the merchant imposed that charge for all other payments, including debit cards, but Visa and Mastercard forbid surcharging for debit cards, the affidavit explained.

“Thus, for merchants that accept American Express, the Visa and Mastercard level playing-field rules effectively prohibit merchants from surcharging Visa and Mastercard credit cards,” the Stiglitz affidavit said, calling those rules a “principal reason” that competition didn’t ensue after a prior 2012 settlement related to the networks.

Now that Visa and Mastercard are eliminating that prior restriction that hinged on American Express rules, they contend in the settlement that merchants will be able to impose a surcharge in 96% of consumer credit card transactions under the settlement terms, as opposed to about 20% previously. 

Surcharges have been generally controversial in the credit card world for years, with different states across the nation instituting varied restrictions on the ability of merchants to surcharge. Increasingly, merchants have won the right to surcharge on credit transactions.

As a result of the settlement, Visa and Mastercard have agreed to allow merchants to impose a 1% surcharge regardless of how they treat transactions with rival American Express, and 3% if the merchants charge card competitors, such as American Express and Discover, that same higher rate, the affidavit said. The situation will leave American Express in the perhaps difficult position of deciding whether to enforce rules requiring that the fee be charged to its rivals’ debit cards.

“If American Express does not enforce that restriction, then the merchants can surcharge all credit cards up to 3%—a major win for merchants and for competition,” the Stiglitz affidavit said.

Amex didn’t immediately respond to a request for comment.

The situation could spark more litigation if American Express takes a different course, the economist predicted. “If American Express does enforce its restriction, then merchants might drop acceptance of American Express,” the affidavit said. “Alternatively, merchants could (and should) sue American Express for enforcing a patently anticompetitive rule.”

In any case, Stiglitz expects the settlement to prompt more competition, he wrote in the affidavit. The settlement “creates incentives” for merchants that take credit cards “to negotiate with American Express for the ability to surcharge its cards, to litigate for that ability, or to discontinue accepting its cards,” he wrote. “All three avenues should increase the pressure on American Express to provide more competitive rates. The pressure on American Express can, in turn, ratchet up the competitive pressure on Visa and Mastercard, in a virtuous competitive spiral.”

The week before the settlement was filed, a group of merchants sued Amex in U.S. District Court in Rhode Island, alleging they had been overcharged by the card company for credit and debit transactions, according to a report from the media outlet Reuters. The lawsuit, filed on March 21, cites antitrust law violations and seeks class action status for thousands of merchants.

The Visa-Mastercard settlement is still subject to review by the U.S. District Court of New York for the Eastern Division.

By Lynne Marek on April 1, 2024
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