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After opting out of a large-scale class action, Disney has now filed its own lawsuit alleging the card networks have set their interchange fees too high.
In a complaint filed on Friday (July 29), Disney says that Visa and Mastercard have set “supracompetitive” interchange fees and forced merchants to abide by a number of anticompetitive rules.
The House of Mouse argues that Visa and Mastercard have implemented a number of rules that eliminated competition between banks for merchant acceptance and fixed prices at excessive levels.
Similar claims have already been raised against the card networks in In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, which claimed that merchants paid excessive fees to accept Visa and Mastercard cards as a result of the card networks’ anticompetitive practices.
The class action closed with a $5.54bn settlement in 2019, which was to be shared among 225,000 merchants. Disney opted out of the class action in time and has now filed an individual court case, seeking “compensatory damages”.
Disney rues lack of competition
Although banks compete with each other to issue cards to consumers, by offering various combinations of interest rates, annual fees, cashback rewards, points and other features, Disney claims no such competition exists when it comes to merchant acceptance.
In fact, Disney says “each issuing bank has agreed not to compete for merchant acceptance of the credit and debit cards that it issues”.
In May 2013, Visa CEO Charles Scharf admitted that Visa’s rules “stood in the way of [banks] working together to do something positive for the merchant”.
Building on this statement, Disney argues that both Visa and Mastercard’s rules “equally bar issuing banks from doing ‘something positive’ for cardholders, who would have benefitted from banks competing for their business by differentiating their offerings, including by offering discounts and other benefits at the point of sale, through direct deals with merchants”.
Instead, banks use the default interchange fees set by the card networks, which practically fixes the price of acceptance at a level higher than that under competitive circumstances.
Although the name “default” suggests issuing banks and merchants could negotiate different rates, the complaint claims that the card networks implemented a number of rules that impede such negotiations.
For instance, under the Honour All Cards Rule, merchants that accept any Visa or Mastercard credit cards must accept all regardless of which bank issued the card.
Merchants have previously spoken out against this rule, telling Congress that it wipes out any incentive for issuers to negotiate terms with merchants because all merchants are required to accept their cards anyway.
Similarly, the All Outlets Rule requires merchants to accept Visa and Mastercard cards at all of their merchant locations, hindering their ability to gain any benefits as to the terms of acceptance by location.
These rules, individually and together with the No Discount Rule and the No Surcharge Rule, “preclude card issuing banks from competing for merchant acceptance of their cards”, Disney argues.
Restoring competition for merchant acceptance
Although many of these rules had already been subject to actions in US courts and were amended accordingly, Disney says these efforts have been ineffective.
Changes to these rules “did not diminish Visa’s and Mastercard’s power to dictate price and prevent competition”, the complaint says, noting that shortly after these cases the card giants increased their credit card interchange fees and forced merchants to accept rewards and terms tying other products.
Even the landmark Durbin Amendment was not enough to bring competition back to interchange fees because it has “not eliminated the anticompetitive effects of [Visa and Mastercard’s] setting of ‘default’ interchange fees”, the company says.
The Durbin Amendment, adopted in 2011, set a cap on interchange fees for transactions on debit cards issued by large banks.
Disney notes that although Durbin may have reduced debit interchange fees to the level of the regulatory maximum, the interchange fees “are still higher than they would be if there were active competition for merchant acceptance”.
If merchants had the ability to use competitive strategies with respect to their acceptance of the cards of individual issuing banks, they would “induce competition among issuing banks that would lead to lower interchange fees”, the complaint says.
A Mastercard spokesperson told VIXIO they are aware of the filing and have been in discussions with Disney since the company opted out of the merchant class settlement.
"We do not anticipate litigating this and expect a resolution could be announced in the near term," the card network added.
Disney and Visa did not respond to requests for comment by the time of publication.
Durbin 2 in the making
Restoring competition has been the key theme in Senator Richard Durbin’s Credit Card Competition Act, introduced to Congress last week.
The bill would mandate large credit card issuers to enable merchants to choose from at least two competing networks over which a credit transaction may be processed.
The legislation focuses on opening up credit card processing for competition, which experts believe could lead to more effective long-term solutions than a simple cap on interchange rates.
“We’ve seen elsewhere in the world that sometimes caps create a whack-a-mole situation; if you cap one fee, another pops up in it’s place,” an expert told VIXIO.
“Routing choice means market forces will govern swipe fees and the market will eventually settle on rates that are fair to merchants, banks, card networks and consumers alike,” merchants added.
UPDATED AT 10:10am: The article has been amended to add comments from Mastercard.
