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Credit Card Settlement May Side-Swipe Consumers

NEW YORK ( LowCards.com) -- Retailers reached an antitrust settlement on interchange fees with Visa (V - Get Report), MasterCard (MA - Get Report) and several large banks that will be good for merchants, but may hit cardholders with higher prices and drastically decreased credit card rewards. Indeed, if the settlement concludes another round in the battle over interchange fees, it begins a new round with the merchants and banks circling each other and trying to figure out how to pass on the costs to consumers without generating too much backlash.

For consumers not even aware that interchange -- or "swipe" fees -- were being charged, here's the back story leading up to the landmark settlement and the potential side-swiping of consumers that could occur as a result of it:

When consumers swipe a card for payment at the register, Visa and MasterCard charge the retailer a fee, commonly called an interchange or swipe fee, every time a credit card or debit card is used for payment. The card processor collects the fee and splits it with the bank that issues the card. The fee on a credit card typically ranges from 1.5% to 3% of the transaction, depending on the merchant and the type of card. Merchants have fought against this fee because it cuts into their profits and is one of the biggest costs of running a business. Merchants hope this settlement increases transparency and forces card processors to reduce the amount they charge for interchange fees.

Credit card processors defend the fee because it covers the expense of the processing the card, the risk of fraud, and the cost of providing funds while payment is pending.

The $7.25 Billion Settlement
Credit card companies have agreed to reduce swipe fees for eight months. This temporary adjustment is valued at $1.2 billion by plaintiffs' lawyers. In addition, MasterCard, Visa and major banks, including JPMorgan Chase (JPM - Get Report) and Bank of America (BAC - Get Report), agreed to pay more than $6 billion to settle accusations that they engaged in anticompetitive practices and price fixing in payment processing. Visa will pay $4.4 billion while MasterCard will pay $790 million.

The settlement did not include American Express (AXP) or Discover Financial Services (DFS) because both of these issuers already permit swipe fee surcharges, as long as merchants impose surcharges on payments with other rival cards.

A judge in the U.S. District Court must still approve the settlement and this may not happen until at least the end of the year. Merchants cannot assess a surcharge until this approval and there will be a cap on the amount they can charge. There are ten states that prohibit merchant surcharges and retailers in those states must still abide by state law. These states are: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas.

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