The Interchange Settlement

I've held my tongue for a while on the proposed class settlement in the multidistrict credit card interchange fee litigation (MDL 1720).  I'm weighing in on it now.  I've written up an analysis of the proposed settlement.  It's available here.  It's worthwhile noting that the settlement is not a done deal yet--at this point it is a deal between lead counsel for the proposed plaintiff class and the defendants--the settlement must still be accepted by the named plaintiffs (or at least some of them) and approved by the court.   

The short of my analysis is that the settlement is an exceedingly bad deal for merchants.  The dollars involved amount to just two months of interchange fees, the settlement does not prevent future increases in interchange fees, the injunctive relief offered is largely illusory, the relief is unbelievably broad (and likely unconfirmable because it violates due process by purporting to bind future merchants who do not yet exist!), and it lumps into a single class merchants who are receiving different types of relief and may thus have divergent interests. Perhaps the most troubling aspect of the settlement is that the centerpiece of injunctive relief—removing the no-surcharge rule—is of no value to over 40% of US merchants—those based in the 10 populous states with state no-surcharge laws and those who want to accept Amex as well as MasterCard and Visa.  

From a systems perspective, the settlement is also awful. It will lock in the existing interchange fee system that has smothered innovation in the payments space.  The US lags the rest of the developed world in payment system technology in no small part because the locked in profits of the current credit card interchange fee system remove the competitive pressure to innovate from banks, and network effects combined with credit card pricing rules that reference other products make it exceedingly difficult for new systems to break into the market.

If the settlement is approved as is, it is a huge win for the card networks and banks, a payday for class counsel, and permanently locks in US merchants and consumers to an outdated, inefficient payment system.