Credit card terminal
A successful legal challenge to the $6 billion class-action settlement reached in July that pits merchants against the two biggest credit-card companies and some of the country's largest banks could allow MasterCard and Visa to continue preventing retailers' removing card-service fees from product and service prices and replacing them with surcharges at the point of sale only for those who use plastic to make their purchases. Creative Commons

Here’s a profound change with implications for the way you shop that could appear in the near future: a surcharge for using your MasterCard or Visa at the grocery store.

It is just one part of the $6 billion class-action settlement reached with MasterCard Inc. (NYSE: MA), Visa Inc. (NYSE: V) and some of the largest U.S. banks that 10 of the 19 plaintiffs in the case say is inadequate.

Consisting of retailers and trade groups, they hope to block the approval of the settlement by a U.S. District Court in Brooklyn, N.Y., next week. Some of them, including the National Retail Federation, are filing their own lawsuits as added measures.

“The people asking the court to approve the proposed settlement simply do not represent the interests of most merchants. We do,” Hank Armour, CEO and president of the National Association of Convenience Stores, said in a joint statement by the 10 plaintiffs. “The proposal represents a minority view and must be rejected.”

The deal requires MasterCard, Visa and the banks to reimburse as many as 7 million retailers for what the plaintiffs successfully argued were excessive so-called interchange fees that, until a fee cap was implemented last October, were averaging about 44 cents per transaction, according to one widely cited estimate. The deal also provides an eight-month fee discount.

The 10 disputing plaintiffs -- include D’Agostino Supermarkets in New York, Affiliated Foods Midwest in Norfolk, Neb., and the National Community Pharmacists Association, based in Alexandria, Va. -- claim the settlement doesn’t address a core issue: MasterCard/Visa's duopolistic dominance of the payments system.

If the settlement is blocked, it would lengthen the already seven-year-old dispute that has pitted merchants against the two card companies that handle 80 percent of the debit- and credit-card purchase volume in the U.S. -- and the banks.

Blocking the deal would also delay the option merchants would have to implement card surcharges at the cash register rather than factoring in the fee price to the cost of every product.

Currently, MasterCard and Visa prohibit retailers from charging the card fee at the point of sale, which means the fee is “hidden” in the sale price of the product, forcing customers who make cash purchases to also pay the little “extra” factored into the price tag. With the exception of small outlets willing to knock a couple of dollars off a purchase if the customer pays cash, most merchandisers simply charge the same for cash purchases as they do for credit-card purchases.

A key issue is that the true cost of running a nationwide interbank electronic payment system is known publicly only through surveys and analyses. The U.S. Federal Reserve claims a median cost of 7 cents to authorize, clear and settle a card transaction, based on surveys. Drawing on its findings last year, the Fed called for a 12-cent cap.

The current swipe-fee cap under the Durbin Amendment to the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 that became effective a year ago is 21 cents plus 0.05 percent of the transaction and, in some cases, a penny to fund fraud prevention. That’s down from the widely used estimated average fee of 44 cents per transaction, but more than three times what the Fed estimates is the actual median cost.

The question is: How should the profit from a service that benefits both banks and retailers be divvied up? If the real cost of an average debit-card transaction is 7 cents, and the current swipe cap is more than 21 cents, then how should the margin be divided among the banks, the card companies and the merchants? With an estimated 40 billion card swipes in the U.S. last year, those pennies add up to serious cash flow. Banks alone rake in $15 billion a year on swipe fees, according to Bloomberg.

A year has passed since the Durbin swipe-fee cap was implemented, and the first-year review has retail advocates cheering it as a win for Main Street (according to Progressive Grocer), while opponents of the fee cap say consumers aren’t seeing lower prices and that capping swipe fees is raising other bank fees (according to the Electronic Payments Coalition). Banks might use the cap as an excuse to add or boost fees for other services, even if the actual cost of processing these payments is lower than the current cap, as the Fed has claimed.

The National Retail Federation, or NRF, estimates that interchange fees paid by merchants and their customers have increased from $16 billion in 2001 to $50 billion this year. It also claims that since the Durbin cap was implemented, merchants and customers have seen a savings of $18 million per day. It’s unknown how much of that money is in the form of lower prices. The NRF speculates that competition is a guarantee that merchants must be passing some of that savings on in the form of price cuts, a claim disputed by opponents to the swipe-fee cap.

Who continues to be clear losers in all of this?

Consumers who pay cash, because they, too, pay interchange fees to merchants, with very few exceptions (and most of those are gas stations). Analysts at the Federal Reserve Bank of Boston estimated in 2010 that card nonusers pay $149 a year due to the hidden-fee phenomenon -- where merchants generally don’t encourage cash use by charging less for cash -- while the average card-using household receives $1,133 worth of awards paid for by cash users.

One positive change for consumers that could go into effect if a judge approves the settlement is an end to the hidden-fee phenomenon. Retailers would be allowed to treat swipe fees for what they are: surcharges that should be paid only by people who use plastic instead of cash. No longer would cash customers have to pay credit-card fees in the form of added costs of products and services themselves.

“Give merchants the option to pass along swipe fees to consumers and see what happens,” Kevin Drum wrote in Mother Jones shortly after the class-action settlement was announced in July. “If they end up doing it, it's pretty good evidence that fees were too high and were being paid at least partly by unwitting consumers, many of whom prefer the option of switching to cash once they realize the real price of using plastic.”

So while retailers and banks continue to bicker over how much to charge for credit-card usage, one thing is certain: merchants might start charging fees at the cash register when customers whip out their plastic.