Visa, MasterCard, banks in $7.25 billion retail settlement

By Jessica Dye

NEW YORK (Reuters) - Visa Inc, MasterCard Inc and banks that issue their credit cards have agreed to a $7.25 billion settlement with U.S. retailers in a lawsuit over the fixing of credit and debit card fees in what could be the largest antitrust settlement in U.S. history.

The settlement, if approved by a judge, would resolve dozens of lawsuits filed by retailers in 2005. The card companies and banks would also allow stores to start charging customers extra for using certain credit cards in an effort to steer them toward cheaper forms of payment.

The settlement papers were filed on Friday in Brooklyn federal court.

Swipe fees - charges to cover processing credit and debit payments - are set by the card companies and deducted from the transaction by the banks that issue the cards, essentially passing on the cost to merchants, the lawsuits said.

The proposed settlement involves a payment to a class of stores of $6 billion from Visa, MasterCard and more than a dozen of the country's largest banks who issue the companies' cards. The card companies have also agreed to reduce swipe fees by the equivalent of 10 basis points for eight months for a total consideration to stores valued at about $1.2 billion, according to lawyers for the plaintiffs.

The deal calls for merchants to be allowed to negotiate collectively over the swipe fees, also known as interchange fees.

Merchants would also be required to disclose information about card fees to customers, and credit card surcharges would be subject to a cap, according to the settlement papers. Surcharge rules would not affect the 10 states that currently prohibit that practice, which include California, New York and Texas.

An additional $525 million will be paid to stores suing individually, according to the documents.

"This is an historic settlement," said Bonny Sweeney, a lawyer for the plaintiffs. The settlement "will help shift the competitive balance from one formerly dominated by the banks which controlled the card networks to the side of merchants and consumers," said Craig Wildfang, who also represented the plaintiffs.

Noah Hanft, general counsel for MasterCard, said the company believed its interests were "best served by an amicable resolution" of the case. Visa Chief Executive Officer Joseph Saunders said the settlement was in the best interest of all parties and did not expect the settlement to impact its current guidance.

Not everyone was pleased with the proposed settlement, however. One class plaintiff, the National Association of Convenience Stores, rejected the settlement in a statement on Friday from its president, Tom Robinson, who is also president of Robinson Oil Corp.

"Not only does the proposed settlement fail to introduce competition and transparency, it actually provides Visa and MasterCard with the tools to continue to shield swipe fees from market forces," Robinson said.

The proposed considerations are a far cry from the $50 billion in swipe-fees paid each year by U.S. retailers, he said.

The American Bankers Association, a trade group whose members include the bank defendants, said retailers, not consumers, stood to gain the most from the proposed settlement.

"Big-box retailers will likely seize this opportunity to ask Congress for even more handouts," said ABA President Frank Keating in a statement, referring to the Durbin amendment passed by Congress in 2010 limiting debit-card swipe fees - a move that banks say resulted in an $8 billion windfall for retailers.

"The legal process worked and should send a signal to Congress that it is wrong to pick winners and losers in a complex dispute between two industries," the Electronic Payment Coalition, which represents payment networks, said in a statement.

The plaintiffs charged that Visa and MasterCard colluded directly and indirectly through the issuing banks to keep merchants from finding ways to mitigate credit-card costs.

Plaintiffs in the case include supermarket chain Kroger Co, pharmacy chain Rite-Aid Corp and shoe retailer Payless ShoeSource, as well as trade associations such as the National Association of Convenience Stores, National Grocers Association and the American Booksellers Association.

The National Retail Federation, a trade group representing retailers, said that "the test will be whether the injunctive relief is meaningful. Unless it is, the card market will stay broken and neither merchants nor their customers will achieve a long-term benefit."

A number of banks that issue Visa and MasterCard cards, including JP Morgan Chase & Co, were also named as defendants in the lawsuit, along with Visa and MasterCard's payment networks.

A spokeswoman for Bank of America NA said it believed the terms of the settlement were fair. JP Morgan declined to comment. Citigroup Inc acknowledged its role in the deal and declined further comment.

A spokesman for Wells Fargo said the company was pleased to put the matter behind it.

An estimated 7 million retailers will be affected by the settlement, according to lawyers for the plaintiffs.

Visa and MasterCard have been plagued by legal problems over their payment-card policies for the last decade. In 2003, the companies paid a combined $3 billion to settle a lawsuit by stores over their "honor all cards" policies, which tied acceptance of credit to debit cards.

The U.S. Department of Justice brought and settled a civil antitrust suit against Visa and MasterCard in 2010. As part of the consent decree, the companies agreed to drop certain policies that kept stores from steering their customers to cheaper forms of payment.

But the decree left intact policies that prohibit stores from charging customers more when they use certain payment cards, according to a July 2011 court filing from plaintiffs.

The defendants denied that any collusion took place.

Visa said its share of the settlement is $4.4 billion, and Mastercard said its share is $790 million.

In December, Visa announced it set aside an additional $1.57 billion to cover the cost of a potential settlement in the case, bringing its litigation reserve balance to $4.28 billion, according to a regulatory filing. MasterCard in the fourth quarter of 2011 recorded a $770 million pretax charge, as an estimate of its potential liability in the case, a filing with the U.S. Securities and Exchange Commission showed.

MasterCard said in a statement that it expected to incur an additional $20 million pre-tax charge in its 2012 second quarter financial statements to cover its portion of the settlement.

Visa and MasterCard together accounted for more than 80 percent of U.S. credit and debit card purchases by volume in 2011, according to data from the Nilson Report, a California trade publication.

Albert Foer, president of think-tank the American Antitrust Institute, said that the settlement should create more transparency for consumers at the cash register. Because merchants had been forbidden from charging customers extra for costlier payment forms, they often built that cost into the retail price, he said.

While it may not lead to lower prices, "it gives the consumers some choice and it should ultimately mean a better deal for everybody," Foer said. "In the longer run, it should help keep retail prices under better control."

It may also be the last time retailers are allowed to take Visa and Mastercard to court over interchange fees. The proposal provides for extensive litigation releases that would keep stores that join the settlement from suing over a wide range of issues relating to fees and anti-steering restraints.

The case is In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, in the U.S. District Court for the Eastern District of New York, no. 05-1720.

(Reporting by Jessica Dye; editing by Bernard Orr, Andre Grenon and Carol Bishopric)

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Retail investors jump back into stocks in February (Reuters)

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Retail Looks Healthy Now, but Wait Till the Holidays (The Motley Fool)

With more than 26,000 retail jobs added last month, it's no wonder July retail sales exceeded expectations in both high- and lower-end stores. But retail experts warn that the next few months could take a turn for the worse as the holiday shopping season kicks in.

Retailers' sales at stores open at least a year were up 4.6% in July, according to a tally of 27 major retail chain stores from the International Council of Shopping Centers.

"A lot of the trends that have been in place continued through July. Spending and sales continued to be relatively strong," said Michael Niemira, chief economist at the ICSC.

July's sales spike isn't as impressive as June's 6.9% increase, but June data was "abnormally strong," he noted.

"It's really a stock picker's world now more than ever, because you look at broad retail trends and say they are pretty good, then you look underneath it. It's driven by a few key players, while others are far more choppy," he said.

The luxury-store segment, which draws customers during the dog days of summer by slashing price tags on designer duds, was led by Saks (NYSE: SKS) and its whopping 15.6% increase during the month, while Neiman Marcus edged up 7.7%.

Wholesale giant Costco Wholesale (NASDAQ: COST - News) reported a 10% boost in same-store sales in July, trailed by a 9.2% gain of its bulk competitor BJ's Wholesale Club (NYSE: BJ - News).

Discount retailer Target (NYSE: TGT - News) benefited from its new grocery segment and a strong back-to-school sales start, posting a 4.1% gain.

Dillard's (NYSE: DDS - News) led the department-store pack with a 9% gain, while Macy's (NYSE: M - News) edged up 5%and J.C. Penney (NYSE: JCP - News) was up 3.3% in July.

Not all retailers fared well in July, with Kohl's reporting a 4.6% drop in same-store sales, and Gap's subpar performance resulted in a 5% fall.

"Numbers are still relatively good. Looking forward, we worry," he said. "It's a tale of two cities. When you look right now everything looks fine. When you look out three to six months, that's when you start to worry. Things can change between now and then. Leading indicators aren't flashing good signs."

Those indicators include U.S. GDP growth and employment, which are slowing because demand for U.S.-made goods and services is weak, he says.

"Without stronger income or services, we are not going to get stronger growth," he said. "The worry then is the backdrop of things, that it's deteriorating from here."

Moving into the holiday season, if clothes -- which are starting to reflect higher apparel costs -- aren't clearing off racks and being purchased at registers, then there's cause to fret.

"That can easily create a situation where inventory is too high, and the usual reaction is increased discounting and weaker retail profits," he said.

Time will tell what the back-to-school shopping season holds, which makes up a sixth of stores' annual sales. The National Retail Federation anticipates that families will drop an average of $603.63 on everything from backpacks to pencils this season, down slightly from $606.40 in 2010.

Fool contributor Tierney Plumb holds no positions in any of the stocks mentioned. The Motley Fool owns shares of Gap and Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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JPMorgan shuffles top retail bank executives (Reuters)

NEW YORK (Reuters) -- JPMorgan Chase & Co shuffled several retail banking executives, signaling Chief Executive Jamie Dimon's determination to rebuild the bank's profits and elevate in-house talent to high-profile roles.

In a statement released on Tuesday, the bank said retail banking chief Charlie Scharf was moving to the company's private equity arm and that other senior executives were taking on additional responsibilities in his former division.

Todd Maclin, 55, chief executive of JPMorgan's commercial bank, will continue in that position and also have responsibilities for the company's branch network, consumer franchise, small-business banking and private banking business, according to the statement.

Gordon Smith, 52, CEO of card services, will take on responsibility for the company's auto finance and student lending business, on top of his current role.

Dimon, 55, talking to Reuters in an interview after the announcement, said the changes should contribute to his push to raise the bank's profits. "This should help us," he said.

"Sometimes it is good to have a fresh pair of eyes looking at things," Dimon added.

Dimon said Scharf, 46, had told him a year ago that he wanted to do something different at the bank. "It was his decision to go, and when that happens I have to figure out who is going to do his job. It takes a while to get all of the ducks in a row."

The businesses that Scharf was responsible for will now be overseen by Maclin, Smith, and Frank Bisignano, Dimon's chief administrative officer whom he assigned in February to fix the retail bank's mortgage business.

In a memo to staff, Dimon said Scharf "will continue to work with our consumer team to help transition the business and assist in any way possible."

The shifts come as JPMorgan tries to strengthen its retail banking arm, which is being hurt by low demand for loans and hit by growing regulatory demands that will squeeze profits.

The retail financial services segment fell the furthest short of its profit goals of any JPM segment in 2010, with a return on equity of 9 percent compared with a target of 30 percent, according to a report by analyst Christopher Mutascio of brokerage Stifel Nicolaus.

The bank also said its investment banking head, Jes Staley, will assume oversight of its business outside of the United States, taking over from Heidi Miller, 58, who will retire early next year.

Dimon said the moves were not an explicit part of the company's preparations for his eventual successor, but he added: "It is always good to cross-train people."

MORTGAGE CHIEF PUSHED OUT

The bank said in a separate memo to staff on Tuesday that its chief of home lending, David Lowman, would be leaving. He had been pushed aside in February after the bank racked up billions of dollars in losses on mortgages and became mired in litigation over foreclosures.

"Dave Lowman and I have decided he will leave the firm," Bisignano said in the memo.

Lowman joined JPMorgan from Citigroup in 2006. During his tenure at JPMorgan, the bank picked up bad mortgage assets through its acquisitions of investment bank Bear Stearns & Co and retail bank Washington Mutual.

Under Lowman, the home lending unit was so disorganized that the bank seized homes of at least 33 U.S. military servicemen on active duty, violating federal law and prompting Dimon to apologize at the company's annual shareholder meeting. The bank has said it is forgiving those loans.

Lowman could not immediately be reached for comment on Tuesday.

Lowman appeared before congressional committees last year where he was chastised for his division's refusal to cooperate with borrowers and modify mortgages. Lowman said in a June 2010 hearing that the bank was understaffed but was adding employees to work on problem mortgages. In a hearing in November, Lowman acknowledged mistakes in foreclosure paperwork and said the bank was cleaning up errors.

JPMorgan and other large banks are in negotiations with the Department of Justice and state attorneys general to settle probes into mistakes in foreclosures.

The bank recorded $1.1 billion in litigation expenses in the first quarter, primarily because of mortgage-related claims. It also marked down the value of its mortgage-servicing contracts by $1.1 billion because of increased costs and booked $1.1 billion of expenses for losses on its residential real estate portfolio.

(Editing by Maureen Bavdek, Matthew Lewis and Steve Orlofsky)

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