Litigation a Way of Life in Payments Processing Industry

On Oct. 12, 2011, MasterCard and Visa, the two largest credit cards and payment networks, were sued by the National ATM Counsel, Inc., a trade group representing operators of automated teller machines. The trade group claims that Visa and MasterCard fix prices and suppress competition between ATM networks.

In October 2010, the U.S. Department of Justice filed a civil antitrust lawsuit in U.S. District Court challenging rules that American Express, MasterCard and Visa had in place that prevented merchants from offering consumers discounts, rewards and information about card costs, ultimately resulting in consumers paying more for their purchases. The department also said that the rules increased merchants’ costs of doing business.

While American Express chose to fight the antitrust lawsuit, Visa and MasterCard quickly reached a settlement with the DoJ that let merchants reward consumers for paying with lower-cost credit or debit cards.  The settlement meant that about four million merchants across the U.S. that accept just Visa and MasterCard were free to steer customers to different credit cards or forms of payment by offering discounts, rebates or other special treatment.

Such is the world of payment processing — a complicated, constantly evolving industry highly prone to litigation because of the vast amounts of money at stake.

Innumerable transactions continue to migrate from cash and checks to credit cards, including most online transactions. In 2010, MasterCard and Visa processed more than half a trillion dollars worth of cash transactions in the U.S. alone.

Companies sue other companies because in this business there are just so many organizations involved, which means that there are a multitude of targets to sue.

Knowing the Players

An often confusing array of players fills the payments processing field.

  • Merchants get their accounts from Merchant Banks, which handle acceptance and payment of credit card transactions to the Merchant’s bank account.
  • Issuing Banks are the financial institutions that physically provide a credit card to an individual for use.
  • Card Associations like Visa, MasterCard, American Express and Discover work in conjunction with various local, state, territory and federal government agencies to make the rules regarding acceptance and use of credit cards.
  • Processors provide a point of connectivity for the Merchant to authorize and settle its credit card transactions through the appropriate payment network for each of the card types the Merchant accepts.

A Merchant Bank pays the Issuing Banks and Card Associations fees for transactions processed on behalf of its Merchant Account holders. In return, Merchant Banks provide their services to Merchants for a fee (normally called a Discount Rate).

Front-End Processors handle the up-front authorization of a credit card transaction. Back-End Processors receive settlement batches from the Front-End Processor. Processors are paid for their services on a per transaction fee basis. The fee is included in the Merchant’s Discount Rate.

Then there are local, state and federal government entities involved.  Now, what could possibly go wrong amongst all this back and forth?

The answer is, of course, plenty, as our attorneys at Hornberger & Brewer know all too well.

Legal disputes inevitably arise over issues such as nonpayment, breach of contract,credit card fraud, charge-backs, reserve accounts and more.

Because these disputes are so commonplace and so costly, Hornberger & Brewer has developed an extensive practice in this fast-growing and dynamic field.

Our law firm is one of the few in the country whose attorneys have an extensive track record representing businesses in the credit card processing industry.

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