erchants' primary objective in suing Visa U.S.A. and MasterCard International is to fundamentally alter the interchange system, according to the lead plaintiff attorney in the class-action suit. In late April 2006, merchant groups suing Visa, MasterCard and their member banks broadened the suit to include debit cards as a point of contention. The original complaint alleged collusion in fixing credit card interchange rates.

"Obviously, merchants think they should be compensated for damages," said K. Craig Wildfang, co-lead Counsel for the plaintiffs. "But for most, the important part is to fix the system going forward."

One plaintiff, Mike Schumann, co-owner of Traditions Classic Home Furnishings in Minneapolis, said the cycle of competition to attract cardholders, using rewards as incentives, drives up interchange and is accelerating. If successful, Schumann said, "We will force the credit card industry to use fiscal discipline," rather than passing high costs to merchants. Structural problems he sees are the no-surcharge rule and the multiplicity of fee rates and rules that allow a consumer merchandise superstore, for example, to get typically lower grocery interchange rates by selling milk.

"There should be a level playing field," Schumann said. "If there is going to be an interchange fee, it should be one standard fee. Structural problems need to be addressed either by eliminating [interchange] or putting a draconian cap on it."

The lawsuit is without merit, according to MasterCard. "Accepting payment cards provides merchants with an incredible value at a fair price. ... MasterCard does recognize that merchants do want lower costs" and has been working with them to find solutions.

"While we remain confident in our ability to defend interchange from merchants and other attacks," Visa will continue to explore ways of working cooperatively with merchant partners, Visa President and Chief Executive Officer John Philip Coghlan wrote in the company's most recent annual report.

Peering into the fishbowl

The suit alleges that collusion occurs because the boards and committees of the card Associations are so intertwined. According to the suit, plaintiffs' arsenal includes a 1992 letter from a former unnamed MasterCard General Counsel to the Department of Justice (DOJ) stating "each of the Associations is a fishbowl, and officers and board members are aware of what the other is doing, much more so than in the normal corporate environment."

Both card networks, however, have begun to make changes by adding independent directors to their boards. In 1992, the DOJ was investigating the issue of "duality," the practice of allowing banks to issue cards and acquire merchants for both brands. "MasterCard had always been of the view that it was harmed by ... duality," Wildfang said. "The importance is that it is an admission that there is horizontal collusion [in interchange]." The DOJ eventually filed and won an antitrust suit against both card Associations over exclusionary rules.