What was thought to be a win for MasterCard (NYSE: MA) and Visa (NYSE: V) over the fees they charge merchants who accept debit and credit cards, is backfiring. An appeals court last week found fault in an antitrust class action settlement reached by the credit card networks, which upends the agreement that had pretty much let the credit card networks off of the hook easily.

When investors got wind of the court’s finding, the share prices of these credit card networks fell. Investors were naturally concerned that the nearly decade long effort that led to the settlement to appease merchants, and keep that revenue source flowing, could lead to the fees charged being up in the air again.
 

 · Interchange fees

 
Credit card networks typically charge what are called interchange fees to handle plastic transactions, which are those from credit cards and debit cards. The problem stemmed from them charging considerably more to merchants to process credit card transactions than they did for debit card transactions. This practice led merchants to cry foul, ranting that the networks were the benefactors of the higher fees for the credit card transactions, while they were the losers.

Eventually, the federal government got involved, and capped the fees back in 2011.
In 2013, MasterCard and Visa went a step further, and reached a $7.25 billion settlement agreement with thousands of merchants over the fee amounts they had previously charged them.

However, the problem with the settlement, according to the 2nd U.S. Circuit Court of Appeals in Manhattan, was that the merchants covered in the lawsuit had inadequate attorney representation. The law firms involved were accused by the appeals court of not allowing some merchants to opt out of the settlement agreement when the odds of them benefiting from it were minimal.
 

 · Impact on Visa and MasterCard

 
These credit card networks had already been complaining about the caps that were put in place on the amount of the fees they assessed. These caps were the result of the Durbin Amendment, which took effect in 2011. It gave some relief to merchants by allowing them to set minimum purchase amounts for credit cards.

Consumers who became accustomed to using their credit cards for small purchases, such as for a $4 cup of coffee, were barred from doing so at some merchants.

However, if they used their debit cards, which cost less for the merchant to process, there was no minimum purchase amount.

Feeling the sting of this, the credit card networks have been vocal. For example, when MasterCard and Visa released its first quarter earnings report for 2016 in April, they noted that whether or not it will be able to achieve its financial objectives is being affected by the legal and regulatory challenges associated with interchange fees.
 

 · What’s next?

 
Some observers see MasterCard and Visa appealing the 2nd circuit court’s decision.

I don’t. In fact, I would be surprised if MasterCard and Visa decided to take the battle over the settlement back to court because the odds of them being successful seem to not be in their favor. I see them renegotiating the settlement, and taking into account the concerns that the lawyers made out better than the merchants.

When solely based on this ruling against the settlement, I see no reason to change long positions in MasterCard or Visa.