The United States has the world’s most lucrative credit card market, and that’s largely due to high interchange fees combined with very high credit card acceptance. Over the years there have been a lot of efforts to change the status quo and lower interchange fees, through both government bills and lawsuits.
Along those lines, Visa and Mastercard are nearing a settlement with merchants, which could have some major implications for consumers, and could impact the credit card rewards that we earn.
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Interchange fees could decrease, in addition to new restrictions
The Wall Street Journal reports that Visa and Mastercard are nearing a settlement that would put an end to a 20-year legal dispute with merchants, to lower the credit card fees that stores pay, and give them more power about which types of cards they can accept.
Under the terms of the settlement, Visa and Mastercard would lower interchange fees (often between 2% and 2.5%) by an average of around 0.1% over several years. But the even bigger point here is that rules would be loosened that require merchants that accept one of a network’s credit cards to accept all of them.
In other words, a merchant that accepts one type of Visa would no longer have to accept all kinds of Visas, given the different types of fees that they come with. Credit card acceptance could be divided into several categories, including rewards credit cards, credit cards with no rewards programs, and commercial cards.
That means some stores could refuse to accept cards with higher interchange fees, while accepting ones with lower interchange fees. Furthermore, this deal would increasingly allow surcharging, the practice of merchants being allowed to charge consumers extra when they pay by credit card.
This entire case dates back to 2005, when merchants sued Visa, Mastercard, and large banks, alleging that they were engaged in anticompetitive behavior with regards to interchange fees and credit card acceptance terms.
So we’ll see what comes of this. The parties are apparently nearing a settlement, though nothing has been finalized yet, and this has been two decades in the making…
How big of an impact would this have on consumers?
It goes without saying that generous credit card welcome bonuses and rewards structures are largely funded by how lucrative it is for banks when we spend on their cards, thanks to high interchange fees.
A 0.1% reduction in interchange fees over several years will be material for the payment processors and banks, but probably won’t be a total game changer. I think the much bigger issue involves credit card acceptance across the Visa and Mastercard networks.
Just as an example, a Visa Infinite product will typically have higher interchange fees than a more basic product. Of course those cards typically offer the most rewards and consumer protection, so those are the products that many of us use.
If a settlement is reached, merchants would have a lot more flexibility to only accept the lowest cost types of credit cards. The question is, would they actually do so? Merchants don’t accept credit cards out of the kindness of their hearts, but instead, they do so because it’s good for business (and on some level there’s a cost to accepting cash, but that’s a different issue).
If this passes and merchants could easily avoid people paying with more costly card types, I’m sure they would. That being said, would merchants face declining sales, and would it catch on enough for it to be the norm rather than the exception?
We’ll see how this plays out. Keep in mind that (separately) for the past few years, we’ve seen a push for new credit card legislation, in the form of the Credit Card Competition Act. This would mandate that merchants can route payments through an unaffiliated network, and this would apply to Visa or Mastercard credit cards issued by banks with more than $100 billion in assets. In other words, Visa and Mastercard would no longer have the same power when it comes to merchant fees.
So far nothing has passed on that front (and I can’t imagine it will in the current political climate), but it’s always something that’s on the table. One other thing to keep in mind is that nowadays, US airline profits are largely derived from lucrative co-brand credit card agreements, and those are largely subsidizing our airfare. So any changes to the richness of credit card rewards could also have implications for airlines.
Bottom line
Visa and Mastercard are nearing a settlement on a case that dates back to 2005. If this is finalized, we could see interchange fees lowered by around 0.1% over the next several years. The much bigger point is that merchants could choose which Visa and Mastercard products they want to accept. So they could start to reject the more premium Visa and Mastercard products, which have higher interchange fees (but which also offer better perks).
This all has the potential to greatly impact the credit card landscape. If a significant number of merchants stopped accepting premium products (like Visa Infinite or World Elite Mastercard), it would obviously create a real problem for cardmembers.
What do you make of this potential Visa and Mastercard settlement?
Many merchants now already charge a 3 to 3.5% addition to purchases made with cards. But one place I go has approached it differently, providing a 5 % discount on cash payments which sounds a lot better than a surcharge although basically the same thing.
Amex is not part of this - and they manage to fund lucrative rewards with plenty of acceptance and a healthy business on their part. So without knowing more details, feels like that's a market baseline that would prevent too much rewards card user disruption.
Plenty of people only carry rewards credit cards. For them, "basic credit cards only" = "cash only". That would be huge. Also, how would staff tell? If someone plops down a German credit card, it's not going to be obvious to the minimum wage clerk what category it falls into! The result would be vast amounts of aggravation directed at the poor staff if any company was stupid enough to introduce this.
I see a merchant like Costco accepting cash, debit, and co-brand card only. Otherwise, I see little change.
This would be a nightmare
This just seems silly. If I walk into a restaurant to pick up dinner for the family and the merchant tells me I can't use my CSR, I'm leaving and going somewhere else. Then the merchant has to "eat" the cost of the food because they were too cheap to accept a 2% cc surcharge. This doesn't seem cost-effective.
Disgusting greedy American businesses up to no good again! Constantly trying to nickle and dime customers, even though they're already making a killing compared to prices is other countries. How to get rich quick? Start a business in America! Small businesses aren't the ones that need help -- it's the consumers they're ripping off, charging 100x what they paid pennies for because it was made oversees. This is why I don't tip, and don't buy...
Disgusting greedy American businesses up to no good again! Constantly trying to nickle and dime customers, even though they're already making a killing compared to prices is other countries. How to get rich quick? Start a business in America! Small businesses aren't the ones that need help -- it's the consumers they're ripping off, charging 100x what they paid pennies for because it was made oversees. This is why I don't tip, and don't buy things from any merchant with a credit card surcharge!
Choice is always good, so this settlement would be very be welcomed.
Give consumers a choice: pay with a run of the mill credit card and there's no fee, pay with a rewards card and there's a 1% (or whatever) fee to cover the higher interchange cost.
Ending socialism (forced subsidies) is the right thing to do.
Limiting the interchange fee IS limiting consumer options which IS socialism, you nitwit. Same thing will happen as with debit cards due to the government-imposed 25 cent fee limit.
No need to call people names, Paul.
And government regulation is not the same as socialism. There's a huge difference.
Then it will be butts in seats to gain miles, as it was before loyalty spending on cards. The sky didn't fall then, I suspect it won't now either.
Just a new normal.
Visa and Mastercard have long been planning for interchange fees to go to zero or close to it.
Restaurants and merchants will never waste their time checking a credit card to see if it's Infinite or whatever. They'll simply do what merchant's have been doing as of late. Put a 3% surcharge on each bill, regardless of amount, for use of a credit card while also refusing cash. Simple solution.
Now whether the consumer...
Visa and Mastercard have long been planning for interchange fees to go to zero or close to it.
Restaurants and merchants will never waste their time checking a credit card to see if it's Infinite or whatever. They'll simply do what merchant's have been doing as of late. Put a 3% surcharge on each bill, regardless of amount, for use of a credit card while also refusing cash. Simple solution.
Now whether the consumer tips less because of that surcharge, is their business.
@Alonzo
This is patently false. Neither Visa nor Mastercard has ever planned for interchange fees to go to zero or close to. It is a billion $$ cash cow and they have fought any such claim at all cost.
Not to mention the obvious - if they have ever wanted to do it - they could - just as easily as they raise interchange fees continually.
They've been looking into diversifying their revenue stream for over a decade. Much like brokerage firms charged for trading stocks. Now they all charge zero. How did all the brokerage firms not only survive, but get bigger?
Visa and MA ain't dumb, they knew this day would eventually come.
Yes, Visa and Mastercard have sought to eliminate interchange fees, their main source of revenue what sustains and supports the whole credit card industry.
Another dumb comment from alonzy. Tip less? More like NOT tip at all, which should be the status quo and IS the status quo in most countries, like Japan (and the service is great).
@Jim first crash out of the day after that first sip of matcha?
If merchants start telling me which card I can or cannot use, that will impact which merchants I choose to patronize.
I think the more important part of this is not well defined. How many merchants are going to start restricting what specific cards you can use?
it seems like a lot to have employees track using an AMEX gold at a restaurant - oh sorry you can use a platinum card but not a gold. The gold earns too many reward points.
Stop whining about credit card fees. Think they are too high? Put a sign on your window store or website: “We don’t accept credit cards. Cash, check or debit only”. This is a free market. No one is forcing anyone to use or accept credit cards.
There's a fee for debit too.
Processing checks also cost money.
Best to take cash only.
Don't worry your cash is very safe in the cookie jar.
‘Could’ is doing a lot of work here.
Many of us who enjoy our points and miles are so quick to clutch pearls and suggest the sky is falling as soon as any accountability or regulation is discussed within this space.
“0.01%” oh no! It’s over! Sell everything! Al Pacino in House of Gucci: “DEAD!!”
Friends, consumer protections are not the end of our hobby. We need to end the excessive corporate greed, one way or another.
“Boof.”
Yes, let’s put a cap on corporate greed. After capping credit card interchange fees, let’s cap annual fees too; let’s say to a maximum of zero. While we are at it, let’s cap hotel rates, airline fares and car rental prices too, as we know greed runs amok in those industries as well. I suggest a price cap of $5 for all of them. Thereafter, let’s move on to taming corporate greed in housing. No...
Yes, let’s put a cap on corporate greed. After capping credit card interchange fees, let’s cap annual fees too; let’s say to a maximum of zero. While we are at it, let’s cap hotel rates, airline fares and car rental prices too, as we know greed runs amok in those industries as well. I suggest a price cap of $5 for all of them. Thereafter, let’s move on to taming corporate greed in housing. No house can be sold for more than $10K and no rent can bee more than $100 a month. Those caps will teach those greedy developers and landlords. Car makers and dealerships are super greedy too. No car can cost more than $1K. A gallon of gas? Capped at $0.10.
No thanks, Regis. We want data-driven, common sense regulations, not hyperbole or a strawman, like you attempted above.
A good first step. The level of interchange fees in the U.S. is outrageous and is ten times what it is in other areas like Europe - all costs ultimately passed on to the consumer.
Hey Peter, if "all costs ultimately passed on to the consumer" then why would merchants complain.
Or all these merchants are just greedy Americans wanting 1% more sales unlike modest European?
@Pedro This is called greed by the merchants. There has been extensive study when the debit card interchange fees were capped that most merchants did not pass on any savings to the consumers. The consumers would be the ones ending up with less rewards and perks. And in major cities in the U.S. there are businesses that already require consumers pay a surcharge for using their credit cards or have two separate pricing, one for...
@Pedro This is called greed by the merchants. There has been extensive study when the debit card interchange fees were capped that most merchants did not pass on any savings to the consumers. The consumers would be the ones ending up with less rewards and perks. And in major cities in the U.S. there are businesses that already require consumers pay a surcharge for using their credit cards or have two separate pricing, one for paying by card and one for paying by cash. Of course, paying by cash would be less. And yes merchants greed by tacking on 18 percent tip whether the service was good or bad and in some instances that 18 percent tip was based on the total bill and not the subtotal.
Stanley, they can't add a 18 percent tip onto your bill unless it's removable. Otherwise, it's no longer a tip. They can add a "service charge" to all bills, and that's not removable. Restaurants prefer not to do that, because to the extent that goes to pay server wages, they pay FICA, unemployment and workers compensation taxes/insurance on that.