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 have just reached a settlement with merchants, which could have some major implications for consumers, and could impact the credit card rewards that we earn. A couple of days ago I first covered how a settlement was close to becoming a reality, but this has now been finalized, so we have all the details.
Interchange fees could decrease, in addition to new restrictions
Visa and Mastercard have just reached a $38 billion settlement that puts an end to a 20-year legal dispute with merchants. This lowers the credit card fees that stores pay, and gives them more power regarding which types of cards they can accept.
Under the terms of the settlement, Visa and Mastercard will lower interchange fees (often between 2% and 2.5%) by an average of around 0.1% over the next five years. But the even bigger point here is that rules will be loosened, which 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 will no longer have to accept all kinds of Visas, given the different types of fees that they come with. Credit card acceptance will be divided into several categories, including rewards credit cards, credit cards with no rewards programs, and commercial cards. The rates for cards with no rewards program will be capped at 1.25% for eight years, a more than 25% reduction in fees.
This means some stores could refuse to accept cards with higher interchange fees, while accepting ones with lower interchange fees. Furthermore, this deal increasingly allows for surcharging, the practice of merchants being allowed to charge consumers extra when they pay by credit card. Specifically, merchants can add a fee of up to 3% for paying with credit cards.
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.
How big of an impact will this settlement 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.
Merchants will now have a lot more flexibility to only accept the lowest cost types of credit cards, or even to add surcharges for more expensive types of cards. The question is, will 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 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 have reached a settlement on a case that dates back to 2005. With this, we’ll see interchange fees lowered by around 0.1% over the next five years. The much bigger point is that merchants can 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). Furthermore, merchants will increasingly have the ability to charge up to a 3% fee for paying by credit card.
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) or added credit card surcharges, it would obviously create a real problem for cardmembers.
What do you make of this Visa and Mastercard settlement?
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