MW How the Visa-Mastercard swipe-fee settlement could affect your credit-card rewards
By Hannah Erin Lang
The $30 billion settlement lowers interchange fees for merchants - but customers may see a negative impact.
The country's largest credit-card networks have struck a deal that will change what happens behind the scenes when you swipe your credit card - but those doing the swiping won't see much of a benefit.
Visa (V), Mastercard $(MA)$ and the country's largest credit-card-issuing banks said Tuesday they had agreed to a settlement that will lower the fees that businesses pay to accept credit cards. The landmark agreement follows two decades of litigation between merchants and credit-card firms.
The settlement, which is still subject to court approval, would lower the rates by 0.04% and keep them there for five years. That could lead to almost $30 billion in savings for merchants on swipe fees alone.
It also simplifies rules around surcharging for merchants and establishes new policies around "steering," through which merchants could nudge shoppers to use particular credit cards that are cheaper to process.
"By negotiating directly with merchants, we have reached a settlement with meaningful concessions that address true pain points small businesses have identified," Kim Lawrence, Visa's North America president, said in a statement.
The pact is set to boost businesses' bottom lines, experts told MarketWatch. Consumers, though, could see additional charges and fewer rewards.
"It is estimated that this settlement could save merchants tens of billions of dollars over the next five years," Matt Schulz, chief credit analyst at LendingTree, told MarketWatch in a statement. "However, there's no guarantee that even a dime of that savings gets passed on to consumers."
The fight over interchange fees
Every time you swipe your credit card - literally or digitally - at a retailer, restaurant or other kind of business, that merchant has to pay a fee to the credit-card issuer and payment processor called a swipe or interchange fee. It's typically charged as a small percentage of the transaction, about 2%.
The fee amounts are determined and set by the payment networks - such as Visa or Mastercard - but most of the charges actually go to the card-issuing bank. Banks typically use the revenue to fund customer services like fraud protection and credit-card rewards programs.
Merchants have criticized Visa and Mastercard for using their dominance to set higher-than-necessary swipe fees; the two companies control about 80% of the payment-processing market. The expensive charges also indirectly lift prices for consumers, merchants have argued.
Will the Visa-Mastercard settlement impact credit-card rewards?
The debate over swipe fees has drawn the attention of federal lawmakers, a handful of which have sponsored a bill that would target the charges.
The bill, called the Credit Card Competition Act, takes aim at Visa and Mastercard's market dominance with the ultimate goal of lowering swipe fees by requiring credit-card issuers to partner with different payment networks.
Credit-card companies have fiercely opposed the bill, arguing the revenue earned from interchange fees helps them fund rewards programs like airline miles, cash back or dining points. A reduction in the fees would threaten those popular programs, industry advocates have said.
From the archives (Nov. 2023): Could Congress really kill credit card rewards? Here's why airlines are up in arms.
Tuesday's settlement wasn't related to the pending legislation. But similarly, it probably won't have a positive impact on credit-card rewards, said Brian Kelly, CEO of the travel-rewards website The Points Guy.
"It's definitely a negative," he said. "At the end of the day, the pot from which rewards are paid for is shrinking."
That's still a much more muted impact than what the CCCA could cause, according to Kelly; he thinks that it would be "catastrophic" for the credit-card rewards system.
The Electronic Payments Coalition, a trade group that includes Visa, Mastercard and many of the country's largest banks, said the new agreement addresses the issue at the core of the proposed law, while preventing the uncertainty it would unleash on the market.
"The merchant-agreed settlement addresses many of the unknowns and concerns with the [Credit Card Competition Act] because it ensures consumers' transactions remain on the known, tested, secure networks they are using today," an EPC spokesperson said in a statement to MarketWatch. "Rewards are also preserved because it gives a certainty that [the bill] did not, so banks and small businesses can plan for the change."
Visa and Mastercard did not respond to requests for comment on the settlement.
The agreement might also "take away some of the urgency" for swipe-fee legislation, Kelly said, which could impact not just credit-card issuers but rewards-program partners as well, like airlines.
Sen. Dick Durbin, an Illinois Democrat and co-sponsor of the CCCA bill, said the agreement only highlights the need for lawmakers to address the interchange-fee debate.
"I fear that this deal only provides temporary concessions negotiated by a few lawyers behind closed doors," the senator said in a statement Tuesday. "We need to bring real competition to the credit-card industry. My bill ensures that the Visa-Mastercard duopoly ends their price-gouging tactics that disproportionately hurt American families and small businesses."
How else could the agreement impact consumers?
There are a couple other consumer-facing changes that card users may see take effect as a result of the Visa-Mastercard settlement with merchants.
The payment networks already allowed for some surcharging, but their latest agreement simplifies the rules around it and caps credit-card surcharges at 1%. Consumers could see surcharges for some card transactions, similar to the ones you can already spot on some restaurant bills or at the ATM.
The settlement also makes some changes that would allow merchants to "steer" customers toward certain cards, by offering incentives to encourage them to pay with a card that's cheaper to process.
Some businesses already use similar arrangements - think gas stations or mom-and-pop shops that offer discounts for paying in cash.
But you might not see that kind of thing become very common. In a Tuesday note, Barclays analysts, led by Ramsey El-Assal, pointed out that these kinds of programs can be tricky - and risky - for merchants to implement.
"Implementing complex card-steering and surcharging/discounting processes at the point of sale is not only technologically complex (and likely realistic only for very large merchants), but also risks alienating consumers and losing sales," the analysts wrote.
As for when consumers might start to notice changes, that's still up in the air. The settlement has yet to be approved by the courts, and could also be appealed.
"Consumers shouldn't expect anything any different at the checkout counter immediately," LendingTree's Schulz said.
-Hannah Erin Lang
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March 28, 2024 11:42 ET (15:42 GMT)
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