Visa and Mastercard poised to Lower Fees for Merchants.

Visa and Mastercard have a potential deal with retailers that would lower fees for merchants, thereby potentially lowering prices but threatening prized consumer rewards. The deal, which is still subject to court approval, could mean big changes for businesses and consumers.

In 2024, over a third of all purchases were made with credit cards and those who use them might face new surcharges when they swipe or have to use another form of payment if businesses don’t accept their card. Consumers made more payments in 2024. The average number of monthly payments increased, continuing a trend since 2021. In 2024, consumers made an average of 48 payments per month, up two payments compared to 2023 (46).

Credit card payments drove overall growth in payments; Most of the increase occurred in remote payments. More than 90% of consumers stated that they had no plans to stop using cash amid growth in non-cash payments, a share consistent since 2022. In comparison, 5% said they already did not use

cash and about 3% of consumers planned to stop using cash within an expected time frame, ranging

from between within the next two years to more than five years from now.

And because credit card companies finance credit card rewards, lower interchange fees may mean fewer perks. If the interchange fees need to be lowered, simultaneously the rewards need to be lowered too, as asserted by Joanna Stavins, principal economist and policy advisor at the Federal Reserve Bank of Boston. That’s because “rewards are financed by interchange fees”.

The two credit card giants have been entangled in a lawsuit brought by retailers for the last 20 years that alleged the companies have fixed the price of interchange fees, in which a large portion of the fee’s merchants pay when a customer makes a purchase with a credit card. The companies were close to reaching a settlement last year, but U.S. District Judge Margo K. Brodie rejected the $30 billion proposal.

Retailers typically are charged 2% of the total customer transaction in swipe fees, but they can be as much as 4% for some premium rewards cards, according to industry estimates. The proposed settlement would have lowered those fees by at least 0.04% percentage points for a minimum of 03 years. In the suit, merchants alleged that the card companies and the banks that issue cards with them colluded to charge businesses inflated swipe fees and prevented them from directing their customers to other, cheaper payment options.

The proposal announced would see the two companies bring down interchange fees by 0.1% over the next 05 years, give merchants the choice to add surcharges when customers pay with credit cards as well as the option to refuse premium cards, which often charge substantially higher fees.

“Credit card companies are working to serve the most affluent customers more and more”, said Doug Kantor, general counsel at the trade group National Association of Convenience Stores (NACS). These companies “try to get high earners more rewards at everyone else’s expense by pushing those costs on to everyone”.

This year, both American Express and JPMorgan Chase added luxury perks to their top rewards cards. For example, the Amex Platinum Card now offers a $200 credit for an Oura ring, while the Chase Sapphire Reserve comes with a credit of up to $500 for high-end hotels; both cards have many other benefits like access to airport lounges. These new perks were paired with higher annual fees, with the Platinum Card now $895 and the Sapphire Reserve $795.

However, annual fees are only part of how credit card companies provide what they advertise as thousands of dollars in savings for cardholders. These rewards are also funded by the fees that credit card companies charge merchants every time any customer pays with a card. These so-called swipe fees often include items like interchange, processing, and other charges that merchants must pay to credit card companies to accept their cards.

After more than 20 years of litigation, Visa and Mastercard have reached a proposed settlement with U.S. merchants of all sizes that would provide meaningful relief, more flexibility and options to control how they accept payments from their customers, as affirmed by Visa.

On the other side, Mastercard have said that “smaller merchants will gain in this settlement – more acceptance choices, reduced costs and simplified rules”. The proposal from Visa and Mastercard specifically states that the deal is not an admission of wrongdoing.

The National Retail Federation, a powerful trade group representing retailers, called the proposal “window dressing”. A press release issued in response to reports of the proposal said the reduction in interchange fees doesn’t go far enough to address the rise in interchange fees, which they say average around 2.35%.

According to an internal report of both Visa and Mastercard, swipe fees would be reduced by about one-tenth of one percentage point for “several” years. However, industry experts claim that the reduction is inadequate because it is a small fraction of the 2.35% average swipe fee charged to merchants in 2024 and equivalent to rolling back fees by only about one year, swipe fees averaged 2.26% in 2023. Swipe fee rates have grown by three times as much since 2010, when they averaged 2.02%.

The report did not say whether the settlement would do anything to change with the individual company’s practice of centrally setting swipe fee rates charged by all banks that issue credit cards under their brands, which the lawsuit argues is a violation of federal antitrust law. In addition, the reduction would apply to interchange, the portion of swipe fees that goes to card-issuing banks, but the report did not cite any limits on the portion that goes to Visa and Mastercard. That would potentially leave them free to raise that portion and wipe out any savings for merchants and their customers.

The European Union capped credit card interchange fees at 0.3% in 2015.

Team Maverick