Visa, Mastercard agree to lower credit card interchange fees

Daniel Acker/Bloomberg

After roughly 20 years of litigation, Visa and Mastercard have agreed to reduce and limit credit card interchange rates as part of a settlement with merchants across the U.S.

The contentious battle between small merchants and the major card networks over the fees that can be charged to consumers at the point of sale goes as far back as 2005, when a group of five retailers alleged that issuers collectively worked with Visa and Mastercard to dictate credit card interchange fees. While a federal judge originally ruled in favor of the plaintiffs to the tune of $7.25 billion, that value fell to $5.7 billion as many merchants opted out of the agreement. The agreement was eventually thrown out in federal appeals court in 2016. 

In the settlement announced this week, which some tout as one of the largest cases in U.S. antitrust history, the two card networks would enact the following changes: Posted swipe fees for merchants would be reduced by four basis points for a minimum of three years, rates would be capped for five years at values present as of Dec. 31 of last year and systemwide swipe fees must be at least seven basis points below current average rates for a period of five years, according to a press release issued Tuesday by Hilliard Shadowen LLP, one of the firms representing the plaintiffs.

"This settlement is the culmination of eight years of hard-fought litigation and detailed, painstaking negotiations. … It provides comprehensive market-based solutions to too-high swipe fees, while providing immediate fee relief to merchants as they make these new competitive tools work for them," Steve Shadowen, co-lead counsel on the case, said in the release.

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This settlement, which is tied to claims in the class-action lawsuit, is subject to approval by the U.S. District Court for the Eastern District of New York. Plaintiffs represent "all merchants who accepted Visa or Mastercard debit or credit cards in the United States at any time during the period between December 18, 2020, and the date of entry of final judgment by the court," according to the release.

In addition to the potential changes in credit card swipe fees, merchants would also have greater flexibility to dictate discounts and added costs for certain payment options to push consumers toward preferred cards. This practice is known as "tender steering."

Richard Hunt, executive chairman of the Washington D.C.-based lobbyist group Electronic Payments Coalition, said in a statement that this agreement has been "decades in the making" and "treats businesses of all sizes equally without government mandates or jeopardizing consumers' data security and rewards programs," he said.

Regulators with the Consumer Financial Protection Bureau have been closely monitoring interest and late fees on credit products for some time, as the agency reported that consumers were charged roughly $130 billion in what CFPB Director Rohit Chopra has dubbed "junk fees" for 2022. The CFPB finalized its rule cutting late fees on credit cards to $8 earlier this month, drawing the ire of banking trade groups across the U.S.

But some industry experts contend that while merchants and issuers would benefit from the increased clarity established by this week's agreement, there's another entity that stands to benefit even more — Apple.

Richard Crone, chief executive and founder of Crone Consulting, said issuers like JPMorgan Chase and Citi that offer their products through the tech giant's Apple Pay wallet are required to relinquish a 15 basis point cut of each credit transaction run through the platform. The settlement would enable Apple to save a considerable sum of money on the merchant side, while also positioning its digital wallet as a more competitive option for card issuers. 

With Apple's position as a "mobile wallet, merchant and issuer themselves," the potential increase in competition would fuel "further consumer engagement" and overall growth, he said.

"This [agreement] alone [would] open the flood gates of fintech innovation by propelling new over-the-top alternative payment options to Visa and Mastercard … such as buy now pay later, real time payments, FedNow and the granddaddy of all OTP methods, pay-by-bank decoupled debit," Crone said.

As the case awaits a final decision, the question remains whether this new effort will be enough to finally cross the finish line.

"By negotiating directly with merchants, we have reached a settlement with meaningful concessions that address true pain points small businesses have identified," Kim Lawrence, president of Visa's North American market division, said in a press release. "Importantly, we are making these concessions while also maintaining the safety, security, innovation, protections, rewards and access to credit that are so important to millions of Americans and to our economy."