Visa and Mastercard have agreed to cap the so-called swipe fees they charge merchants that accept their credit cards. This is part of a class-action lawsuit that could save retailers an estimated $30 billion over five years – the latest development in nearly 20-year-old litigation.
Every time a customer uses one of their credit cards, Visa or Mastercard charges a swipe fee – also called an interchange fee – to process the transaction and shares it with the card-issuing banks. Merchants pass these fees on to customers, a practice that effectively drives up prices (and potentially leads to discounts for customers who pay with cash).
The settlement announced Tuesday, which still requires court approval, stems from a 2005 lawsuit by merchants in which they alleged they paid excessive fees to accept Visa and Mastercard credit cards.
As more consumer spending has shifted to credit cards over the years, processing fees have also increased. To accept Visa and Mastercard, U.S. merchants paid a total of $101 billion in fees in 2023, including $72 billion in interchange fees, according to the Nilson report, which tracks the payments industry. The fees also generate profits for major banks that issue the cards and indirectly fund credit card rewards programs that are not expected to be affected by the settlement agreement.
In addition to setting a cap on swipe fees – an average of 2.26 percent of the transaction, according to Nilson – Visa and Mastercard also agreed to reduce each merchant's reported swipe fee by at least 0 for at least three years .04 percentage points. For five years, companies will not increase fees above the rates published at the end of last year. Systemwide, the average fee must be at least 0.07 percentage points below the current average rate, a calculation that an independent auditor will review.
Merchants will also be allowed to adjust their prices based on the costs associated with accepting different cards, while also communicating to customers why some cards – typically business cards and those with more rewards and perks – cost more than others.
“With this settlement, we achieve our goal of eliminating anti-competitive restrictions and providing immediate and meaningful savings to all U.S. retailers, large and small,” Robert Eisler, co-lead counsel for the plaintiffs, said in a statement.
But not all retailers, especially smaller ones, are so optimistic about the proposed changes. Temporary fee reductions fall short of what is needed and underscore why Congress must pass legislation to promote a more competitive market, said the Merchants Payments Coalition, a trade group representing retailers, supermarkets, convenience stores, gas stations and online merchants represents.
“The settlement does nothing to encourage competitive market forces to raise fees or change the behavior of a cartel that centrally sets rates and prevents competition,” said Christopher Jones, a coalition executive committee member and senior vice president for government relations at the National Grocers Association Coalition. “Instead, an attempt is being made to create symbolic, temporary relief and then give card companies the opportunity to increase rates again.”
Senator Richard J. Durbin, an Illinois Democrat who has long fought to keep interchange fees in check, introduced bipartisan legislation in June that would require major banks that issue credit cards to process the cards in at least any network other than Visa or Mastercard, in an effort to create more options for merchants beyond the two industry heavyweights.
Doug Kantor, general counsel at the National Association of Convenience Stores, said the settlement provisions, which would allow merchants to charge more for credit cards with higher fees, were complicated to implement and would pit merchants against their customers.
“Even if they do use them, it makes merchants the tax collector of fees – and makes them the villain in the eyes of consumers, when in reality it is the credit card companies that are squeezing everyone when it comes to high fees.” , added Mr. Kantor.
Neither Visa nor Mastercard admitted any wrongdoing.
In a statement, Rob Beard, Mastercard's chief legal officer and general counsel, said the agreement “resolves a long-standing dispute by providing significant security and value to business owners, including flexibility in managing acceptance of card programs.”
Separately, Kim Lawrence, Visa's president for North America, said the company had “reached an agreement with meaningful concessions that address real vulnerabilities that small businesses have identified.”
Ron Shevlin, chief research officer at Cornerstone Advisors, a banking advisory firm, said the most significant part of the deal may be the ability of smaller dealers to band together to negotiate fees as large groups.
“This has opened the door to something,” he added, “to something they didn’t have the power to do.”