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The credit card you use to make a purchase quickly determines how much you’ll pay.
A new settlement announced this week ends a long-running dispute between the companies and Visa and Mastercard over credit card “swipe” fee practices.
Swipe fees are charged to retailers, service providers, and other merchants every time a customer uses their card. Banks and credit card companies typically charge about 2% or more per transaction, according to the National Retail Federation.
Previously, merchants were required to “honor all cards” on the network. For example, if you accepted one Visa credit card, you had to accept all Visa cards, regardless of the swipe fee rate charged. The proposed settlement would allow banks to decline cards with high fees to save revenue. Additionally, merchants may be able to charge customers different fees depending on the credit card used.
“This is a battle between banks and merchants, and consumers are caught in the middle,” said Ted Rothman, senior industry analyst at Bankrate.
According to TransUnion, approximately 175 million consumers have at least one credit card, making it the most common purchasing method. Point cards are the most popular type of plastic, and a study by the National Retail Federation found that about 85 percent of credit cards issued today are point cards.
The long-running battle over swipe fees
Doug Kanter, executive director of the Merchant Payments Coalition, said merchants have been battling card issuers for 20 years over what he called “cartel-like pricing practices.”
In 2005, retailers and other sellers filed a class action lawsuit against Visa and Mastercard, which control 80% of the market, alleging anti-competitive fees and acceptance conditions.
Monday’s settlement could be the conclusion to a 20-year lawsuit over the fees banks and credit card companies charge to process payments. “We believe this is the best solution for all parties, providing the clarity, flexibility and consumer protections needed in this effort,” a Mastercard spokesperson said in a statement. Visa did not respond to a request for comment.
Under the settlement, credit cards would fall into three categories:
Commercial cards Premium cards (including points cards) Standard non-reward cards
Merchants can choose which categories to accept, but must still accept all cards within a category. Merchants can also add up to a 3% surcharge to customers’ bills when they pay by credit card. Finally, the settlement caps the fees that banks, as well as Visa and Mastercard, can charge merchants.
The settlement is still several months away from being implemented and must be approved by the courts that have already rejected previous agreements. But experts say there may ultimately be a shift for credit card users.
The settlement could make it more common for certain loyalty cards to be rejected at some retailers. costco The company does not accept American Express cards for purchases, according to people familiar with the thinking of major U.S. banks.
The person, who requested anonymity to speak candidly, said the final impact is not yet clear because it involves ongoing litigation. But banks are upset about the outcome of the settlement, which they believe will give merchants more leverage in future negotiations involving the cost of accepting cards.
The settlement could cause some merchants to refuse to accept loyalty cards, others to begin charging additional fees for their use, and banks to reduce their loyalty programs.
Short-term outlook: “No major changes are expected.”
Experts say retailers are unlikely to choose to reject all loyalty cards. With nearly 90% of credit card spending coming from point cards, merchants have no choice but to continue accepting points cards, Rothman said. “In the real world, it wouldn’t make that much of a difference.”
Rejecting some high-cost cards at the point of sale also risks alienating customers who hold those cards, said Matt Schultz, chief credit analyst at LendingTree.
As a result, National Retail Federation Chief Administrative Officer Stephanie Maltz said in a statement that the proposed settlement is “all window dressing and no substance.” “Reducing swipe fees still hasn’t gone far enough, and changing the honor all-card rule won’t accomplish anything,” she said.
Long-term outlook: Fees will increase, benefits will decrease.
A possible outcome of the settlement would be for retailers to impose additional fees on customers who pay with loyalty cards to cover costs. “There could be a lot more different approaches to this, in which case we would charge an additional fee,” said John Cavell, managing director of payments intelligence at J.D. Power.
But wealthier cardholders are already paying a premium. Rewards credit cards typically have annual fees, which can exceed $500 for some cards, and higher-than-average interest rates to compensate issuers for the additional benefits, Rothman said.
In return, customers can earn cash back, miles or points, which are popular differentiators in the card market. “People love loyalty cards, especially high-income groups,” Schultz said.
The proposed settlement requires Visa and Mastercard to reduce swipe fees by 0.1 percent over five years, which could make it difficult for card issuers to continue to expand their benefits.
According to Trent Swanson, a loyalty points consulting advisor who runs Mileshusband.com, “approximately 86% of interchange fees are paid to card issuers to fund credit card rewards and loyalty programs.” “What is often overlooked is that the cost of operating rewards programs is already rising.”
In another scenario, merchants increase prices to cover the cost of accepting cards with higher interchange fees. “What’s really happening is that we’re all paying these huge fees in the form of inflated prices and we don’t know it,” Kanter said. “Customers who pay with cash get the shortest straw every time.”
J.D. Power’s Cavell said the settlement may not change things right away, but over time, if merchants start adding extra fees and point-of-sale points of sale become more expensive to use, it could reign in an upward spiral of perks and perks that consumers have come to appreciate.
Cavell said if premiums become more common among mid-tier and premium card groups, even lower-value cards could see their offers reduced. “This final announcement is unlikely to be the final chapter.”
—Stephanie Dhue and Hugh Son contributed to this report.
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