A few months back there was some big news, Visa/Mastercard and a broad group of suing merchants agreed upon terms that would see a range of restricted actions on the part of networks (Visa, Mastercard) and fewer restrictions for merchants (surcharges, ability to decline certain card types). Anything impacting transactions (restrictions, fees, surcharges, etc.) has the potential for major impacts on the marketplace. What does that mean for the consumer, and what does that mean for the cards you’re using to purchase things?
This is a good article on the lawsuit & settlement from Reuters
What is interchange, and why is it important?
You swipe your credit card to purchase something. Networks like Visa/Mastercard charge a fee to merchants. Those fees pay for the cost of processing transaction, overhead for the network, benefits associated with the card, and a large chunk is passed on to issuers (Capital One, Chase, Citi, etc.) which fund both rewards programs and business profit. These average ~2.35% across cards (according to the lawsuit). This is a fee paid by merchants, reasonably resulting in prices to increase nominally to offset this cost. Absent interchange, or in a world where that’s lower, and card rewards/benefits will see substantially paired down rewards. This BBC article from 10 years ago highlights the reasonable issuer response (cut rewards).
What’s actually in this settlement?
There’s a few core components. I’m highlighting my perspective here, as to what’s most important and impactful.
- Huge financial settlement for merchants (multi-billion dollar financial relief provided directly to merchants). This will pad the corporate coffers, but reasonably won’t result in any meaningful direct benefit to consumers, as there’s no forward looking benefits from this payout. Verdict: neutral for the consumer
- Reduction and capping of interchange fee rates. This sounds remarkably big, and for Visa and large banks it is (fees dropping from 2.35% average to 2.25% average as percent of transactions). In the scale of trillions of spend, that’s tens of billions of dollars over the course of the settlement. Is this fraction of a percentage likely to result in any reduction in merchant prices? Given the magnitude here, I doubt it. There’s also a cap in fee rate for the lowest tier of card product (effectively a non-rewards tier). Also unlikely to have any notable impact. Verdict: neutral for the consumer
- Allows merchants to surcharge transactions. There are a range of restrictions around surcharges today, which make these uncommon but not rare. These restrictions under this settlement disappear, absent a cap on surcharge rate of 3%. This means what is disrupting and annoying today is likely to see a substantial surge in use as merchants adopt that, because they can. Verdict: negative for the consumer
- Allows merchants to decline or restrict certain cards. Today’s model is accept one, accept all. There are greatly varying fees between Debit and Consumer and Commercial card products (from <1% to 3%+). That model is thrown out the door, and merchants have the ability to price discriminate by banning “expensive” transaction types, if they want. The only good news here is the granularity is extremely limited (even I don’t offhand now the difference between “Standard Consumer” and “Premium Consumer”.) But, at the core, this means more restrictions and less flexibility, even if we see limited use of this new flexibility. Verdict: negative for the consumer
Unfettered, escalating fees are absolutely bad for merchants, bad for consumers, and good for banks. This lawsuit’s orientation around merchant wants and needs leave Consumers stuck in an awkward and generally losing position. Despite fee reductions and caps, Consumers are likely to see transaction costs actually jump up.
Post-ending gif capturing my feelings
