Visa and Mastercard have agreed to a landmark settlement, which is estimated to save retailers across the United States nearly $30 billion on swipe fees alone in five years.
The settlement, announced on Tuesday, would resolve a 2005 class action antitrust lawsuit filed by a group of mostly small retailers who accused the card networks of colluding with some of the top U.S. banks to set credit card interchange fees at anti-competitive levels.
Interchange fees, commonly called a “swipe fee,” are what banks charge merchants each time a customer makes a purchase using a credit card they issue. The fees are then passed on to the customer. While Visa and Mastercard don’t earn any money from interchange fees, they have raised the rates significantly over the years to the point that many small businesses add a surcharge to bills for customers paying with credit cards to encourage cash transactions.
At the stake of the settlement is a multi-billion-dollar revenue for the banks that issue cards under Visa and Mastercard’s brands. As reported by payment industry publication The Nilson Report, credit card swipe fees have grown from $51.5 billion in 2012 to $126.4 billion a decade later.
As part of Tuesday’s agreement, which is among the largest in U.S. antitrust history, Visa and Mastercard will reduce credit interchange rates by four basis points in the U.S. for at least three years. The rates will be capped at what was in place at the end of 2023 for five years.
The agreement will also remove the so-called “anti-steering” policies, giving merchants greater flexibility in terms of preferred payment methods and surcharging. Specifically, the merchants will be allowed to charge for using a Visa or Mastercard credit card, give discounts to customers who use different cards, and adjust prices based on the costs associated with accepting different cards, although they won’t be able to reject a customer’s given Visa or Mastercard card.
The changes could lead to $29.97 billion in savings in the five years after it’s approved by the courts, the lawyers representing the class of merchants said.
“Experts expect substantially greater additional savings as the agreed-upon policy changes provide merchants of all sizes with new negotiating leverage against Visa and Mastercard,” they said in a press release.
The agreement is still subject to approval by the Eastern District Court of New York. Mastercard said in a statement that it doesn’t expect the changes to go into effect until after the settlement receives court approval.
According to the Merchants Payments Coalition, a group advocating on behalf of supermarkets, convenience stores, and gas stations across the country, credit and debit card swipe fees are too high for retailers to shoulder and, therefore, hurt consumers.
“Swipe fees, on average, are the single biggest expense for merchants aside from labor, and the price tag is far too big for businesses to absorb,” the Coalition said. “As a result, the average American family is getting hit with more than $1,000 a year in higher prices due to these anticompetitive fees.”
About 75 percent of in-person purchases are paid for with credit or debit cards, according to the Federal Reserve. Online, virtually all transactions are made with plastic, and swipe fees are even higher than in-store. Visa and MasterCard wield dominating power in this market, accounting for nearly 576 million cards, or about 83 percent of general-purpose credit cards.
Tuesday’s settlement is not related to the Credit Card Competition Act, a bill introduced earlier this year by a bipartisan group of Senators. The bill would, among other things, give businesses a choice of at least two unaffiliated networks to process credit card transactions. These two networks can’t be those “with the largest market share of cards issued”—namely Visa and MasterCard.
The lawmakers said this would drive down the prices that consumers pay for everyday purchases by giving retailers more options for the network that processes cards. There is currently no such choice, meaning that a business accepting a card will have to process it on that card’s network.
“Interchange fees put a brutal strain on our small businesses, but because of the Visa-MasterCard duopoly in the credit card network market, Main Street businesses have no choice but to pay these crushing fees or risk going under,” said Sen. Peter Welch (D-Vt.), the bill’s co-sponsor. He was joined by Sens. Dick Durbin (D-Ill.), J.D. Vance (R-Ohio), and Roger Marshall (R-Kan.).
