The United States has the most lucrative credit card market in the world, largely due to high interchange fees combined with very high credit card acceptance. Over the years, there have been numerous efforts to change the status quo and reduce interchange fees, both through government proposals and lawsuits.
With that in mind, Visa and Mastercard are close to reaching an agreement with merchants, which could have a significant impact on consumers and impact the credit card rewards we receive.
In addition to new restrictions, interchange fees could fall
The Wall Street Journal reports that Visa and Mastercard are nearing a deal that would end a 20-year legal battle with merchants to lower the credit card fees stores pay and give them more power over what types of cards they can accept.
Under the agreement, Visa and Mastercard would reduce interchange fees (often between 2% and 2.5%) by an average of about 0.1% over several years. But the more important point here is that it would relax rules that require merchants that accept one of a network's credit cards to accept all credit cards.
In other words, a merchant that accepts one type of visa would no longer have to accept all types of visas due to the different fees associated with it. Credit card acceptance falls into several categories, including rewards credit cards, credit cards without rewards programs, and store cards.
This means that some stores may refuse to accept cards with higher exchange fees while accepting cards with lower exchange fees. In addition, this agreement would increasingly allow for surcharges, i.e.
This entire case dates back to 2005, when merchants sued Visa, Mastercard, and major banks, accusing them of engaging in anti-competitive behavior regarding interchange fees and credit card acceptance terms.
So we'll see what comes of it. Apparently the parties are getting closer to an agreement, but nothing has been finalized yet and it has already taken two decades to work out…
What impact would this have on consumers?
It goes without saying that generous welcome bonuses and reward structures on credit cards are largely funded by how lucrative it is for banks when we spend money on their cards due to the high interchange fees.
A 0.1% reduction in interchange fees over several years will be significant for payment processors and banks, but is unlikely to be a game-changer. I think the much bigger issue concerns credit card acceptance on the Visa and Mastercard networks.
For example, a Visa Infinite product typically has higher interchange fees than a simpler product. Of course, these cards tend to offer the most rewards and consumer protection, so they're the products many of us use.
If an agreement is reached, merchants would have much more flexibility and would be able to accept only the lowest-cost types of credit cards. The question is, would they actually do that? Merchants accept credit cards not out of kindness, but because it's good for business (and in some ways there is a cost to accepting cash, but that's a different topic).
If this goes through and merchants could easily avoid paying with more expensive types of cards, then I'm sure they would. However, would retailers face declining sales, and would this become widespread to the point where it would be the norm rather than the exception?
We'll see how this plays out. Keep in mind that in recent years (unrelated to this) we have seen a push for new credit card legislation in the form of the Credit Card Competition Act. This would require merchants to route payments through an independent network, and would apply to Visa or Mastercard credit cards issued by banks with more than $100 billion in assets. In other words, Visa and Mastercard would no longer have the same power when it comes to merchant fees.
Nothing has happened on this front yet (and I can't imagine that will be the case in the current political climate), but it's always something that's on the table. Also keep in mind that most of U.S. airline profits today come from lucrative co-branded credit card arrangements, and these largely subsidize our airfares. Therefore, changes to the variety of credit card rewards could also impact airlines.
Conclusion
Visa and Mastercard are close to reaching a settlement in a 2005 case. If settled, interchange fees could be cut by about 0.1% over the next few years. The much bigger point is that merchants can choose which Visa and Mastercard products they want to accept. Therefore, they may start rejecting the premium products from Visa and Mastercard, which have higher interchange fees (but also offer better perks).
This all has the potential to have a major impact on the credit card landscape. If a significant number of merchants were to stop accepting premium products (like Visa Infinite or World Elite Mastercard), this would obviously create a real problem for cardholders.
What do you think about this possible agreement with Visa and Mastercard?