Does The Visa And Mastercard Settlement Really Matter?

Interchange fee reductions don't always benefit everyone but some win big

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Recently, the big news in payments was the settlement that Visa and Mastercard reached with a group of merchants in the United States. The case originated as a Class Action Complaint on June 22nd, 2005. The Class Settlement Agreement of March 25th 2024, brings the case to a close - at least for now. (A class action lawsuit allows various parties to come together to make a case on behalf of a larger group.) The result was a series of changes to the fees businesses pay for accepting card payments. Reuters led with the headline Visa, Mastercard reach $30 billion settlement over credit card fees. $30bn is a significant number in anyone’s book, but $30bn did not change hands here. So what is the actual impact, and does it matter?

Just some of the fee savings that will be made with this settlement agreement. Photo by Mackenzie Marco on Unsplash

I’m not going to re-cap every detail of the case. (Some valuable sources on the case can be found in the financial media, including the Financial Times, The Wall Street Journal, and Bloomberg. Some valuable LinkedIn posts on this topic are from Christopher Uriate at Glenbrook, John Drechny from Merchant Advisory Group, and Flagship Advisory Partners. On X, as usual, there’s been some excellent analysis, particularly from Scott Wessman - part 1, part 2.) Instead, in this post, you’ll find some observations, especially regarding the interchange fee reductions within the settlement agreement and the potential impact on credit card rewards.

Originally, I wrote another section at the end of this post on the impact of the settlement agreement on surcharging. But upon reflection, it seemed to duplicate much of what is written elsewhere with little added value. So please take a read of some of the links above if this area is of interest.

Interchange Regulated

A crucial part of the settlement is the regulation of interchange fees. Interchange fees are often described synonymously as swipe fees in much of the media reporting on this story. The settlement agreement itself doesn’t use the term “swipe fees”. Instead, it mentions “swipe/dip/tap”, reflecting that cards are often not only swiped these days. Cards are dipped when reading the chip and tapped for a contactless payment. Interchange is just one part of the total fee incurred when a payment card is used, albeit the largest part. The other elements are network fees (scheme fees) and markup applied by the acquirer. In some cases, the acquirer may be represented by a payment processor. The acquirer charges and collects all the fees, keeps their markup, and distributes the rest to the other parties.

This is showing a standard or blended pricing model example - more on this later on in this post. Source: Interchange in 1,000 words

Only the interchange element of the total credit card processing fee is mentioned in the settlement agreement. There’s a mandated reduction in interchange fees for credit cards of at least 0.04%. This required reduction of four basis points is the Posted Interchange Rate Reduction (PIRR), and applies to all credit card interchange fee types and categories. I mention “all fee types and categories” as interchange fees are not straightforward. From an earlier Payments Culture post on the topic of credit card rewards:

Interchange fees are complex [in the United States]. The full range of interchange fees are publicly available on the Visa and Mastercard websites [and] differ based on the type of business the card is used at, and the type of card itself.

For instance, on a Visa consumer credit card, interchange fees can range from 2.10% to 2.60% when used at a restaurant. When cards are used at a supermarket, interchange fees can from 1.15% with an additional flat fee of $0.05 up to 1.40% with an extra $0.05. Different sectors incur different fees.

If a card offers little or no rewards, then the interchange fee will be at the low end. Cards that offer the highest rewards will incur an interchange fee at the high end.

In addition to the minimum four basis points reduction that needs to be applied to all credit card interchange fee rates, the settlement also contains a seven basis points reduction in what is called the Average Effective Rate Limit (AERL). Therefore, whilst each interchange fee category must be reduced by at least 0.04%, the average overall fee reduction must be at least 0.07%. If some fee categories are only reduced by 0.04% then others will need to be reduced by more to make the reduction across the board equivalent to 0.07%.