Credit Card Giants Reach $30 Billion Settlement, Agree To Temporarily Lower Fees

The catalyst for the settlement began nearly 20 years ago. An antitrust lawsuit from U.S. merchants alleged that Visa and Mastercard engaged in a conspiracy to fix fees related to card processing at an artificially steep rate. Initially, a settlement was reached in which the defendants would pay out over $5 billion to those impacted. However, those merchants felt it wasn’t enough.

Now, with the conclusion of round two, Visa and Mastercard will distribute close to $30 billion, realized over a five-year period. This payout will be in the form of savings through a lowered interchange rate, a cap on fees and the allocation of $15 million toward a new program for merchant education.

Interchange Rate Reduced

Have you ever wondered why payment methods vary from retailer to retailer? The reason is that it costs merchants a small fee, or interchange fee, each time you swipe your credit card. These so-called swipe fees go straight to the processor—in this case, Visa and Mastercard.

A fee of 1% to 2% may not seem like much, but the data paints a different picture. Visa and Mastercard in 2022 alone saw billions of dollars in revenue from these swipe fees.

Under the new settlement agreement terms, Visa and Mastercard will lower these interchange rates for in-store purchases by four basis points—0.04% over three years. And for the next five years, interchange fees must be under the current average rate by at least seven basis points. The idea is to encourage competitive pricing among processing networks by giving merchants the power to choose options.

Five-Year Rate Cap

In addition to lowering interchange rates, Mastercard and Visa have agreed to a five-year rate cap during which they will not increase fees. This applies to any rate posted as of December 31, 2023.

Again, the hope is to create a more equitable landscape by giving merchants more choices when it comes to processing fees.

According to Visa Inc., the settlement will help businesses manage costs by giving “merchants greater flexibility at the point-of-sale.” With merchants benefiting from reduced costs on transactions, you would expect these savings to trickle down to consumers, right?

Not necessarily. In fact, we’ve seen a similar scenario play out before with the Durbin Amendment of 2011, which aimed to cap swipe fees for debit card transactions.

According to a study published in the Richmond Fed Economic Brief by Zhu Wang, Scarlett Schwartz and Neil Mitchell, which looked into the impact of the amendment, few merchants were “found to reduce prices or debit restrictions as debit costs decrease.”

This historical precedent suggests that while the settlement may provide relief for businesses, consumers won’t see the benefits, at least in the form of lower prices.

What This Means for Rewards Credit Cards

Cash back and travel points and miles earned through rewards credit cards could also be at risk. Rewards programs are primarily funded through processing fees. This shift in fees could prompt credit card issuers to reassess their rewards structures to compensate for any revenue loss.

Consumers could find themselves grappling with diminished incentives or, as with the Durbin Amendment mentioned above, the complete loss of rewards.

This settlement marks a significant development in the longstanding legal battle over processing fees. Businesses will likely benefit from the agreement. Whether the outcome is as beneficial for consumers, however, remains to be seen.