What Does the Mastercard & Visa Credit Card Payment Settlement Really Mean for Merchants?

Author: Stever Glover, Payment Projects Lead

Mastercard and Visa reached a $30 billion settlement last week with merchants over a long-standing credit card payment swipe fee case. If approved, the antitrust settlement will be one of the largest in U.S. history.

Under the agreement, the credit card giants agreed to reduce interchange fees (also called swipe fees). This would allow more flexibility on surcharging and anti-steering rules. The announcement comes almost 20 years after merchants filed a class-action lawsuit in New York federal court.

According to Nilson, U.S. merchants paid over $70 million in interchange fees last year, with an average fee of 2.24%. Under the settlement terms, Visa and Mastercard would reduce interchange fees from credit card payments by just 4 basis points (0.04%) for three years.

Typical Costs from Major Credit Card Companies

Source: Forbes

While the settlement is being heralded as the best thing since sliced bread for merchants, I’m not so sure that’s the case. Here’s why.

So, credit card payment fees will go from 2.24% to 2.20%? 

If you’re like me, that doesn’t sound like much of a boon to merchants.

Moreover, Visa and Mastercard only set interchange rates annually in April and October. They don’t make money from them directly, which goes to the issuing banks. Visa and Mastercard earn so-called network fees, also paid by merchants (and acquirers and issuers).

Network fees vary depending on the type of transaction, the merchant's location, the cardholder, the merchant industry, and other key factors. These fees are not transparent to merchants and are often bundled with other fees by the acquirers or processors who provide payment services to merchants.

While interchange fees have been subject to regulation in many parts of the world, Visa and Mastercard have been free to charge whatever they like in network fees. The truth is that they like to charge a lot. And they like to increase those fees regularly well above inflation.

One way they get away with it is to make the whole thing so complex, with many different fee types, that merchants (and even banks) have a tough time reconciling them.

Credit card networks also have a history of increasing their fees simultaneously when interchange fees are artificially reduced.

Credit card companies seem to believe that a minor fee reduction will appease merchants and they will not discover that they aren’t reaping the full savings. This less-than-transparent approach has been well documented in Europe, where interchange fees were regulated at 0.3% or lower. This prompted the UK’s regulators to open an investigation into such fees.

Visa alone earned $45 billion in revenue in FY23 or 0.37% of the dollar volume. To incentivize network usage, Visa turns around and gives $12 billion back to select large merchants and other partners. For example, Visa may give a rebate on Visa debit transactions to discourage a large merchant from considering PIN debit routing. Otherwise, Visa would lose out to networks such as Star, NYCE, and Pulse.

The settlement is subject to court approval and will expire after five years. So, don’t be surprised if we see more network fee increases off the back of this settlement, which was intended to help merchants.

The settlement comes one year after the federal appeals court in Manhattan upheld a $5.6 billion class action settlement with Visa and Mastercard, covering about 12 million merchants. Those merchants accused the credit card giants of colluding to fix interchange fees and prevent merchants from steering customers to cheaper payment methods.

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