Visa and Mastercard have reached a groundbreaking settlement, estimated at a staggering $30 billion, aimed at curbing credit and debit card fees for merchants. This historic antitrust settlement, announced on Tuesday, represents one of the largest in U.S. history and, if approved by the court, would bring an end to the nationwide litigation that has been ongoing since 2005.
The crux of the issue revolves around the accusation by merchants that Visa and Mastercard have been imposing exorbitant swipe fees, also known as interchange fees, whenever customers use their credit or debit cards. Additionally, merchants have alleged that they were prevented from steering customers towards more cost-effective payment methods through anti-steering rules imposed by the card networks.
Swipe fees typically consist of a combination of small fixed fees and a percentage of the total sale amount, averaging between 1.5% to 3.5% per transaction, as reported by Bankrate.com. In response to these allegations and in an effort to address merchant grievances, Visa and Mastercard have agreed to significant concessions under the terms of the settlement.
Key provisions of the settlement include a commitment by Visa and Mastercard to reduce swipe rates by at least four basis points for a period of three years, followed by a guarantee of an average rate that is seven basis points lower than the current average for the subsequent five years. Additionally, both card networks have agreed to cap rates for a five-year period and eliminate anti-steering provisions that restrict merchants from guiding customers towards cheaper payment options.
Furthermore, merchants will now have greater flexibility in offering discounts or surcharges based on the interchange fees associated with different payment methods. Many merchants have already begun informing customers at checkout that they may incur additional charges for using cards instead of cash.
The estimated value of the fee reductions and caps alone stands at an impressive $29.79 billion, according to court documents. Visa has highlighted that small businesses represent over 90% of the merchants involved in the settlement.
While Visa and Mastercard have denied any wrongdoing in agreeing to settle, executives from both companies have expressed optimism about the agreement’s potential to address longstanding concerns raised by small businesses. Kim Lawrence, Visa’s North American president, emphasized that the settlement targets “true pain points” identified by small businesses, while Rob Baird, Mastercard’s General Counsel, underscored that it provides businesses with “substantial certainty.”
Following the announcement of the settlement, the stock performance of Visa and Mastercard exhibited minor fluctuations, with Visa shares closing down by 0.2% and Mastercard shares rising by 0.2%.
Despite the monumental nature of the settlement reached between Visa, Mastercard, and merchants, opposition to the agreement is anticipated from various quarters. This dissent stems from concerns about the effectiveness and lasting impact of the settlement on the broader merchant community.
One year prior to this settlement, a $5.6 billion class action settlement with Visa and Mastercard was upheld by the federal appeals court in Manhattan, covering approximately 12 million merchants. However, some merchants chose to opt out of that settlement and are pursuing separate lawsuits seeking damages. Adam Levitin, a professor of law and finance at Georgetown University, highlighted that these merchants may object to the new settlement as it would bind them, potentially limiting their ability to seek further relief.
Critics argue that despite the settlement, U.S. merchants would still be subject to high swipe fees, averaging 219 basis points, which are among the highest in the developed world. Levitin expressed disappointment, suggesting that if this outcome is the culmination of nearly two decades of litigation, then the settlement represents a significant loss for U.S. merchants.
The settlement, which requires approval by U.S. District Judge Margo Brodie in New York City’s Brooklyn borough, may face challenges and appeals before being finalized, likely not before late 2024 or early 2025. Doug Kantor, general counsel of the National Association of Convenience Stores, criticized the settlement, arguing that it offers only minimal and temporary relief to merchants, with no mechanism in place to prevent future rate increases by Visa and Mastercard.
While some analysts acknowledge the concessions made by Visa, Mastercard, and banks, concerns remain regarding the potential implications for small banks and credit unions. Jaret Seiberg, an analyst at TD Cowen, suggested that larger retailers could negotiate deals with major banks for cards offering discounts at checkout, potentially disadvantaging smaller financial institutions.
However, proponents of the settlement, including Nobel Prize-winning economist Joseph Stiglitz, emphasize the potential for substantial savings for merchants, which could be passed on to consumers in the form of lower prices. The plaintiffs’ lawyers noted that Visa and Mastercard have agreed to pay up to $170 million in legal fees and expenses.
Despite the settlement, ongoing efforts in Congress, such as the Credit Card Competition Act, aim to promote competition in the payment card industry by allowing merchants to process Visa and Mastercard credit cards through other payment networks. Analysts suggest that while the settlement may influence these legislative efforts, it may not entirely quell them.
As the settlement undergoes further scrutiny and potential challenges, its impact on the payment card industry and merchants’ relationships with Visa and Mastercard remains to be seen. The case, officially titled In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, is being closely watched as it progresses through the legal system.