To settle a lawsuit initiated in 2005, Visa and Mastercard have agreed to reduce their credit card interchange fees by 0.04 percentage points in the U.S. over a three-year period. They also agreed not to raise their swipe fees for the next five years.
These changes could save merchants $30 billion over the next five years, according to a statement issued by their lawyers. For context, Visa and Mastercard’s swipe fees hit a record high of $100.77 billion in 2023, according to the Merchants Payments Coalition (MPC).
Merchants’ Second-Biggest Expense
The MPC says that swipe fees are generally the single biggest expense aside from labor for small retailers such as convenience stores. Total swipe fees, including debit cards, topped $172 billion in 2023, with more than $132 billion of that from Visa and Mastercard debit and credit cards.
While those numbers are sizable, it’s worth noting how large the entire credit card industry is in the U.S.
“Card use in the U.S. is $10 trillion a year right now, so the reduction in interchange fees is not that dramatic,” said Don Apgar, Director of the Merchant Payments Practice at Javelin Strategy & Research. “The Durbin amendment to Dodd-Frank had a much bigger positive impact to merchants when it capped interchange fees on debit cards issued by banks with over $10 billion in assets. Remember that the swipe fees are income to the card issuers, and right now the margin that issuers make between the cost of funds and the interest rates they charge to cardholders are at historic highs.”
Last summer, Sens. Richard Durbin (D-Ill.) and Roger Marshall (R-Kan.) reintroduced the Credit Card Competition Act, which would require financial institutions with more than $100 billion in assets to have at least two network options for processing credit card transactions. At least one of those must be an option other than Visa or Mastercard.
Unintended Consequences Ahead
The new settlement, perhaps in anticipation of that law, says that Visa and Mastercard must negotiate their fees with merchant buying groups.
“If the intent there is to allow separate interchange rates between issuers, say Chase and Citi, the complexity of the interchange billing system for merchants will multiply geometrically,” said Apgar. “This additional work that must be performed at the processor level could result in processors increasing their fees—and wind up costing merchants more than the savings they got in interchange fees.
“From a practical standpoint, how does the average merchant implement this? Every sale at the register becomes a negotiation? Does Target program their registers to recognize expensive card types and add a surcharge to the bill? Some of this is more of a victory in principle than an actual win.”
