When the latest iteration of the settlement involving Visa, Mastercard, and various merchants was proposed in November, there was speculation that the deal could reshape the credit card rewards model. However, a group of retailers led by Walmart argued that the settlement doesn’t go far enough to create a meaningful impact for merchants.
Under the proposed deal, Visa and Mastercard would lower the credit card interchange fees that merchants have increasingly criticized, reducing fees from roughly 2%-2.5% to about 0.1% over several years.
Perhaps the more impactful part of the settlement is that merchants would gain the ability to decline certain credit cards—particularly high-fee rewards cards—that they were previously required to accept. Still, Walmart and other retailers emphasized that this latest settlement doesn’t sufficiently address the ongoing challenges merchants face.
“What’s being offered to merchants is not really a practical solution, allowing them to not accept higher-cost rewards cards,” said Don Apgar, Director of Merchant Payments at Javelin Strategy & Research. “That defeats the purpose of having a shared acceptance mark like Visa or Mastercard—that was the whole power of the brands when they started. For a store to say, ‘We accept some Visa cards, here’s a list of Visa cards we do and do not accept,’ is ridiculous.”
“Retailers don’t want to be put in a position of instituting fragmented payment policies that disadvantage consumers and add friction to the shopping experience,” he said. “Merchants, for the most part, acknowledge that card payments are fast and convenient, but the rising cost of interchange and network fees has damaged the value proposition for merchants.”
Perks with Payment
One of the factors driving calls for change is that rewards cards have shifted from being the exception to the rule. Once the domain of luxury credit cards—such as those issued by American Express—more card issuers have added benefits to attract cardholders.
As consumers have come to expect perks with their payments, rewards programs have become an integral part of the credit card landscape. However, even as consumers enjoy cash back and discounts, credit card companies pass a portion of these costs to merchants. This has intensified merchants’ calls for a reduction in interchange fees.
Overlooking the Benefits
Amid the focus on costs, the substantial benefits of credit cards should not be overlooked. These payment cards have become the dominant form of payment in the U.S., offering consumers flexibility, protection, and efficiency.
The widespread use of credit cards has led to measurable increases in shopping activity and spend per visit at merchants. E-commerce, mobile payments, and contactless transactions have all benefited from their adoption.
What’s more, transaction times at the point-of-sale have been substantially reduced, while the risks and expenses associated with handling large amounts of cash have been minimized.
“Sadly, the great benefits that branded card acceptance has brought top large-chain retailers are being completely ignored in these conversations,” Apgar told PaymentsJournal. “Cards have been part of our daily shopping lives for long enough that merchants have stopped tracking the benefits and focus solely on the expense of the fees to accept cards.”
The Final Analysis
For their part, Visa and Mastercard have been working toward a solution with merchants for years, even as they continue to deny any wrongdoing. Prior to the November proposal, the two companies reached a $30 billion settlement with merchants last year, which was initially considered a win for retailers.
However, in the final analysis, this settlement only amounted to a 0.04% reduction in interchange fees over three years. The deal was later struck down by a New York federal judge for failing to provide adequate compensation to merchants.
The Walmart-led group has petitioned a federal judge in Brooklyn to reject the latest settlement on similar grounds. Additionally, there are concerns that accepting this settlement could affect other ongoing actions against the card companies.
Impacting the Business Model
The uncertainty surrounding these actions has put many credit card issuers in limbo. If the latest settlement is approved, it could significantly disrupt their rewards-driven strategies, potentially forcing them to scale back on cashback and points programs.
“There (would be) a shift of control at the acceptance point, from the card issuer to the merchant,” Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research told PaymentsJournal. “The big deal to watch is whether cardholders will lose confidence in their card. Consumers may need to have multiple cards in their wallets or purses to ensure the merchant will accept the product.”
“For some large issuers that have strong merchant relationships, this might be a positive,” he said. “But expect chaos for small issuers who might just issue one type of a credit card.”
