Visa, Mastercard agree to lower credit-card fees in landmark merchant settlement

By Emily Bary

Merchants say multifaceted settlement in long-running suit is one of the largest in U.S. antitrust history

Visa Inc. and Mastercard Inc. agreed to lower and cap credit-card interchange rates as part of a landmark settlement with U.S. merchants that follows almost two decades of litigation, the parties said Tuesday.

Through the blockbuster agreement, which merchants say is one of the largest in U.S. antitrust history, Visa (V) and Mastercard (MA) will lower published credit-card interchange fees by four basis points in the U.S. for at least three years. The companies also won't raise interchange fees for five years above the rates that were in place at the end of 2023.

While the interchange concessions run behind the scenes, the companies also agreed to changes that could be more visible to consumers. For example, they've simplified rules around surcharging and established new policies around "steering," through which merchants could incentivize shoppers to use particular cards.

Visa and Mastercard set interchange fees, which merchant banks pay to card-issuing banks as part of the economics of card transactions. Though Visa and Mastercard don't earn the interchange fees themselves, their willingness to raise rates over the years has drawn the ire of merchants, who say the fees pinch their bottom lines while financial-services companies profit heavily.

"By negotiating directly with merchants, we have reached a settlement with meaningful concessions that address true pain points small businesses have identified," Kim Lawrence, Visa's North America president, said in a statement.

The settlement "brings closure to a long-standing dispute by delivering substantial certainty and value to business owners, including flexibility in how they manage acceptance of card programs," Mastercard Chief Legal Officer Rob Beard said in a separate release.

Shares of Visa and Mastercard were each up fractionally in Tuesday morning action. Baird analyst David Koning wrote that he and his team "view this as an overhang that is now past and likely means less risk of future litigation/regulation."

The agreement could lead to almost $30 billion in savings on swipe fees alone in the five years after it's approved by the courts, according to a statement put out by the lawyers representing the class of merchants. "Experts expect substantially greater additional savings as the agreed-upon policy changes provide merchants of all sizes with new negotiating leverage against Visa and Mastercard," that release said.

The long-running merchant suit has two components: financial damages and injunctive relief. The payment networks largely have resolved the damages component, with the exception of some opt-out merchants, but a past attempt to settle the injunctive class was struck down by an appellate court in 2016.

The payment networks already allowed for some surcharging, but their latest settlement simplifies the rules around it and caps credit-card surcharges at 1%. Consumers may already be used to seeing other types of surcharges on their bills when dining out, such as those said to cover inflation or employee health insurance.

Meanwhile, "steering" can operate as an effective inverse of surcharging. Some gas stations, for instance, have two sets of prices and give consumers discounts for paying by cash in a practice known within the industry as steering. That phenomenon could expand in the wake of the recent settlement, which opens the door for merchants to steer users to a different card or network, though they won't be able to decline acceptance of a customer's given Visa or Mastercard card.

The settlement seeks to resolve a 2005 suit filed by merchants who said the card networks violated antitrust rules by charging them excessively for credit-card acceptance.

Mastercard said in its statement that the agreement is still subject to approval by the Eastern District Court of New York, and the company doesn't expect rules-practice changes to go into effect until after the settlement receives court approval, likely later this year or early in 2025.

The agreement is unrelated to the Credit Card Competition Act, a bipartisan bill proposed by U.S. lawmakers that, in part, aims to require that merchants get a choice of at least two networks when running credit-card transactions. While debit-card transactions have more favorable economics for merchants as debit interchange caps and routing requirements were set forth by the post-financial-crisis Durbin amendment, lawmakers have more recently set their sights on credit-card rules.

Barclays analyst Ramsey El-Assal El-Assal said that he would be "monitoring the degree to which today's settlement blunts any potential momentum when it comes to the Credit Card Competition Act (CCCA) as well as other pending of future legal and regulatory interventions."

The Credit Card Competition Act is polarizing, with some card issuers, such as airlines, saying they could be forced to limit consumer rewards if their credit-card business models are upended by new rules. Many in the financial-services industry have opposed it. Merchant groups, however, say that high card-processing fees result in higher consumer prices for goods and services and retailers may have to compensate for these costs.

-Emily Bary

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03-26-24 1123ET

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