A Settlement on Swipe Fees Leaves the Credit Card Industry Wondering What Comes Next

Credit card industry titans Visa and Mastercard announced earlier this month that they are close to a settlement with merchants over a dispute that has gone on for 20 years and centers on credit card fees and acceptance requirements.

The terms of the settlement call for Visa and Mastercard to reduce the fees merchants face when they accept payments from credit cards. But the deal also paves the way for merchants to decline payments from certain cards, which could cause confusion for businesses that take card payments and other industry stakeholders.

Under the terms of the proposed arrangement, merchants would be able to avoid rules that force them to accept every one of a network’s credit cards if they choose to accept one of them, according to a Wall Street Journal report on the settlement.

Refusing to accept payments from certain cards could provide merchants with savings opportunities. Interchange fees come in different sizes, depending on the type of card a customer uses to pay for a purchase. And certain types of cards, such as those that offer rewards programs to cardholders, can lead to higher fees for a merchant.

The proposed settlement will allow merchants to accept payments from only those credit cards that don’t link them with higher fees. Of course, that practice may also introduce its own set of problems.

Rewards credit cards are popular payment instruments with consumers in the U.S. A recent study reveals that 63% of U.S. survey participants said they turn to credit cards to pay for purchases to earn cash back or other perks.

Merchants that adopt a practice of no longer accepting rewards credit cards may do so with the hope that a customer who would typically pay with a rewards card will instead produce an alternative method of payment, such as a check or a debit card, to complete a transaction.

But not everyone carries multiple forms of payments. And some cardholders who learn that a merchant won’t take their rewards card may shop at businesses that will.

We caught up with Brian Riley, Director of Credit Advisory Services and Co-Head of Payments at Javelin Strategy & Research, to hear his perspective on merchants and credit cards in light of the settlement.

“One of the challenges to rewards programs, and it’s been an issue going on for 20 years, is the love-hate relationship between merchants and credit cards,” Riley told us. “Merchants hate to pay the fees, but they love the fact that credit cards increase sales for them, and that’s important.”

Merchants that refuse payments from rewards credit cards could see their sales volumes decline.

Merchants that can retain a bigger piece of the price customers pay for purchases may see significant savings over many transactions. But a merchant could also face crippling losses if their customers choose to abandon a purchase altogether because the business doesn’t accept the card they prefer to pay with.

Jason Steele, Freelance Writer and Founder of CardCon, told us he has a hunch that merchants won’t want to turn away customers who pay with premium cards.

“Those are typically the people who have deep pockets,” Steele said.

And many merchants may not need much time to come to the conclusion that even a sale where they pay a little more in interchange expenses is better than no sale at all.

The settlement gives merchants more options to implement surcharges on transactions. According to a report from Reuters, businesses would have the unfettered ability to impose fees of up to 3% when a customer pays with a credit card.

A recent investigation of the user experience with premium credit cards details some of the challenges consumers can encounter when trying to maximize the value they receive from card rewards programs. More surcharges from merchants could make it increasingly difficult for cardholders to determine whether premium rewards programs are worth their while.

Credit cards traditionally offer better rewards than other methods of payment, including buy now, pay later tools. If merchants ramp up surcharges on rewards credit cards, issuers will need to consider if their rewards offerings remain robust enough to attract new customers and keep current ones.

But just because merchants may have more room to implement surcharges doesn’t mean they will.

Matthew Goldman, Founder of consulting firm Totavi, told us that, for a merchant, accepting any type of payment, including cash, comes with costs.

Managing cash payments can also come with expenses for merchants.

“Big corporations know this, but of course they’re going to complain about interchange because they want to pay less,” Goldman said. “But not every retailer wants everyone paying in cash. Then they’d have to pay for a Brink’s truck to come to their stores, which would actually be much more expensive.”

The proposed settlement between Visa, Mastercard, and merchants will require court approval.

Tony DeSanctis, Senior Director of Client Education and Knowledge Strategy at Cornerstone Advisors, told us he has doubts over whether the current version of the settlement will wind up being the final one.

“I’m a little bit skeptical that they’re not going to have to go back to the drawing board,” DeSanctis said, in reference to the parties involved in the settlement. “I think they’re just going to continue to put proposals out there to try to find a middle ground.”

CardRates will be following this story to track further developments.