Proposed Visa–Mastercard Deal Hands Merchants New Power to Steer Spending

A proposed settlement between Visa, Mastercard and merchants over interchange fees, also called swipe fees, has been two decades in the making. 

In addition to lower interchange rates, a settlement would allow merchants the right to decline some Visa and Mastercard-branded credit cards and add surcharges on some credit cards.

The dispute between Visa and Mastercard and merchants dates back to claims brought forth by merchants in a federal court in Brooklyn, New York, in June 2005. 

A proposed settlement would decrease interchange fees by 10 basis points for five years and set a 1.25% rate for standard consumer cards for eight years, Payments Dive reports. The details of a proposed settlement was revealed in November. The next hearing is scheduled for April 27 in Brooklyn. 

If the proposed settlement goes through, merchants will be allowed to steer credit card customers away from more expensive premium cards.

For example, a merchant could add a surcharge for premium rewards cards, such as Chase Sapphire Reserve or American Express Platinum cards, to make up for the cards’ higher interchange fees.

This could be a boon for merchants but it could mean trouble for premium card issuers. If consumers are charged a surcharge each time they make a purchase with a premium rewards credit card, this could hurt demand for premium cards, especially those with pricey $500-plus annual fees.

There is nothing premium or exclusive about paying more when you use your high-end credit card for purchases. How much can merchants charge? Merchants may add surcharges of up to 3%, according to Datos Insights. 

In addition to steering customers away from expensive credit cards, some merchants are urging consumers not to use credit cards or debit cards at all but to pay with cash instead. 

There may be a small sign urging cash sales at the checkout telling customers that the merchant prefers cash sales. And some merchants offer a small discount to customers who pay with cash.

Encouraging customers to pay with cash and steering credit card customers away from expensive cards are both ways merchants lower the amount of money they pay for interchange fees. It also improves their bottom line.  

Another possible outcome of a potential settlement between Visa and Mastercard and merchants is the end of the  “honor all cards” rule, which requires merchants to accept all Visa and Mastercard-branded cards. 

Doing away with the rule would give merchants the freedom to turn down cards with pricey interchange fees, such as rewards cards, and accept other credit cards with lower fees. The result would help to minimize interchange fees.

But would it be good customer service to turn away customers based on the credit cards they carry?  Could this backfire and be bad for business? It is something to consider. 

About 175 million consumers carry at least one credit card, according to TransUnion. So the impact of a settlement and any moves made by merchants, such as adding surcharges or turning down credit cards, will affect a large number of potential card customers.

In addition to lower interchange fees, a proposed settlement between Visa and Mastercard and merchants would allow merchants to add surcharges on some credit cards and decline others. Merchants would be able to steer customers away from higher cost credit cards, such as premium rewards cards, by adding surcharges to these cards.

The end of the “honor all cards” rule means merchants may turn down credit cards with high interchange fees altogether. Whether this would be a good move for their businesses is up for debate.