Unpacked   //   March 29, 2024

A proposed swipe fee deal from Visa & Mastercard causes concern among retailers 

The push to lower so-called “swipe fees” charged to retailers for credit card processing hit a major milestone this week when Visa and Mastercard reached a proposed settlement with merchants in a 19-year-old federal court case. 

Plaintiffs attorneys Tuesday announced a deal that would temporarily limit what retailers pay to process credit card transactions. The rates tend to go up twice a year, and some small businesses say the costs are their second or third-highest operational expense. The deal has a number of requirements, but one major tenant would cap the fees at 2023 levels for five years.

Court documents say the deal — which also could open up the door to more surcharges for customers — could save merchants up to $30 billion in costs and give them new negotiating powers. “The spiraling cost of interchange is no longer sustainable and is being regulated all over the world. This is the settlement of an antitrust case, and it offers competition-based relief that is rational, practical, and achievable,” the settlement proposal says.

The Electronic Payments Coalition, which is a group of dozens of banks and card networks, said the proposal will help merchants more than the proposed legislation that’s currently in Congress, known as the Credit Card Competition Act. But some retail advocates are saying the proposal is a short-term solution, and further reform is needed to curb anti-competitive behavior from the credit card companies.

“Based on the direct feedback we’ve had in the past 24 hours, this is something that has serious concerns with it,” said Austen Jensen, an executive vice president with the Retail Industry Leaders Association that represents businesses like Target, Walgreens and Home Depot. “When you compared the $30 billion in savings [from the settlement deal] to the $160 billion that we pay every year in swipe fees, it’s a drop in the bucket.”

Here’s a rundown of what’s happened with the case, and what’s ahead in the swipe fees debate. 

What are ‘swipe fees’ and how do they work?

Many shoppers are familiar with the extra charge they’re hit with at some stores when they use credit cards. That’s because many merchants pass along the so-called “swipe fees” that they pay to credit card companies in exchange for processing the transactions.

Also known as interchange fees, the fees are charged as a small fixed fee plus a percentage of the transaction amount. But the rates are different based on the kind of credit card the shopper has — meaning a fancier rewards card will typically carry a higher fee. Once collected, credit card companies say they use these fees to help cover costs for securing payment works, and support operations like credit card rewards programs.

Merchants argue that the big card networks use their dominance to charge high rates. And retailers and their advocates have expressed concern about how swipe fees have gone up over the years. But credit card lobbyists say that the fees go up in proportion to sales. They’ve argued that putting limits on swipe fees would harm the credit card reward systems, and amount to corporate giveaways.

The proposal to lower credit card swipe fees is coming from a massive antitrust case in the New York federal court. Originally filed in 2005 by a cohort of small businesses, the case challenges Visa and Mastercard over their interchange fees — or the fees that a merchant and its bank has to pay when a customer uses a credit card at their store. Card issuers say they use the proceeds to help offset costs for fraud protection and payment processing.

A previous settlement was reached in 2012 but later overturned following challenges from merchants.

What are the terms of the proposed settlement?

The highly technical proposal — which clocks in at 261 pages — has a multitude of changes. Lawyers conducted more than two dozen mediation sessions over eight years to come up with the proposal, according to court documents. But one key part is that Visa and Mastercard would have to reduce rates by at least four basis points for at least three years. In addition, they also couldn’t raise rates for five years above what they were at the end of 2023. This is estimated to save merchants nearly $29.8 billion.

“It stops the upward interchange-fee spiral,” the settlement says. “And it goes beyond halting that upward trajectory, providing impetus toward competitive fees by rolling back current rates.”

The proposal also includes provisions for “merchant steering rules,” which means merchants could put more surcharges on credit cards transactions for more expensive types of credit cards. Merchants could also charge different fees to customers based on the card they are using, like aiming to steer people to use preferred cards by offering a discount. Additionally, smaller merchants are also able to band together to form a buying group that can enter into an agreement with Visa and Mastercard to lock in a rate for their sector or region.

Another provision reforms rules around digital wallets like Apple Pay. Right now, an “honor all cards” rule from Visa and Mastercard means that merchants that want to accept digital wallets have to accept any that have a Visa or Mastercard attached as payment. The proposal would eliminate that rule and essentially leave it up to the retailer what kind of cards they want to accept from digital wallets.

Why are some retailers concerned?

Doug Kantor, general counsel for the National Association of Convenience Stores, said one of the issues with the settlement is it doesn’t address how Visa and Mastercard set the prices for swipe fees that are uniform across banks. This means businesses can’t price-shop the way they might for other vendors or expenses.

“Merchants can’t differentiate and say, ‘Citibank, you’re too expensive, I want Wells Fargo or these other guys,'” he said. “They can only say ‘I’m going to take Visa and Mastercards or I’m not.”

Kantor is an executive committee member of the Merchant Payments Coalition, which supports seeing legislation to help control swipe fees. He said some members of the coalition are already considering what they may have to do to challenge the settlement.

Jensen from RILA also said that members are concerned that the provisions on capping surcharges would last for just five years. After that, Visa and Mastercard could “put the pedal to the metal” and raise rates again.

What’s next for the settlement?

While landmark in its scope and scale, the proposal has a long road ahead from a legal perspective. Challenges can be filed, and the judge overseeing the case would have to sign off after hearing such objections. The class of merchants would also have to be certified in order to received the relief from the settlement. If approved, the plaintiffs for the case would be paid fees and expenses up to $170 million, according to court documents.

What other actions are underway to address swipe fees?

Outside of the antitrust litigation, groups like the National Retail Federation have been lobbying for years for policy to help control swipe fees. Their biggest push is the Credit Card Competition Act , which is co-sponsored by Sen. Dick Durbin, who this week called the proposed antitrust settlement “temporary concessions negated by a few lawyers behind closed doors.”

Durbin’s proposal addresses an element of choice that’s not reflected in the antitrust settlement — essentially requiring banks to offer two networks that businesses can process their transactions through. The goal is that that would create competition for the fees and give merchants a cheaper option — and in turn, prevent stores from passing down higher costs to customers. But groups like the EPC say that’s “a sweetheart deal” for big-box stores that could get massive cuts in what they spend on fees.

Though it’s yielded bipartisan support in both chambers of Congress and Durbin is angling for a hearing, it’s uncertain if the CCCA would see a vote before the November election, or in a lame-duck session. Still, advocates for retailers intend to push forward.

“It’s more important than ever, and we are hopeful for votes,” Jensen from RILA said. “But there’s a lot of other variables that come into play on that.”