What you need to know
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When it’s time to make a purchase, which credit card you use can quickly determine how much you pay.
A new agreement announced this week will end a long-running dispute between businesses and Visa and Mastercard over credit card swipe fee practices.
Retailers, service providers and other merchants are charged swipe fees each time a customer uses their card. Banks and card companies typically charge about 2% or more in taxes on each transaction, according to the National Retail Federation.
Previously, merchants were required to “accept all cards” on a network; for example, if they accepted a Visa credit card, they were required to accept all Visa cards regardless of the swipe fee rates charged. According to the proposed solution, they can reject cards with high fees to protect their profits. Moreover, merchants may charge customers different fees depending on the credit card they use.
“This is a fight between banks and merchants, and consumers are caught in the middle,” said Ted Rossman, senior industry analyst at Bankrate.
Approximately 175 million consumers have at least one credit card, making it the most common method of making purchases. TransUnion. Rewards cards are by far the most popular type of plastic; According to findings from the National Retail Federation, approximately 85% of credit cards issued today are rewards cards.
The long-running battle over swipe fees
Merchants have been fighting card issuers for two decades over what they call a “cartel-like pricing practice,” according to Doug Kantor, a board member of the Merchants Payments Coalition.
In 2005, retailers and other merchants filed a class-action lawsuit against Visa and Mastercard, which control 80% of the market, claiming that their fees and acceptance conditions were anticompetitive.
Monday’s agreement is the likely conclusion after 20 years of litigation over the fees banks and credit card companies charge to process payments. “We believe this is the best solution for all parties that provides the clarity, flexibility and consumer protection sought in this effort,” a spokesperson for Mastercard said in a statement. he said. Visa did not respond to a request for comment.
According to the agreement, credit cards will be divided into three categories:
- trading cards
- Premium cards including reward cards
- standard, non-reward cards
Merchants can then choose which categories to accept, but they must still accept all cards in a category. Merchants can also add up to a 3% surcharge to customers’ bills when paying by credit card. Finally, the agreement also limits the fees that Visa and Mastercard, as well as banks, can charge merchants.
The proposed solution is still months away from being implemented and must be approved by the court, which has already rejected an earlier agreement. However, experts say that changes may eventually await credit card users.
The deal could similarly make rejections of certain rewards cards more common at some retailers. costco A person familiar with the thinking of a major U.S. bank said it does not accept American Express cards for purchases.
This person, who asked to remain anonymous to speak publicly, said the final results are not yet clear because it involves active litigation. But banks are upset about how the deal turned out and see it as giving merchants more leverage when it comes to future negotiations over the cost of card acceptance.
They said the deal could cause some merchants to decide not to accept rewards cards and others to start charging additional fees for their use, and banks could also scale back their rewards programs as a result.
Near-term outlook: ‘Not much will change’
It’s unlikely any retailer will reject all rewards cards, experts say. almost since 90% of all credit card spending Despite being included in rewards cards, Rossman said merchants have no choice but to continue accepting them: “Not much is going to change in the real world.”
Rejecting some high-cost cards at the point of sale also risks alienating customers who carry them, according to Matt Schulz, LendingTree’s chief credit analyst.
That’s why the proposed deal “is purely window dressing and has no substance,” Stephanie Martz, executive director of the National Retail Federation, said in a statement. “The reduction in swipe fees doesn’t begin to go far enough, and the change to the honor-all-card rule won’t accomplish anything,” he said.
Long-term outlook: More fees, fewer benefits
One potential outcome of the deal is that retailers will charge extra fees to customers who pay with rewards cards to help cover the cost. “You may see a more diversified approach to this that requires additional fees,” said John Cabell, managing director of payments intelligence at J.D. Power.
But wealthier cardholders are already paying premiums. Rewards credit cards usually Above-average interest rates to compensate issuers for additional perks, in addition to the increasingly common annual fee, which can exceed $500 depending on the card, according to Rossman.
In return, customers earn cash back, miles or points, which creates a sought-after difference in the card market. “People love rewards cards, and especially high-income people,” Schulz said.
That could make it harder for card issuers to continue increasing benefits, as the deal requires Visa and Mastercard to reduce toll fees by 0.1 percent over five years.
“About 86% of interchange fees go to card issuers to fund credit card rewards and loyalty programs,” according to Trent Swanson, a loyalty points consulting consultant who runs mileshusband.com. “What is often overlooked is that the cost of running rewards programs is already increasing.”
In another scenario, merchants raise prices to cover the cost of accepting cards with higher interchange fees. “The reality is that we’re all paying these huge fees in the form of inflated prices and we don’t know it,” Kantor said. “The cash-paying customer always gets the shortest stick.”
Even if there’s no immediate change to the deal, over time, if merchants start adding additional fees and rewards cards become more expensive to use at the point of sale, that could dominate the spiral of rewards and perks that consumers have come to appreciate, J.D. Power’s Cabell said.
Cabell said even relatively modest cards could see a decline in their offerings if surcharges become more common across mid-tier and premium card groups. “This latest announcement is unlikely to be the final chapter.”
— Stephanie Dhue And Son of Hugh contributed to this report.
