A historic class action settlement about antitrust was recently achieved between major payment networks, including Mastercard and Visa, and the merchants of the U.S. The settlement resolved a class action that began on June 22, 2005, with a Class Settlement Agreement finalized on March 25, 2024. This settlement concludes the litigation and introduces significant changes to the fees merchants incur when accepting card payments. This article explores the future of payment card interchange fees post-settlement and its benefits to merchants.
An Overview of the Payment Card Interchange Fees Settlement
As reported by Business Wire, Visa has reached a settlement agreement to resolve a lawsuit concerning high credit card processing fees. The lawsuit mainly involved small businesses, which made up over 90% of the plaintiffs. The agreement outlines benefits of over $30 billion to the affected parties, along with commitments for ongoing support.
A significant feature of the settlement is that it provides merchants with increased flexibility in payment acceptance and proposes reduced interchange fees, which will remain constant until 2030. Despite these measures, some critics believe the settlement does not offer adequate compensation or future protections.
Initiated in 2005, the lawsuit is poised to conclude if the court sanctions the settlement, thereby ending nearly two decades of litigation. The case is now advancing to the settlement administration phase, and eligible parties should file a claim by the deadline of August 30, 2024.
Businesses that processed payments using Mastercard or Visa from 2004 to 2019 may be entitled to a portion of a $5.54 billion fund, and if eligible, you should Submit a claim by August 30, 2024. Known as the “swipe fee” lawsuits, this litigation accused Mastercard and Visa of anti-competitive practices by artificially raising fees and breaching antitrust laws.
The settlement, valued at $5.6 billion, reached on March 15, 2023, is the largest in a private antitrust case under the Sherman Act. It aims to hold credit card firms accountable and potentially reduce fees for merchants and consumers.
The Future of Payment Card Interchange Fees Post-Settlement
- Five-year average effective rate decrease
Under the proposed terms, Mastercard and Visa will reduce interchange rates by 7 basis points (bps) for five years, beginning in April 2025.
Importantly, the proposed settlement allows Mastercard and Visa to negotiate individual credit card interchange rate agreements with merchants at any rate. However, transactions made under these customized agreements would typically be considered when calculating the average effective rate reduction.
- Mandatory three-year reduction in interchange fees
Post settlement, Mastercard and Visa will be immediately mandated to lower all posted interchange rates for most domestic credit card transactions in place as of December 31, 2023. This adjustment forms part of the average effective rate reduction initiative.
Specifically, they will decrease the posted swipe fees for merchants by 4 bps, maintaining this reduction for at least three years from the initiative’s start.
- Five-year rate cap and flexible payment steering
Mastercard and Visa have reached an agreement to lower the interchange fees that U.S. merchants are charged on credit card transactions and to cap these rates for a minimum of five years, maintaining them above the levels as of December 31, 2023.
Additionally, the agreement grants merchants increased flexibility to direct payments. Under these terms, the card networks must alter their regulations to exempt merchants from the requirement to implement the same permissible steering strategies across all their locations for each of Mastercard and Visa. These steering rules will also apply to Mastercard and Visa cards stored in digital wallets.
- The “Honor All Wallets” will be adjusted
The “Honor All Wallets” rules mandate that merchants accept all payments carrying the network’s brand, regardless of the device or technology used. This includes payments from any digital, mobile, or fob device that features the same network brand, regardless of the method of storage or loading.
According to the proposed new agreement terms, Mastercard and Visa would need to revise their “Honor All Cards” policies. These revisions would grant merchants the flexibility to select which digital wallets they accept, albeit with certain limitations.
Under these revised terms, merchants could opt not to accept a particular digital wallet. However, this decision must be based exclusively on the wallet rather than the specific card brands it supports. Suppose a wallet may include a Visa or a Mastercard card and is operated by the respective card network. In that case, the merchant must accept it if the transaction fees and interchange rates are consistent with those of transactions conducted without a digital wallet. However, merchants would not be obligated to accept cards from other networks contained within these wallets.
The settlement further clarifies that the updated rules on permissible steering, as stipulated in the agreement, will remain effective for Mastercard and Visa cards used in digital wallets.
Additionally, merchants must notify Mastercard and Visa in writing and in advance about their decision to decline certain digital wallets. This requirement also applies to online transactions processed through digital wallets.
- New surcharging rules
The proposed settlement stipulates that Mastercard and Visa must uphold their surcharge rules, allowing merchants to add surcharges to credit card transactions at either the “Brand Level” or the “Product Level.” Additionally, the networks must adjust their regulations to exempt merchants from certain nondiscrimination obligations that have traditionally mandated uniform surcharges for Mastercard and Visa credit card transactions.
Under the terms of the settlement, Mastercard and Visa have consented to permit merchants to apply a 1% surcharge on transactions, irrespective of how transactions through competitors like American Express are handled. Merchants can impose a 3% surcharge if they apply the same higher rate to competitors like American Express and Discover. The settlement prohibits Mastercard and Visa from enforcing interchange rate structures that specifically target or disadvantage merchants who surcharge according to the rules.
Furthermore, merchants who implement surcharges must continue to comply with the notification and disclosure requirements of Mastercard and Visa.
- No discounting rule
Under the proposed settlement, Mastercard and Visa must avoid adopting or enforcing any rules or agreements preventing merchants from directing customers toward specific payment methods.
The settlement modifies Mastercard and Visa’s “no-discounting” and “non-discrimination” policies to allow merchants to provide discounts depending on the credit or debit card issuer. Consequently, merchants are now able to offer discounts that vary based on the issuing financial institution.
- Flexibility for merchants in accepting Mastercard and Visa cards at specific locations
The proposed settlement would permit merchants to decide whether to accept all Mastercard or Visa point-of-sale debit devices or other products in each of their stores operating under the same brand. However, it would not restrict Mastercard and Visa from offering discounts and special pricing to merchants who choose to accept their cards at all their locations. Nevertheless, the card companies would not be allowed to mandate merchants to accept their cards at every location as a condition for these discounts.
Mastercard and Visa are required to revise their regulations within 90 days of the settlement’s approval. These updates will allow merchants to experiment with not accepting Mastercard or Visa cards at specific locations within the same brand in the U.S. This trial must be limited to certain locations, restricted in duration and scale, and merchants must provide written notification of where and when the trial will occur.
- Formation of Merchant Buying Groups
Within three months of the proposed settlement’s approval, Mastercard and Visa are required to amend their policies to facilitate the formation of “merchant buying groups.” These groups will be able to negotiate directly with Mastercard or Visa on various aspects of their operations.
Specifically, the amendments will allow merchants to establish Merchant Buying Groups that adhere to defined criteria. These groups can submit proposals to Mastercard and Visa concerning a range of issues, including interchange rates and categories, merchant fees, rules, procedures, network practices, and other operational elements that affect merchants.
In response, Mastercard and Visa must engage in good faith by reviewing the Merchant Buying Group’s proposals to determine if they offer commercially reasonable benefits for the network, consumers, merchants, and all stakeholders. Following this evaluation, Mastercard and Visa must undertake sincere, bona fide negotiations regarding the proposals with the Merchant Buying Group.
- The education program will be established
The Merchant Education Program, established with a $15 million allocation from the Mastercard and Visa Swipe Fee Settlement, is designed to assist merchants in comprehending the settlement details and implementing the changes. This program will be free to all merchants, regardless of their size or type. The educational content will cover:
- Updates to the rules
- Ways merchants can gain from these rule changes
- Advantages of creating and participating in Merchant-Buying Groups
- Techniques for distinguishing between Mastercard or Visa-branded credit cards according to the issuing bank
- Legal restrictions on future actions
Under the terms of their legal settlement, Mastercard and Visa have agreed to provisions that prohibit future lawsuits related to the issues discussed or that could have been raised during this litigation. This aims to prevent ongoing legal disputes over the same issues.
The settlement provides temporary relief while establishing a broad, possibly permanent prohibition on future lawsuits by merchants concerning swipe fees. This includes no option for dissenting parties to opt-out. Plus, the settlement extends to prevent future businesses from suing, which may conflict with provisions of the Sherman Antitrust Act.
Conclusion
The future of payment card interchange fees post-settlement appears poised for significant changes. If approved, the settlement will increase flexibility and potentially lower costs for merchants. By reducing interchange fees and modifying rules around digital wallets and surcharging, Mastercard and Visa aim to address long-standing merchant concerns.
Establishing Merchant Buying Groups and the Merchant Education Program further highlights the settlement’s potential to reshape the payment processing landscape. While some critics argue that the settlement may not fully compensate affected merchants, the proposed changes mark a critical step towards resolving nearly two decades of legal disputes. They could lead to a more competitive and transparent market for payment card transactions.
Frequently Asked Questions
What does the recent settlement involve?
The latest settlement in the payment card interchange fee litigation is a $5.5 billion agreement to compensate merchants charged high fees for accepting Mastercard and Visa payments. It addresses claims of anti-competitive practices by the card networks and provides significant financial redress to affected businesses.
Are there any new terms in the updated settlement agreement?
The revised settlement increases the total to $6.2 billion, with an added $900 million. If more than 15% of the parties opt out, $700 million may be returned to the card companies. The agreement also allows for future lawsuits against the card companies after five years, reflecting ongoing concerns about their practices.
How does the “Honor-all-Cards” rule impact the settlement?
The “Honor-all-Cards” rule requires merchants accepting Mastercard or Visa to accept all cards from these networks. While criticized for supporting anticompetitive practices, it is defended as essential for widespread card acceptance, helping the networks’ effectiveness and consumer convenience.
What are the implications of this settlement for the future of interchange fees?
The settlement underscores the tension between competitive interchange fees and card network operations. The substantial payout and the provision for future litigation suggest ongoing scrutiny of interchange fees. The outcome may lead to more transparent and potentially lower fees depending on how the card networks adjust their practices and how merchants leverage the new rules.
