Recently, the two major credit card networks in the United States, Visa and Mastercard, have reached a new settlement agreement with merchants and retailers regarding the longstanding dispute over “swipe fees”. If the agreement is approved by the court, the changes in how credit cards are used for payment could have a chain reaction affecting both merchants and consumers.
These changes could determine which credit cards merchants are allowed to accept and whether consumers need to pay additional fees or continue to enjoy high rewards when checking out.
Under the settlement agreement, Visa and Mastercard will slightly reduce the swipe fees borne by merchants by around 0.1%.
However, retailers believe that the reduction in swipe fees is too small. The National Retail Federation (NRF), the largest retail trade organization in the United States, has also criticized the proposed 0.1% reduction in swipe fees as insufficient.
According to NRF data, these two companies generated a record $111 billion in revenue from swipe fees last year.
Additionally, the settlement case will also modify the longstanding “Honor All Cards” rule, which required merchants to accept all credit cards under the Visa or Mastercard brand if they accepted one.
The new agreement essentially abolishes the “accept all cards” rule but does not allow merchants to selectively accept certain high-fees credit cards. Instead, it will establish three new categories, allowing merchants to decide whether to accept or reject reward-bearing credit cards.
Currently, there is a significant difference in swipe fees between different credit cards, especially high-end reward cards, where transaction fees can go as high as 4%.
Merchants may end up accepting fewer types of credit cards, leading to fewer payment options for consumers.
With the new agreement, retailers will have greater flexibility to reject high-fees credit cards, potentially reducing costs and giving them an advantage in fee negotiations.
For consumers, this could mean having to search for a card in their wallet that a store is willing to accept at checkout.
According to Sara Rathner, a credit card expert at NerdWallet, “Many consumers may find themselves hunting through their wallets at checkout because they don’t necessarily know the specific terms of their credit cards.”
Despite this, reward credit cards remain popular and help stimulate spending, so merchants are unlikely to stop accepting them altogether.
Your favorite restaurant may still accept your preferred credit card, but you may see the introduction of additional fees.
This is because the proposed settlement solution grants merchants more choices in credit card charges. According to J.D. Power data, over a third of small businesses have already done so.
Ted Rossman, an analyst at the New York consumer financial services company Bankrate, stated, “I think we’ll see more added fees.”
Rathner pointed out that some merchants may absorb the cost of high transaction fee reward cards themselves, while others may incorporate these costs into product prices.
She said, “As a consumer, you’re almost powerless in this situation.”
Consumers, however, will vote with their wallets, and any increase in added fees could face resistance.
Eighty percent of credit card holders in the United States use reward credit cards. If swipe fees are reduced, the income of Visa and Mastercard could decline, raising concerns about potential weakening of the reward system.
Research from the Federal Reserve Bank of New York shows that, on average, banks return 86% of swipe fee income as rewards to cardholders. In theory, reducing swipe fees could narrow this reward space.
However, Rossman pointed out that banks have other adjustment methods, such as increasing annual fees, foreign transaction fees, or late fees, rather than directly cutting credit card rewards. He believes that the limited reduction in swipe fees should allow the current reward system to remain intact in the short term.
“This system isn’t perfect, but I think maintaining the reward mechanism is a good thing for consumers,” he said.
On the other hand, NRF pointed out that swipe fees have become the second largest cost in retail after labor expenses, pushing up annual household consumption costs by nearly $1,200. NRF is calling for congressional intervention for reform.
In conclusion, if the court approves this settlement agreement, consumers may face more checkout surcharges, a rejection of a few high-rate credit cards, and pressure on the credit card reward system to adjust. Although the industry believes the impact may be limited, the environment of using credit cards for payment could undergo subtle changes as a result.