Visa and Mastercard Settle Long-Running Dispute with Merchants

Visa and Mastercard Settle Longstanding Swipe Fee Dispute, Promise Relief to Merchants

by Faruk Imamovic
Visa and Mastercard Settle Long-Running Dispute with Merchants
© Getty Images/Tim Boyle

Visa and Mastercard have agreed to cap the swipe fees they charge merchants who accept their credit cards, potentially saving these businesses an estimated $30 billion over the next five years. This development marks a significant milestone in a legal battle that has spanned nearly two decades.

The settlement, announced on Tuesday, still awaits court approval. It originates from a 2005 lawsuit where merchants accused Visa and Mastercard of charging excessive fees for processing credit card transactions. Each time a customer uses a Visa or Mastercard, a swipe fee—also known as an interchange fee—is collected. This fee, which averages 2.26% of the transaction amount according to the Nilson Report, is shared between the card companies and the issuing banks. These fees are typically passed on to customers, contributing to higher prices for goods and services.

As consumer spending has increasingly shifted to credit cards, the total processing fees have risen correspondingly. In 2023 alone, U.S. merchants paid $101 billion in total fees to accept Visa and Mastercard, including $72 billion in interchange fees. These fees not only generate profits for the issuing banks but also fund credit card rewards programs, which will remain unaffected by the settlement.

Key Provisions of the Settlement

The agreement introduces several key changes designed to benefit merchants. Visa and Mastercard have committed to rolling back the posted swipe fee of every merchant by at least 0.04 percentage points for a minimum of three years. For five years, they will not raise fees above the posted rates as of the end of last year. System-wide, the average fee must be at least 0.07 percentage points below the current average rate, with an independent auditor verifying this calculation.

Additionally, merchants will now be allowed to adjust their prices based on the costs associated with accepting different types of cards. They can inform customers why certain cards—especially those offering more rewards and perks—are more expensive to process.

Robert Eisler, co-lead counsel for the plaintiffs, praised the settlement, stating, “This settlement achieves our goal of eliminating anticompetitive restraints and providing immediate and meaningful savings to all U.S. merchants, small and large.”

Visa and Mastercard
Visa and Mastercard© Getty Images/Justin Sullivan

Mixed Reactions from the Business Community

Despite the potential benefits, the reaction from the merchant community has been mixed. Smaller merchants, in particular, remain skeptical about the long-term impact of the changes. The Merchants Payments Coalition, representing a broad array of retailers, supermarkets, convenience stores, gas stations, and online merchants, has voiced concerns that the temporary fee reductions are insufficient.

“The settlement does nothing to actually bring competitive market forces to swipe fees or change the behavior of a cartel that centrally fixes rates and bars competition,” said Christopher Jones, a member of the coalition’s executive committee and senior vice president of government relations at the National Grocers Association. He argued that the settlement offers only token, temporary relief, allowing card companies to raise rates again in the future.

Senator Richard J. Durbin, a Democrat from Illinois, has long been an advocate for keeping interchange fees in check. In June, he introduced bipartisan legislation that would require large banks issuing credit cards to enable the cards to be processed on at least one network other than Visa or Mastercard, aiming to create more competition in the marketplace.

Challenges Ahead for Merchants

Doug Kantor, general counsel at the National Association of Convenience Stores, pointed out the practical difficulties merchants might face in implementing the settlement provisions. Allowing merchants to charge more for credit cards with higher fees could complicate pricing strategies and strain customer relations.

“Even if they do use them, it makes the merchants the tax collector for the charges—and it makes merchants the bad guy in the eyes of the consumer, when it’s really the credit card companies that are squeezing everyone when it comes to big fees,” Kantor noted.

Neither Visa nor Mastercard admitted to any wrongdoing as part of the settlement. Rob Beard, Mastercard’s chief legal officer and general counsel, stated that the agreement “brings closure to a longstanding dispute by delivering substantial certainty and value to business owners, including flexibility in how they manage acceptance of card programs.” Similarly, Kim Lawrence, Visa’s president for North America, highlighted that the company had “reached a settlement with meaningful concessions that address true pain points small businesses have identified.”

Ron Shevlin, chief research officer at Cornerstone Advisors, believes that the settlement’s most significant impact could be empowering smaller merchants to band together and negotiate fees as larger groups. “This is where the door has opened,” Shevlin remarked, “to something they haven’t had the power to do before.”

This historic agreement, if approved by the court, promises to reshape the landscape of credit card processing fees, offering a measure of relief to merchants while continuing to fuel the ongoing debate over the need for broader regulatory reforms in the payments industry.