Visa, Mastercard reach $30 billion settlement over credit card fees

Visa and Mastercard reached an estimated $30 billion settlement to limit credit and debit card fees for merchants, with some savings likely to be passed on to consumers through lower prices.

The antitrust settlement announced on Tuesday is one of the largest in U.S. history, and if it received court approval would resolve most claims in nationwide litigation that began in 2005. Some opponents believe it may not go far enough.

Merchants have long accused Visa and Mastercard of charging inflated swipe fees, or interchange fees, when shoppers used credit or debit cards, and barring them through “anti-steering” rules from directing customers toward cheaper means of payment.

Swipe fees typically include small fixed fees plus percentage of total sale amounts, and average about 1.5% to 3.5% per transaction according to Bankrate.com.

Under the settlement, Visa and Mastercard would reduce swipe rates by at least four basis points (0.04 percentage points) for three years, and ensure an average rate that is seven basis points below the current average for five years.

Both card networks also agreed to cap rates for five years and remove anti-steering provisions.

Merchants will have more discretion to offer discounts, or impose surcharges on cards with higher interchange fees.

Many already warn customers at checkout they will pay more using cards instead of cash.

The fee rollbacks and caps alone are worth $29.79 billion, according to court papers, and Visa estimated that small businesses comprise more than 90% of the settling merchants.

Visa and Mastercard denied wrongdoing in agreeing to settle.

In separate statements, Visa’s North American president Kim Lawrence said the accord addressed “true pain points” identified by small businesses, while Mastercard General Counsel Rob Baird said it offered “substantial certainty” to businesses.

Visa and Mastercard shares were each up less than 1% in afternoon trading, with Baird analyst David Koning writing that the settlement removes an “overhang of uncertainty.”

The settlement requires approval by U.S. District Judge Margo Brodie in Brooklyn, New York, likely not before late 2024 or early 2025, and appeals are possible.

“It’s a bad deal for merchants,” said Doug Kantor, general counsel of the National Association of Convenience Stores, in an interview. “It provides very small, very temporary relief, but afterward Mastercard and Visa will be free to raise rates, and the agreement doesn’t provide a mechanism to slow an increase.”

The Retail Industry Leaders Association, which represents businesses that employ more than 42 million Americans, said the settlement required closer review but amounted to “a mere drop in the bucket.”

TD Cowen analyst Jaret Seiberg wrote that small banks and credit unions may object because big retailers such as Walmart (WMT.N), opens new tab could cut deals with larger banks for cards that offer discounts at checkout.

But he said the accord reflects “extraordinary concessions” by Visa, Mastercard and banks because merchants can impose surcharges on airline and cash-back credit cards, though few may because they would rather complete sales than save on fees.

Last March, the federal appeals court in Manhattan upheld a $5.6 billion class-action settlement by Visa and Mastercard, covering damages for about 12 million merchants, but did not resolve what kinds of fees could be imposed.

Tuesday’s settlement attempts to do that, but would not resolve damages claims by merchants that opted out of $5.6 billion settlement and sued separately.

Joseph Stiglitz, a Nobel Prize-winning economist and expert hired by the settling merchants, in an affidavit said the settlement “greatly enhances merchants’ freedom to steer customers using the linchpin of competition–prices,” and could lead to “very substantial” savings for merchants.

“Competition among merchants results in these cost savings being passed on to customers in the form of lower prices,” Stiglitz added.

Some U.S. senators have promoted legislation, the Credit Card Competition Act, to let merchants process Visa and Mastercard credit cards through other payment networks.

Darrin Peller, an analyst at Wolfe Research, wrote that Tuesday’s settlement “likely takes some wind out of the sails” of that effort.

The court case is In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, U.S. District Court, Eastern District of New York, No 05-md-01720.