This past Monday, card networks Visa and Mastercard announced a new proposed $38B settlement to end a class-action lawsuit that’s been ongoing since 2005. The original lawsuit, In Re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, accused the card networks and card-issuing banks of violating antitrust law by colluding to fix their interchange fees at high levels. The new deal replaces a $30B swipe-fee settlement previously agreed to in Mar 2024, which was later rejected by a federal judge in Jun 2024 due to, in part, lack of adequate relief. Notably, the new deal, if approved, would break the longstanding “honor all cards” rule that requires merchants to accept all cards – including premium rewards cards that carry higher fees – in order to accept any of a network’s cards.

Background: Credit-card interchange fees, also known as swipe fees, range from 1.5-4% of a transaction and typically land around 2-2.5%, with the average at 2.35%. (Debit-card swipe fees are lower at less than 1%.) This is the rough breakdown of that credit-card swipe fee: The consumer’s card-issuing bank (which absorbs most of the risk) gets about 70%; the card network (e.g. Visa) gets 10%; and the merchant/acquiring bank and payment processor share the remaining 20%. In 2024, Visa and Mastercard – which together control about 80% of credit-card transactions – charged US merchants $111B in swipe fees (up 9.4% from 2023).

Swipe fees are generally set by the card network, and up until now, very little of it has been negotiable by the merchant, including what cards they will accept. Cards that run on Visa/Mastercard’s premium networks – which have been on the rise – typically cost the merchant significantly more. Before now, merchants have been barred from charging additional fees to the end-customer for using a Visa/Mastercard or a higher-fee card.

Under the new settlement (if approved), Visa and Mastercard have agreed to lower the average interchange rate on US credit transactions by 10 basis points (0.10%) for 5 years. (In the original deal, this was 7 basis points.) That item alone could be worth $24B-$27B to merchants. Rates on standard consumer cards will be capped for 8 years at 1.25%, representing a 25%+ reduction. These terms could save merchants $38B in swipe fees through 2031.

Merchants would also gain more flexibility on card acceptance. They will be able to choose whether to accept US cards by major category – i.e. standard consumer cards, premium consumer cards, and/or commercial cards. The capped 1.25% rates (for 8 years) on standard consumer cards would certainly give merchants even greater incentive to prefer standard consumer cards. Merchants would furthermore be able to impose up to 3% in surcharges when people pay by card. Economists have suggested that opening up competition in the market could eventually result in as much as $224B in savings.

Swipe fees are the core funding mechanism of credit-card rewards. The key questions for consumers are whether their rewards cards will stop being accepted, whether merchants will start charging card-specific fees, and whether rewards cards will end up going away altogether.

Given that 85% of transactions today involve rewards cards, many retailers will likely feel they have little choice but to accept them to avoid losing transactions. The popularity of rewards cards is particularly notable among young and affluent groups, with 89% of Gen Z cardholders and 87% of high-earning cardholders ($100K+ income) pursuing rewards. Card issuers also have the ability to reclassify existing cards as premium consumer cards, making it even harder for retailers to reject that category en masse.

Some retailers may try to steer consumers towards different payment methods, although this runs the risk of alienating higher-income customers. Most of the heavyweight retailers have already negotiated advantageous rates with card networks – such as Costco’s reported less-than-0.4% deal with Visa – meaning little change for them.

Industry watchers believe the reductions outlined in the settlement may not be enough for card issuers to make any major changes to rewards or annual fees. Rewards cards tend to be much more profitable for issuers than standard cards, by a factor of nearly 4x. High-end cards have been raising their fees, helping to insulate their business model. Certain rewards (e.g. statement credits for specific purchases) are also being partially funded by merchants, which insulates issuers further.

With respect to the card networks, their share prices slid about 2% this week but revenues have been rising at a rate of 12-17% on the back of resilient consumer spending. On the other hand, they continue to face growing competition from non-card digital payments, ACH, lower-fee debit cards, the Capital One-owned Discover network, and emerging stablecoin payments.

It’s not clear whether benefits will trickle down to consumers. By one estimate, swipe fees (credit and debit) cost the average US household about $1,200+ annually in higher prices. However, merchants are not required to pass the savings from the settlement on. At the same time, consumers may see a hit to their lucrative rewards benefits or higher interest rates/fees from card issuers looking to make up the shortfall. Consumers could also face higher fees – and potential awkwardness – at the cash register when they try to use their preferred premium card.

Whether rewards in general are good for consumers depends on the consumer. Rewards cards tend to favor more sophisticated consumers at the expense of the more naive – resulting in a redistribution from poorer to richer individuals. Credit-card rewards also tend to be a depreciating asset for consumers who are amassing but not using them.

Much depends on whether the new deal can get approved. The card networks are hoping for it to be approved by 2027. Critics, including the National Retail Federation and National Association of Convenience Stores, are saying the settlement provides limited and temporary relief, and fails to fundamentally restructure how fees are set.

Visa and Mastercard are under increasing pressure from regulators. One of the most significant efforts is the Credit Card Competition Act, which is a still-active effort to break up the “Visa-Mastercard duopoly.” Under the proposed legislation, merchants would be able to route payments made with a Visa or Mastercard credit card through an alternative unaffiliated network. Alternative networks could, in turn, offer lower interchange fees to compete for their business. There is precedent – in 2010, similar legislation was passed that required debit-card issuers to offer merchants a choice of network to route payments.

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