Why the Recent Visa Mastercard Settlement May Be Bad News for Merchants

Mastercard and Visa have reached a settlement with merchants over a long-standing swipe fee case, with the card giants agreeing to reduce interchange fees and permit more flexibility on surcharging and anti-steering rules.
While this is being billed as the best thing since sliced bread for merchants, I’m not so sure.

US merchants paid over $70m in interchange fees last year, according to Nilson Report, with an average fee of 2.24%. Under the settlement terms, Visa and Mastercard will reduce interchange fees by just 4 basis points (0.04%).

So fees will go from 2.24% to 2.20%? That doesn’t sound like much of a boon to merchants.

Moreover, many will know that Visa and Mastercard only set the interchange rates, they don’t make money from them directly, that goes to the issuing banks. Visa and Mastercard earn so-called network fees, also paid by merchants (and acquirers and issuers).

While interchange fees have been subject to regulation in many parts of the world, Visa and Mastercard have been free to charge whatever they like in network fees. And they like to charge a lot. And they like to increase those fees regularly well above inflation. One of the ways they get away with this is to make the whole thing so complex, with many different types of fees, that merchants (and even banks) have a hard time reconciling them.

The Card networks also have a history of increasing their own fees at the same time interchange is artificially reduced. I guess they think merchants will be happy with some reduction, and won’t know if they don’t get the whole reduction. This was well documented in Europe, where interchange was regulated at 0.3% or lower, prompting the UK’s regulators to open an investigation into such fees.

Visa alone earned $45bn in revenue in FY23, or 0.37% of dollar volume. They then give $12bn back to select large merchants and other partners to incentivize usage of the network. For example, they may give a rebate on Visa debit transactions to discourage a large merchant from looking at PIN debit routing. Otherwise Visa would lose out to those networks such as Star, NYCE and Pulse.

So don’t be surprised if we see more network fee increases off the back of this settlement. This war between the big networks and merchants feels like it will never be over.


Steve Glover

Payments Project Lead


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