After nearly two decades in court, the two largest credit card issuers have reached an agreement with retailers and merchants to reduce interchange fees.
Interchange (or ‘swipe’) fees are the fees the retailer pays when you, as a consumer, use your credit card to make a purchase. They average 2% of the cost of a transaction, but can be as high as 4% for premium credit cards.
That revenue is passed on to the bank, which uses it to fund rewards it offers cardholders – including cash back, points and miles – and to ensure shopping benefits such as purchase protection and return protection.
The fee is built into the cost of most goods and services and helps cover credit card benefits and even the points we value so much here at The Points Guy.
This new agreement is expected to save retailers billions of dollars in interchange fees over the next five years. Visa and Mastercard will reduce their rates by 0.04 percentage points over three years and by an average of 0.07% over the next five years. However, this agreement is subject to approval by the US District Court for the Eastern District of New York.
The settlement came amid pressure from some senators to introduce industry-wide legislation in the form of the Credit Card Competition Act, which may no longer be necessary if this agreement survives. The proposed legislation could have far-reaching, potentially negative consequences for consumers and travelers, especially those who enjoy earning rewards on their credit card spending.
The Electronic Payments Coalition (EPC), a group representing credit unions, community banks, payment card networks and other banking institutions involved in the electronic payment process, issued a statement applauding the settlement and suggesting it further erodes the case for new legislation.
“The agreement between merchants, Visa, Mastercard and financial institutions has been decades in the making and treats businesses of all sizes equally, without government mandates or without compromising consumer data security and rewards programs,” said Richard Hunt, executive chairman of the EPC.
“The Durbin-Marshall bill has had no debate, no legitimate hearing and remains unnecessary,” he continued.
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That said, Senator Dick Durbin’s office released a statement after news of the settlement came to light, promising to move forward with passing the Credit Card Competition Act. “Today’s news confirms that it is time to pass my bipartisan, bicameral legislation – the Credit Card Competition Act – to increase competition among credit card networks and ultimately lower costs for small businesses and consumers,” the statement from the senator. “We must ensure real competition in the credit card industry. My bill will ensure that the Visa-Mastercard duopoly ends their price gouging tactics that disproportionately harm American families and small businesses.” Only time will tell whether his colleagues will join him in considering the legislation, given the evolving situation that Visa and Mastercard’s deal with retailers has created.
This news also follows the announcement of the merger of Capital One and Discover, which would solidify their position as the third major player in the industry, increase competition and potentially further negate the need for legislation from Washington, DC.
There are some nuances that may need to be worked out, such as whether the agreement could open the door to merchants charging a different fee depending on what type of card a consumer uses for a purchase.
Overall, however, this deal is seen by some, including TPG founder Brian Kelly, as a step in the right direction. The settlement should reduce costs for small businesses while continuing to provide value in the form of rewards and protections for consumers.
We will keep you informed of the outcome of the agreement and its implications for credit card consumers as it continues to develop. In the meantime, watch the video below for TPG’s Brian Kelly’s thoughts on today’s deal.
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