The Card Industry’s Endless War

Merchants have rejected the card networks’ latest deal on card-acceptance costs. Now it’s up to a judge to decide whether the sides can finally achieve peace at last.

Talk about a forever war. After more than 20 years of legal wrangling and rejected settlement offers, no end appears to be in sight for merchants’ ongoing battle against Visa Inc. and Mastercard Inc. over interchange fees.

The latest offer from the defendant card networks, which includes temporary interchange caps, changes to their honor-all-cards rule, and a higher cap on any surcharges that might be levied by merchants, was rejected by plaintiff merchants in November. A final hearing will be held to approve or reject the offer, after hearing oral arguments over merchants’ objections.

The latest offer was crafted after Judge Margo Brodie, who was overseeing the case at the time, in June 2024 ordered defendants to revise a settlement offer without giving it preliminary approval. U.S. District Court Judge Brian Cogan has since been assigned to the case.

The first settlement offer came as long ago as 2012. That offer was rejected and sent back to the defendants for revision. Given the inability of both sides to reach an agreement, the case has essentially languished all these years, even though the case is reportedly ready for trial.

At the heart of the impasse is that merchants claim the card networks have failed to address the central issue of the case, which is that Visa and Mastercard set interchange rates for card issuers. Under Visa and Mastercard rules, card issuers are prohibited from negotiating rates directly with merchants.

Merchants argue that prohibition creates cartel pricing, rather than competitive pricing, says Doug Kantor, a Merchants Payments Coalition executive committee member and general counsel for the National Association of Convenience Stores. Neither the MPC nor NACS is a plaintiff in the lawsuit.

“The defendants did not address the court’s concerns in their latest settlement offer,” Kantor says. “They tinkered at the edges a bit, but no major changes were made that addressed the central issue [of the lawsuit].”

With a resolution seemingly nowhere in sight, the case raises two key questions: can it be settled without a trial; and, if a settlement is reached, how will it change the landscape of the card industry?

‘It’s Perplexing’

Under the terms of the settlement offer, Visa and Mastercard will implement a 10-basis-point interchange reduction for five years and cap the rates for standard consumer credit cards at 125 basis points “for at least 8 years,” as the offer puts it.

The settlement also provides allowances for merchants to negotiate interchange rates with individual card issuers, as well as at the brand and product levels. That provision extends for at “least another eight years” an expired Department of Justice consent decree that requires Visa and Mastercard to permit discounting at the brand and product levels, according to the agreement.

“Mastercard has not previously permitted issuer-level discounting. Visa permits issuer-level discounting, but that policy is not reflected in its rules,” the settlement offer says.

Modifications to the honor-all-cards rule will for the first time permit merchants to decide which cards they will accept within three card categories—commercial, premium consumer, and standard consumer. Merchants will no longer be required to accept digital wallets “because they contain a Visa or Mastercard branded card,” according to the settlement offer.

The card networks also upped to 3% of the transaction the percentage merchants can levy for surcharges to offset the cost of swipe fees, a term merchants use as a reference to interchange fees. Those fees are typically in the 2% to 3% range, according to payments experts. The settlement also stipulates both networks will amend their rules to allow for merchant surcharging.

Based on plaintiffs’ documents filed with the court, the networks’ latest settlement offer is projected to collectively save merchants more than $200 billion in card-acceptance costs over the course of the multi-year period covered by the proposal, according to the Electronic Payments Coalition, which represents networks and issuers but is not a defendant in the case.

“There are greater savings to be had by merchants in the latest settlement offer than would be realized under [the proposed] Durbin-Marshall legislation (a.k.a. the Credit Card Competition Act),” says Richard Hunt, executive chairman of the Electronic Payments Coalition, in an email message. “Merchants wanted changes on the honor-all-cards rule and they got it, but rejected the offer anyway. It’s perplexing and it is looking like nothing is ever going to be good enough for merchants.”

The CCCA first surfaced in Congress in 2022 and proposes that big banks be required to offer merchants a choice of at least two networks for all credit card transactions. The bill was backed by Senators Richard Durbin and Roger Marshall.

Meaningful Relief?

As payment experts digest the components of the settlement offer, doubts are rising that the interchange relief being offered will be meaningful for most merchants, especially small ones.

Verisave, a Salt Lake City, Utah-based consulting firm that specializes in helping merchants reduce credit card processing fees, estimates that, on average, the 10-basis-point reduction will result in savings of about $100 a month for most retailers, though the largest merchants are projected to see greater savings.

“The reduction eases pressure on interchange rates, but I’m not sure that is going to be enough to move the needle for most merchants,” says Jeremy Layton, Verisave chief executive and founder.

Questions are also emerging about whether card issuers will try to recoup lost interchange revenue if the settlement is approved. “For every action, there is a reaction. If interchange revenues are lowered, do issuers layer on fees to make up the lost revenue or do they tighten chargeback rules and fraud screening?” asks Brian Riley, head of payments for Javelin Strategy & Research.

“It’s important to remember that card revenues have to be in line with the risk level. When you start chipping away at card revenues, something else will happen [downstream]. Decisions can’t be made in a vacuum,” adds Riley.

Proposed changes to the honor-all-cards rule is another component of the settlement receiving a lot of scrutiny. Enabling merchants to choose which cards they will accept poses a potential threat to the universality of card acceptance, Riley argues. With honor-all-cards in place, consumers don’t fret about a merchant refusing to accept any Visa- or Mastercard-branded card in their wallet.

Allowing merchants to pick which cards they accept also means they can refuse to accept higher-cost cards, such as rewards cards. “Changing the honor-all-cards rule creates less consumer confidence in the system because consumers won’t know what cards they can use at any given merchant until they are at the point of sale, and that is harmful,” says Riley.

But Verisave’s Layton contends permitting merchants to choose which cards to accept has more potential “to move the needle” than temporary interchange reductions. “Flexibility on the honor-all-cards rule will be vital to any settlement, because that type of flexibility is the most impactful [to merchants],” Layton adds.

But if the current settlement offer is sent back to defendants for further revisions, it is questionable whether Visa and Mastercard will agree to further modifications of the honor-all-cards rule. “How far Visa and Mastercard are willing to go on this is unknown,” Layton says.

‘A lot of Moving Parts’

The right to choose which cards they accept is important to merchants, but equally important is the right to negotiate interchange rates with individual issuers, says the MPC’s Kantor. The latest settlement offer does not address this issue.

“Card issuers should be the ones setting interchange, not Visa and Mastercard,” Kantor says. “This is [the] redress merchants want.”

Key questions around this issue are whether issuers want to negotiate interchange with individual merchants and whether merchants will expect issuers to strike across-the-board deals, as opposed to deals that vary by individual seller, according to payment experts.

“Is there any bilateral appetite among issuers and merchants to negotiate rates individually, that’s the question,” says Steve Mott, principal at payment consultancy BetterBuyDesign.

Mott adds that merchants’ push to negotiate interchange with individual issuers addresses a fundamental issue in the lawsuit, which is “who has the power of the purse over interchange.”

How that issue will play out is uncertain because the payments world has become more politically charged across the more than 20 years the case has been litigated. “The payments world has become more political over who controls the future of payment economics,” says Mott.

In many ways, Motts adds, the politics around the case are now more about how quickly Visa and Mastercard will move away from their duopoly model, “while not giving up the ghost” on being able to set interchange rates.

“There are a lot of moving parts to this case that keep the enmity between banks and merchants in the headlines,” Mott adds. “If pushed, Visa and Mastercard will continue to refine their offer, but I don’t expect any great changes to how they manage the card business.”

‘A Game of Chicken’

Nor are merchants immune to political agendas in the case. Payments experts agree that merchant needs around card-acceptance costs differ based on their size, which can lead to friction when it comes to agreeing on a settlement. For example, the largest merchants may want to hold out for completely eliminating the honor-all-card rule, because anything less would be seen as a hollow victory, some payments experts argue.

“Different merchants have different agendas, as do the attorneys representing merchant groups. That can make it hard to reach a settlement,” says Mott. “That’s part of the politics.”

Some payments experts predict the latest offer will be rejected and sent back to the defendants. “There’s going to be a lot more back-and-forth on this,” says Verisave’s Layton. “Yes, the latest offer eases some of the pressure [from interchange costs], but it does not fundamentally change the system.”

Even if the lawsuit languishes in the courts for years to come, it is unlikely merchants’ disputes with the card networks over interchange and network fees will prompt either merchants or issuers to turn their backs on the card-payment system.

“No one will walk away from the card industry, because card acceptance is a mutually beneficial arrangement between merchants and issuers. But a pill does have to be swallowed at some point,” says Javelin’s Riley. “Right now, it is a game of chicken.”