COMMENTARY: Why the Interchange Settlement Is Bad

It will stifle competition and harm consumers just as the card market has grown more competitive.

Nobody is delighted with the latest settlement proposal in the multi-decade antitrust lawsuit against Mastercard and Visa over interchange fees and acceptance rules (“In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation”), other, perhaps, than the merchant plaintiffs’ attorneys.

Merchants detest the two-sided payment networks’ asymmetric pricing where merchants pay more to accept, and consumers are paid to make, payments. Consumers, of course, love it.

If the landmark settlement is greenlighted, it will give merchants modest economic relief and additional tools to pressure the credit card networks and issuers on fees, while the leading open-loop payment card networks would eliminate a massive legal risk.

To stand up in court, antitrust violations require abuse of market power harming consumers. Mastercard and Visa have a righteous defense against the antitrust charges levied against them. Nonetheless, storied trial attorney Lloyd Constantine’s framework for thinking about Mastercard’s and Visa’s risk obtains.

In 2004, at a UBS conference in New York City, Constantine likened Mastercard and Visa at trial to defend themselves against an antitrust lawsuit to playing Russian roulette. Reasonable people could disagree on how many chambers the revolver had. Mastercard and Visa, however, know there would be a catastrophic outcome in at least one chamber.

In June 2024, Judge Margo Brodie rejected the last proposed settlement because it didn’t address the honor-all-cards doctrine. She also deemed the agreement’s interchange-fee reductions and surcharging liberalization insufficient. To satisfy her objections, the leading open payment networks sweetened their offers, weakening the honor-all-cards doctrine, increasing the credit-interchange reduction a tad, and loosening surcharging restrictions.

The reigning general-purpose credit and debit card systems provide guaranteed payments for the majority of merchants’ sales while generating incremental sales. Sellers take for granted that, every year, interoperating and competing payment networks, processors, issuers, and fintechs will deliver improved services.

However, in the merchants’ dream world, card acceptance would be free, or, better yet, generate fees. They can’t get free acceptance in the market, in settlement of their antitrust lawsuit, or thus far on Capitol Hill and in state capitals.

Elsewhere, when retailers have had the power, they’ve forced banks to pay them to accept payment cards. Indeed, for several decades, Australia’s national EFTPOS debit network had negative interchange fees.

Enormous Value

Imagine a counterfactual in which American cardholders were indifferent between half a dozen payment cards in their leather and digital wallets, a world where merchants wouldn’t lose sales by aggressively preferring a particular payment product. Interchange fees would plummet, and likely go negative. But consumers have payment preferences.

Mastercard and Visa deliver enormous value to consumers and merchants, value that’s taken for granted. Their concessions will destroy value.

The settlement proposes the networks’ credit interchange fees on a weighted basis systemwide be reduced by 10 basis points for five years. On standard cards, the reduction would be considerably more, 125 basis points for eight years. Retailer Goliaths enjoying custom interchange rates would receive proportionate reductions for the lesser of five years or the term of their deal. Joseph Stiglitz and Keith Leffler, the plaintiffs’ economists, estimated these interchange cuts would save merchants $38 billion in fees by 2031.

Two-sided open-payment networks like Mastercard and Visa use interchange pricing to optimize participation on both sides of the platform to maximize total value. Interchange fees fund rewards, grace periods, fee-free accounts, robust consumer protections, and a raft of neobank and fintech innovations.

Moreover, two-sided, semi-open payment systems like American Express also price asymmetrically. The epic Supreme Court’s 5-4 “Ohio et al v. American Express” decision in 2018, penned by Justice Clarence Thomas, held AmEx’s antisteering provisions didn’t violate federal antitrust law, and recognized that general-purpose payment card networks are two-sided platforms and that competition and value must be viewed holistically.

It held that the plaintiffs’ focus on one side of the market—on merchants’ transaction costs—was flawed. It noted Amex used higher merchant fees to fund “a more robust rewards program, which is necessary to maintain cardholder loyalty and encourage the level of spending that makes it valuable to merchants.”

Large retailers’ profitable two-party and cobranded credit card programs similarly incentivize use by offering cardholders hefty benefits.

Many two-sided-platform businesses employ asymmetric pricing. Job boards charge employers—not jobseekers—with more elastic demand. Internet search is free for consumers, as advertisers pay for it. Bars sometimes offer women free drinks. If Google charged for search and paid advertisers, it would lose share to Bing and Yahoo. A bar that gave men but not women free drinks wouldn’t last long.

Surcharging’s Green Light

Shackling interchange prices by lawsuit, law, or regulatory fiat reduces payment-platform value.

Across the pond, the European Union’s draconian 30-basis-point credit interchange price cap means European credit card reward programs are sclerotic by U.S. standards. Consequently, Europeans have less incentive to use credit cards. A majority of U.S. card payments are made with credit cards, in contrast to a paltry 3.6% of card payments in the EU in 2024.

Under the settlement, credit card rewards that U.S. Mastercard and Visa issuers offer would be trimmed, but would still be robust compared with Europe. To offset reduced interchange fuel for the system, Mastercard and Visa could hike network acquirer fees and slash issuer fees, and even make them negative.

Forced interchange cuts harm cardholders.

Merchant lobbyists have long demanded the right to surcharge. Permitting it is part of the price of ending vendors’ decades-long antitrust lawsuit. The agreement would permit surcharging up to the lesser of 3% or sellers’ acceptance costs, defined as interchange and network fees. For purposes of the settlement, acquirers’ (net) fees are excluded from acceptance costs.

Sellers could surcharge Mastercard and Visa credit cards without surcharging American Express and Discover. Since AmEx bans the practice unless competitors’ cards, including debit, are comparably surcharged–and Mastercard and Visa prohibit surcharging debit—that’s a significant concession.

Surcharging hurts cardholders. That’s why, historically, the global card networks banned the practice. That’s why 10 states, including New York, California, Texas, and Florida, once prohibited it. Connecticut, Massachusetts, and Puerto Rico still ban it. And laws in California, New York, and Maine render surcharging nearly impossible for merchants.

Many national and state regulators and lawmakers understand surcharges are anti-consumer and often abused. They’re increasingly viewing them through the lens of unfair and deceptive practices.

Even where surcharging is permitted by payment-network rules and state law, unfair or deceptive acts or practices laws still require they be disclosed clearly, prominently, and early enough in the purchase flow that consumers can reasonably anticipate them.

Regulators have repeatedly framed hidden or latebreaking fees as “junk fees” or “drip pricing,” emphasizing the problem is not just the fee, but consumers being misled about the ultimate price.

Surcharging is already widespread and widely abused. Because the settlement would make it easier, more merchants will surcharge. That will tick off consumers and shift spend to debit, cash, Zelle, ACH, private-label cards, American Express, and perhaps Discover.

‘A Poisoned Chalice’

Ominously, the agreement would weaken the honor-all-cards rule. Merchants could accept, or not, each of four categories of Mastercard and Visa payment cards: commercial, premium, and standard credit, and debit cards.

The leading credit networks, however, have to think this concession has no teeth. The honor-all-cards doctrine is fundamental to their value proposition. For consumers, Mastercard’s and Visa’s brands convey the promise of universal acceptance. Eviscerating that promise would destroy value for everybody.

Mastercard’s and Visa’s U.S. honor-all-cards doctrines, strictly speaking, ended in 2003 as part of the settlement of the Visa Check/MastercardMoney antitrust lawsuit, when debit and credit acceptance bundling was severed. However, only a tiny percentage of merchants accepts Mastercard and Visa debit but not credit cards.

The right to decline more expensive premium credit cards would be a poisoned chalice for retailers. It would be operationally challenging, and, critically, would provoke the ire of their best customers—a penny-wise, pound-foolish strategy if ever there was one.

Some 55.5% of U.S. general-purpose card spend is on credit cards. A majority of that comes on premium cards. Issuers would migrate more cardholders and payment volume from standard to premium credit cards, making it even more difficult for merchants to decline or surcharge premium cards.

American Express—whose cards are priced like the leading open-payment networks’ premium credit cards—isn’t part of this settlement. Declining or surcharging Mastercard and Visa premium credit cards would push profitable payment volume to AmEx. It also might create an opening for the distant number-four credit network, Discover (now part of Capital One), to up its game and start to take share.

If merchants refuse to accept Mastercard and Visa premium credit cards, that would harm cardholders. Cardholders haven’t had a seat at the table. They want richer, not diminished, rewards. They don’t want to be surcharged or declined at the point of sale because their card has generous rewards.

Paid to Pay

The dynamic U.S. payments system isn’t broken. It’s fiercely competitive and innovative at every stage in the value chain. The nature and intensity of that competition and innovation continue to evolve.

The more competitive the system, the more consumers are paid to pay.

The U.S. has four general-purpose credit networks, a dozen general-purpose debit networks, a range of two-party retail credit and debit card networks, digital-wallet-anchored payment networks like PayPal, a raft of burgeoning buy-now-pay-later systems, open-banking-initiated payments, peer-to-peer payment systems spilling into retail like Cash App, Venmo, and Zelle, and a wave of putatively disruptive dollar stablecoins and deposit tokens.

How the market works and is defined matters in antitrust.

Judge Barbara Jones said in her 2001 ruling that Mastercard and Visa banning member banks from participating in Amex and Discover was illegal “[b]ecause Visa and MasterCard have large shares in a highly concentrated market with significant barriers to entry, both defendants have market power in the general-purpose card network services market, whether measured jointly or separately.”

But the competitive field in payments is expanding. The broader market definition used by Judge William Hoelver in deciding the first antitrust suit against Visa’s asymmetric interchange pricing is relevant.

In 1979, Nabanco contended Visa’s interchange fees involved price fixing and were anticompetitive. Hoelver held that the relevant market was “the nationwide market for payment systems,” in which Visa didn’t have market power. He concluded that interchange fees were pro-competitive and promoted “efficiency and competition,” and that prohibiting them would “undermine interbrand competition.”

Not a Done Deal

The current case stems from more than 50 antitrust lawsuits consolidated into MDL 1720. A $7.25-billion proposed settlement was overturned in 2016 because merchants seeking damages and those seeking changes to the system’s rules didn’t have the same interests and therefore weren’t adequately represented by the same counsel.

MDL 1720 was split into damages and injunctive-relief cases. The damages case settled for $5.5 billion in 2018 and was upheld on the final appeal in 2023.

Merchants individually and through their lobbying arms, including Walmart, the National Retail Federation, Circle K Stores and the National Association of Convenience Stores, and 7-Eleven, have sent to Judge Brian Cogan a barrage of objections to the proposed settlement.

The proposed settlement of the injunctive-relief suit isn’t a done deal. It’s subject to a preliminary hearing this year and a fairness hearing, presumably, late this year or early 2027.

The settlement is preferable to government intervention. It would preserve, albeit with constraints, the leading credit networks’ ability to use interchange to balance participation across the ecosystem. Also, it would forestall the Credit Card Competition Act and make it more difficult to advance legislation regulating interchange fees at the state level.

If Cogan approves the settlement, Mastercard and Visa would get an armistice with merchants on one front in the forever war over acceptance fees. They won’t, however, be singing kumbaya. The forever war over payment-acceptance fees will continue at the point of sale, on Capitol Hill, in state capitals,  and with regulators.

—Eric Grover is principal at Intrepid Ventures