Mastercard’s Chief Executive Laments a Broken Interchange Deal

Mastercard Inc.’s chief executive early Wednesday deplored the recent collapse of a key interchange settlement and highlighted the card company’s rapid progress in tokenization, a key technology that masks actual card data from potential cyberthieves.

Pointing to a U.S. District Court judge’s rejection last month of an agreement between merchants and card companies, Michael Miebach told equity analysts on a conference call the ultimate outcome of the case is “difficult” to foresee now. The yearslong case involved a massive lawsuit by merchants challenging the interchange fees they pay on credit cards.

“We’re disappointed where this [case] has landed for now,” Miebach said during Mastercard’s presentation of its second-quarter results. “We respectfully disagree with the court’s ruling. Across the board, there has to be a dialog to find the best outcome.”

Margo K. Brodie, U.S. District Court Judge for the Eastern District of New York, issued a written order in June nullifying the proposed agreement, which had been years in development. Under the deal’s terms, Visa and Mastercard would have frozen for at least five years the posted credit card interchange rates that were effective Dec. 31, 2023. The networks also agreed to lower their rates by at least four basis points for no fewer than three years. The parties to the case now believe it will go to trial, an outcome some merchant spokesmen have said they welcome.

“It’s difficult to speculate about the outcome at this point. Across the board, there has to be dialog to find the best outcome,” Miebach said.

On a sunnier front, Miebach celebrated Mastercard’s progress in artificial intelligence and in tokenization. Mastercard tokenized more than 22 billion transactions worldwide in the first half of the year, up 49% over the same period last year, the company announced.

Now, Miebach hinted, comes the next step. “We’ve invested in tokenization, and now we have the opportunity to build services on top of the token,” he said, pointing to a potential new revenue stream for Mastercard. “We should price for it, and will price for it,” he said.

Miebach pointed to advances in artificial intelligence as setting the stage for the next episode in Mastercard’s evolution, particularly when it comes to growth. The company has long leveraged technologies like machine learning for fraud prediction, he said, but now “the trend is more infusion of AI to make products scale better. That remains unchanged.”

Nor is Mastercard ignoring the mounting interest in the payments business in open banking, the concept of making a payment to anyone through a direct transfer from a bank account. The technology can appeal to consumers because it’s fast and easy, and to merchants because the transaction is reportedly less expensive than one with a card. “We do invest in it, and that’s why we called out open banking as a future activity for us,” Miebach said.

But he sounded a cautious note about the technology. “It’s not quite where open-banking enthusiasts would have liked,” he argued. “On the payments side of open banking, I’m not comfortable if there’s a problem and you can’t get your money back. It’s evolving, and we’re trying to make sure it’s understood that the value we bring with cards is unparalleled.”

For the quarter, Mastercard processed $764 billion in U.S. payment volume, up 6% over the same period last year. Worldwide, volume was $2.4 trillion, up 9%. Cards totaled 3.42 billion globally, up 7%. All told, the card company recorded $6.96 billion in revenue, up 11%.