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As the dust settles around the latest settlement agreement in Visa Inc.’s and Mastercard Inc.’s long running legal battle with merchants over card-acceptance fees, how the offer will impact the payments industry is coming into focus.
Early reaction to the agreement from payments experts is that interchange relief will be uneven for merchants, while the provision to allow merchants to levy surcharges of up to 3% on card transactions will make surcharging more widespread.
Merchants with large card volumes are expected to be the primary beneficiaries of interchange reductions, while merchants with lower card volumes won’t see much relief. Under the agreement, the card networks are offering a 10-basis point interchange reduction over five years and a rate cap for standard consumer credit cards at 125 basis points for at least 8 years.
“Merchants with large card volumes will feel the impact more than small merchants with low card volumes,” says John Cabell, managing director, payments intelligence for J.D. Power. “For a majority of merchants, there is probably not going to be much relief.”
Another interchange-related provision being questioned is a provision allowing merchants to negotiate rates with individual issuers. While the offer looks appealing on the surface, questions are emerging about how many merchants have enough transaction volume to make negotiating with them worthwhile.
“Merchants see cards from a lot of different issuers, [so] how many really see a large enough percentage from one issuer for this to have an impact,” asks Cliff Gary, principal at Gray Consulting. “It is hard to see how this would work out for the average merchant, and for some it won’t move the needle at all.”
Complexity is another potential issue, as card issuers may opt to negotiate only on specific products, rather than striking an across-the-board deal for all their card products, Cabell adds.
And yet another question is how merchants will negotiate with issuers of cards on networks outside the Visa and Mastercard ecosystem, such as Capital One, which owns the Discover network.
“Does the merchant negotiate on individual products or the network? It would be a complex situation,” Cabell adds. “The provision adds flexibility for merchants when it comes to negotiating interchange, but I am not sure how useful it really is.”
Merchant groups also question how much flexibility merchants will have when negotiating rates with individual issuers. One question is, if a merchant strikes a deal with one issuer, will other issuers insist on the same deal? Another is whether merchants can conclude individual deals with multiple issuers, or if a deal struck with one issuer will apply to all.
“The way the provision is written is not really clear [on these points], which means it could be a bit of a straightjacket,” says Doug Kantor, a Merchants Payments Coalition executive committee member and general counsel for the National Association of Convenience Stores. Both groups have been strong advocates for interchange relief.
The surcharging provision is also drawing scrutiny. While surcharging to offset card-acceptance costs is becoming more prevalent—some 65% of consumers say they have paid a surcharge on a card purchase, according to J.D. Power—the expectation is that the provision will make surcharging more widespread. One reason, payments experts say, is that the settlement agreement calls for Visa and Mastercard to amend their rules to allow for merchant surcharging.
“It used to be that card-acceptance costs were a part of doing business, but now the assumption is moving toward surcharging based on a consumer’s payment choice,” says Cabell. “This [provision] will reinforce the idea that consumers pay card-acceptance costs, not merchants.”
Most merchants levying surcharges already charge a 3% fee, according to Cabell and Gray.
Just how impactful the latest offer will be in reducing merchants’ card-acceptance costs—which include interchange and network and processing fees—remains to be seen.
“If the settlement agreement is approved, it will quiet things for a while, but card-acceptance costs are a dynamic issue, and this is probably not the final chapter,” Cabell says.
