Using your premium credit card may cost more after Visa-Mastercard deal

PICTURE this: A customer walks into a grocery store just looking to buy a carton of milk and a dozen eggs. But when they get to checkout, they are suddenly faced with a choice: if they pay with a Chase Freedom Unlimited card it will be one price. But if they whip out a US$550-a-year Chase Sapphire Reserve, it could cost them more.

That is the new reality laid out in a landmark agreement struck between Visa and Mastercard, and millions of United States merchants on Tuesday (Mar 26), in which the payment giants agreed to a series of changes that retailers say will save them at least US$30 billion in credit card swipe fees in the coming years. The agreement is the culmination of two decades of bitter negotiations between the two sides over the fees, which have swelled to become a US$100 billion-a-year business for the two networks and the world’s biggest banks.

The deal, if approved by courts, will finally allow US merchants to charge customers extra when they are paying with certain types of Visa and Mastercard credit cards. That threatens to upend the world of luxury credit card programmes in the US, where banks charge pricey annual fees in exchange for offering perks such as airline miles or hotel stays and ride credits.

“Forcing consumers to think about the surcharge, if you are the merchant, creates a lot of friction at the point of sale, for not that much gain and benefit,” Lulu Wang, an assistant professor of finance at the Kellogg School of Management, said. “If all you are saving is a small percentage point for holding up one of your highest paying customers, you are holding up the line.”

Infinite, Elite

As part of Tuesday’s agreement, merchants will now be able to charge consumers more for using a card that carries the Visa Infinite or Mastercard World Elite branding, which typically come with a higher interchange fee than cards that rely on the standard Mastercard and Visa networks. It might be the first time many consumers note there is a difference.

Take a US$100 transaction at a small restaurant. Currently, if a customer swipes a Visa Infinite card, that would cost the merchant US$2.60 in fees, whereas a traditional Visa rewards card would cost it just US$2.10, according to rate tables laid out in Tuesday’s settlement.

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It may sound like pennies, but retailers are now shelling out more than US$170 billion a year to accept credit and debit cards. In recent years, they have grown increasingly frustrated that swipe fees have at times climbed faster than consumer spending, arguing that it is partially because the number of cards that come with these pricier networks has ballooned.

The premium offerings from the networks often come with packages of perks that go far beyond travel points, with some offering discounts on gym memberships, entertainment subscriptions, hotel credits and fine dining offers. Banks and payment networks say those rewards entice consumers to spend far more than they normally would at a given store or restaurant.

Merchants are not so sure. But because Visa and Mastercard have required merchants to honour all their cards at checkout, they have had little choice but to stomach the higher fees.

“The increased ability for merchants to steer at a product level should theoretically result in increased competition between the networks,” KBW analyst Sanjay Sakhrani said. “We see that as part and parcel of their business model, but importantly, how these will be implemented by the merchants remains to be seen.”

Familiar sight

Even before Tuesday’s agreement, surcharging had become a more familiar sight at small businesses across the country as merchants felt increasingly pinched by rising interchange fees.

Usually, it was signs scribbled at checkout noting that if a consumer pays with a credit card, there would be an additional fee. Or, at restaurants, waiters would deliver the bill and there would be one price for paying with cash and another for using a card. About 23 per cent of small businesses said they charge an extra fee to customers using credit cards, according to a 2022 survey by payments consultancy Strawhecker Group.

With the latest settlement, though, consumers would have a much clearer understanding of just how much merchants pay to accept these more premium cards.

“The settlement agreement opens competitive doors that have been closed for decades, while providing rate relief to every merchant that accepts Visa or Mastercard credit cards,” Joseph Stiglitz, an economist who submitted a declaration on the settlement, said.

As part of the agreement, Visa and Mastercard also agreed to reduce the swipe fees they charge each merchant by at least 4 basis points for at least three years. And for the next five years, the average systemwide swipe fee for both networks must be at least 7 basis points below the current average. Still, the impact from that reduction will be relatively minor for issuers, Sakhrani said.

The legal fight over credit card swipe fees dates back to at least 2005 – before both Visa and Mastercard were spun off from the banks that owned them to become publicly traded companies. On Tuesday, trade groups representing some of the country’s largest retailers were already arguing that the latest settlement still does not go far enough.

“A few years of very small relief followed by business as usual is not a good outcome from 20 years of litigation,” Christopher Jones, senior vice-president of government relations at the National Grocers Association, said. “Instead, it tries to provide token, temporary relief and then allows the card companies to raise rates yet again.” BLOOMBERG