When Visa and Mastercard settled with retailers for $30 billion, it was touted as a win for the underdogs. Merchants, who have struggled for decades with the high fees imposed by credit card companies, were said to have secured a significant victory over the big banks.
But how big of a win was it? In his recent report, Visa and Mastercard Settle With Merchants: What Does It Mean?, Don Apgar, Director of Merchant at Javelin Strategy & Research, explored the wide-ranging ramifications of the settlement.
The settlement marks the conclusion of litigation that has lingered since 2005. The drawn-out lawsuit resulted in fatigue on the part of both Visa and Mastercard, with both companies strongly desiring to resolve the matter. Because of that fatigue, merchants secured several concessions regarding card acceptance rules, in addition to the fee reduction.
Those concessions are likely to have a bigger impact than the fee cut. While merchants will receive $30 billion, the impact will be greatly reduced after it has been distributed across the 10 trillion card purchases in the U.S. alone.
“When you peel back the onion, the merchants got a little bit of ice in the wintertime,” Apgar said. “The $30 billion, broken down, makes a difference of four basis points. That’s 0.04%, when the average merchant pays 2.5% to 3% to accept credit cards. It’s more of a symbolic win than a material win.”
Honor All Cards
For quite some time, both Visa and Mastercard have held merchants to the Honor All Cards rule. As the brands have grown, they have expanded beyond simple credit and debit cards and now offer various rewards programs. That’s in addition to commercial cards, travel cards, and a host of business options.
“The Honor All Cards rule meant if you saw the Visa logo on a merchant’s door, you knew you’d be able to use your Visa card, regardless of the type,” Apgar said. “But the card companies charge more when it’s a rewards card, and merchants quickly became savvy to that fact. From the merchant’s perspective, why they should have to bear that cost when it’s the consumer who gets the rewards?’”
Merchants have lobbied to pass those costs on to the customer, and that was one of the other key concessions from the settlement. Visa and Mastercard agreed that merchants could alter their charges based on the type of card used.
“That’s also a symbolic victory,” Apgar said. “If you’re running a busy coffee shop, how are you going to tell a customer that their cup of coffee will cost $3.00 instead of $2.50, just because they want to use a travel rewards card?”
Point of Sale Challenges
It can be difficult to distinguish between standard and rewards cards, making identifying the type of card a pain point at the point of sale. For a major retailer that has tens of thousands of cashiers, implementing a policy that will be consistently applied at checkout becomes nearly impossible.
That won’t be an issue for smaller merchants, and some will likely want to take advantage of the new rules. But charging customers different rates for different cards could have impacts on infrastructure providers.
“The banks, the processors, the software companies that service retailers, they need to be prepared to support the merchants that want to make the shift.” Apgar said. “There are sure to be retailers who want to implement the new procedures, and the infrastructure isn’t yet there to support it.”
Apgar also identified an opportunity created by the settlement. Since identifying rewards cards by sight is tricky, a software platform could be developed to cross-reference the card type based on its account number. But then merchants will have to pay to use the platform, which could negate the benefits of the hard-won settlement.
Too Many What-Ifs
While the effects on merchants have yet to be determined, it’s a certainty that the fight is over—at least for now. The settlement still must be approved in the Southern District Court in New York, but due to the length of the litigation, there is little doubt it will be pass.
There are still plenty of doubts about its ramifications, even though the settlement continues to be considered a win. It’s not clear if the new model the deal creates will offer avenues that are even worth pursuing.
“That’s the biggest takeaway,” Apgar said. “Everyone has reacted to the $30 billion, but each individual merchant will only see a small slice. It’s the operational details that will have a much greater impact, for better or worse, than the $30 billion. At this point, there are too many what-ifs.”