In today’s Finshots, we tell you all about a decades-long antitrust lawsuit that Visa and Mastercard have been stuck in and why it may not end anytime soon.

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The Story

Visa and Mastercard have just slid a proposal across the table to a bunch of American merchants. Their offer is simple. They want merchants to accept a settlement that could keep card-swiping fees under control until 2030 and indirectly benefit them (the merchants) by about $30 billion.

What’s going on, you ask?

Okay, first some context.

Look, when you pay using a card at a store, you only pay how much your product costs. But the store actually has to bear an extra cost for accepting this payment method. It’s called a Merchant Discount Fee or Merchant Discount Rate (MDR). This is a fee that the merchant’s bank charges them for maintaining the card acceptance system and other related services. This fee then gets divided between the merchant’s bank, the customer’s bank and the network provider depending on their internal arrangements. That’s a part of how they make money.

For instance, when a US merchant accepts a card issued by Visa or Mastercard, they incur an average fee of about 2% on the value swiped. That amounted to a whopping $101 billion in total for all merchants in 2023 according to The Nilson Report.

That seems like a lot, no?

And the fact that Visa and Mastercard control roughly 90% of the payment processing market outside of China meant that merchants had little control over moving to a different card network. They were forced to bear the fees. And, had to say yes to all other rules these networks placed whether they liked it or not.

For instance, they had to abide by something called the ‘honor all cards’ rule which meant that if merchants accepted even one brand of cards offered by these card networks, they had to accept all brands of cards that they offered. So if a merchant accepted a Visa Classic card, they also had to accept Gold, Platinum and every other card type Visa offered even if the fees for these cards were different. They couldn’t refuse a card type that charged higher fees than the other.

Merchants were also bound by other rules which they called ‘anti-steering rules’. Simply put, they couldn’t nudge customers into cheaper methods of payment. And they couldn’t slap a surcharge on customers for paying via cards to cover the cost of fees that they had to pay.

Now you can imagine that none of this made merchants in the US happy. So, in 2005 many of them dragged Visa and Mastercard to court for what they said were unfair rules and high charges.

Now the case hasn’t reached its conclusion yet. But Visa and Mastercard have tried to frame settlement agreements twice in the past, which were either approved and reversed by the court or even left hanging because some merchants wanted to opt out of these settlements and fight their battles their way.

And that brings us to the latest settlement on offer from Visa and Mastercard today.

What does it say?

Well, the 261-page document says 3 main things:

  1. Visa and Mastercard will cap Swipe Fees
    The two card networks have now offered to lower their fee by at least 0.04% for the next 3 years. And then keep the swipe fees to 0.07% below the current average for the next 5 years. Also, it will not directly or indirectly raise fees until 2030. So yeah, that means they won’t indirectly increase fees by luring card users with an upgrade to make up for the loss.
  2. Doing away with anti-steering rules
    We already told you that merchants couldn’t slap a surcharge on customers for paying via Visa and Mastercard to cover the cost of fees that they have to pay. That’s part of the anti-steering rules. But the new offer says that Visa and Mastercard will drop this rule and let merchants charge a surcharge if they want to as long as they are transparent about it.

    Also, the merchant can charge a different fee based on the card itself. For instance, as Bloomberg points out, if a customer swipes a US Visa Infinite card for a restaurant bill of $100, that will cost the merchant $2.60 in fees. But if the customer had swiped the typical Visa rewards card, it would cost the merchant just $2.10. So now, the merchant can include a higher surcharge for the Visa Infinite Card.
  3. Letting merchants negotiate with card networks
    And finally, merchants can also form groups and negotiate for lower fees with Visa and Mastercard by refusing to accept their cards. And they could use data from experiments that they conduct. For instance, stores can stop accepting a Visa or Mastercard at some branches or other brand stores that they operate for a few months. And if that data proves that it’s profitable for them, then they could use it to negotiate with these card networks for lower fees or stop accepting their cards for good.

And all of that translates into a big boost of billions of dollars we told you about when we started this story.

But could it cheer merchants, you ask?

We don’t know about that because there does seem to be an outcry from the merchants. They don’t seem too happy with the settlement. They might be worried that if they accept these terms, it’s only going to keep them happy, however little, for the next 5 years. And given Visa and Mastercard’s dominance, merchants would still have to bear the brunt of their anti-competitive practices after that term expires.

And not to forget the court still needs to give its approval to the settlement too.

But in the meantime, the US is also trying to pass legislation to rein in the powers of the card networks. It’s something called the Credit Card Competition Bill where card-issuing banks or financial institutions with assets over $100 billion would have to enable at least two card networks. So one of these would have to be a network other than the Visa or Mastercard duopoly. And that could enable more competition in the card network market and give Visa and Mastercard a run for their money.

Could that be a reality? Well, if it does, it’ll be another Finshots story to tell for sure.

Until then…

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