What you need to know

When it comes time to make a purchase, which credit card you use could soon determine how much you pay.

A new settlement announced this week would end a longstanding dispute between businesses and Visa and Mastercard over credit card “swipe” fee practices.

Swipe fees are charged to retailers, service providers and other merchants each time a customer uses their card. Banks and card companies typically levy about 2% or more for every transaction, according to the National Retail Federation. 

Previously, merchants had to “honor all cards” on a network — for example, if they accept one Visa credit card, then they must accept all Visa cards regardless of swipe fee rates charged. Under the proposed settlement, they can reject those cards with high fees to save their bottom line. What’s more, merchants may be able to charge customers different fees depending on which credit card they use. 

“This is a fight between banks and merchants, and consumers are caught in the middle, said Ted Rossman, senior industry analyst at Bankrate.

Roughly 175 million consumers have at least one credit card, making it the most common method of making a purchase, according to TransUnion. Rewards cards are by far the most popular kind of plastic — about 85% of the credit cards issued today are rewards cards, the National Retail Federation also found.

Merchants have been battling with card issuers over what they’ve called a “cartel-like pricing practice” for two decades, according to Doug Kantor, an executive committee member at the Merchants Payments Coalition. 

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In 2005, retailers and other merchants filed a class-action lawsuit against Visa and Mastercard, which control 80% of the market, alleging that their fees and acceptance terms were anti-competitive. 

Monday’s settlement is the potential conclusion after 20 years of litigation over the fees that banks and credit card companies charge to process payments. “We believe that this is the best resolution for all parties, delivering the clarity, flexibility and consumer protections that were sought in this effort,” a spokesperson for Mastercard said in a statement. Visa did not respond to a request for comment.

Under the settlement, credit cards would be classified into three categories:

• commercial cards
• premium cards, including rewards cards
• standard, no-rewards cards

Merchants could then choose which categories to accept, but must still accept all cards within a category. Merchants can also add a surcharge of up to 3% to customers’ bills for paying by credit card. Finally, the settlement caps the fees that banks, as well as Visa and Mastercard, can charge merchants.

The proposed settlement is still months away from being put into practice, and it must be approved by the court, which already rejected a previous agreement. But eventually, experts say, changes may be in store for credit card users. 

The settlement could make it more common to have certain rewards cards rejected at some retailers, similar to how Costco doesn’t accept American Express cards for purchases, said a person with knowledge of the thinking of a major U.S. bank.

This person, who asked to remain anonymous to speak candidly, said that the ultimate ramifications weren’t yet clear as it involves active litigation. But banks are upset at how the settlement turned out and view this as giving merchants greater leverage when it comes to future negotiations involving the cost of card acceptance.

The settlement could cause some merchants to decide not to accept rewards cards, others to start levying surcharges for their use, and banks could also scale back their rewards programs as a result, they said.

According to experts, it is unlikely that any retailer will choose to reject all rewards cards. Since nearly 90% of all credit card spending is on rewards cards, merchants really have no choice but to continue to accept them, Rossman said: “In the real world, not a lot is going to change.”

Rejecting some high-cost cards at the point of sale also risks alienating customers who carry them, according to Matt Schulz, chief credit analyst at LendingTree.

For that reason, the proposed settlement is “all window dressing and no substance,” the National Retail Federation’s chief administrative officer Stephanie Martz said in a statement. “The reduction in swipe fees doesn’t begin to go far enough, and the change in the honor-all-cards rule would accomplish nothing,” she said.

One potential outcome of the settlement is that retailers will tack on an extra fee for customers who pay with rewards cards to help cover the cost. “You could see a more varied approach to this, which would be surcharging,” said John Cabell, managing director of payments intelligence at J.D. Power.

But more affluent cardholders are already paying a premium. Rewards credit cards generally have higher-than-average interest rates to compensate issuers for the additional perks, in addition to an increasingly common annual fee, which can exceed $500 depending on the card, according to Rossman.

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In return, customers earn cash back, miles or points, which have become a sought-after differentiator in the card market. “People love their rewards cards and especially high-income folks,” said Schulz. 

Since the settlement calls for Visa and Mastercard to lower swipe fees by 0.1 percentage point for five years, that may make it harder for card issuers to keep boosting benefits. 

“About 86% of interchange fees go to card issuers to fund credit card rewards and loyalty programs,” according to Trent Swanson, a loyalty points consulting adviser who is known as the “miles husband.” “What’s often overlooked is that the cost of running rewards programs has already been rising.”

In another scenario, merchants raise prices to cover the cost of accepting cards with higher interchange fees. “What, in fact, happens is that all of us pay these huge fees in the form of inflated prices and we don’t know it,” said Kantor. “The cash-paying customer, they get the shortest straw every time.” 

While there may not be an immediate change from the settlement, over time, if merchants start adding surcharges and rewards cards become more expensive to use at the point of sale, it could reign in the upward spiral of rewards and benefits that consumers have grown to appreciate, according to J.D. Power’s Cabell. 

Even relatively modest cards might see a reduction in offerings as well if surcharges become generally more prevalent with mid-tier and premium card groupings, Cabell said. “It is unlikely that this last announcement is the final chapter.”

— Stephanie Dhue and Hugh Son contributed to this report.

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