• Networks, retailers have fought over interchange for decades
• Concessions likely to crimp revenue of banks like BofA, Citi

By Paige Smith

(Bloomberg) -- Visa Inc. and Mastercard Inc. agreed to cap credit-card swipe fees — a deal that US merchants say will save them at least $30 billion over five years — in one of the most significant antitrust settlements ever, following a legal fight that spanned almost two decades.

The deal, which is subject to court approval, also would allow retailers to charge consumers extra at checkout for using Visa or Mastercard credit cards and use pricing tactics to steer customers to lower-cost cards, according to a statement Tuesday from attorneys representing the merchants.

“This settlement achieves our goal of eliminating anti-competitive restraints and providing immediate and meaningful savings to all US merchants, small and large,” Robert Eisler, co-lead counsel for the plaintiffs, said in the statement.

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. The fees, also known as interchange, are a key driver of profit for card-issuing banks and they are the primary mechanism used to fund popular rewards programs. 

In recent years, merchants have grown increasingly vocal about their opposition to these fees, which typically amount to about 2% of a purchase and totaled more than $100 billion last year. While Visa and Mastercard set the level of these fees, it’s the banks that issue the cards that actually collect most of that revenue. 

That means banks including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. that issue cards with Visa and Mastercard are likely to take a hit with these concessions. JPMorgan, the biggest US bank, collected $31 billion of interchange and merchant processing income last year, leading to total card income of $4.8 billion after it accounted for customer rewards, payments to partner companies and other costs.

“For decades, Visa and Mastercard have used their duopoly to fleece retailers of all sizes,” the Retail Industry Leaders Association said in a statement. The trade group’s members include more than 200 retailers, manufacturers and suppliers, including Apple Inc., Dollar Tree Inc., Starbucks Corp. and Home Depot Inc. “This settlement is a mere drop in the bucket. It proves that merchants deserve injunctive relief, but whether the settlement terms proposed are sufficient to remedy the harm caused by the current interchange system needs to be carefully reviewed.”

Stephanie Martz, chief administrative officer and general counsel of the National Retail Federation, said her organization is also reviewing the terms of the settlement.

“The fact remains that these fees are an unfair business practice that harms merchants and consumers and benefits banks,” she said in a statement.

Settlement Terms

As part of the settlement, Visa and Mastercard agreed to reduce the swipe fees they charge each merchant by at least 4 basis points for at least three years, lawyers for the retailers said. And, for a period of five years, the average systemwide swipe fee for both networks must be at least 7 basis points below the current average, subject to review by an independent auditor. 

Retailers will now be able to charge consumers for using a Visa or a Mastercard card and they’ll be able to adjust their prices based on the cost of accepting different credit cards. That could mean, for instance, that a consumer with a Chase Sapphire Reserve card, which carries the Visa Infinite branding and therefore comes with a higher interchange fee, would be charged more at checkout than a customer using a Chase Freedom Unlimited card.

That should help address a pain point among those merchants who despise Visa and Mastercard’s “honor all cards” rules, which stipulate that if a merchant accepts one of the brands’ cards, then it has to accept all of the brands’ cards. Some retailers have said those rules are behind the surge in interchange fees in recent years because Visa and Mastercard have worked with banks to issue more cards that run on their premium networks, which typically cost retailers more. 

“This agreement brings closure to a long-standing dispute by delivering substantial certainty and value to business owners, including flexibility in how they manage acceptance of card programs,” Rob Beard, general counsel and head of global policy at Mastercard, said in a statement. 

Merchants will also now be allowed to offer discounts to consumers using cards from a certain bank.