Last week, the U.S. Department of Justice announced that it had reached a settlement with Visa and MasterCard under which the two credit card giants agreed to relinquish certain anti-competitive practices. Under the agreement, Visa and MasterCard will no longer restrict merchants from offering discount incentives to customers, who pay with no-frills credit or debit cards, which come with lower processing fees.
The DOJ, along with seven state attorneys generals, also filed a civil anti-trust lawsuit against American Express, which refused to enter into a settlement agreement over its discounting restrictions against merchants. The suit and the proposed settlement follow a two-year investigation into the restrictions credit card companies impose on merchants wishing to offer discount incentives for consumers who pay with alternative forms of payment.
At the heart of the battle are the so-called credit card interchange or “swipe” fees. These are the fees that merchants pay to credit card companies to cover the processing cost of credit card transactions. Whenever a consumer pays with a credit card, merchants pay interchange fees ranging between 1 percent to as high as 5 percent of the total purchase. The fees are divided between the credit card issuing bank and the credit card company itself.
Swipe fees are one of the leading sources of revenues for credit card companies; last year Visa, MasterCard, and American Express and their affiliate banks collected $35 billion in interchange fees alone. Interchange fees have been on the rise, and merchants have complained that the fees drive up the cost of goods and are particular unfair for those who habitually pay with cash.
Up until now, merchants have been prohibited from offering incentives for customers using payment methods like checks or cash with no processing fees or credit cards with lower processing fees. Now, under the new settlement agreement with Visa and MasterCard, this will change. In addition to offering discounts and rebates, merchants can also promote certain credit cards and inform customers about the costs incurred from using a specific card.
“We want to put money in consumers’ pockets,” Attorney General Eric Holder said in a statement. “By eliminating credit-card companies’ anti-competitive rules, we will accomplish that.”
The proposed settlement with Visa and MasterCard still needs to be approved by the U.S. District Court in New York, and it is unclear exactly how the new regulations would play out. Theoretically, however, with the restrictions lifted on discounting transactions for certain payment methods, stores, restaurants, gas stations, and other businesses in the future will be able to offer a discount, say 5 percent, for people who pay with cash instead of plastic. Or, consumers may be offered a lower percentage discount if they pay with credit cards that levy a lower swipe fee.
American Express meanwhile has announced that it has no intention to settle. The interchange fees on American Express cards are among the highest in the industry, but Amex claims it has a unique business model, which benefits merchants as much as Amex. Amex swipe fees are higher, the company reasons, because the Amex brand targets affluent, high-spending consumers, a highly desirable consumer segment for merchants. American Express also claims that Visa and MasterCard dominate the market, as they issue ten times as many cards as does Amex, and are accepted by far more merchants. To allow these companies to dissuade customers from using American Express, according to an Amex spokesman, would give Visa and AmsterCard an unfair competitive advantage.
The Amex hold-out means that the about six million merchants who currently accept both Visa, MasterCard, and American Express will have to wait for the outcome of the suit before taking advantage of the lifted discounting restrictions. Merchants that only accept Visa and MasterCard, however, will be able to act on the new rules right away.
It remains to be seen how aggressively merchants will use discounts to direct payment choices, or whether consumers will respond. And if consumers do, in fact, pay more often with cash, it could introduce new issues for merchants: greater congestion at checkout lines, for instance, or the fact that consumers who pay with cash spend less.