Last week, Visa and Mastercard settled a 19-year federal court battle with merchants, which did not seem like a significant win for retailers. Merchants were unable to gain the right to choose which bank cards to accept or reject, a move that could have lowered the fees they paid for processing credit card purchases. Despite this setback, the card networks agreed to reduce interchange fees by at least 0.07 percentage points for the next five years, potentially saving merchants $30 billion compared to the estimated $800 billion they would have paid in interchange fees over that period. This deal could give larger retailers more leverage in negotiations with banks and lead to new shopping discounts and rewards for loyal customers.
Interchange fees in the U.S. are high due to the rewards consumers receive from banks, such as 2% cash back or free travel. Currently, interchange fees range from 1.18% to 3.15% of a sale, depending on the card used, with higher fees associated with richer rewards. Retailers wanted the ability to reject certain high-fee cards and only accept low-fee cards, but this was not granted in the settlement. However, merchants are now allowed to offer discounts or rewards to customers using specific bank cards that cost less or alternative payment methods that bypass the card networks, potentially leading to lower interchange rates and increased consumer loyalty.
The settlement enables merchants to enforce more detailed surcharges on premium credit cards, although this may be challenging for smaller businesses and could alienate high-income customers. While some are critical of the settlement for not delivering on key priorities such as card rejection and ending default interchange, others, especially in the ecommerce sector, see potential for significant change. This could involve merchants creating their own loyalty programs that promote cheaper payment methods and incentivize customers to use these alternatives through rewards and discounts.
Ecommerce experts believe that the settlement could lead to merchants having more control over their loyalty programs, moving away from interchange-funded rewards schemes offered by banks to programs they design and fund themselves. By encouraging consumers to use cheaper payment methods, merchants can build direct relationships with their customers and reduce reliance on the card networks. For instance, offering rewards for pay-by-bank transactions could drive customer loyalty and increase engagement with the brand, ultimately benefiting merchants more than passing on funds to Visa or Mastercard.
While pay-by-bank has been slow to gain traction in the U.S. due to the popularity of credit cards, some companies have already implemented strategies to promote this payment method. For example, AT&T and Verizon offer discounts for customers using pay-by-bank for recurring payments. Airbnb, JP Morgan, and Plaid have also introduced pay-by-bank options through partnerships with payment processors to facilitate secure transactions. These initiatives could pave the way for greater adoption of pay-by-bank and a shift towards merchants controlling their reward programs and building direct relationships with customers.
Overall, the Visa and Mastercard settlement may not have fully addressed the demands of merchants, but it has opened up opportunities for retailers to negotiate lower interchange fees, offer customized discounts and rewards, and promote cheaper payment methods like pay-by-bank. By taking control of their loyalty programs and building direct relationships with consumers, merchants can reduce reliance on the card networks and enhance customer engagement, ultimately benefiting both parties in the long run.