Visa, Mastercard Slide on Landmark Deal to Cut Merchant Swipe Fees
The settlement, ending a 20-year legal battle, will lower interchange rates and grant retailers unprecedented power to steer customers away from high-fee rewards cards.
Visa and Mastercard shares dipped on Monday after the payment giants agreed to a landmark settlement to lower credit card swipe fees and end a bitter, two-decade-long legal feud with U.S. merchants.
The agreement, which still requires court approval, aims to resolve one of the most contentious issues in retail: the billions of dollars in interchange fees that businesses pay each time a customer pays with a credit card. While the deal brings a measure of certainty, it introduces new headwinds for the card networks' highly profitable business models.
In Monday morning trading, shares of Visa (V) were down 0.3% to $336.02, while rival Mastercard (MA) fell 0.2% to $551.97. Though the immediate market reaction was modest, the settlement's terms signal a significant shift in the balance of power between the payment duopoly and millions of American businesses.
Under the proposed terms, the networks will reduce credit interchange rates by an average of 0.10 percentage points over the next several years. More significantly, the deal dismantles the rigid "honor all cards" rule. This will give merchants, for the first time, the flexibility to decline certain high-fee rewards and premium cards, and more freedom to surcharge customers for using credit.
These interchange fees, which amounted to over $100 billion last year, have been a long-standing grievance for retailers, who argue the card giants operate an anti-competitive system to inflate profits. However, merchant advocacy groups were quick to condemn the settlement as insufficient. The National Retail Federation described the proposal as "all window dressing and no substance," arguing that it fails to address the fundamental lack of competition in the U.S. payments market.
"It’s a bad deal for merchants,” said Doug Kantor, general counsel for the National Association of Convenience Stores. “It doesn’t solve the problem that Visa and Mastercard collude to set these fees.”
While retailers voiced their disappointment, some market analysts believe the direct financial impact on Visa and Mastercard will be limited. Instead, they suggest the burden of lower fees will likely be passed on to the card-issuing banks.
"The settlement will have no material impact on Visa and Mastercard revenue," noted Jeff Cantwell, an analyst at Seaport Research Partners, in a recent report. He argued that the financial pain will be primarily shouldered by the banks that issue the cards. Analysts at UBS echoed this sentiment, estimating that the reduction in interchange fees will directly impact bank revenues, with some major issuers potentially seeing earnings from this source decline by 3% to 6%.
The real long-term threat to the card networks may lie in the new flexibility granted to merchants. The ability to steer customers toward lower-cost payment options could erode the dominance of premium rewards cards, a lucrative segment that has fueled growth for both the networks and their co-brand partners, particularly in the airline and hospitality industries.
For decades, Visa and Mastercard have built a powerful duopoly controlling over 80% of the U.S. credit card market. This settlement, born from nearly 20 years of litigation, marks the most significant concession they have made to date. As the payments landscape evolves with the rise of digital wallets and alternative payment rails, investors will be watching closely to see if this legal resolution marks the beginning of a broader erosion of their once-impenetrable fee structure.