Nearly every American checkout counter has a particular moment that frequently goes unnoticed. You give your card a tap. The terminal emits a beep. The transaction is cleared. The merchant just paid a fee to a network of banks and processors set up behind the two businesses that operate the system in the milliseconds that passed between those two events. This fee typically ranges from 1.5% to 3.5% of the total amount you spent. The vast majority of card transactions in the United States are handled by Visa and Mastercard combined. These small fees, when multiplied by the approximately $200 billion in annual swipe charges in the United States, have finally led to the kind of legal and political battle that Main Street retailers have been attempting to initiate for the past 20 years.
The newest attempt to settle antitrust lawsuit, which has been dragging through federal courts in various incarnations since the early 2000s, is the recent settlement plan. When you closely examine the headline stats, they are not as amazing as the press releases make them seem. There are just slight charge reductions. The relief has a finite duration. Retailers have been primarily concerned with the structural mechanics of interchange calculation, which are mostly unchanged. The section of the code that shops had been privately incensed about for years did, perhaps surprisingly, change. The “honor all cards” provision, which had previously required retailers to accept any card a network issued, regardless of how costly it was to process, is no longer in effect as a result of the settlement.
The aspect of the arrangement that could really make a difference is that one modification. A small bookstore that signed up to accept Visa under the previous regulations had a contractual obligation to accept all Visa cards, including the high-end Visa Infinite with the highest interchange of all, the premium travel rewards Visa with significantly higher interchange, and the basic consumer Visa with low interchange. The retailer was unable to reject the pricey cards while taking the less priced ones. As a result, regardless of whether the merchant’s profits could sustain it, every retailer essentially sponsored every premium cardholder’s rewards program. A small business can now refuse premium cards while still accepting basic ones since the new regulations give shops the option to select which card types to accept.
Speaking with employees of retail trade associations gives me the impression that the long-term effects of that change will be greater than what the immediate settlement coverage indicates. The premium rewards card market in the US, which includes cash-back, travel, and points programs that millions of customers view as practically free money, was established with the presumption that interchange fees would rise steadily from all card-accepting businesses. That economic underpinning starts to falter if a significant portion of small companies start rejecting premium cards at the register. The major networks have been planning for that situation in secret for the past few years, but they haven’t exactly figured out how to discuss it in public.
The store coalition is dissatisfied with the deal for primarily mathematical reasons. The National Retail Federation has deemed the proposed fee reductions insufficient, pointing out that even a significant percentage drop against an annual basis of $200 billion results in savings that are significantly less than what the structural problem requires. The Merchants Payments Coalition has persisted in advocating for legislative action, especially with regard to routing changes akin to those implemented for debit card transactions following the 2010 Dodd-Frank reforms. The largest banks would be required to allow competing routing networks on credit card transactions under the Credit Card Competition Act, which has been bouncing around Congress in different forms for a number of years. If enacted, this change would have a greater impact on the underlying economics of interchange than any current settlement.
It has been easy to ignore the consumer side of this narrative. The new settlement offers merchants more freedom to transfer card processing fees directly to customers at the point of sale. Surcharging has been quietly growing throughout U.S. retail over the past few years. This implies that more customers will come across the minor surcharge reminders that are already typical at independent businesses, restaurants, and petrol stations; these prompts typically range from 2% to 3.5%, depending on the kind of card and the merchant’s processor. The value calculation is beginning to change for customers with premium rewards cards. If a merchant charges a 3% extra for accepting a 2% cash-back card, the card isn’t actually earning 2%.
As this battle progresses, there’s a sense that the payments sector as a whole is approaching a structural turning point that it has been delaying for years. The networks, the issuing banks, and the most devoted premium cardholders have all found success with the interchange model. For everyone else, it hasn’t worked as well. Fees that frequently surpass their net margins on individual transactions have been absorbed by small sellers. The rewards programs of higher-income consumers who use premium cards have been effectively subsidized by lower-income consumers who often use debit or basic credit cards. Only recently has the larger political discourse begun to recognize the system’s subtle regressions.
The larger pattern is difficult to ignore. The United States has opposed interchange caps for decades, but the majority of nations with sophisticated payment systems, including the EU, the UK, Australia, and much of Asia, have already put them into place. Interchange costs in the United States are still among the highest in the developed world. Even if the planned Visa-Mastercard settlement is small, it is the networks’ first significant structural concession in many years. Congress and the federal courts are currently debating whether that opens the door to more dramatic reform or just lets the current model drag on for another ten years. The retailers have made the decision to press on. For the first time in a long time, the networks have determined that some movement is inevitable. Meanwhile, one of the more contentious aspects of American trade is the checkout counter.