Visa and Mastercard settlement terms detrimental to merchants in the long-term

29th June 2018
Callum Godwin
Callum Godwin

The WSJ reports that Visa and Mastercard are close to reaching a one-off $6.5 billion settlement with merchants over excessive interchange fees that would see the card giants and major banks compensate merchants for excessive card fees.

This is the latest in a roller-coaster of developments over a six-year period. An initial offer of $7.25 billion was made in 2012, which was reduced to $5.7 billion after 8,000 (primarily large) merchants opted out. In 2016, the settlement collapsed altogether but now appears to have been revived in a revised format.

However, CMSPI does not see this potential settlement as a positive move for merchants for two main reasons. Firstly, it is lower than the $7.25 billion, suggesting merchants have ceded ground. Secondly, it represents a drop in the ocean compared to the huge fees within the card system. US network fees charged to merchants alone exceed $7 billion annually, while Visa and Mastercard both report operating margins in excess of 50%.

Additionally, Nilson Report data shows US merchant service charge fees totaled nearly $100 billion in 2017, so the $6.5 billion one-off fee is shown to be punitive. In exchange for this, merchants are losing their right to future legal action for an undisclosed period of time.

There are other litigation cases in the space. Earlier in June 2018, the Supreme Court ruled 5-4 in favor of American Express in its case against merchants wishing to steer customers to cheaper payment methods. Meanwhile, in Europe many major merchants are currently involved in legal cases against both Visa and Mastercard following interchange fee regulation in 2015.

We can understand that merchants may be tempted by a short-term benefit, particularly given how strained the retail environment is. However, we do not see the terms of this deal to be remotely satisfactory and will not prove to be helpful in the long-term. Ultimately, it allows the networks to continue to get away with charging excessive interchange and network fees.

Callum Godwin, Chief Economist
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