After almost 20 years in court, the two largest credit card issuers have reached an agreement to lower interchange fees.
Interchange — or “swipe” — fees are the charges that the retailer pays when you, as a consumer, use your credit card to make a purchase. They average 2% of the cost of a transaction but can reach 4% for premium credit cards.
That revenue gets passed along to the bank, which uses it to issue rewards — including cash back, points and miles — as well as offer shopping protections like purchase protection and return protection.
The fee is built into the cost of most goods and services and helps to cover credit card perks and even the points that we value so much here at The Points Guy.
With this new agreement, retailers are expected to save billions of dollars over the next five years. Visa and Mastercard will lower their rates by 0.04 percentage points for three years and an average of 0.07% over the next five years.
Note that this agreement is subject to approval by the U.S. District Court for the Eastern District of New York.
This has occurred amid pressure from some senators to introduce industry-wide legislation in the form of the Credit Card Competition Act, which may no longer be needed. The proposed legislation could have far-reaching, potentially negative consequences for consumers and travelers, especially those who like to earn rewards with their credit card spending.
Indeed, the Electronic Payments Coalition (EPC), which is a group representing credit unions, community banks, payment card networks and other banking institutions involved in the electronic payment process, issued a statement applauding the settlement, suggesting it further erodes the case for new legislation.
“The agreement between merchants, Visa, Mastercard and financial institutions has been decades in the making and treats businesses of all sizes equally without government mandates or jeopardizing consumers’ data security and rewards programs,” said EPC Executive Chairman Richard Hunt.
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“The Durbin-Marshall bill has had no debate, no legitimate hearing and continues to be unnecessary,” he continued.
It also comes on the heels of the announcement of Capital One and Discover merging, which would strengthen their position as a third major player in the industry, increase competition and potentially further negate the need for legislation from Washington, D.C.
There are some nuances to this that may need to play out, such as the reality that the agreement could open the door to merchants applying a different surcharge depending on which type of card is used.
However, overall, this agreement is being viewed by some, including TPG’s founder, Brian Kelly, as a step in the right direction. The agreement should reduce costs for small businesses while continuing to provide value in the form of rewards and protections to consumers.
We’ll keep you posted on the outcome of the agreement and the impacts on credit card consumers as it evolves. In the meantime, you can watch the video below for thoughts from TPG’s Brian Kelly on today’s agreement.
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