greg_atlanta

I think it's the classic argument that a premium cardholder typically spends more money than the average customer and therefore they're more profitable to the merchant. Which is probably true to some extent, so the merchant willingly pays more. But with some swipe fees approaching 4% for certain cards it starts to get ridiculous from the merchant's perspective.

I have 11 credit cards accumulated over the years and 9 of them have some sort of reward or rebate. Only 2 are plain vanilla cards. But I won't be canceling those 2 vanilla cards since I may have to use them at some point to avoid an upcharge at certain merchants. (The vanilla cards are more likely to have 0% promotional APRs, which is free money if interest on savings is better than average).

Most upscale merchants will just ignore this settlement (if implemented) and continue pricing their services accordingly.

phltraveler

The entire thing is a shell game and honestly a kind of sham by Visa/MC.

Prepare for a long post...

When cards started offering rewards, Visa argued that the issuer was taking a hit on offering the rewards, and essentially "the more you spend, the more you earn!" mentality would lead people to spend more, meaning the merchants would get more spend overall. So paying a little more swipe fees to get more money overall was a net win for everyone. Of course eventually almost every card became a rewards card.

Visa/MC wanted a way to push rewards rates even higher, so they started introducing the Visa Signature cards. When Visa Signature came out, they boasted of the cardmember benefits: The first Visa Signature Cards usually had "no pre-set spending limit" (which anybody who knows anything about risk management knows this means there's a preset spending limit that the bank doesn't tell you until you hit it, but to those who don't, it sounds like the bank is writing you a blank check), and later on, $5K minimum credit limit. Mastercard had World Elite as the essential equivalent of Visa Signature. Both argued that with higher credit limits that they were offering you a more valuable, more spendy clientele and that they came with oodles of perks like extended warranty, purchase protection, travel benefits, etc. etc. so higher interchange was justified.

The dilution of benefits (or what some term "enshitification") came later, where Visa and Mastercard essentially allowed any issuer with a pulse to issue was World Elite/Visa Signature. First the no preset spending limit caved to $5K minimum CL, and nowadays, at least some issuers have choice (I'm damn sure my AOD FCU Visa Signature was issued at $5K because they're risk averse and that was the maximum CL they were willing to extend me because they had to) and products like the Amazon Prime Visa are routinely issued as Visa Signature with well below a $5,000 CL. Citi over the past few years has basically done the same, converting essentially all Mastercard Reward cards to World Elite over time. Very few Visa Signature products actually offer the extended warranty, purchase protection, etc. benefits anymore. Sure, an AF card is likely to offer them, but almost every Visa I have is a no AF Visa Signature where the issuer opted out of all of the benefits that were supposed to justify the interchange.

This of course did not sit well with merchants who recognized the farce. Often Visa Signature interchange is the same or 1-10 basis points more than standard rewards as a dilution.

Visa Infinite was introduced as a "no guys we're serious" level to say hey these are cards with Amex Plat level AFs. There may be exceptions, but generally Visa Infinite products have at least a $400 AF in the US market, and actually still have premium cardholder benefits. These cards generally have benefits still and Visa's posturing is it's more comparable to an Amex plat level cardholder, more spendy, perks, more valuable, therefore more interchange. However, looking at the current October 2023 interchange chart, Visa Signature and Visa Infinite interchange generally mirror each other.

So to make an even further division, Visa decided to make tiers within Visa Signature and Visa Infinite. Fine, we bring back the no-preset spending (thereafter NPSL) limit option of the Visa Signature. If you issue with NPSL, then you can be Visa Signature Preferred. Taking an example of, say, Supermarket Credit Tier 0, a Visa Signature Preferred would get 1.65% + $0.05, and a regular Visa Signature card would get 1.55% + $0.05. Other interchange is wider - small merchant recurring payments for telecom is 2.20% + $0.05 Visa Signature Preferred, but a mere 1.43% + $0.05 (matching standard Visa rewards and all other products) on non-Preferred Visa Signature.

Visa Infinite is binned into two buckets, spend qualified and not. Details are scant on what this actually means, but best I can tell, it's essentially the same as Visa Signature Preferred - the lack of a preset credit limit is a spend qualification flag that has a value of Q if it "meet's spend qualified management amount for the card product", N if it doesn't, and is blank if it doesn't apply to the product (non-infinite/non-signature cards).

In essence, the entire thing has been a game of cat and mouse between Visa/MC and merchants. Over time between posturing, the marketplace legitimately competing, and lawsuits, merchants have strived to lower interchange, and Visa/MC/other networks have invented pretexts to essentially reset interchange. OK standard Visa card interchange is down, we swear Signature is new, it's going to be great because no spending limit so we need more money to pay for you getting access to high net worth customers. OK some of them don't have a preset spending limit but they still have oodles of benefits and will attract a better cardholder. OK they're offered with <$5K CL to basically anyone with a pulse on no AF cards now so there's a REAL tier of Visa Signature Preferred, just trust me bro, it's worth the higher interchange. As much as the cardholder is the customer and a merchant is a customer, issuing banks are the most real customer to these networks. Visa Signature was allowed to be diluted to the degree it was to allow issuers to collect more interchange.

I realize I'm way into my diatribe now, but my point is that the card networks are not our friends. I look at this settlement very passively because, as I've stated multiple times, I don't see it changing much. Visa gives a temporary and very small reprieve on interchange rates (4 basis points for three years), which is why a lot of retailers don't like it. What the smarter retailers realize is that basically this doesn't change the status quo, but it ends the lawsuit. Courts are slow as hell. Visa gets to end this lawsuit, get a 5 year reprieve on getting sued over swipe fees, and if they raise them again in five years - the retailers can sue again. Oh no! Except this lawsuit has been going on for 18+ years. If the settlement ends this lawsuit and Visa starts hiking base interchange back up in three years/average overall fees by 7 basis points in five years, Visa can spend the next 15+ years dragging out the next lawsuit.

Some would say that this settlement is an example of why the credit card competition act is needed. Essentially, the oligopoly of Visa/MC/token competition from Amex & Discover is a broken system that doesn't actually compete. The Credit Card Competition Act strikes me (personally) as the worst of both worlds, in that it would exempt Amex and Discover (maybe merged Cap1/Discover if that's allowed to go through) from the secondary network requirement on cards they issued themselves. Especially with a merged Cap1/Discover, these issuers would be too large to realistically drop by merchants, and thus Amex/Discover would have more fat in interchange to offer rewards, but way less competition as Visa/MC issuers have secondary networks and would have to cut rewards rates. Less competition overall on credit card rewards would mean that Amex/Discover would not have to compete as hard, just offer better rewards than the larger Visa/MC issuers (Visa/MC issuers with <$100B assets would be exempt. Rise of the credit union rewards cards?) . Essentially as I see it, the Credit Card Competition Act is a "worst of both worlds".

I'll end my rambling by saying that the larger issuers have a ton of choice. Infinite does not seem diluted yet from a benefits perspective. Signature absolutely is, and at the largest issuers, basically everything is issued at Visa Signature or World Elite level now after both were diluted.

josephstern

Maybe the answer is an a la carte card where I can choose my benefits and pay accordingly:

+ Extended warranty = 5 basis points
+ Priority Pass = 31 bp
+ Add restaurants = 6 bp
+ Travel Insurance = 12 bp
+ Rental Car CDW = 14 bp

Then when my Whole Foods screen pops up and asks me if I want to pay an additional 3.29% to us my SternVisa, I can rest easy knowing that I opted for exactly this basket of benefits.

phltraveler

I'm going to (for the sake of discussion) ignore how pricing benefits on an a la carte level is something that the networks are not designed to do. Let's say a lawsuit forces Visa and Mastercard to allow this and to convey a tailored product cost in interchange to the merchant to present to the cardholder for surcharge consent and the slow moving payments industry rapidly updates their point of sale integration to facilitate this.

Individually purchasing these benefits would erode their value to the point where nobody would use them.

When you use a benefit like extended warranty, or purchase protection, or rental car damage coverage, at the end of the day, these are insurance benefits. Amex is a rare case of self insurance (these benefits are administered by Amex Assurance Company). When you don't, you contract them from another benefits company. Citi loves Virginia Surety. Many smaller financial institutions and some larger will just use on Visa Card Benefit Services, which is Asurion. Even things like Priority Pass or other lounge access are essentially. You're not paying list.

These are benefits which your issuer and the benefit provider have calculated the value of and accordingly priced. Not everyone with an Amex Platinum is going to go to a lounge twice a week. Not everyone with a Chase Sapphire Preferred is going to make an rental car damage claim. So you spread the premium or cost of the benefit among your entire cardholder base that you're offering the benefit to. The benefit is priced accordingly for the issuer. Obviously someone with an Amex Plat card is more likely to make a trip interruption/delay claim, but I know people who could have and never did.

If you get to the point of making the benefits separable to the point where there's a discrete fee on each purchase, then you're going to end up with self-selection that makes the benefits untenable to offer. 10 basis points extra that I get surcharged for extended warranty? Okay, I'd take that on an Amex that I essentially only use on electronics purchases. But then I'm much more likely to A) have opted into the benefit because I'll use it B) only use it for purchases in which I need said extended warranty coverage. That reduces the amount of overall swipe fees amex gets, reduces the charges to ones I'm potentially going to make claims on, and I've self selected to pay for that benefit because I'm going to use it. This factors into premiums for the issuer; if use of a benefit goes up, they're going to pay more for the claims and the cost to adjust them. Do I rent a car once a year or less or do I do it weekly? If I'm on the road 75-100% of the time and work doesn't cover LDW I'm probably gonna buy that. But if not, I'm probably going to buy LDW from the rental car company or risk having to claim damage on personal auto insurance.

This is ostensibly why Citi killed Price Rewind (Price protection). Services like Earny would automate a price protection claim for you. For me, with my time, I would have to notice a price difference of at least $25 to say a claim is worth it, and I'm not omniscient of every sale on the planet, so I would only look for larger purchases. Earny would automate sending price protection claims by scanning your inbox and submitting them to your issuer for any amount in exchange for a 25-30% tithe. All of the sudden you have claims going in front of a human being for toothpaste being a nickel less. Citi's premiums for this are predicated based on the cost to directly pay claims, and the cost to administer them. Earny decimated price protection pretty much everywhere (stragglers exist) by stuffing the claims inbox with claims that were way more effort in administrative effort (people work and earn money for a living) than their claim amounts, to the point where Earny became an affiliate cashback site like Rakuten or Honey.

Similarly, if you made it so Amex Platinum was self selecting and you could do a checkbox on different benefits, they wouldn't be priced the same either. If Centurion lounge access was separable from the entire AF, you'd have a lot of people opt out. Or people in NYC where there's no Walmart to get grocery delivery from opting out of that. Or people outside major cities where there's no Equinox gyms opting out of that.

Again I'm rambling, but a la carte benefits on card charges are not going to work. Part of what makes the benefits cheap is that most benefits are insurance policies subsidized by people who rarely or never claim. Which is not that different from health insurance in the US at large employers, where large health plans have cheaper premiums than individually purchased ones.

notquiteaff

Begs the question - why should Whole Foods pay more in fees for my purchase if I choose to include Travel Insurance or Priority Pass on my card benefits? Wouldn’t the logical implementation of such an “a la carte” card be to have an annual fee that varies depending on the benefits?

I don’t have any evidence, but one local restaurant has never accepted my CSR. I occasionally try again and the owner usually says that the card probably won’t go through (and even tells me ahead of time when I hand him the metal card) and still goes through the motions of trying to run it. I don’t see what exactly he enters on the terminal, so no idea if the failure is the result of that… or if the terminal is programmed to reject expensive cards… in any case, I just give him my CFU and get the same 3X rewards. If it wasn’t the only restaurant with that type of food in the area (and good food), I probably would have stopped going there a long time ago.

josephstern

Right - I was being facetious there. Could never work. But to some extent, a lot of us on FT already do operate this way a bit. We charge flights on one card, groceries on another, and hotels on a third, etc. all for the specific benefits they provide (even though many are overlapping).

But if/when we are presented with "Press OK to acknowledge the 3.24% fee to use your Acme Card" at checkout, we will weigh whether we need x or y benefits or whether we are earning enough z rewards to compensate for the fee.

tmiw

The one upside for smaller merchants is that they would be able to just surcharge 1% across the board (after dropping AmEx, of course) and call it a day. Any amount extra, especially if it ends up becoming standard practice at most businesses, would be enough to significantly cut credit volume as most people aren't into the rewards game.

The downside is that issuers might end up increasing rewards to compensate. Meaning that more people may very well decide that paying the extra 1% is worthwhile, thus still costing smaller businesses more money.

Ultimately, the only thing that has been shown to actually reduce interchange so far is a hard legally-mandated cap. I don't think we're politically there yet but I can see the US getting to that point eventually if people get fed up enough (even if we don't end up capping to as low levels as the EU).

notquiteaff

If merchants go down that route, basically arguing that optional expenses should be born by those customers who cause them (and not by cash payers), I might argue that labor expenses ought to be built into the price of products/services as they are equally applicable to all customers, and not be funded from generous tips. In other words, maybe I just need to switch to the European model of adding a little bit extra for excellent service, but certainly not 20% as I now routinely give. Even going back to a strict 15% (and less for mediocre service and a hard zero for counter service) would recoup any extra costs from credit card surcharges…

phltraveler

The surcharge doesn't net the issuer that much money. Let's take an example of my earlier 1.85% + $0.10 on a services transaction on a non-preferred Visa signature, and your 1% surcharge.

Without surcharge: $100 charge, 1.85% of $100 USD is $1.85, + 10 cents is $1.95.

With 1% surcharge: $100 charge, $1 surcharge, $1.85% of $101 USD is $1.8685 USD, round to $1.87, plus ten cents, $1.97 swipe fee.

If the issuer awards at the same rate - let's say 2% everyday spend for the sake of argument - then yeah, it's 2 cents rounding up, thus equal-ish for the merchant, but I'm taking a 1% hit on the chin to get net 1%. I'm making ~$1 instead of ~$2 in rewards. The issuer doesn't have incentive to increase rewards rates drastically because their net did not drastically change.

It's not something I would personally love, but I view it more favorably than secondary network requirements that just lead to hellish unintended consequences like Amex/Discover being given a huge blank check on the credit market if the CCCA passes.

cbn42

Yup, this is the bottom line. Visa has more money to spend on lawyers than the merchants. They basically dragged out the lawsuit until the merchants couldn't justify the cost anymore, and the merchants were forced to settle on unfavorable terms. Unfortunately, that's how many lawsuits are resolved in our legal system.

I wonder if merchants will choose to opt out of the settlement this time, and what that will look like.

frappant

That's right, cash-handling is a hassle for merchants.

Some small merchants faced risks taking cash deposits to the bank.

So I guess the larger retailers and restaurants will hire some armored service where they come and collect cash in those trucks that get robbed in the movies?

greg_atlanta

True, cash isn't free. Banks charge to process it (not sure how much). Plus being cash only or cash heavy puts you at a higher risk of robbery during business hours (potential harm to employees, customers, and property).

Going debit only is probably a good path for some merchants if the swipe fees for debit are minimal. Are swipe fees for debit the same now with or without a PIN? (At one point they were higher for no PIN transactions).

I went to an expensive restaurant ($40+ entrees) a few years ago that charged a 3.5% fee for ALL cards including debit. I didn't carry enough cash for a $100+ meal so I sucked it up (4x pts on Amex Gold, though). But if they charged for credit but not debit that would be a good compromise to piss off the fewest customers.

tmiw

If transaction volumes stay the same, sure. I can see some people deciding that it's not worth it anymore if they only get 50% of the rewards they used to, though, which might cause issuers to incentivize people to keep using their cards. (OTOH, if people are going to come out ahead anyway, maybe not that many people will opt for using less expensive cards?)

I looked a while ago and Chase at least seemed to charge around 0.3% or so for cash deposits. Based on that, I can see how many merchants (especially smaller ones with few to no employees) rightly or wrongly would conclude that cash is cheaper for them, especially if e.g. you're running a lower-risk business otherwise.

For the large banks, the original Durbin Amendment capped interchange to 0.05% regardless of how the card's run. IIRC there's still a difference between PIN and not-PIN for the cards from smaller issuers (and I imagine it's a significant enough difference that the larger stores are incentivized to steer people towards the former).

As for going debit-only, unfortunately I suspect merchant processors make that incredibly difficult to do and you definitely can't if you want to use something like Square or Toast. Otherwise, I'd at least have seen it more outside of like Costco (if not using Visa), WinCo and Arco (before they started taking credit cards too).

phltraveler

You're ignoring the 22 cents in addition to the five basis points for larger issuers under Durbin. If the issuer has less than $10B in assets, they're exempt and it's far more.

It took 18+ years for Visa to offer the tiniest crumb. I expect merchants to largely accept the offer, on the grounds that, in theory, it provides some relief (without Visa/MC admitting wrongdoing) and the right to sue again in 5 years (assuming Visa/MC hold up their end of the agreement). Individually suing Visa/MC absent the class (look at what the class was able to get in 18 years?) is butting your head against the wall.

If you gave me a magic wand and told me I was, at a point in time, god of credit card swipe fees - I would implement EU style interchange caps. As someone who utilizes both rewards and credit card benefits heavily, I would personally suffer from that choice. Most people here would. But intellectually, if it was an across the board cap, I could buy into it. Or let the free market compete.

It's basically a "when in Rome" situation. Merchants are powerless to effectively stop Visa/MC swipe fees. We as cardholders are effectively powerless to stop them either, except to the degree that we refuse to patronize merchants that, historically, have always borne these fees as a cost of doing business. Why would we start accepting them as cardholder liable now? Especially after the pandemic encouraged payment methods that reduced contact.

josephstern

So who eats the fees when we use a US V/MC in Europe with their capped fees?

If I use my Chase Sapphire Reserve there (which I generally do when I'm there) who is picking up the much higher interchange rate? Does the merchant have to eat it somehow or does Chase reduce the fee to European rules on those charges?