2024 VISA/Mastercard Interchange Settlement
 

Looks like it is less of a break financially to merchants (7 bps interchange cut eventually, with a 5 year cap on fees) but it allows surcharging and also surcharging by card type and allows merchants to pick which cards they will accept. Might severely curtail the points/miles game as playing becomes more expensive.

Visa, Mastercard Reach $30 Billion Swipe-Fee Deal With Merchants - Bloomberg

Visa Agrees to Landmark Settlement with U.S. Merchants Reducing Rates and Guaranteeing No Increases for at Least Five Years | Visa

“Retailers will now be able to charge consumers for using a Visa or a Mastercard card and they’ll be able to adjust their prices based on the cost of accepting different credit cards. That could mean, for instance, that a consumer with a Chase Sapphire Reserve card, which carries the Visa Infinite branding and therefore comes with a higher interchange fee, would be charged more at checkout than a customer using a Chase Freedom Unlimited card.”

(Bloomberg article)

How is that going to work in practice? Do merchant terminals have a way of determining the type of card and display the card-specific fee for customer approval? Will merchants maintain a photo book of “expensive” cards and check every card against the list? How will that work with mobile payments - does the phone pass the card type to the terminal? Do I need to show the merchant the picture? Can I get a discount if I use a prepaid debit card (of course, paid for with a credit card)?

You'd think, in theory, the system would already be able to determine the fee based on the BIN and know the fee that card would be assessed. Agree this is going to be a mess if merchants actually start doing this.

1) Its going to be a mess at the point of sales terminals if this different pricing is implemented at all how the various online articles discuss.

2) Its going to have negative impacts on rewards programs. Probably not as bad as some, including myself, had feared... but with these caps now, various programs that are deemed "too generous" will need to be adjusted to remain profitable with the banks and CC companies involved.

Will definitely be interesting to see what lies ahead. Of course, Congress is still working through legislation that if passed, will be even more detrimental than this settlement. CC rewards could easily go away (or, more likely, severely curtailed to a low & fixed redemption value) like what happened with Debit Card rewards.

I would assume this could work just like the dynamic currency conversion screens or tip screens that are already implemented on the terminals. After swiping/dipping/tapping it makes the initial network lookup, then before the transaction processes it can present a screen that says "Accept charge of $xxx (+ 1% or whatever)" or "change payment method."

The “change payment method” button will see heavy use then :)

I guess I will then, at every merchant that implements anything like this, cycle through all my cards in the order of my preference. E.g., dining charge - first I give them my CSR, comes back with a 5% fee, no thanks. Let’s try my Citi Premier. 3% fee… no thanks, let’s try my CFU - 0%, okay, let’s use that one. And in a sit down restaurant, does that mean the waiter will run back and forth with the cards and the check if they don’t have a terminal they can bring to the table?

Also Amex doesn’t seem to be covered by this.

I have a feeling they haven’t really thought this through.

Or just boycott and cancel any transaction that tries to impose a surcharge.

In other countries they impose like 1-3% surcharge on all credit cards. That's blanket so you can't find too many places which doesn't have CC surcharges.

But in the US, tell merchants to cancel any transaction which has a CC surcharge.

Consumers should have some market power.

But then what happens on e-commerce sites, where increasingly more and more of all retail purchases are migrating to?

I'm thinking there'll be some general verbiage on menus or something stating that you agree to be surcharged up to how much it costs the restaurant to run your card and that the only way to opt-out is to pay cash or with a debit card. And since you agreed to the surcharge by giving them a credit card in the first place, they're not going to agree to void your transaction and run a cheaper card.

Given that the plaintiffs' attorneys claim that 96% of Visa/MC transactions can be surcharged with this settlement, this might become difficult pretty quickly (depending on how the final rules are written).

If most in-person transactions eventually start getting surcharged, a fair number of online transactions probably will too.

How can an unknown surcharge possibly be legal?

What if I decline to sign the credit card slip (hurrah for outdated technology) when it shows an amount greater than the amount originally on the bill?

I think more likely the merchants are not going to bother with different surcharges for different cards. They will just apply the max to all cards and collect the profit.

For in person transactions cash is the obvious alternative payment method. Would you expect debit cards to be the surcharge-free online payment method?

If they specify a maximum that it could be, I would think that charging anything less than that would be fair game (local laws of course vary). Especially if it's made clear on the receipt that it was X% more because you used a Visa Infinite or something.

In theory signature isn't required by the networks anymore, so I don't think it'd matter from a chargeback perspective. (Of course, there are still a lot of places that ask even to this day for various reasons.)

Again, this will depend on how the final rules are structured. Though it wouldn't surprise me if many still bend the rules a bit (or a lot), i.e. by surcharging debit cards too or simply charging the same 3% or so regardless.

The National Public Radio version of the story.

https://www.npr.org/2024/03/27/12411...-with-merchant

Quote:
According to the settlement announced Tuesday, Visa and Mastercard will cap the credit interchange fees until 2030, and the companies must negotiate the fees with merchant-buying groups.

The law firm that announced the settlement put the value of the savings in swipe fees at close to $30 billion.

Id.

A billion here, a billion there, but 30 billion, now you are talking serious money :eek:

I'll make it my new hobby to file complaints for every debit card transaction that is surcharged against the rules.

I don't see much at all changing.

EDIT: The Visa/MC settlement terms, if you're inclined to read several dozen pages of the finer details.

The four basis points minimum reduction for three years and keeping interchange at least 7 basis points below where we are now for five years... this is relative peanuts. Taking an example of services interchange on Visa Signature non-preferred:

Status quo: 1.85% + 10 cents
Year 1, settlement: 1.81% + 10 cents
Year 2: 1.77% + 10 cents
Year 3: 1.74% + 10 cents
Year 4: 1.78% + 10 cents (still 7 basis points below the settlement amount)
Year 5: 1.78% + 10 cents
Beyond that: could be 1.85% or higher again

EDIT 2: Per my next post, per reading the actual proposed settlement (instead of articles summarizing it), it's not 4 basis points minimum reduction per year for three year, it's three basis points total on the posted interchange for a period of three years, as a subset for reducing average interchange including fees and other assessments by 7 basis points minimum on average by network for five years.

On product level surcharging: This has been allowed by Mastercard since at least 2019, and Visa at least since 2022. It's an absolute nightmare to implement. How is your point of sale going to determine if someone is Visa Infinite Qualified (expected to spend $50K-$250K on the card) or non-qualified Visa Infinite? Same with Visa Signature Preferred (similar thresholds) vs. non- Preferred Visa signature. All of this forgets standard rewards and "all other". And are you going to post an Excel table printed on your 8.5x11" piece of paper with a chart by Visa and Mastercard product type and expect the person coming to your counter to know if their card is Mastercard World Elite or not?

Issuers do product changes without changing the account numbers to new BINs, and sometimes upgrade cardholders within a BIN (my Citi Double Cash was originally an AAviator Mastercard before PC, and was originally a regular mastercard before Citi changed it to a world elite.

In short - unless there's some genius technical solution that I'm not aware of like the issuer passing their interchange classification during card processing (which I have never, ever seen in practice, but who knows), product level surcharging is impossible even if the merchant is manually checking what's printed on the card.

(All of this ignores sometimes allowed stylistic changes - the Apple Card is a World Elite mastercard, but MC permitted Apple/GS a cleaner design that doesn't say that on the physical card or the design in Apple Pay.)

Amex isn't covered by this settlement, and if you surcharge as a merchant who accepts Visa, Mastercard, or both Visa/MC, and you also accept Amex - it is absolutely impossible to surcharge all cards without breaking somebody's network rules.

Visa and Mastercard surcharge rules hold that you can't surcharge debit or prepaid products, even if you run them in credit mode without PIN and more expensive swipe fees.

Amex on the other hand has a most favored nation clause - if you surcharge Amex products, "all other payment methods" in terms of cards must be surcharged - including debit and prepaid.

So let's walk through our scenario surcharges:

1. You don't surcharge at all... you're not surcharging.
2. You surcharge all cards including debit. Amex is cool with this, but you're breaking Visa and Mastercard network rules. In 2023 Visa started threatening acquirers to warn merchants that they will be giving out hefty fines for non-compliance and doing secret shopping.
3. You surcharge credit only, but spare debit. Visa/Mastercard are fine with this, but you're breaking Amex's network rules.
4. You drop Amex acceptance. You can surcharge credit on Visa/MC/Discover and be compliant, but you lose access to Amex cardholders.
5. You surcharge Visa/MC, but spare all Amex products. That just creates incentive for your cardholders to use Amex with higher swipe fees.
6. You drop Visa/MC to be able to surcharge all Amex and Discover cards. Congrats, you've lost access to the majority of the US credit card market.

See above on Amex and Visa/MC that have conflicting rules that create a catch-22 for surcharging if you accept Visa, MC or both, in addition to Amex.

This all ignores that Visa/MC rules prohibit surcharging debit products even when they run as "credit" without PIN at higher swipe fees, so unless your point of sale is somehow smarter than anything I've ever seen in practice to discriminate on the BIN and automatically spare Visa/MC debit the surcharge, then your employees have to be absolutely eagle eyed to be compliant and not surcharge debit cad holders.

If you have guts and particularly if it's a small business, maybe tell them first so they can be educated and avoid network fines. If you do and they listen, you make a merchant realize they're doing something they aren't allowed to do and you get your desired end result (no surcharging), if they don't, you tried before the stick came in (network smackdown).

Visa was totally impotent on this during 2021 and just basically said that they reminded the merchant acquirer to tell the merchant to be compliant, but 2023 drastically changed the picture - Visa lowered their maximum permitted surcharge to 3%, started warning merchant acquirers to tell merchants that if they're not compliant there's going to be huge fines, and updated their merchant surcharge FAQ to say that they're sending secret shoppers around to check for non-compliant surcharging and merchant acquirers could be fined $1000+ for non-compliant surcharging (which the merchant acquirer is going to pass to the merchant with fees).

I created a wikipost after a more in depth review of the actual settlement text (which I linked in said Wikipost). It seems even weaker than I thought in my last post, because it's not four basis points reduction per year for three years, it's four basis points on the posted interchange rates for that entire period. The seven basis points is an average of all Visa/MC credit acceptance including fixed fees (10 cents per transaction in addition to a percent, for example), unavoidable network fees, etc... so this is really quite small. Essentially the 4 basis points in the three years (4bp total) is a subset of the reduction of 7bp average effective including fees (7bp total) for five years.

I would note that the settlement text allows merchants to enter a pilot to not accept Visa/MC debit/other non-credit Visa/MC products at all of their locations, initially starting as a pilot limited to 20% of outlets under a single banner/brand, but the surcharging term changes in this settlement apply exclusively to credit. So if a merchant is accepting Visa/MC debit, it won't change that these products are still not allowed to be surcharged (which many merchants do anyways, violating Visa/MC network rules).

Again, in practice, for any merchant that accepts Visa/MC/both in addition to Amex - surcharging is de facto not allowed. If they follow Visa/MC network rules and don't surcharge debit, they're breaking Amex network rules that all cards must be surcharged. If they surcharge all debit including Visa/MC, then even after this settlement, they would be violating Visa/MC network rules.

I guess that the possibility for merchants to decline to accept Visa/MC debit would allow a theoretical situation where a merchant declined to accept Visa/MC debit but accepted Visa/MC credit, surcharge Visa Credit/Mastercard Credit/all Amex, and that would be kosher with both networks (MC/Visa you don't accept debit so you can't surcharge it, Amex you're surcharging all other accepted cards equally). The difficulty with this option is that banks with >$10B assets are required to provide secondary networks for debit routing, but issuers with less are not under Durbin Swipe fee reform. Start trying to explain to consumers that your credit union or local/regional bank debit card isn't accepted because it's not from Citi/Chase/BofA/Wells Fargo...

So again, I don't really see this settlement practically changing much in the pervasiveness of surcharging. Most merchants that are violating network rules on surcharging now (most of them due to the Visa/MC and Amex catch-22 on their rules) will still be violating them if they accept Amex in addition to Visa/MC after this settlement.

Debit cards (well, domestic ones anyway) are actually pretty easy to tell from the POS point of view now that chip is a thing.

BTW Clover in my experience does in fact detect the use of a debit card and not apply any surcharges. Not sure about others as I don't use debit that often.

If I see a retailer call out that credit card only transactions are charged instead of "by card", I'm more likely to test credit, but I've done it at different points as a litmus test. Toast at least prior to this year did not distinguish.

Toast seems to have a beta as of early 2024 to detect non-compliant non-credit surcharges. BINs tend to be much more reliable as a way between debit and credit than they are for credit card tiers. Toast's change in posture to offer a beta product after Visa started knocking on doors of acquirers in 2023 surely can't be a coincidence.

(Other than local restaurants, merchants surcharging in my area is rare.)

Thank you for the informative analysis, phltraveler. I don't think that places would shut off smaller debit cards since it would frustrate too many customers. Also, like you indicated, the BIN isn't indicative of the card type necessarily. I have done product changes too where I've kept the same card number.

Is there any documented case of a merchant getting fined for this?

If not, I think it's just talk. Visa can yell louder and louder and make threats, but I don't think they are actually going to do anything tangible about it. It's not in their interest to damage their relationship with either merchants or acquirers.

Possibly but let's assume Visa Infinite cards pay some high 3%+ surcharge. If rewards aren't attractive enough to AT LEAST offset that surcharge, why would anyone ever get a Visa Infinite card again?

I think merchants in the US have more of a problem with credit cards in general and not the various levels of Visa cards that are out there (though I'm sure stuff like Visa Infinite doesn't help). IMO that's why merchants are probably going to go the simplest possible route if they do start surcharging more regularly, which per the settlement is going to be a flat 1% regardless of card type or how much it actually costs the merchant. Just enough to maybe get a significant number of people not in the miles/points game to reconsider using a CC instead of some other payment method but not enough to make rewards completely not worth it.

In any case, we'll see what happens over the long run.

I reported a couple merchants for inadequate notice for surcharging in 2023, and to be honest, I'm not looking to be a "karen" against small businesses. The concept of a credit card surcharge grates me but some examples of where I didn't say anything:

1. A local fried chicken shop that fully complied with surcharging regulations not only in the state of NY but cardholder networks - dual pricing. Menu said things like 4 piece chicken meal $10.00 cash, $10.30 credit - I can't begrudge this at all because it's intellectually honest.
2. A local bakery that started accepting credit for the first time with surcharge circa 2018-2019. I'm so used to bringing cash there that I really can't begrudge it. Before that they had an ATM and it was cash or check.
3. A local Mexican restaurant started surcharging 3% on credit, but it was disclosed at the door, on the menu, not applied to debit, disclosed before the check was presented, disclosed on the receipt for the check, and then shown as a nontaxable amount. (They later decided to stop surcharging likely because it's so offputting).

For merchants where I did: Visa was completely passive in 2021, but in 2023, took action. Examples of a couple of merchants who irked me:

1. The menu of one merchant (already high priced) said that the menu prices reflected a cash discount of 2.5% which would be removed if I paid with a card. Debit can't be surcharged, nor is presenting a discount as included but removed intellectually honest.
2. Another merchant only had the card surcharge appear on the receipt. Either that or the sign was not conspicuous in any way.

Both of the merchants that I felt were not forthcoming I complained to Visa in 2023 and both stopped surcharging within 4 weeks of the complaint.

Now is that proof that Visa fined anybody? No, it isn't. I can tell you I complained about merchants with substandard/absent pre-check disclosures on surcharging in 2021 and 2022 and Visa complaints did absolutely nothing. It could be anecdotal, but I take Visa's extremely strong posturing on the steps they will take as a sign that they're fed up. It may be compounded by New York law making effective surcharging as a dollar amount or percent illegal versus the network in my anecdotes.

I will say that I think the networks, per this settlement, are trying to be passive aggressive. Visa goes on active audit of merchants? Class action that you're setting policies to fine merchants. Set policies and wait for cardholder complaints as settling a dispute? Well hey we're an intermediary between cardholders and merchants... just trying to make sure everyone follows the rules...

I noticed this, too. For the merchants where I've complained about surcharges, Visa has followed up in recent months. Prior to last year, I only had evidence of the payment networks following up with a merchant on an issue unrelated to surcharges. (A restaurant had started requiring ID for card transactions due to still swiping cards after the liability shift but stopped doing so within weeks after my complaint.)

I doubt anyone was fined. My guess is that Visa reported it to their acquirer, which sent them a strongly worded letter reminding them to follow the surcharging rules. They probably didn't want to bother deciphering the rules, so just gave up on it.

As for the timing, I think Visa is noticing that surcharges are becoming more common. A few years ago, surcharging was rare enough that they didn't really care. But now, in some parts of the country, surcharges at independent restaurants are the rule rather than the exception. So obviously, Visa is concerned that if this trend continues, it will reduce transaction volume, and wants to get ahead of it. Intimidating merchants costs less than lowering interchange fees.

Yes, the pervasiveness of surcharging certainly is a factor. A Jan 2024 Paymentsdive article mentions a December 2023 memo from acquirer Priority Technology holdings to their merchants mentions "increased enforcement" for non-compliant surcharging. In June of 2023, the CEO of Visa bashed surcharges as "not a great customer experience". An earlier article from April 2023 indicated that Visa upped their fine to a potential $5,000 for the first surcharging transaction with a potential $1 million fine for repeated violations.

Of course this could be more barking than bite, with the merchant getting a nastygram and warned of the potential for jaw dropping fines being a massive incentive to either make surcharging compliant or drop it entirely.

In my area of New York (state, not five boroughs), surcharging seems most popular at independent restaurants or other eateries (example of the bakery in my earlier post). In New York, it's easier to point out that explicit surcharging is actually illegal beyond just violating network rules to merchants...

In terms of why large brands aren't surcharging, I think it creates a logistical nightmare for customer experience. Beyond the optics which would probably go viral of Walmart/Safeway/Home Depot/etc. passing on their cost of doing business to the consumer, you have states where surcharges are capped at different levels (2% in Colorado for example), you have multiple states where explicit surcharging is illegal (Expressions Hair Design v. Schneidermann remand had surcharges illegal in NY for years, but codifying the remand in written law to be even more black and white wasn't effective until Feb 2024) or where it's limited (Colorado, NJ, others), etc. and you're setting up for a recipe of inconsistent experience if you're a retailer that operates in multiple states or nationwide.

This settlement (if implemented) heavily favors the banks and shifts the burden to retailers to implement system upgrades to accurately calculate the surcharge for premium cards. I doubt merchants will want to have negotiation prompts at in-person point of sale since it's a huge waste of time for the merchant, and rude to the next customer waiting in line.

Do you want to be THAT GUY/GAL making the waiter run back and forth to try different cards and slowing down service for everyone else??!?!?

Online merchants could implement this easier since they could display the different surcharges for your cards on file (or any newly added cards) and you could decide how to proceed -- and nobody else's time is wasted.

But for most merchants nothing will change, they'll continue to mark up the prices for everyone to subsidize the rewards for the more fortunate customers. (The poor pay more).

They can just make the "accept the fee" a green box and "use an alternate payment method" a red box and 95% of people will just click through. Sure it's a dark pattern, but it keeps the line moving so it keeps the torch and pitchfork folks at bay.

Based on the number of people I've seen filling in a tip line at places with gratuities already included, I highly doubt this attention to detail will be a thing at scale. I have complete confidence in the laziness of the average human.

All of this is .... whatever .. break it out as a fee, bundle it in with the base product cost, in the end the price is the price. On an individual transaction basis I strongly believe it wouldn't be enough money for the average consumer to worry about. If in aggregate it starts to amount to meaningful dollars then maybe investigate more efficient payment methods. I imagine most of the people reading this collection of sub-forums already do that today when they look to maximize their cash back / point earnings in various categories, so now potentially optimizing for reduced costs might be a thing. Some people will adapt and feel better about savings if that materializes, but the vast majority will let inertia take the wheel and swipe away using whatever card they fancy most.

Visa and Mastercard actually have pretty strict requirements on the "point of sale" disclosures, for example, under Visa rules at the point of sale there's supposed to be a sign with font the equivalent of 16 point Arial or bigger with specific language (including that it's not greater than the cost of acceptance and that Visa debit is not surcharged). A dark pattern on a point of sale touchscreen is not going to achieve this without pissing off customers. Let's say you get compliant sign via the display instead and the dark pattern tricks someone into hitting "accept the surcharge" and then sees they got charged more on the receipt when they meant to decline the surcharge and use alternate payment. Do you think that customer is going to return?

Tipping fatigue is real to the point where the incessant tipping prompts are causing people to tip less in general.

I think you underestimate fatigue of people when presented with a variety of options.

You get a prompt at the point of sale or on your sit down restaurant receipt saying 3% for card payment surcharge. Changing to your mastercard or amex in the same wallet isn't going to change anything. You can pay cash if you have it, you can charge if you want, you can decide whether or not that's going to be a breaking point to return to that merchant. Different surcharges by brand? Discover and Amex have most favored nation clauses where they have to be surcharged equally or less to other products.

Now you get into the nitty gritty. Let's say that you want to charge those people using more expensive Visa Signature and Infinite cards more, because they cost more to process. Amex is going to say that you're charging less for all other card products including debit and prepaid. So if you're charging, say, 3% for Visa Signature and Infinite, 2.5% for Visa Rewards, and 2% for all other Visa products - then Amex is going to argue that hey, you should be charging 2% surcharge max on Amex.

Except if "all others" is charging a 2% surcharge on debit, then you broke Visa/MC merchant rules. If you exclude Visa debit and surcharge Amex, Amex considers you to have broken their rules because you're not surcharging all other products (including debit) therefore Amex shouldn't be surcharged at all regardless of product.

Alright, let's assume that a merchant decides it's worth dropping Amex over not being able to surcharge in accordance with network rules. A grand assumption but sure. Now you have to make signage disclosing the various Mastercard and Visa tiers that complies with network rules and start making a 16 point font ugly sign about how you're presenting the surcharge at the point of sale. Then your customers start asking idk what kind of mastercard I have, what's an Apple Card on the percentage? (Apple card is a world elite mastercard with higher interchange, but Apple/GS have a style waiver from Mastercard that allows them to present a very plain mastercard logo).

Product level surcharging was permitted before this proposed settlement. It's an absolute nightmare to implement both from a network compliance and not pissing off your customers perspective.

Brand level surcharging was also permitted before this settlement, but unless merchants are willing to drop Amex, they're in a catch 22 where they can't surcharge at all without breaking Visa/MC rules or Amex rules.

So a lot of retailers and retailer groups aren't too enthusiastic about the settlement.

For context, $30 billion in savings isn't that much and some retailers want it capped more than just 5 years.

Read in Bloomberg Law: https://apple.news/ASWxzcffKQ729qfyHmDD5Lg

Article also notes that retailers could try to ban high-swipe-fee cards like Visa Infinite (as opposed to maybe having different surcharges for different types of cards?) but in practice, won't do it because large chains won't ban such cards.

So they don't want to go out on a limb and risk consumer backlash.

​​​​​​​

Does anyone know how the decision process works for how much each type of credit card charges?

There must be some reason why Chase isn't charging the network as much for a Freedom charge as for a Ritz Carlton charge, but since this is largely blind to merchants, I don't really see why Chase wouldn't charge the max.

Does Visa have requirements for specific interchange rates? Like the card has to offer extended warranties or certain travel protections to merit a higher rate?

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.

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.

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.

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.

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.

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.

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).

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…

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.

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.