Unpacking the Latest Merchant-Network Settlement: The Future of Payment Processing

U.S. merchants and payment networks, Visa and Mastercard, reached a pivotal antitrust class action settlement, marking a significant turn in the ongoing discourse around card payment practices. This settlement, pending approval by the U.S. District Court for the Eastern District of New York and subject to appeals, promises to usher in a new era of choice and flexibility for merchants, altering the landscape of payment processing.

A Glimpse into the Settlement’s Core

At the heart of this settlement are measures aimed at enhancing merchant autonomy in navigating card payment acceptance. This ruling would give merchants the ability to implement surcharges, offer incentives, or steer customers towards more economically favorable card products. Additionally, the settlement introduces the prospect for merchants to band together into buying groups to negotiate more favorable terms directly with the networks — a move that could significantly empower small businesses and those not fully leveraging card payments.

One of the more nuanced aspects of this is its potential to slightly tilt the competitive balance towards other networks, like Discover, known for their flexibility in merchant steering practices. However, the actual financial adjustments involved, notably a modest interchange fee reduction, suggest that the settlement’s impact might be more structural than immediately financially significant.

The Settlement in Detail

Under the proposed terms, Visa and Mastercard have committed to a 7 basis points (bps) reduction in interchange rates for five years, starting April 2025, with an immediate rollback of interchange rates by at least 4bps for a minimum of three years. Moreover, the networks are barred from hiking interchange rates above current levels (as of December 31, 2023) for the duration, ensuring an average system-wide rate reduction of at least 7bps, verified by an independent auditor.

Removing anti-steering restrictions stands out as a pivotal element of the settlement, granting merchants the freedom to guide customer card choices more directly, including the ability to surcharge for using Visa or Mastercard credit cards, irrespective of policies towards American Express.

This landmark settlement not only addresses grievances from the injunctive relief class of merchants but also caps a significant chapter in merchant litigation history, dating back to the original MDL 1720 case. With the damage class of merchants having reached a $5.54 billion settlement in 2018, this latest agreement closes a long-standing legal battle, setting the stage for a more collaborative and competitive payment processing future.

Broader Implications for the Payment Ecosystem

This settlement reflects broader industry trends challenging the traditional dynamics of transaction-based economics. With the transaction pie shrinking, there’s growing pressure on networks and issuers to foster competition and enhance consumer choice. This case is but a snapshot within a larger series of market and regulatory initiatives aiming to recalibrate the payment processing ecosystem, including the Consumer Credit Card Act (CCCA) and regulations around late fees.

Winners and Losers in the Settlement’s Wake

While the settlement is a modest win for merchants in terms of relief, it represents a strategic victory for networks by providing a temporary shield against merchant litigation and shifting most of the financial burden onto issuers. The real question looms over which issuers will bear the brunt of the impact, with small merchants — who often face flat fee pricing — potentially standing to gain the least despite the promise of universal rate reductions. On the flip side, payment players like Square, which typically offer flat fee pricing, and smaller/ alternative networks like Discover may emerge as beneficiaries.

Bottom Line

While this settlement represents a clear victory for the networks by resolving pending litigation and possibly dampening the grounds for future disputes, its true impact on the broader payment ecosystem remains to be seen. Merchants gain newfound liberties in card payment acceptance, potentially altering how consumers engage with payment options. Yet, the nuanced shifts in economic burden and the strategic openings for smaller networks highlight the complexity of balancing interests across the payment processing landscape. As the industry moves forward, the unfolding dynamics will likely serve as a critical barometer for the evolving relationship between merchants, networks, and issuers in the digital age.