Visa-Mastercard deal won’t end swipe fee battle

The US credit card industry is desperate to head off an effort in Congress to slash the lucrative swipe fees charged on every transaction. It's perfect timing then for Visa Inc. and Mastercard Inc to settle on a nearly 20-year-old legal fight with a group of retailers that pay these so-called interchange fees.

If the aim was to neutralize the threat of legislation, it appears to be too little, too late for supporters of the proposed Credit Card Competition Act, drawn up by Senator Dick Durbin, a Democrat from Illinois, and co-sponsored by colleague Roger Marshall, a Republican from Kansas. Their measure would require the largest banks to offer a choice of networks for processing transactions, including one outside of Visa or Mastercard.

The settlement announced Tuesday promises $30 billion of savings from cuts to charges, which sounds impressive but is tiny compared with total fees charged. It also contains other remedies meant to help retailers benefit from more competition among credit cards, but these are complicated and potentially hard to carry out.

The banks and card companies campaigning against Durbin's bill claim the Act would simply boost profits for the biggest retailers while giving no benefits to consumers. The argument goes, that consumers will lose because these swipe fees fund rewards programs, which are wildly popular in the US despite offering dubious value to the vast majority of users.

Three retail lobby groups immediately expressed skepticism about Tuesday's deal, which ends a long-running antitrust suit. The Retail Industry Leaders Association, the National Retail Federation, and the National Association of Convenience Stores all said they would continue to advocate for the Durbin-Marshall bill. Doug Kantor, general counsel of NACS, told me the cut to charges was "very small and very temporary."

The Visa-Mastercard deal will reduce swipe fees by just 0.04 percentage points for three years and by at least 0.07 percentage points on average over five years, according to Bloomberg News. That is minuscule compared with average interchange fees of 2.26 percentage points. Once the five years are up, Visa and Mastercard are free to lift rates again. The networks set the fees, but banks and other card issuers receive most of them.

The settlement also proposes that retailers will be allowed to charge different prices for goods and services based on the card that customers use. So, for example, users of premium cards that fund more generous rewards programs through higher interchange fees could be charged more for the same purchase than someone holding a more basic card.

Kantor of NACS said this remedy appeared to involve a lot of red tape and would be difficult to do. "And it makes the merchant look like the bad guy" for charging some people more, he added.

The banks say that most of the interchange money goes back to consumers in the form of rewards. However, these programs are a highly profitable business that encourages people to use credit cards instead of other forms of payment and can reduce competitive pressure on credit card interest rates. If you pay your bill every month, that's fine, but the people who get the worst deal are high spenders who carry rolling debts on their cards.

The Electronic Payments Coalition, a financial services trade association, said the settlement "eliminates the need for legislative action on credit interchange" and would provide "multi-year benefits to small businesses and consumers." Representative Patrick McHenry, the Republican chair of the House Financial Services Committee, tweeted his support, saying: "Legislation isn't always as practical as commercial or private sector solutions."

Still, the legislative effort has attracted supporters from both parties, with Senators Josh Hawley, a Missouri Republican, and Jack Reed, a Rhode Island Democrat, adding their names as additional co-sponsors last month.

The senators still have to find a way to get their bill onto the legislative slate, but if Visa and Mastercard thought Tuesday's legal settlement would take the wind out of their sails, they'll be disappointed.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.