Proposed Visa/Mastercard Interchange Fee Settlement – A Sea Change or Drop in the Ocean for Merchants?

The series of antitrust class action lawsuits first brought by U.S. merchants against Visa and Mastercard in 2006 continued its winding path toward closure as the parties announced in March 2024 that they had reached a proposed class settlement agreement worth up to $30 billion (the "2024 Settlement").[1]

While the 2024 Settlement does not provide any direct monetary relief to class members, Visa and Mastercard each undertake to modify their respective network rules to loosen existing restrictions on merchant steering and surcharging practices, as well as their ability to organize buying groups to negotiate merchant terms. The 2024 Settlement also reduces average interchange on most domestic (i.e., U.S. card and merchant) credit card transactions by 4-7 basis points. These changes are all subject to court approval of the settlement and will generally be effective for five years from implementation (with some exceptions noted below).

Participants should, however, exercise caution before making any material financial, operational, or strategic decisions based on the terms of the 2024 Settlement. As further discussed below, the 2024 Settlement remains subject to final approval by the district court, and a decision to approve or reject is likely to be appealed. The fate of the prior settlement attempted with respect to this merchant class in 2012 may call certain aspects of the 2024 Settlement into question. It is therefore at least questionable whether the 2024 Settlement will be approved and upheld in its current form.

Key Terms of the 2024 Settlement

Changes to surcharge rules

While the 2024 Settlement retains Visa and Mastercard's existing requirements for permissible surcharging, several conditions have been relaxed in the merchants' favor. Merchants may still assess either a brand-level or product-level surcharge (but not both), and the maximum surcharge cap remains at 3%.[2] However, merchants now have the option to surcharge only Visa and/or Mastercard credit transactions and not (for instance) Discover transactions. If surcharges are not applied equally across Visa/Mastercard and competing card brands, the surcharge is capped at 1%.[3] If the surcharge is applied equally across all card brands accepted by the merchant, the cap is 3%.[4] Existing notice and disclosure requirements, as well as the general prohibition on surcharging debit cards, remain in place.[5]

Reduction in interchange on domestic credit transactions

Visa and Mastercard will each reduce their average interchange rate for applicable domestic credit transactions by at least seven basis points from the average across both networks' applicable domestic credit transactions over the 12-month period ending March 31, 2024.[6] An applicable domestic credit transaction is one where a U.S.-issued credit card is acquired at a U.S. merchant location.[7] For a period of three years, Visa and Mastercard will each also reduce all posted interchange rates for applicable domestic credit transactions by a minimum of four basis points.[8]

Changes to no-discrimination rules

Visa and Mastercard are required to modify their "no discounting" and "non-discrimination" rules to permit discounts at the issuer level,[9] creating opportunities for new and deeper economic partnerships between merchants and issuing banks. At present, merchant partnerships with issuing banks are mainly comprised of co-branded card partnerships and participation in earning and redeeming card rewards – the change will in theory allow merchants to select preferred bank partners and receive rebates, financial services, and other incentives from such banks in return for discounting transactions at the point of sale made using preferred bank cards.

Changes to "honor all wallets" rules

Merchants will no longer need to accept any wallet that provides access to a Visa/Mastercard card under the "honor all cards" rule. The revised rule will allow merchants to decline digital wallets (regardless of the card brands within that digital wallet) at brick-and-mortar locations and enable some digital wallets for online transactions, so long as they accept Visa or Mastercard-owned or operated wallets where the acceptance characteristics are the same as they would be for a transaction where the applicable card is tendered directly to the merchant.[10]

Buying groups

Merchants will be allowed to form buying groups to negotiate collectively any terms that affect them with Visa and Mastercard.[11]

Questions Surrounding the 2012 Settlement

In 2016, the 2nd Circuit vacated the district court's certification of two merchant classes and overturned its approval of a settlement agreement that the parties entered into in 2012 (the "2012 Settlement").[12] While the 2nd Circuit's decision primarily rested on the conflict of interest inherent in the same counsel representing both the class of merchants that had accepted Visa and Mastercard transactions from January 2004 through November 2012 (the "Legacy Merchants") and the class of merchants that would accept Visa and Mastercard payments going forward ("Current Merchants"), the 2nd Circuit expressed a high degree of skepticism on the value of the 2012 Settlement terms to Current Merchants:

No one disputes that the most valuable relief the Settlement Agreement secures for the (b)(2) class is the ability to surcharge at the point of sale. To the extent that the injunctive relief has any meaningful value, it comes from surcharging, not from the buying-group provision, or the all-outlets provision, or the locking-in of the Durbin Amendment and DOJ consent decree. For this reason, it is imperative that the (b)(2) class in fact benefit from the right to surcharge. But that relief is less valuable for any merchant that operates in New York, California, or Texas (among other states that ban surcharging), or accepts American Express (whose network rules prohibit surcharging and include a most-favored nation clause). Merchants in New York and merchants that accept American Express can get no advantage from the principal relief their counsel bargained for them.[13]

The 2024 Settlement applies to a single class of merchants (the Legacy Merchants having settled their claims in 2019), and therefore the conflicts issues that plagued the 2012 Settlement are less relevant in this case. Nonetheless, while the 2024 Settlement also introduces additional merchant-favorable terms, the court's objections to the analogous terms in the 2012 Settlement still hold true to a great extent. Merchants in states that prohibit surcharging will still receive no benefit from the relaxation of the surcharging rules. Even in states where surcharging is permitted, the amount of the surcharge is effectively capped at 1% for merchants to the extent that any competing network does not permit surcharging, as uniform surcharging across brands is a condition to applying the higher 3% cap allowed under the 2024 Settlement. On the other hand, the 4-7 basis point reduction in domestic interchange is a significant improvement over the 2012 Settlement.

Given the 2nd Circuit's dismissiveness over the value of the all-outlets and buying group concessions, the inability of class members to opt out of the 2024 Settlement and the stated intention of many large retailers to dispute its terms, it is at least questionable whether the 2024 Settlement will be approved and upheld in its current form.