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The recent settlement between merchants and card brands could have a significant bearing on how emerging payment methods develop.
Credit card giants Visa and MasterCard last week agreed to pay retailers approximately $7.25 billion to end a seven-year battle over credit card fees. Several credit card-issuing banks joined Visa and MasterCard in the settlement, including Chase, Capital One, Bank of America and Wells Fargo. The eye-popping payout includes more than $6 billion in direct payments to retailers and a reduction in Visa and MasterCard fees worth about $1.2 billion to merchants.
Both MasterCard and Visa released statements characterizing the settlement as a happy resolution that allows everyone to get back to working on what they do best instead of fighting a protracted legal battle.
"This agreement should remove the distraction of litigation for all parties," said Joshua R. Floum, general counsel of Visa Inc. "We will go forward with a focus on helping retailers grow their businesses and providing them with efficient and valuable payment options."
Noah Hanft, MasterCard’s general counsel and chief franchise integrity officer, agreed, saying "A settlement avoids years of litigation and uncertainties that are inherent in such cases. We believe that today’s settlements should resolve all issues with the merchant community."
Making credit cards less attractive
But within the settlement is an important covenant that could benefit a few non-combatants, namely startup competitors looking to carve out some space for themselves in the $13-trillion payment space. MasterCard and Visa agreed to amend their rules allowing merchants to charge more for credit card purchases. That means using a credit card could become a more expensive way to shop.
Merchants have long sought relief from fees to accept plastic as a form of payment. In the recent Dodd Frank law, merchants won a major victory by reducing debit card fees to about half of what they had cost before. But interchange rates on credit cards have always been much higher than debit card fees and merchants have been prevented by credit card network rules from seeking relief by charging fees to customers who use credit cards to pay.
Not so anymore. With the ability to charge more for credit card purchases, retailers can now, within limits, pass along their cost for accepting credit cards.
And according to Yankee Group analyst Nick Holland, that's a boon to companies providing alternative payment methods to credit cards. He said any friction like an increase in costs to use a particular payment method will make participants look elsewhere.
"This is good news for say PayPal and other providers," Holland said.
Now, consumers may face the choice of paying more at the point of sale if they pull out a Visa or MasterCard credit card. That's a choice that could encourage those consumers to opt for a different payment method.
What's more, any new mobile payments allow retailers the ability to offer additional discounts to consumers, adding to consumers' savings. PayPal's digital wallet, for instance, automatically deducts any relevant discounts from a customer's purchase, even those the customer may not have been aware of. Startup LevelUp, which recently announced it would be dropping all merchant fees, provides users with discounts they can accumulate every time they use the payment method.
Moving past the fight
But lest anyone view credit card brands and their issuers as losers in this battle, Holland said the credit card brands themselves were anxious to put their fight with retailers behind them. Both Visa and MasterCard were suffering from fatigue after protracted fights with regulators and retailers, Holland said.
(Visa and MasterCard) are dealing with the cumulative effect of regulatoion of the past few years, Holland said. "Payments has been under the microscope, and the regulatory environment is shifting," he said. The companies felt it was in their best interest to settle and move forward.
And moving forward doesn't necessarily mean into a world where Visa and MasterCard are left behind by new payment competitors. Both companies have invested heavily in their own alternative visions of a future without plastic. MasterCard just released it's PayPass Mobile Wallet, and Visa is working on rolling out it's V.Me digital wallet.
"The settlement is an enable for MasterCard and Visa as well," Holland said, adding that the credit card companies, by settling the dispute, can now try to stay relevant and remain a part of the payment chain.
Whether or not the settlement is viewed as a "win" for either side, or even for those not directly involved in the litigation, what is clear is that the end of this lawsuit between the major card brands and issuers on one side, and retailers on the other, may signal the beginning of a bigger battle for consumers' wallets.
For more stories like this, visit the carriers/card schemes research center.