What the Visa and Mastercard Settlement means for banks, merchants, and consumers

In a landmark decision that sent ripples through the financial services industry, Visa and Mastercard have reached a settlement with merchants to reduce interchange fees, also known as swipe fees. These fees are charged to merchants by banks for the privilege of accepting credit card payments and are a significant revenue source for financial institutions. The move comes off the back of a federal ruling just weeks prior to cap credit card late fees at $8, as the government continues its push to eliminate junk fees. This most recent settlement marks a pivotal moment, with far-reaching implications for banks, customers, and merchants alike.

Negative Effects on Banks

This settlement requires the credit card giants, as well as the banks they used to issue cards, to lower fees by $30 billion over the next five years. The lawsuit was initiated in 2005, and appeals are expected to delay final details until late 2024 or early 2025. Interchange fees represent a substantial income stream for banks, underpinning their ability to offer credit card-related services. The removal of these fees threatens to erode a significant portion of their revenue. This loss could have several repercussions:

Reduced Profitability: Banks may see a noticeable decline in their profitability margins, given that interchange fees contribute to covering the costs of offering credit card services, including fraud protection and reward programs.

J.P. Morgan stated on the matter; “On a preliminary basis, we estimate the impact at around 1%-2% of EPS before any mitigation efforts using retail card volumes, but interchange fees can vary significantly by transaction.”

Service Cutbacks: To mitigate revenue losses, banks might scale back on customer rewards programs and other benefits that were previously funded by interchange fees.

Increased Costs for Consumers: Financial institutions could look to recoup lost revenue by introducing or increasing fees in other areas, potentially affecting annual credit card fees, interest rates, or introducing new charges for services that were previously free.

Potential Positive Effects on Customers and Merchants

The intended impact of this ruling is to benefit merchants with reduced fees in transactions. Many businesses already refuse to take premium cards like Amex or offer discounts for cash transactions. Swipe fees often cost anywhere from 2%-4% per transaction but will have these lowered by just .04 percentage point for a period of three years, and .07 for a period of five years.

NRF, a trade federation representing retailers, believes this is hardly enough. NRF’s chief administrative officer, Stephanie Martz, told CNN the savings amount “to pennies on the dollar”. There are fears that this will do more to push credit card companies to pass on harmful costs to customers.

But some benefits may still trickle down to customers:

Lower Transaction Costs for Merchants: With the removal of swipe fees, merchants could save a significant amount on transaction costs, which could be particularly beneficial for small and medium-sized enterprises (SMEs) that operate on thin margins

Reduced Product Prices for Consumers: Merchants might pass on the savings from lower transaction costs to consumers in the form of lower prices, making goods and services more affordable.

Enhanced Competition: The removal of interchange fees could level the playing field for new entrants into the payments market, fostering innovation and competition.

“I think this will help Real Time Payment systems like FedNow as well,” stated Robin Collins, Heitmeyer’s Senior Director of Advisory and Consulting Services. “With the removal of anti-steering restrictions and competitive pricing enabled by the settlement, merchants may encourage more cash or debit transactions. This could really help jumpstart more RTP payments programs.”


Potential Negative Effects on Customers and Merchants

Critics have stated that, while the settlement will bring short-term benefits to customers, banks will adjust by passing along the increased costs, leading to long-term negatives. In fact, merchants have the ability to impose surcharges on customers depending on their type of card. These will focus on high reward users who receive cashback and airline miles, while others may get discounts for using a preferred card.

Loss of Credit Card Benefits: As banks seek to offset lost revenue, consumers might see a reduction in reward programs, cashback offers, and other benefits associated with credit card usage. Of particular note is a fear of losing travel reward miles, a sentiment echoed by tourist destinations fearing loss of business.

Shift in Banking Fees: Banks could introduce or increase other fees to compensate for the lost revenue, potentially affecting a broader range of banking services beyond credit cards.

Operational Challenges for Merchants: While eliminating interchange fees reduces costs, it could also lead to operational challenges. For instance, banks might reduce the level of support or services provided to merchants, affecting transaction efficiency and security.

“In the end, I think consumers will feel the most negative impact here. Merchants will most likely keep their newfound savings, and banks will increase annual fees, or reduce/eliminate reward programs to compensate for the revenue impact,” said Mr. Collins. “You may also see ‘Credit card usage fees’ and ‘cash discounts’ becoming more widespread.”



The settlement between Visa, Mastercard, and merchants to remove interchange fees is a watershed moment with complex implications. While it presents opportunities for reducing costs and fostering competition, the broader impacts on the financial ecosystem must be carefully managed. Banks will need to navigate the challenges of maintaining profitability without overburdening customers with fees. Merchants and consumers, while potentially benefiting from lower costs, must remain vigilant about the quality of services and the possibility of shifting fee structures.

Mr. Collins believes banks need to remain proactive in their strategies surrounding the settlements ramifications; “Overall, banks will need to assess the specific implications of the settlement on their revenue streams, profitability, and competitive positioning within the payment card market. They may need to adjust their strategies and operations accordingly to mitigate any adverse effects and capitalize on potential opportunities that arise from the changing landscape.”

The full impact of this settlement will unfold over time, but it is clear that it marks the beginning of a significant transformation in how financial transactions are conducted and monetized.