A protracted dispute between Visa and Mastercard and merchants appears poised for resolution, with both parties reportedly nearing an agreement to gradually reduce credit card interchange fees that merchants pay.

According to The Wall Street Journal, this could involve a significant cut in the fee range from approximately 2% to 2.5% down to around 0.1%, spread over several years. However, another key aspect of the proposed settlement is perhaps even more far-reaching: it would permit merchants to decline certain credit cards, particularly high-fee rewards cards, at the point of sale.

The Core Value Proposition

The essence of the Visa and Mastercard brands lies in their ability to unify numerous issuers and merchants under a single umbrella,” noted Don Apgar, Director of Merchant Payments at Javelin Strategy & Research. This brand recognition ensures that consumers can use their cards universally without worrying if only certain bank-issued cards are accepted.”

Splitting the Visa and Mastercard brands into rewards and non-rewards versions could lead to confusion among cardholders regarding which types of cards a merchant will accept,” Apgar added. Would merchants need new signage indicating their acceptance criteria?”

The Evolution of Rewards Cards

This potential shift is critical because rewards cards have transitioned from being the exception to becoming the standard. Initially, Visa and Mastercard introduced rewards cards to compete with American Express for high-income customers.

Given that Amex charged merchants a higher fee—around 3.5%—other issuers followed suit, creating more competitive conditions that led to a proliferation of rewards programs. At one point, only about 10% of credit card transactions were subject to these higher fees, but now the majority are.

The unexpected outcome was an intensifying competition among issuers for rewards cards,” Apgar observed. Today, nearly 90% of all cards issued are rewards-based, even though the fee rates themselves haven’t increased significantly. The effective cost has risen due to a greater share of transactions falling under higher fees.”

Higher transaction fees have also limited American Express’s market penetration as merchants faced increased costs. Now, Visa and Mastercard might face similar pushback from their merchant base.

A Risky Strategy?

To restore balance in the interchange fee landscape, Visa and Mastercard are essentially betting that merchants won’t opt out of accepting rewards cards,” Apgar suggested. They hope to persuade merchants into a compromise they can’t fully utilize, but this is risky given the readiness of some merchants—such as Costco—to limit their card acceptance.”

Apgar drew an analogy to economics: Like setting milk prices to encourage consumption while ensuring farmers produce it, Visa and Mastercard must ensure interchange fees are fair for both parties without stifling competition or consumer choice.”

Control Shift at the Point of Sale

The proposed settlement could lead to a significant shift in control at the point of sale. Merchants may need to inform cardholders about specific card acceptance, complicating the transaction process for enhanced product cards like Mastercard World Elite or Visa Infinite,” Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research, said.

Consumers may end up carrying multiple cards to ensure they can use them anywhere. This could be positive for large issuers with strong merchant relationships but chaotic for smaller ones,” he added.