Proposed Settlement’s Impact on Credit Card Rewards Model

In November, a new settlement involving Visa, Mastercard, and merchants was proposed, potentially reshaping credit card rewards systems. However, retailers led by Walmart argue that the proposed deal doesn’t go far enough to substantially benefit them.

Under the proposal, interchange fees would be reduced from around 2%-2.5% to about 0.1% over several years.

A key aspect of the settlement is that merchants can now decline certain high-fee rewards cards they were previously required to accept. Yet, this hasn’t convinced Walmart and others, who believe it falls short in addressing their ongoing challenges.

Acceptance policies should not be so restrictive,” noted Don Apgar, Director of Merchant Payments at Javelin Strategy & Research. Merchants expect a consistent acceptance environment for branded cards.”

Apgar added, Retailers don’t want to create fragmented payment strategies that inconvenience customers and complicate the shopping experience.”

Shift in Rewards Cards Dominance

The growing prevalence of rewards programs has made them more than just a niche offering. Once exclusive to premium cards like American Express, many issuers now offer perks to attract cardholders.

Consumers increasingly expect rewards with their payments, making these programs integral to the credit card landscape. Despite this, merchants continue to face high interchange fees passed down from credit card companies.

Overlooking Card Benefits

Focusing on cost reduction means overlooking significant benefits that branded cards provide. These payment tools are widely accepted and offer consumers flexibility, protection, and convenience.

Their widespread use has boosted shopping activity and spend per visit at merchants, supported e-commerce, mobile payments, and contactless transactions.

Furthermore, transaction times have been reduced, while handling large amounts of cash has become less risky and expensive.

Apgar stated, Merchants should recognize the advantages cards bring to their business. The settlement disregards these valuable contributions.”

Past Settlements and Future Uncertainty

Previous efforts by Visa and Mastercard aimed at addressing merchant concerns have been met with mixed results. An $30 billion agreement from last year was a initial victory for retailers, but only reduced fees by 0.04% over three years.

This deal was later rejected due to insufficient compensation for merchants. Walmart’s group has petitioned against the latest settlement on similar grounds, raising concerns about its impact on ongoing actions against the card companies.

Impact on Business Models

The uncertainty surrounding these developments could disrupt credit card issuers’ strategies. A shift in acceptance policies might force issuers to scale back cashback and points programs, changing how consumers manage their cards.

Apgar explained, Cardholders may need multiple cards to ensure merchant acceptance. Smaller issuers with limited relationships might issue fewer types of cards.”

For some large issuers with strong merchant ties, this could be beneficial. However, the scenario poses challenges for smaller issuers who depend on specific card types.