April 21, 2024

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Visa and Mastercard have reached an agreement to reduce swipe fees – how will this affect your rewards?

Visa and Mastercard have reached an agreement to reduce swipe fees – how will this affect your rewards?

After nearly 20 years in court, the two largest credit card issuers have reached an agreement with retailers and merchants to lower interchange fees.

An interchange fee – or “swipe” – is the fee the retailer pays when you, the consumer, use your credit card to make a purchase. It averages 2% of the transaction cost but can be up to 4% for premium credit cards.

This revenue is passed on to the bank, putting it toward the rewards it offers to cardholders — including cash back, points and miles — as well as ensuring shopping perks like purchase protection and return protection.

Fees are included in the cost of most goods and services and help cover credit card benefits and even points, which we value greatly here at The Points Guy.

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Through this new agreement, retailers are expected to save billions of dollars in interchange fees over the next five years. Visa and Mastercard will cut interest rates by 0.04 percentage point for three years and by an average of 0.07% over the next five years. However, this agreement is subject to approval by the United States District Court for the Eastern District of New York.

The settlement occurred amid pressure from some senators to introduce industry-wide legislation in the form of the Credit Card Competition Act, which may not be needed if this agreement continues. The proposed legislation could have far-reaching and potentially negative consequences for consumers and travelers, especially those who want to earn rewards by spending their credit cards.

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The Electronic Payments Coalition (EPC), a group representing credit unions, community banks, payment card networks and other banking institutions involved in the electronic payment process, issued a statement praising the settlement, suggesting it further erodes the case for the new legislation.

“The agreement between merchants, Visa, Mastercard and financial institutions is decades in the making and treats businesses of all sizes equally without government mandates or jeopardizing the security of consumer data and rewards programs,” said Richard Hunt, CEO of EPC.

He continued: “The Durbin-Marshall bill has had no discussion, no legitimate hearing and remains unnecessary.”

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However, Senator Dick Durbin's office issued a… statement After news of the settlement emerged, the company pledged to lobby to seek passage of the Credit Card Competition Act. “Today’s news confirms that it is time to pass bipartisan legislation — the Credit Card Competition Act — to strengthen competition among credit card networks and ultimately lower costs for small businesses and consumers,” the senator’s statement said. “We need to bring real competition to the credit card industry. My bill ensures that the Visa-Mastercard duopoly ends price-gouging tactics that disproportionately hurt American families and small businesses.” However, only time will tell whether his colleagues will line up behind him to consider the legislation, given the evolving situation created by Visa and MasterCard's agreement with retailers.

This news also comes on the heels of the announcement of the merger of Capital One and Discover, which would strengthen their position as a third major player in the industry, increase competition and potentially eliminate the need for legislation from Washington, DC.

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There are some nuances to this that may need clarification, such as whether the agreement could open the door to merchants applying different surcharges depending on the type of card a consumer uses for a purchase.

Overall, however, this agreement is viewed by some, including TPG founder Brian Kelly, as a step in the right direction. The settlement should reduce costs for small businesses while continuing to provide value in the form of rewards and protections for consumers.

We will keep you updated on the outcome of the agreement and its impacts on credit card consumers as it develops. In the meantime, you can watch the video below to get thoughts from TPG's Brian Kelly on today's agreement.

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