Key Takeaways
- In settling a major part of a long-running class action lawsuit, Visa and Mastercard recently agreed to reduce the interchange fee rates U.S. merchants pay on credit card transactions, cap those rates for at least five years, and give merchants more flexibility to steer payments and impose surcharges.
- We do not expect the settlement to directly and materially affect the card networks' profitability, largely because the card issuers, rather than the networks, earn the interchange fees that Visa and Mastercard set for most merchants.
- We think the relatively small reduction should be manageable for credit card issuing banks, though a separate proposal from the Federal Reserve to lower debit card interchange fees may add to interchange pressures in general.
- Overall, we view this settlement as a positive development for Visa and Mastercard because it should (with court approval) resolve a large remaining part of the long-running merchant litigation and prevent merchants from filing similar lawsuits while the cap is in place.
This March, Visa Inc. (AA-/Stable/A-1+) and Mastercard Inc. (A+/Stable/A-1) agreed to a settlement with U.S. merchants to lower credit card interchange fee rates, cap those rates for at least five years, and provide merchants more flexibility in surcharging.
Specifically, the card networks agreed to reduce interchange rates by 4 basis points (bps) across all types of charged transactions, plus an additional 3 bps on individually selected fee programs (to be decided by each card company separately). In total, the interchange fee must be at least 7 bps below the current average rate. In addition, the settlement gives merchants more flexibility to steer payments (through preferred payment networks or by type of credit card) by, among other methods, updating the surcharging rules for card use.
S&P Global Ratings views this landmark settlement, which requires court approval, as positive for both Visa and Mastercard because it lowers risk of similar lawsuits in the medium term.
Despite Settlement, Litigation Will Remain A Significant Long-Term Risk
Since 2005, Visa and Mastercard have been contending with merchants' legal claims that the card networks and their financial institution clients conspired to set interchange fees and enact certain rules. Visa and Mastercard settled a major part of these claims in 2018 with one class of plaintiffs, known as the damages class, agreeing to a significant monetary payout. The March 2024 settlement relates to a second class of plaintiffs, known as the injunctive relief or rules relief class, who were seeking changes in business practices.
Despite the settlement, we still expect litigation to remain a key risk for Visa and Mastercard in the long term given their prominence in payments. For instance, according to the Federal Reserve, about 85% of the outstanding general-purpose credit cards in the U.S. use Visa or Mastercard's payment platforms.
Lower Interchange Fees Should Be Manageable For Both Card Networks And Card Issuers
We don't anticipate the announced reduction in interchange fee rates to have a direct and material impact on the profitability or credit quality of Visa and Mastercard or of the banks issuing credit cards.
This is especially because interchange fees--although set by Visa and Mastercard on most transactions conducted on their networks--are the charges card issuers (most notably banks) receive from merchants on credit card transactions. The card networks receive other fees from card issuers and merchants.
Card issuers, affected by lower interchange fees, conceivably could in turn look to reduce the fees they pay Visa or Mastercard, but we don't expect any large changes.
Furthermore, we think a 7 bps cut in these fee rates should be manageable for banks because credit card interchange rates in the U.S. are often roughly 1.5%-2.5% and sometimes higher on transactions. Card issuers could look to offset the relatively modest reduction, for example by somewhat limiting or adjusting the rewards they offer to cardholders. Even with the reduction, interchange fees in total may rise over time given that electronic payments continue to grow at a solid pace.
Risk Of Government Caps Remains Limited
We have not seen any significant momentum toward legislation to cap credit card interchange rates in the U.S. That's in contrast to the caps set by the regulator on debit card interchange rates in the U.S. and interchange rates in general in some other countries. For instance, by legislation, far more stringent interchange fee caps for credit cards already exist in Australia (0.88%), the U.K. (0.3%), and the EU (0.3%).
Given those caps, card issuers offer lower or no rewards to customers for credit card usage, making the product less popular than in the U.S. Their payment functionality can be replaced by debit cards, combined with other types of consumer lending, unrelated to the Visa or Mastercard networks.
Credit Card Interchange Fees Remain Important To Monoline Banks' Performance
While the interchange fee reduction and cap should be manageable for most banks, they have greater relevance for the credit card monoline banks that use the Visa or Mastercard networks. Those banks already have to cope with the upcoming reduction in late fees mandated by the Consumer Financial Protection Bureau ("CFPB's Final Rule On Credit Card Late Fees Could Hurt Card Issuer Earnings But Will Be Manageable For Most," published March 8, 2024).
Gross interchange fees (including debit cards) can form up to 7%-20% of annual operating revenues for some of the card-focused financial institutions. However, the proposed fee reduction is not large enough to affect our current assessment of their credit risk.
We assume the settlement will receive court approval, without significant objection from individual merchants, in the first half of 2025.
Separately, A Fed Proposal May Somewhat Pressure Banks With Large U.S. Debit Card Businesses
The Fed has proposed lowering the maximum interchange fee that a large debit card issuer can receive for a debit card transaction. For example, the Fed said that the cap on an average-sized $50 debit card transaction would decline from 24.5 cents under the current rule to 17.7 cents under the proposal. It made the proposal in October 2023 and has extended the comment period until May 12, 2024.
For most banks, we expect the Fed's proposal on debit card interchange fees would have a relatively minor impact on revenues. However, banks more dependent on debit card revenues may feel moderate pressure.
This report does not constitute a rating action.
| Primary Credit Analyst: | Michal Selbka, New York +1 212 438 0470; michal.selbka@spglobal.com |
| Secondary Contacts: | Brandon Solis, New York + 1 (212) 438 2301; brandon.solis@spglobal.com |
| Brendan Browne, CFA, New York + 1 (212) 438 7399; brendan.browne@spglobal.com | |
| Thierry Grunspan, Columbia + 1 (212) 438 1441; thierry.grunspan@spglobal.com |
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