Using Your Credit Card May Get More Complicated

A settlement between Visa, Mastercard and U.S. merchants has been announced, which could usher in a new era of tiered pricing at the register and give businesses more power to charge fees depending on the credit card you use. The agreement comes after a two-decade antitrust battle over interchange fees, the charges banks collect from merchants every time a customer pays with plastic.

The settlement still needs court approval, and is likely to be contested by some merchant groups, which have disagreed over the fees and other terms in the past. A deal last year fell apart after lawyers for some merchants objected.

Merchants have always had the right to refuse to do business with a payment network entirely.  Costco, for example, only accepts Visa credit cards in stores. But current network rules say that if a store accepts one Visa credit card, it has to accept all Visa credit cards. The settlement could change that practice by allowing merchants to pick and choose which categories of cards to accept within a network. The settlement doesn’t affect debit cards.

A more likely outcome is that people will start to see more fees, according to analysts. Some merchants already tack on small fees when customers pay with a credit card instead of cash, but those tend to apply broadly across credit cards. The settlement would go a step further, allowing different surcharges depending on the category the card falls into. A basic, no-frills credit card, for instance, might come with a surcharge of 2.5% of the transaction amount, versus 3% for a rewards card.

The settlement would require banks to add clear visual markers to cards to help consumers and merchants determine what category a card falls into, but that could take years to update, analysts said.  For merchants, adding a surcharge would help offset their costs, but it also risks alienating customers. A recent survey commissioned by TD Cowen found that roughly two-thirds of consumers would switch payment methods if faced with a 3% to 4% surcharge.

The settlement also requires an average 0.1 percentage-point reduction in interchange fees phased in over five years. The banking industry has long argued that limiting interchange fees would threaten rewards for consumers. Analysts, however, say that the reductions spelled out in the settlement aren’t enough to result in sweeping changes to card rewards or annual fees. That means the travel points, cash-back bonuses, and lounge access that have come to define rewards and premium cards are likely to stay put.