US cardholders could get incentives to use certain cards
Antitrust settlement may mean perks from merchants for using preferred payment methods, but also less cardholder rewards
Paying with a particular brand of credit card is likely to be rewarded by merchants in the US after the settlement of a two-year legal battle.
Visa and MasterCard have agreed to settle an antitrust case over their merchant credit card acceptance policies, although rival American Express – whose cards generally have the highest merchant fees as well as offering offer the most cardholder rewards – has vowed to fight on saying it will not sign up to new rules.
The Visa and MasterCard settlement with the Department of Justice lets retailers express a preference to consumers for a particular card issued by Visa or MasterCard that has a lower merchant fee, such as a basic card over a rewards card, or for cards from another brand which tends to have a lower merchant fee such as Discover. Merchants also tend to prefer customers to use debit cards rather than credit due to their lower fees. Until now, retailers have been forbidden to tell consumers about the fees — or offer discounts to customers using cards with lower merchant fees.
The card networks currently get a bigger fee from some cards, such as premium cards and those offering customer rewards, but their rules require that merchants accept all cards.
Retailers will now be able to offer incentives for customers to pay with cards carrying lower fees, debit cards and cash, though Visa and MasterCard both claimed they already offered merchants some leeway in that regard.
The DoJ decision, which requires court approval, stops short of a proposal to allow merchants to surcharge customers for using Visa and MasterCard cards and was consequently seen as a victory for the two networks by some market observers.
However, merchants will now also be able to disclose the cost they incur by accepting one card over another, and can promote a particular credit card network. The settlement mirrors legislation in the Financial Reform Act passed in July aimed to lower fees on debit cards.
Consumer effects
It remins to be seen just how beneficial the Visa and MasterCard settlement is for consumers, despite the Consumers Union stating that it will ultimately lead to lower prices.
Daniel of Frobes.Com said that, for that to happen, the big retail chains would have to start offering a sliding scale of discounts or other incentives to consumers at the cash register for using one card instead of another, or cash.
He added: “That would anger as many customers as it would please. There might be some consumers who get really excited if they save $2 on a $100 grocery bill, but I’ll bet more are excited about seeing 2% of all their purchases drop into the bank account at the end of the month, or receiving a free trip to Europe. The settlement doesn’t say retailers can use the ultimate weapon of slapping surcharges on purchases with cards they don’t like. That would really tip the playing field against high-benefit cards that rake off as much as 3% of sales revenue and hand much of it back to consumers in rebates, Air Miles or other lagniappe.”
Mallory Duncan, general counsel of the National Retail Federation, said the first change from the decision customers are likely to see will be that they are steered toward an alternative form of payment that bears lower costs for the merchant, such as debit cards or cash.
Eventually, merchants may make more subtle distinctions in stating a preference for more basic credit cards, he said.
The incentives may be discounts on purchases or a small perk, such as free delivery or gift wrapping.
Duncan added that it is still too early to tell how widespread any changes will be, but he expects merchants will be eager to offer incentives that defray their costs.
The American Bankers Association said that it is examining the potential impact of the settlement on banks’ ability to offer products customers want, such as rewards programs. Peter Garucci, an ABA spokesman, said it has the potential to impact the rewards banks offer on credit cards.
Civil lawsuit
The DoJ had filed a civil lawsuit against the three card companies on October 4, accusing them of violating antitrust laws.
The department has now dropped the antitrust suit against Visa and MasterCard in return for guarantees on their future behaviour, and neither will pay a financial penalty. Amex, though, has refused to back down.
“We have no intention of settling the case,” said Amex CEO Kenneth Chenault. “We will defend our own ability to negotiate freely with merchants.” He added that the DoJ’s proposed remedy would interfere with consumer choice at the check-out counter by steering Amex cardholders to another payment network.
Dominance
The company said Visa and MasterCard are established as epayments market leaders, and their settlement would only increase their dominance.
Some industry commentators say the impact of the case for American Express, which typically charges higher merchant fees than its rivals, could be major. Consultant Philip Philliou, a former Amex and MasterCard executive, said that the lawsuit was problematic for Amex, as it highlights to retailers and consumers the premium that retailers pay to accept its cards as a form of payment. He said the ruling could impact which card a consumer takes out of their wallet.
If Amex is forced to change its rules, consumers would have to balance merchant discounts on purchases made with low-fee cards against generous rewards typically associated with the type of high-fee cards provided by Amex.
JPMorgan analyst Tien Tsin Huang said he did not anticipate a major change in consumer behaviour from the agreement, mainly because MasterCard already permits discounting by retailers and Visa will only have to change its policies slightly to comply.
In a statement Visa said it will allow US merchants to offer discounts or other incentives to steer customers to a particular form of payment including to a specific network brand or to any card product, such as a “non-reward” Visa credit card.
MasterCard said the terms of the settlement are consistent with its longstanding business practices and will require it only to modify its rules to more specifically conform to its business practices.