Will new rules for Visa and MasterCard really help merchants?

Will new rules for Visa and MasterCard really help merchants?

In October 2011, the U.S. Department of Justice reached a settlement with Visa and MasterCard in its lawsuit against them. This settlement is a win for merchants, as it will allow them to offer customers discounts or rebates as incentives for paying with less-costly cards.

Yet a recent white paper from the Federal Reserve Bank of Boston suggests that the settlement won't solve all merchants' problems -- and that some merchants might not be able to fully take advantage of the settlement's provisions.

Lawsuit triggers agreement
At first glance, the agreement seems to have solved a vexing problem for U.S. merchants. Credit card networks charge merchants transaction fees, which the merchants must absorb or pass on to their customers. In the past, merchants' contracts with Visa and MasterCard prevented them from disclosing these fees to customers -- and from offering customers incentives to use cards that had lower transaction fees.

The Department of Justice sued Visa, MasterCard and American Express in 2010. In its lawsuit, the federal government accused the major card carriers of maximizing financial gain for themselves while preventing merchants and consumers from doing the same. MasterCard and Visa agreed to settle -- American Express has said that it does not plan to.

The settlement has multiple provisions intended to alter the card fee issue in the favor of merchants. The provisions agreed to by Visa and MasterCard now allow merchants to:

• Offer consumers an immediate discount or rebate (or a free or discounted product or service) for using a particular credit card network, low-cost card within that network or other form of payment.

• Express a preference for the use of a particular form of payment.

• Promote a particular form of payment through posted information or other communications to consumers.

• Communicate to consumers the cost incurred by the merchant when a consumer uses a particular card.

A mixed bag for merchants
But does the Justice Department agreement really help out merchants? The Federal Reserve Bank of Boston isn't so sure. In a recent white paper (published a few months before the official settlement), the agency said that, while the agreement was well intended, some merchants are "unlikely to be able to take full advantage of the Proposed Settlement's new freedoms" because they lack the information necessary to do so.

In essence, merchants may not reap the full potential benefits from the agreement, mostly because they may not know the exact swipe fee on each credit card until long after the transaction has taken place. Even when they do learn the fees, merchants can often only learn the aggregate monthly fees for all cards, rather than the specific fee for any given card.

That means that merchants can't always match an individual card to a fee, meaning it would be difficult for them to know how much of a discount or reward to offer a customer on the spot.

Assuming better disclosure is possible, the settlement could hold some advantages for merchants and customers, according to the white paper:

• First, full information and transparency of fees would give merchants the chance to steer consumers toward lower-cost payment methods. Both merchants and customers would end up paying less, making full transparency a win for both parties.

• Second, enhanced transparency would increase competition between merchants. Decreased transaction costs would allow merchants to lower the cost of their goods -- which would then encourage their competitors to lower their costs. Moreover, the incentives for using certain payment methods would allow more aggressive merchants to use discounts and rewards programs to attract more business.

 See related: Paying with credit influences customers' buying habits; Small-dollar debit card transactions have become pricey to process

Published: January 18,2023