Visa and Mastercard recently reached a revised settlement in a long-running antitrust lawsuit with U.S. merchants over interchange fees. These fees represent the lion’s share of the total cost to process credit card transactions, were previously non-negotiable for merchants accepting Visa and Mastercard payments and have been a longstanding point of contention with the U.S. retail industry. This agreement aims to address these issues by reducing interchange fees by 10 basis points (or 0.1 percentage points) from an average of approximately 160 basis points. While that may not sound like much, the sheer volume of annual U.S. Visa and Mastercard transactions makes the settlement valued at approximately $38 billion in estimated savings for merchants through 2031. If this topic sounds familiar, it covers the period of ongoing litigation dating back to 2005 and builds on a prior $30 billion deal that was rejected by a federal judge in June 2024 for being insufficient.
The deal requires approval from U.S. District Judge Margo Brodie in Brooklyn, New York, who previously rejected a similar agreement. Approval could take months. While it’s supported by some industry groups like the Electronic Payments Coalition (which includes banks and card issuers), it faces opposition from merchant organizations such as the National Retail Federation and Merchants Payments Coalition. These groups argue that the reductions are too modest, that interchange fees remain excessively high, doesn’t fully enable competition or allow direct fee negotiations with card issuing banks.
Let us explain.
Merchants can now categorize and selectively accept Visa and Mastercard credit cards in three groups: commercial cards, premium consumer cards (including many rewards cards), and standard no-rewards consumer cards. They must accept all cards within a chosen category but can opt out of entire categories, partially addressing the controversial “honor all cards” rule. Previously, merchants as part of their agreement to connect to the Visa and MasterCard networks were required to accept any of their co-branded payment cards, even if certain cards carried a higher interchange because of rewards and other features-which raises processing costs for that merchant. Now, if approved, retailers may reject certain categories of co-branded cards like commercial cards. The negative for the merchant is the potential for lost sales. However, retailers could always run sales discounts for non-reward cards, like increase store issued points, and/or a purchase price reduction of several hundred basis points. Again, may not sound like much but it is a small step for US retailers.
What’s more, merchants gain expanded rights to add surcharges of up to 3% on transactions based on the card type used, giving them more control over passing costs to customers. Nonetheless, rewards programs, funded largely by interchange fees are unlikely to encounter near-term changes, as most merchants won’t reject popular rewards cards which account for 90% of credit card spending.
Why are Visa and MasterCard so important in this discussion?
Visa and Mastercard represent roughly 75% of total US annual card purchase volume. Almost all the 10+ million merchant-facing businesses in the US accept Visa and MasterCard, which together accounted for $9 trillion in purchases in 2024. Nearly every physical store accepts these cards, with about one billion Visa and 700 million MasterCard cards in circulation domestically. Furthermore, Visa and MasterCard set interchange on behalf of the card issuers who are also their customers. Retailers claim this creates a conflict of interest and artificially keeps interchange high.
What are the fees in a Visa or MasterCard PoS Transaction?
The merchant discount rate (MDR) represents the total cost a retailer pays to accept a payment card transaction. In broad terms, it consists of three main components:
- Interchange fee: This is the largest and most controversial part—a non-negotiable percentage of each transaction that goes to the card issuer (e.g., Bank of America).
- Merchant acquirer fee: This covers the services of the acquirer, which acts as an electronic middleman and maintains records for retail transactions.
- Card brand fee: This is the transaction fee charged by the card networks, such as Visa or Mastercard.
As a rough percentage breakdown of a typical MDR for credit card transactions: about 70% for interchange (card issuer), 18% for the merchant acquirer, and 12% for the card brand (V/MA). Interchange and brand processing fees are non-negotiable or 82% of the MDR.
Example: For a $100 transaction at a small or medium-sized retailer with a 2% MDR, the total fee would be $2. This breaks down to approximately $1.40 for interchange, $0.36 for the merchant acquirer, and $0.24 for the card brand.
The card issuers are the card brands customers (not retailers or consumers).
Big banks, like Bank of America, are high volume Visa and MasterCard card issuers in the US and are compensated by interchange for providing a number of important risk and transactions services. On the risk side of the equation, these include but are not limited to managing: fraud risk, credit risk, charge backs and disputes, and maintaining a secure processing facilities. On the transaction side, partial list includes: Authorization, settlement, and facilitation of payments between parties. Network Maintenance and Infrastructure: Keeping global payment systems operational, including servers, data centers, and payment innovations. Card Issuance and Account Management: Costs for producing and distributing cards, as well as maintaining cardholder accounts and guaranteeing payments to merchants.
Rewards and Incentives Programs: Funding cashback, points, travel perks, and other benefits to encourage card usage and adoption (a major use of fee revenue)
However, to our knowledge, the full, detailed, line item by line-item disclosure of how the interchange rate for Visa and MasterCard issued cards are established has not been made public. There are service categories, like those mentioned above, but the exact mathematical inputs behind the total interchange fee have not been disclosed. This is a point of contention with US retailers because volume is so high, fraud at the physical PoS is so low and given the incredible scale of IT operations at the biggest card issuers why isn’t interchange significantly lower than it was five, ten or twenty years ago? More and better services, rewards programs to be sure, but clearly, retailers want to understand more.
