Visa and Mastercard agreed to settle a nearly two-decade anti-trust case brought by merchants, by promising to cap the costs stores have to pay to process credit card transactions and allowing merchants to surcharge for the use of certain cards.

It costs U.S. merchants about 2 per cent of each transaction paid with a credit card, but those costs can reach higher for payments made with certain premium cards. The inability of merchants to recoup those additional costs because of card network policies has long been a sticking point, both in the United States and Canada. Most of those merchant costs are revenues to the banks and financial institutions that issue the cards, not the card networks.

Under the terms of the agreement, companies will lower the interchange rates by at least 4 basis points (0.04 percentage points) for three years, and ensure average rates are 7 basis points below present ones for five years. It also allows merchants to impose surcharges on premium cards and to create incentives for customers to use certain cards.

Merchant groups behind the action said merchants will save about US$30 billion over the next five years.

The settlement, if approved in court, could lead to changes in practices. Merchants may wish to surcharge for the use of higher cost ‘premium’ cards, but those cards are often used by higher income customers making higher dollar purchases.

In Canada, merchants have had the same surcharge ability since a similar class action suit was settled in 2022. The practice has not gained widespread use.

Loyalty programs could be affected. Premium cards generate higher levels of revenue to card issuers, and those revenues are commonly used to provide higher levels of rewards through loyalty programs.

Merchants could also pass along cost savings to consumers, though are more likely to do so through differential pricing for different cards as opposed to lower overall pricing.

The agreement applies only to U.S. merchants, and still requires court approval. It may also face appeals from smaller banks who could be placed at a disadvantage compared to the largest banks in negotiating with large retailers. Changes would not go into effect until late 2024 or 2025, according to a statement from Mastercard.