What’s Changing: The ‘Honor All Cards’ Rule
Visa and Mastercard have proposed a settlement in their long-running legal dispute with merchants and retailers over how much they charge merchants to accept their cards.
The most important part of the settlement could directly impact how customers use their Visa- and Mastercard-issued credit cards, and may result in some consumers getting denied at the point-of-sale for purchases.
Visa and Mastercard have been in litigation with a class-action group of merchants for nearly 20 years over the costs they impose on merchants to use their payment networks, known as interchange. A previous settlement was rejected by the judge overseeing the case last this year, requiring Visa and Mastercard’s lawyers to go back to the drawing board on the scope and size of the settlement.
The new part of the settlement announced Monday addresses the “honor all cards” rule, a cornerstone of how credit and debit cards work in the U.S.
The rule states that if a merchant accepts Visa or Mastercard as a form of payment, they are required to accept all iterations of Visa and Mastercard products, regardless of who issues it and the cost to the merchant.
That has led to consternation among merchants over the years because rewards-heavy credit cards, like the Chase Sapphire Reserve or Citi Strata Elite, use a premium version of a Visa or Mastercard.
For the Sapphire Reserve, Chase uses the Visa Infinite card, and for a card like Strata Elite, it’s issued as a World Elite Mastercard. These cards have gotten far more popular in the last decade.
Both a Visa Infinite and World Elite Mastercard cost more for a merchant to accept. The amount of additional interchange a merchant will pay varies on size and industry, but one example is the Visa Infinite, which can be 15 basis points (0.15%) more expensive than a Visa Signature (a mid-tier credit card) for a merchant to accept.
Under the proposed settlement, merchants could discriminate between the different tiers of Visa and Mastercard products, meaning high-reward credit card users may be declined at checkout if the merchant has opted out of accepting the higher-tier card. A merchant may also be able to pass along the higher cost to accept the rewards cards to the customer in the form of a surcharge on their bill.
This puts businesses in a bind: accept all cards with higher fees, or turn away customers who rely on premium cards for points and perks.
Like the previous settlement last year, merchants would receive a temporary reduction on swipe fees for a few years. In this settlement it would be a 10 basis point reduction in swipe fees for five years, and standard credit card transactions would be processed at 1.25% of the purchase price for eight years.
When the settlement was announced Monday, major merchant and retail lobby groups came out in opposition. They argue it still doesn’t provide real reform and want Congress to regulate interchange fees the way it does with debit cards.
“Once again, this proposal is all window dressing and no substance,” said Stephanie Martz, chief administrative officer and general counsel for the National Retail Federation. “The reduction in swipe fees doesn’t begin to go far enough, and the change in the honor-all-cards rule would accomplish nothing. If the courts can’t fix this, it’s time for Congress to take action.”
Visa and Mastercard say ending the litigation now is the best path for all sides.
“We believe that this is the best resolution for all parties, delivering the clarity, flexibility and consumer protections that were sought in this effort,” a Mastercard spokesperson said.
The settlement affects Visa and Mastercard only. American Express, which operates as both issuer and payment network, is not part of the case. Debit cards are also unaffected.
