Credit card rewards shake-up: Visa and MasterCard agree to lower swipe fees

High-quality credit cardholders can quickly pay higher fees every time they tap their cards — and may even have to contend with higher card fees or reduced rewards.

Visa and MasterCard, two major card payment processors, a solution On March 26, if they limit the swipe fees with merchants they can charge US merchants. That solution would allow stores to apply variable pricing to purchases made with higher-tier credit cards. That means your transaction may cost you more or less depending on your card type.

Both Visa and MasterCard offer three different credit cards. The higher the tier, the better the card offers.

To use a credit card at their store, merchants pay a fee to the card's payment processing network — Visa, MasterCard, American Express or Discover. These fees are called transfer fees or swipe fees and average between 1.5% and 3.5%. Issuers use interchange fees to fund credit card rewards programs. Higher-end credit cards with premium rewards tend to have higher transaction fees.

Currently, payment processing networks require merchants to accept all tiers of cards, but premium card tiers make it easier to purchase higher swipe payments.

If approved, the deal would benefit merchants and result in lower profits for both banks and networks. But it's not clear how this might affect credit cardholders. Let's unpack it.

What the Swipe Payment Solution Means for Cardholders

As part of the solution, merchants may impose additional fees on consumers depending on the type of credit card used to shop. Visa and MasterCard each offer three tiers of credit cards. Visa includes Standard Visa, Visa Signature and Visa Unlimited. MasterCard offers a standard MasterCard, MasterCard World and MasterCard World Elite cards.

The higher the tier, the better the card perks you get. For example, the World Elite Mastercard has more identity theft protections, a more robust concierge service, and access to exclusive events compared to the World Mastercard. Higher card tiers also tend to charge annual fees.

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The Chase Sapphire Preferred® Card is a Visa Signature, while its upgraded version, the Chase Sapphire Reserve®, is a Visa Infinity Card. Compared to a Visa Signature card, Visa Infinite credit cards have better perks, including Global Entry or TSA PreCheck application fee credit, enhanced concierge service, and greater security.

If the settlement is approved, for example, Chase Sapphire Balanced cardholders may pay more than Chase Sapphire Preferred, depending on the merchant. This is to address the financial burden incurred by merchants due to swipe fees.

However, merchants also have the option of reducing consumer surcharges for credit cards that charge lower swipe fees, giving them more choice in the types of credit cards they want to accept in their business.

“The settlement agreement opens competitive doors that have been closed for decades, while providing fee relief to every merchant that accepts Visa or MasterCard credit cards,” economist Joseph Stiglitz said in a press release.

It could also mean your card will offer fewer rewards or offers soon. Transfer fees charged by credit card issuers are part of a card's rewards program. Therefore, lower swipe fees may translate into less profitable rewards or benefits programs.

But credit card issuers have other ways to make money. Considering rewards and perks are how most issuers entice people to apply, card issuers have a big incentive to keep rewards programs competitive.

“I've heard this argument about how rewards are going to be affected, but John Ulzheimer, formerly of Fico, Equifax and Credit.com, doesn't see any evidence of reducing revenue to process changes to rewards programs.

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“Most, if not all, studies examining why customers choose the cards they do list rewards at or near the top of the list,” he said. “So, while the loss of card processing revenue can easily be offset from other banking footprints, it doesn't make sense from an acquisition perspective to touch rewards programs.”

Unfortunately, your card's interest rate and other fees may increase to make up the difference.

What about other card networks?

Along with Visa and MasterCard, there are two other card networks: American Express and Discover. The difference is that Amex and Discover also act as credit card issuers, whereas Visa and MasterCard partner with banks to issue credit cards.

Amex generally charges higher merchant fees than Visa and Discover, which is why Amex cards may not be accepted at some businesses. If the settlement is approved, the acceptance rate of Amex cards may decrease.

Also, Capital One's potential acquisition of Discover could put the company in a position to offer lower merchant fees to boost its adoption rates.

When will things change?

Things will not change for some time. The settlement still has to be approved by the U.S. District Court for the Eastern District of New York, which means you shouldn't expect your shopping bill to increase (or decrease) in the next year or so.

In the meantime, if you're worried about how much transaction costs will change, you can ask your provider to downgrade your card or apply for a lower-tier credit card. However, credit expert Jason Steele says you probably don't need to.

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“It will be difficult for retailers to implement [a price change] And it hurts the high-value customers who have these cards,” Steele said. “I think you'll see it occasionally with some specialty retailers and merchants, but I don't think airlines, hotels and big retailers will do it.”

bottom line

If the solution is approved, it's sure to shake things up a bit, but it doesn't have to be all doom and gloom for you. The important thing is to prepare for the possibility of paying higher fees if you use a higher-rated credit card, which can affect rewards programs as a result. But if you use a credit card that charges a lower swipe fee at the merchant, you can save money.

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