Visa and Mastercard’s New Deal Would Let Stores Refuse Your Rewards Card — How This Could Upend Airline Miles

Visa and Mastercard are reportedly near a deal to settle a 20-year lawsuit that would:

1. Reduce credit card interchange by an average of 10 basis points (0.10%) gradually over several years.
   
2. Loosen rules that merchants that accept Visa and Mastercard must take all of them, allowing businesses to reject some categories of cards, like business cards or rewards cards.

A 2024 settlement deal was rejected by the judge in the case, and these new settlement talks have revived the idea of broader merchant steering flexibility.

Premium Visa/Mastercard products – like Visa Signature and Infinite, World Mastercard and World Elite Mastercard – carry interchange that’s 15 to 30 basis points higher than no‑rewards products. What effect would allowing merchants to accept only ‘no rewards’ cards have on rewards?

Lower Interchange Fees Have Seemed Inevitable

Ten years ago I gave a keynote at a credit card industry conference where I told brands including airlines and hotels that they weren’t taking a future with lower credit card interchange seriously enough. It wasn’t going to right away, but it would eventually happen.

• It probably wouldn’t be because of folly like the Credit Card Competition Act or other legislation.

• But it could come from lawsuits, settlements, or competition from new payment technologies (although tech would be a long way off, processing blockchain payments was simply too expensive at the time as I noted in 2015). I thought it would eventually be new technologies – competition – ultimately driving down the cost of payment processing.

And this was going to have a huge effect on airlines, especially (and was a reason spinning off loyalty programs wouldn’t be as lucrative as some hoped, an argument that I made in a debate at another conference just before the pandemic).

Less Lucrative Credit Cards Could Have Profound Effects On Airlines

From the routes airlines fly, to whether or not an airline even survives, credit card revenue drives the airline business in the United States.

Delta Air Lines now admits it chooses routes based on where it can acquire credit card customers and grow American Express spending.

Southwest Airlines started flying to Hawaii and became one of the biggest players there, and uniquely offering service between the Hawaiian islands (crucial to locals), in order to have attractive destinations for their Rapid Rewards members – they didn’t have Europe or Asia or business class to inspire cobrand spend like Delta, United and American.

During the Great Recession airlines were pre-selling miles to banks at as much as $1 billion at a time to raise liquidity. The largest airlines raised between $5 billion and $10 billion each backed by their loyalty programs (largely by revenue from their cobrand credit card deals) during the pandemic, supplementing tens of billions in federal subsidies.

Airlines are a money-losing business without credit cards in many cases. American Airlines isn’t making money, despite $5 billion in revenue from selling miles that they’ve said comes with a 53% margin. And they At the end of the third quarter they had $36.8 billion total debt and $29.9 billion in net debt (after cash & short-term investments). Can they even service that debt without Citi?

Delta CEO Ed Bastian said that what the pandemic proved was that the federal government would always be there for airlines with subsidies when needed (“We’ve proven the governments will be there for us if ever needed again, hopefully never again.”). Are taxypayers on the hook for lower merchant processing costs?

What To Actually Expect

We don’t want legislation that crams down interchange because of its disruptive effects, not least of which on how lucrative it is to offer credit, and therefore the availability and cost of credit to the consumer. But something that has only modest effect (5%) on interchange overall and sets up merchants to compete for consumer card business probably doesn’t do that.

Ultimately,

• A ~10 basis point cut phased in over years is noise. The meaningful change is letting merchants decline “rewards” (and business) product categories. E

• Expect targeted non‑acceptance of premium rewards at thin‑margin or high‑ticket merchants, broader use of surcharging, issuer portfolio tweaks to offer some “merchant‑friendly” non-rewards cards, and some pressure on co‑brand everyday‑spend economics. This may also have an effect on American Express.

Over 90% of card spend is on rewards cards, and over 75% of cards offer rewards. Steering consumers away from rewards is going to be tough for many merchants because it risks a lot of their business. If the settlement is, as reported, requiring broad categories of cards so that a merchant has to reject all rewards cards and not merely (say) the most expensive Visa Infinite, it’s going to be a difficult choice! And that’ll limit the effect of the settlement.

Some low‑margin and monopoly vericals likely try this first – gas, utilities, government and education, medical billing, business to business pay‑by‑card – and high‑ticket sellers (jewelry, furniture). Many of these are among the most likely to cap card payments or to surcharge them.

Steering has the potential to save far less than a global 10 basis point cut in interchange, however. Say 15% of Visa/Mastercard credit spend gets steered down to non-rewards cards, they’re saving maybe a quarter what the interchange reduction does.

We probably do’t see this at some categories of merchants, like supermarkets, that are already getting lower interchange and the differential between premium and standard cards is lower. Meanwhile, widespread blanket bans on payment with rewards cards acrossretail are unlikely because of risk of loss of sales to merchants that do take the cards.

Note that the broad category of ‘rewards’ makes it a big decision to reject. And it also prevents product drift to slightly cheaper premium tiers. If a merchant opts out of “rewards,” all rewards products are captured. So this isn’t an incentive to reverse the trend away from Visa Infinite premium cards that are more expensive down to Visa Signature cards which don’t fund as richly.

Meanwhile, settling the case with real steering power may defuse momentum behind legislative ideas like the Credit Card Competition Act. So his could stabilize interchange at close to current levels for a long time. That’s the benefit to Visa and Mastercard in settling! And while there could be some effect for airlines, it won’t be a killer. You could imagine a $750 million gross revenue hit ($400 million net) to American Airlines.

And it may not have that big of an effect! American Express is generally more expensive to accept, but merchants who accept credit cards tend to accept Visa/Mastercard and American Express.

The simple way to steer consumers away from high-interchange products is not to accept Amex. And most do not do this. At some level, though, selective non‑acceptance gets easier once Visa and Mastercard open the door so this could pressure Amex interchange slightly in order to maintain acceptance. This could have some long-term effect on Delta, especially as their current co-brand deal needs renegotiation for 2029.

Bottom-Line

Visa/Mastercard wouldn’t do this if it materially harmed them. A 0.1% reduction in interchange won’t change much. Some merchants will reject rewards cards. Some consumers will keep basic non-rewards Visa/Mastercard or debit as a fallback. This settlement would affect the rewards ecosystem at the margin, raising transaction costs to consumers (via surcharges and hassle of juggling multiple payment methods). The overall business of payment networks, and the associated cash cow to airlines, would remain largely intact.

(HT: Hans)