On the surface, $30B sounds like a lot of money – and it is – but spread out over a five-year period in a market that is measured in the trillions of dollars per year, I can’t help but think, ‘meh.’ And when you peel it back even further the irony is that the injunctive relief class of US merchants, which is made up of ~90% SMBs, is the least likely to benefit from the “massive” savings associated with this settlement. There are, however, significant potential implications for the future of payments and commerce that will affect consumers, merchants and payment service providers in various ways – some positive and some negative.
The networks themselves, Visa and Mastercard, are similarly unlikely to see any meaningful impact from this settlement as the predominant monetary aspect is related to reducing and capping interchange rates which are actually the portion of the merchant discount rate earned by the card issuing banks (network fees and assessments are unimpacted). Interesting. So who wins and who loses here if the two parties directly associated with this settlement are the least likely to benefit or be impacted?
Winners and Losers
Large enterprise merchants are the biggest winners for three reasons:
- Unlike most SMB merchants who pay a fixed fee (e.g. “bundled rate”) to their PSP, typically starting around 2.9% + $.30 per transaction, larger merchants often negotiate what is called interchange plus pricing where the PSP simply passes through the interchange fee(s) and adds their small markup. So they should realize the benefit of reduced interchange rates as early as 2025, depending on when the court grants final approval.
- There’s also a provision in the settlement that allows merchants to start charging a premium (e.g. “surcharge”) for certain cards that carry an associated higher interchange rate (Visa Signature, etc.) and significantly more control over discrimination and steering practices related to which issuers, brands and wallets they wish to accept. The direct impact of this will likely play out over the medium term.
- Finally, and potentially most interestingly, is the removal of any restrictions on merchants’ rights to organize Merchant Buying Groups. The power of collective bargaining is no joke – as evident by industry unions and professional sports over the past many decades – and retail/commerce is increasingly becoming a power law industry. Watch out!
While the PSPs (including payment facilitators and vertical software companies with embedded payment offerings) and acquirers will have to make some R&D investment(s) to enable and support this new optionality and dynamic surcharging at an individual merchant level, ultimately their platforms will be better off for it and it will force them to provide more transparency back to the merchants around the overall costs of acceptance. And it will be those who primarily service the SMBs with bundled pricing who will see the economic benefit accrue to their bottom line.
Unfortunately, consumers are the ones getting the short end of the stick in all of this. Yes, it’s true that they have been the primary beneficiaries of juicy rewards programs over the years that have resulted in higher interchange fees for merchants/PSPs – but that’s more of an issue related to the dichotomy that exists between the portion of a card portfolio who pay in full each month and those revolving cardholders paying double-digit APR rates. We’ve already seen consumers become inundated with a plethora of different options (and decisions to make) at an online checkout – from BNPL to wallets to bank transfers, etc. – and now they are going to have to decide which of their credit cards to pull out when buying their Liquid Death? It’s possible that the steering tactics will work and consumer behavior change will result in a transaction benefit back to them but historical laziness legitimizes some skepticism here, not to mention the potential allergic reaction to the threat of a surcharge for their primary card of choice.
There’s also language related to increased merchant choice around disabling specific digital wallets. So Big Tech (primarily Apple and Google, cry me a river) can no longer count on universal acceptance of their pass-through wallets ‘anywhere Visa and Mastercard is accepted’. But if history is any indication, they will just spend their way out of this and ensure acceptance ubiquity through marketing credits or hard dollars. This does come at a precarious time, though, given Worldpay just released their 2024 Global Payments Report which declared digital wallets are now the #1 form of payment and projected to increase their lead to 61% of transaction share by 2027!
The Good and The Bad
The good news: both consumers and merchants will now have more choice and optionality!
The bad news: both consumers and merchants will now have more choice and optionality!
One of the biggest trends in payments for the past few years has been around enabling payment optimization efforts by individual merchants and platforms. It has even started to morph into the newer broadly defined category of payment orchestration (Glenbrook Partners recently published a good primer on the topic for those who are interested) which includes a la carte management of alternative payment methods, including wallets. So technology is already being built to accommodate this new world but there’s still a lot of work to do.
Ultimately, it is the data-driven, forward-thinking and adaptive merchants who are best positioned to take advantage of this evolving landscape – as is usually the case.
Where We Go From Here
Test. Adapt. React. Iterate. Test some more. Repeat.
We have the foundational technology and now we have the regulatory landscape to make iteration and testing viable key components of any coherent payments strategy for any merchant. Companies like Pagos are even making it real-time and offering easy-to-consume dashboards for data scientists and payments directors alike. In a lot of ways, it feels like the real work of the payments industry is just getting started.
If the disruptive fintech ecosystem does its job, this increased flexibility and general unbundling will only continue to proliferate. It can be either daunting or incredibly exciting. The current AI hype is only further shining a light on the importance of data and now is the time for merchants of all sizes to take back control and own their destiny. Let’s go!