Visa and Mastercard Agree to Lower Swipe Fees in Recent Settlement

The details of the deal

Visa and Mastercard have agreed to lower all of their swipe fees (or interchange rates) by 0.04 percentage point for three years and lower the average rate by 0.07 percentage point for the next five years. The merchants' legal team said this would save their clients $30 billion over that time. Visa and Mastercard together generated about $58 billion in revenue over the trailing 12 months, and losing those fees could make a substantial dent in sales.

This could be just the beginning

Merchants are still worried about the five-year cap, after which the credit card companies can go back to raising rates. A federal judge denied Visa's and Mastercard's request to finish the litigation here, allowing further cases against them. Several large retailers, including Target, Foot Locker, and Starbucks, say that Visa and Mastercard collude to keep processing rates high, and the retailers are pursuing a separate case against them.

Should investors be worried?

This comes following the news that Capital One is acquiring Discover, the fourth-largest credit card network after Visa, Mastercard, and American Express. Although regulators are concerned about how that could reduce competition, it could also break down Visa's and Mastercard's duopoly and generate more competition. Visa and Mastercard enjoy dominant, high-margin businesses that generate rising revenue and increasing profit as shoppers spend more money. This is precisely why investors love these businesses, and Visa and Mastercard stocks have both created tremendous shareholder value. These are the kinds of qualities Warren Buffett looks for in a great stock, and his Berkshire Hathaway owns shares of American Express, Visa, Mastercard, and Capital One.

Economic impact

The impact on the global economy from the lowered interchange rates settlement by Visa and Mastercard is rated 6 out of 10 based on the potential influence on financial markets and consumer spending.