Visa and Mastercard’s New Policy Could Disrupt Airline Miles Programs

Visa and Mastercard are reportedly in talks to settle a long-standing 20-year lawsuit that could significantly alter credit card interchange policies. This settlement is designed to gradually lower interchange fees by an average of 10 basis points (0.10%) over several years and provide merchants with greater flexibility regarding which card types they accept.

Key Changes in Credit Card Policies

According to the proposed settlement, merchants would no longer be required to accept all Visa and Mastercard prodcuts, allowing them to refuse certain categories, such as business or rewards cards.

Previously, a proposed settlement ended in rejection by the presiding judge. However, recent discussions have resurrected the idea of broader merchant steering flexibility.

Impact on Airlines and Rewards Programs

This potential change has raised concerns about the future of airline miles programs and credit card revenue streams. Premium cards, like Visa Signature and Infinite and World Mastercard Elite, have interchange rates that are 15 to 30 basis points higher than standard no-reward products. Allowing merchants to accept only no-reward cards could profoundly affect how airlines structure their loyalty programs.

• Delta Air Lines relies heavily on credit card revenue to shape route decisions.
• Southwest Airlines has targeted specific destinations to boost its Rapid Rewards membership, indicating the strategic importance of credit card deals.
• During the COVID-19 pandemic, airlines raised billions by leveraging their loyalty programs and cobranded credit card agreements.

Financial Implications

Airlines have become increasingly dependent on credit card partnerships for profitability. For instance, American Airlines reported $5 billion in revenue linked to selling miles, which carries a significant margin. Nonetheless, their growing debt raises questions about the sustainability of this revenue stream.

What to Expect Moving Forward

The settlement discussions hint at several developments:

• Merchants could start to target the acceptance of non-reward cards more actively.
• Higher surcharging might become a common practice in several sectors, including low-margin ones.
• Changes to issuer portfolios could promote merchant-friendly, non-reward card options.

While a slight reduction in interchange fees is not expected to have a drastic impact, steering away from rewards products could shift consumer behaviors significantly.

Long-Term Effects on Financial Markets

Settling with potential steering capabilities might reduce the momentum behind legislative initiatives like the Credit Card Competition Act. If implemented thoroughly, it could stabilize interchange at current levels and mitigate potential disruptions in the payment processing industry.

Ultimately, Visa and Mastercard are unlikely to support changes that would damage their business models. While the proposed agreement might create minor adjustments in the rewards ecosystem, the overall dynamics of payment networks and their economic ties to airlines will likely remain secure.