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Visa and MasterCard today agreed to sweeping changes that will allow merchants to offer discounts to customers who pay using the least-expensive credit and debit cards. The changes, announced in a Justice Department consent decree with the companies, could have far-reaching implications for consumers, merchants, and, most especially, the card companies and their network banks, which reaped more than $35 billion from merchant fees in 2009 alone.

American Express – which charges merchants the highest fees for each card transaction and has the most to lose if merchants offer discounts for the cheapest cards – has vowed to fight on.

As the Financial Reform Watch recently told you, the card companies have fought hard to keep control over the so-called interchange fees that merchants pay each time a consumer swipes a card. But new rules under the Dodd-Frank law, pressure from two massive antitrust class actions against the companies, and the now-settled antitrust lawsuit against Visa and MasterCard could mean better prices for customers and cost-savings for merchants.

At a news conference today,Attorney General Eric Holder said that the Visa and MasterCard settlement, if approved, will allow retailers to pass along more options and cost-saving incentives. He also sent a stern message to American Express, which Holder said refuses to give merchants the ability to reward customers who use less-expensive cards..

“American Express’s rules prohibit any of the millions of merchants that accept American Express from taking advantage of the discounts and rebates Visa and MasterCard now can allow as a result of our settlement. Because American Express has refused to change its rules, consumers are being held hostage from receiving the expanded choices and lower prices they deserve under our settlement with Visa and MasterCard,” Holder said.

The settlement is especially important in light of new rules under the Dodd-Frank financial reform law that give the Fed the power to set a ceiling on the interchange rate for debit cards. Debit card transaction fees are already much lower than credit card fees, and under the Fed’s supervision, those rates will almost certainly go lower still. In Europe, the retailers’ debit card rate averages about one-fifth of one percent.

Under the consent decree, Visa and MasterCard agreed that merchants can:

  • Offer consumers an immediate discount or rebate or a free or discounted product or service for using a particular credit card network, low-cost card within that network or other form of payment;
  • Express a preference for the use of a particular credit card network, low-cost card within that network or other form of payment;
  • Promote a particular credit card network, low-cost card within that network or other form of payment through posted information or other communications to consumers;
  • Communicate to consumers the cost incurred by the merchant when a consumer uses a particular credit card network, type of card within that network, or other form of payment.

We will be paying close attention to how American Express responds to the lawsuit.

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