Visa-Mastercard Settlement Benefits Merchants, Makes State Swipe-Fee Carveouts more harmful, ICLE Finds
PORTLAND, Ore. (Oct. 5, 2026) — The proposed Visa and Mastercard antitrust settlement would benefit merchants by reducing interchange fees, while dramatically reducing the cost-savings some would get from state carve-outs to those fees (exemplified by Illinois’ law exempting sales taxes and tips), according to a new issue brief from the International Center for Law & Economics (ICLE). The settlement also means the carve-outs would be even more harmful to consumers, notes ICLE Senior Scholar Julian Morris.
Morris examines how the settlement, which received preliminary approval in June, would interact with Illinois’ Interchange Fee Prohibition Act (IFPA) and similar state proposals. It would reduce average credit interchange by 0.1% of transaction value for five years, roughly matching the IFPA’s projected merchant savings before compliance costs. It would also cap standard consumer credit card interchange at 1.25% for at least eight years and give merchants more options to decline or surcharge higher-fee cards.
Under the settlement, merchants would need no new equipment or paperwork. By contrast, state-level carveouts exempting taxes and/or tips from interchange would require payment systems to split transactions, transmit tax and tip data, or process reimbursement claims. Those costs could consume smaller merchants’ savings.
The settlement would shrink meagre carveout savings for most merchants by lowering the fees subject to exemption. Benefits would further concentrate among large retailers that can spread compliance costs across more transactions. Even before the settlement, just 10 national chains would have received more than one-fifth of the IFPA’s projected savings.
“The settlement would intensify that concentration, making the carveout an even more pronounced subsidy to big-box retailers financed by consumers, smaller merchants, and local financial institutions,” Morris writes.
The settlement’s rate restrictions would also limit issuers’ ability to recover carveout losses through interchange adjustments. If courts reject federal regulators’ determinations that federal law overrides the IFPA for federally chartered institutions, national issuers would likely spread costs to cardholders nationwide through reduced rewards and/or higher fees. Meanwhile, if courts uphold those determinations, losses would concentrate on local banks and credit unions still subject to the law.
State carveouts could also count toward the settlement’s nationwide fee reduction, leaving merchants elsewhere with less relief. Implementation of the IFPA and similar laws would compete with the settlement’s rollout for engineering capacity and require additional compliance checks. Merchants recovering their full acceptance costs through surcharges would gain little additional benefit from carveouts.
Neither intervention covers three-party cards like American Express or Discover. Reduced benefits on Visa and Mastercard cards and slower carveout processing could shift spending toward those cards, which generally cost merchants more to accept.
“A law that steers transactions toward the most expensive card-acceptance channel would be a strange way to lower merchants’ acceptance costs,” Morris writes.
Morris finds that the settlement itself would likely impose net economic costs through reduced cardholder benefits and higher fees. Its lower compliance burden nevertheless weakens the case for carveouts. He recommends repeal in Illinois and withdrawal of similar proposals, regardless of the settlement’s final approval. Capped compensation for electronic tax remittance, which most states already provide, offers a more direct way to address merchants’ tax-collection costs.
The full issue brief can be downloaded here. To arrange an interview with Morris, contact Jim Fellinger at [email protected].
About ICLE
The International Center for Law & Economics (ICLE) is a nonprofit, nonpartisan research center working with a roster of more than one-hundred academic affiliates and research centers from around the globe. ICLE scholars promote the use of law and economics methodologies to inform public policy debates. For more information, visit laweconcenter.org.