Visa and Mastercard's Settlement: Implications for Credit Card Rewards and Co-Brand Partnerships

The recent settlement between Visa (V) and Mastercard (MA) marks a pivotal shift in the credit card industry, with far-reaching consequences for airlines, payment networks, and consumers. By addressing a 20-year legal dispute over interchange fees and merchant acceptance rules, the agreement could reshape the economics of co-brand credit cards and loyalty programs. This analysis explores the long-term financial implications for airlines and payment networks, drawing on industry data and stakeholder strategies.

The Settlement's Core Provisions

According to a report by The Wall Street Journal, the settlement involves a gradual reduction of interchange fees-typically 2% to 2.5% per transaction-by an average of 0.1 percentage points over several years, as reported in a WSJ report. More significantly, it relaxes rules requiring merchants to accept all types of Visa or Mastercard, allowing them to differentiate based on fees, as reported in a GuruFocus article. This could lead to the rejection of premium cards like Visa Infinite or World Elite Mastercard, which often carry higher interchange costs but fund richer rewards, as reported in a GuruFocus article.

For airlines, which rely heavily on co-brand card revenue, this shift poses a dual challenge: reduced interchange income and potential erosion of customer loyalty. U.S. airlines generated $25 billion from interchange fees in 2023, with co-brand cards contributing 57% of frequent-flyer miles issued, as reported in an Investopedia article. A modest fee cut could disrupt this model, forcing airlines to either absorb losses or pass them on to consumers through reduced rewards or higher mileage prices, as reported in an Investopedia article.

Airlines' Co-Brand Revenue at Risk

Southwest Airlines provides a cautionary case study. In Q3 2024, its loyalty revenue included 13% from co-brand cards, as reported in an Investopedia article. However, the airline's recent pivot toward fee-based revenue-such as charging for previously free amenities-has already strained its brand differentiation, as reported in a blog post. If interchange fees decline further, airlines like Southwest may struggle to maintain profitability in their loyalty programs, which are critical for customer retention, as reported in an Investopedia article.

The settlement also intersects with proposed legislation, such as the Durbin-Marshall proposal, which would require banks to enable at least two competing networks on every credit card, as reported in an Investopedia article. This could reduce interchange fees further and limit banks' ability to fund miles, as reported in an Investopedia article. Analysts estimate that even a 0.04% fee cut could shrink sign-up bonuses and earn rates, directly impacting airlines' ability to attract new cardholders, as reported in an Investopedia article.

Payment Networks' Strategic Adaptations

While the settlement pressures airlines, Visa and Mastercard are expanding their embedded finance initiatives to offset revenue declines. Mastercard's partnership with Seattle-based startup Upward, for instance, allows clients to launch Mastercard-branded card programs quickly, leveraging features like Easy Savings®, as reported in a Mastercard blog. Similarly, RS2 Financial Services' new Principal Issuing Member status in Europe grants full BIN sponsorship and co-brand capabilities, as reported in a blog post. These moves suggest that payment networks are prioritizing innovation and partnership agility to retain market share.

Visa's financial resilience-trailing twelve months' revenue at $40 billion and a 66.39% operating margin, as reported in a GuruFocus article-positions it to absorb short-term losses. However, long-term profitability may hinge on its ability to adapt to a landscape where interchange fees shrink and merchant differentiation becomes the norm.

The Future of Co-Brand Partnerships

The settlement's ripple effects extend beyond airlines. For example, hotels and other travel sectors also rely on co-brand card revenue, as reported in a Pariveda article. As merchants gain flexibility to reject high-fee cards, partners must innovate to justify their value. This could lead to tiered rewards structures, enhanced travel benefits, or hybrid models combining low fees with premium perks.

Yet, such adaptations may not fully offset the financial hit. A Bloomberg analysis notes that airlines and manufacturers like Boeing and Airbus have raised concerns about the settlement's potential to undermine loyalty programs, as reported in an Investopedia article. The broader travel ecosystem, which depends on these programs for customer acquisition and retention, could face systemic challenges.

Conclusion

Visa and Mastercard's 2025 settlement represents a tectonic shift in the credit card industry, with airlines and payment networks navigating uncharted territory. While reduced interchange fees may benefit consumers and merchants, the long-term financial health of co-brand partnerships-and the loyalty programs they fund-remains uncertain. Investors should monitor how airlines adapt their revenue models and whether payment networks can innovate fast enough to maintain profitability.