Visa and Mastercard agree to lower average credit card interchange fee below 1%

Instead of capping prices, you could simply require any fees to be paid by the cardholder. Combine that with a standard for payment processing so that lots of companies could compete for payment processing and fees would drop really fast.

If someone is using a POS terminal like Toast or Square, it should be trivial for them to support lots of new payment companies if they're all adhering to a standard. If consumers have to pay the fee, they're going to shop around for the lowest-fee card (just as many shop around for the highest-reward card now). You wouldn't need government caps.

You could tell stores "once you accept payments with the new system, the consumer is responsible for the fees." This would drop fees really fast - even for stores that didn't upgrade their credit card machines. If Walmart, Target, CVS, etc. all update their machines quickly, I'm going to find a card with a low fee. Then when I use that card at a non-upgraded shop, they have to pay the fee, but it's a much lower fee since I had shopped around for a low fee.

The issue right now is that the person choosing the card doesn't feel any of the pain. As the article notes, Visa (Canada) charges 1.25% for a regular consumer card or 2.08% for a premium card. I will pay with a premium card since it will give me nice rewards and I don't feel the additional 0.83% that the store has to pay. If I did have to feel it, I would make different decisions.

If you're looking to change behavior, align people's incentives. Another commenter said that they're capped at 0.3% in Europe. Consumers might hate the idea of paying 0.3% additional, but I think credit card companies would drop below that cap if consumers had to pay it. I think they'd look to make it up on interest or other things. As you note, credit cards can come with 2% rewards so they're essentially giving you the whole interchange fee back already. Make consumers shop around for the lowest fee cards.

The problem is that stores need to take the cards that consumers have with little option to forgo the fees. If Bank of America had a no-fee card while Chase charged 1.5%, consumers would move to BofA if they felt the fee.

Different brands also have different business models. Amex relies very heavily on interchange, Chase is a balanced mix iirc, Citi is more interest, and different companies have everything in-between. This is a deliberate strategy -- issuers split people into transactors, who never carry balances and pay off their CC bills every month, and revolvers, who carry balances and pay interest. It's a core strategic decision to target how much of your customer base you want to be one vs the other.

To a first order, defaults are subsidised by the high interest rate that they pay. Transactors primarily earn the banks interchange revenue, which is a more stable part of the business, and revolvers primary earn the banks interest, which obviously carries with it much greater credit risk. To a second order, some issuers securitise their portfolios into different tranches, and the default risk is thus pushed to the debt purchasers. It gets much more complicated from there, with different scoring models to determine spending patterns, default risk, bust-out risk, etc. (As an aside, there's a fascinating story around Synchrony switching from FICO to VantageScore a while back, thus making it much more complicated to securitise their CC portfolio)

But, in general, credit card interchange is a cost built into everything you buy, and on which the prime-superprime consumer receives a rebate.

If you want to draw this conclusion you’d have to calculate the cost of the alternative. What would the impact on prices be if there were no electronic payments? What would the impact on prices be if every bank had to implement its own electronic payment system with every merchant? The credit card system integrates a huge portion of the worlds merchants with nearly all of the worlds banks. It’s massively more efficient than the alternatives, apart from other conceptually similar systems that have exactly the same type of costs. Your claim that removing this efficiency would lower prices seems entirely implausible and to me.