Credit card rewards are so common these days – so expected, even – that they can seem untouchable. But that could change.
The legislation that is being passed by Congress is intended by its sponsors to encourage “competition in electronic credit transactions.” But if lawmakers do eventually pass the measure, known as the Credit Card Competition Act of 2022, opponents say it could also torpedo the rich rewards and perks that cardholders have enjoyed for years.
“Will consumers be the losers? Probably,” wrote Brian Riley, director of credit counseling at Mercator Advisory Group, in an August post on the Mercator blog. “Their rewards programs are going to dry up, just like they did with debit cards.”
Here’s what’s behind the measure and what it could mean for your wallet if it passes.
Merchants demand lower fees
Credit card rewards are funded, at least in part, by fees paid by merchants. When you use a credit card to make a purchase, the retailer is charged between 1% and 3% of the transaction amount to accept your payment and process it securely. This is called interchange, i.e. a “swipe fee”, and is set by the payment network the credit card operates on – often Visa.
V,
or Mastercard
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A portion of this fee goes to various parties, including the payment network, as well as the bank that issues your credit card.
Interchange fees are largely invisible to consumers. But they’ve long been a hot topic for many marketers — especially small business owners — who call them cumbersome, expensive, and restrictive. From now on, if a merchant accepts a Visa credit card as payment, for example, it must be processed through the Visa network. The same goes for Mastercard, Discover
DFS,
and American Express
AXP,
transactions.
Sen. Richard Durbin (D-IL) says competition is necessary and will benefit consumers.
Getty Images
But the Credit Card Competition Act 2022 would require banks of a certain size to give merchants more choice about the payment network that can be used to process transactions involving their cards. They should allow merchants to choose more than one network – and according to the bill, these networks cannot be “affiliated” with each other, nor just “the two networks with the largest card market share.” of credit issued”. (i.e. Visa and Mastercard, which combine more than 80% market share).
The measure’s sponsors, including U.S. Senator Dick Durbin, D-Ill. — argue that competition is necessary and will benefit consumers.
“Credit card swiping fees inflate the prices consumers pay for groceries and gas,” Durbin said in a news release. “It’s time to inject real competition into the credit card network market, which is dominated by the Visa-Mastercard duopoly.”
Proponents say that if traders have more choice in payment networks, they’ll likely choose one with lower fees, and those interchange savings will trickle down to customers in the form of lower prices. Opponents say lower interchange fees can mean less money to fund credit card rewards programs.
Also on MarketWatch: How credit cards ruined the airport lounge
No guarantee savings will be passed on
If it passes, it is far from certain that this measure would lower prices.
Over a decade ago, Durbin sponsored similar legislation that reduced swipe fees on debit card purchases. Known as the Durbin Amendment to the 2010 Dodd-Frank Act, its proponents made the same argument: Because merchants could save on fees, they passed those savings on to customers.
The results are, however, questionable. Several studies conducted in the years after the Durbin Amendment took effect concluded that it had little, if any, effect on retail prices. In fact, a 2015 economic note released by the Federal Reserve Bank of Richmond included survey results estimating that more than 21% of traders actually raised prices after the rule took effect.
And banks have found ways to claw back some of what they lost in debit card fees — about $14 billion, according to the Federal Reserve — by raising fees on checking accounts. A 2017 report by Federal Reserve economists found that banks subject to the Durbin Amendment were 35.2% less likely to offer free checking accounts and, on average, increased monthly fees on checking accounts with interest and without interest (17% for the former; 20% for the latter). The report also revealed that the average minimum balance required to avoid monthly fees had increased by at least 50%.
Meanwhile, debit card rewards programs have all but disappeared as the swipe fees that funded them have declined. Opponents of the legislation say history is about to repeat itself.
What Credit Card Rewards Look Like in Other Countries
Britain offers a glimpse of the direction credit card rewards could take if exchanges are sharply reduced in the United States
Interchange fees in the UK have been capped for years at much lower rates – and credit card rewards also tend to be lower than in the US. Current common rewards rates on UK cards vary between 0.5% and 1%; for anything above that, you can expect to pay an annual fee.
Australia also reduced interchange fees years ago, and according to a 2012 report by the Reserve Bank of Australia, the result was much the same: cardholders increased.
And after?
The Credit Card Competition Act of 2022 was for some time filed as an amendment to the National Defense Authorization Act, which funds military programs and is what many lawmakers consider a essential legislation. Durbin and his co-sponsor, U.S. Sen. Roger Marshall, R-Kan., were trying to tie the Competition Act to the surcharges that stores on military bases charged credit card users.
But as of October 12, 2022, the measure has failed to make the bill. And at this point, it’s unclear when or if a vote will take place on the Credit Card Competition Act, as industry groups have lined up against it.
More: Four travel card perks that might no longer be worth it
“The perverse effects of this bill [include] the demise of card reward programs that families of all income levels use to stretch their budgets,” according to a joint statement released in September 2022 by several banking and business groups, including the American Bankers Association and Electronic Payments Coalition.
If this is successful, here are some things to note as a consumer:
- That might not mean the complete end of credit card rewards. After all, rewards still exist in countries with lower interchange fees – it’s just that you might have to settle for less lucrative rates, higher annual fees, or reduced benefits presented from a different way. Issuers concerned with customer loyalty may continue to view certain benefits as a cost of doing business.
- There may be times when debit or cash might make more sense. If a merchant is charging a 2% credit card “processing fee,” but your rewards card is only earning 1%, you might be better off using your debit card.
- Regularly evaluate what’s in your portfolio. Regardless of what Washington does, you don’t need to be indifferent if your current credit card no longer works for you. Your issuer may grant you a product change to a better card – one with higher rewards or lower fees. And if not, you can shop around for a card that does a bit more.
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Kenley Young writes for NerdWallet. Email: [email protected]. Twitter: @@kenleyyoung.