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Credit card rewards are so common these days — so expected, even — that they can seem untouchable. But that could change.
Legislation that’s winding its way through Congress is intended by its sponsors to encourage “competition in electronic credit transactions.” But if lawmakers end up passing 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 lose? Probably,” wrote Brian Riley, director of the credit advisory service at Mercator Advisory Group, in an August post to the Mercator blog. “Their reward programs will dry up, just as they did with debit cards.”
Here’s what’s behind the measure and what it could mean for your wallet if it passes.
Merchants push for lower fees
Credit card rewards are funded, at least in part, by fees that merchants pay. When you use a credit card to make a purchase, the retailer is charged somewhere around 1% to 3% of the transaction amount in order to accept your payment and have it processed securely. It’s called interchange, aka a “swipe fee,” and it’s set by the payment network that the credit card runs on — often Visa or Mastercard.
Portions of that fee go 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 sore subject for many merchants — especially small-business owners — who call them burdensome, expensive and restrictive. As of now, 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 and American Express transactions.
But the Credit Card Competition Act of 2022 would require that banks of a certain size give merchants more choice when it comes to which payment network can be used for processing transactions involving their cards. They'd have to allow merchants a choice of more than one network — and per the bill, those networks cannot be "affiliated" with each other, nor can they be only "the two networks with the largest market share of credit cards issued" (which means Visa and Mastercard, which combine for more than 80% market share).
The measure’s sponsors — including U.S. Sen. Dick Durbin, D-Ill. — argue that competition is necessary and will benefit consumers.
“Credit card swipe fees inflate the prices that 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.”
Supporters say that if merchants have more choice in payment networks, they’ll presumably choose one with lower fees, and those savings on interchange will filter down to customers in the form of lower prices. Opponents say lower interchange fees may mean less money for funding credit card rewards programs.
No guarantee that savings will be passed on
If it passes, it's far from certain that this measure would lower prices.
More than 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 supporters made the same argument: Because merchants could save on fees, they’d pass along those savings to customers.
The results, though, are debatable. Multiple studies conducted in the years since the Durbin amendment became law have concluded that it didn’t have much, if any, effect on retail prices. In fact, a 2015 economic brief published by the Federal Reserve Bank of Richmond included survey results estimating that more than 21% of merchants actually increased their prices after the rule went into effect.
And banks found ways to recoup some of what they lost in debit card fees — an estimated $14 billion, according to the Federal Reserve — by raising fees on checking accounts. A 2017 report from Federal Reserve economists found that banks subject to the Durbin amendment were 35.2% less likely to offer free checking accounts and, on average, hiked monthly fees on both interest and noninterest checking accounts (17% for the former; 20% for the latter). The report also found that the average minimum balance requirement to avoid monthly fees rose by at least 50%.
Meanwhile, debit card rewards programs all but disappeared as the swipe fees that had funded them declined. Opponents of the legislation say history is poised to repeat itself.
How credit card rewards look in other countries
Britain offers a glimpse at where credit card rewards might be headed if interchange is sharply curtailed in the U.S.
U.K. interchange fees have been capped for years at much lower rates — and credit card rewards, too, tend to be lower than in the United States. Common ongoing rewards rates on U.K. cards range between 0.5% to 1%; for anything above that, you might expect to pay an annual fee.
Australia also reduced interchange fees years ago, and according to a 2012 report from the Reserve Bank of Australia, the result was much the same: “Overall, reward points and other benefits earned from spending on credit cards have become less generous while annual fees to cardholders have increased.”
The Credit Card Competition Act of 2022 was for a time filed as an amendment to the National Defense Authorization Act, which funds military programs and is what many lawmakers view as must-pass legislation. Durbin and co-sponsor U.S. Sen. Roger Marshall, R-Kan., were attempting to tie the Competition Act to surcharges that stores on military bases imposed on credit card users.
But as of Oct. 12, 2022, the measure failed to make the bill. And at this point, it’s unclear when or whether a vote will come up on the Credit Card Competition Act, as industry groups have lined up against it.
“The adverse effects of this bill [include] the disappearance of card rewards programs that families of all income levels use to stretch their budgets,” according to a joint statement issued in September 2022 from multiple banking and trade groups, including the American Bankers Association and the Electronic Payments Coalition.
If it does pass, here are some things to note as a consumer:
It might not spell an end to credit card rewards entirely. 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 scaled-back perks packaged in a different way. Issuers with an eye on 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 charges a credit card "processing fee" of 2%, but your rewards card is now earning just 1% back, you may be better off reaching for your debit card.
Routinely evaluate what's in your wallet. Regardless of what Washington does, you don't need to stand pat if your current credit card no longer works for you. Your issuer might 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 little more.