Senate Bill Would Kill Credit Card Rewards By Limiting Merchant Swipe Fees

Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) are expected to introduce a bill to limit credit card interchange fees. If enacted it would be a huge win for merchants, who love taking credit cards – since it means higher sales volumes at a lower cost than accepting cash – but would prefer not to pay for the privileges.

This is usually couched, by lobbyists for big retailers, as benefiting consumers. However prices haven’t fallen anywhere that interchange has been limited, such as in Europe and Australia. In fact, in Australia the government followed up price caps on interchange with price caps on the credit card acceptance fees that merchants could charge to consumers, because those pushed prices up.

This would effectively eliminate credit card rewards as we know it. Credit cards aren’t nearly the source of perks and points in Europe, where interchange is capped, as they are in the U.S. But it has zero chance of passing at this time,

  1. This is a mid-term election year. Controversial legislation isn’t moving.

  2. It won’t have Republican support to reach 60 votes in the Senate, and can’t be passed through reconciliation.

  3. While it has a House sponsor in Representative Peter Welch (D-VT), Democrats are likely to lose the House this fall.

  4. President Biden was Senator from Delaware, representing banks and card issuers. This isn’t going to be high on the President’s agenda.

Dick Durbin previously stuck a provision into the Dodd Frank financial reform act 12 years ago that effectively made profiting from debit card transactions illegal, capping debit interchange at 21 cents plus 1/20th of one percent of each transaction. The result was that offering free checking accounts were no longer profitable for many banks (since they no longer generated fees for debit payments from those accounts). This made bank accounts more expensive for many and increased the number of unbanked.

Ultimately credit card processing fees are likely to fall.

  • Big merchants have been negotiating lower fees. Amazon just reached a new, less costly deal with Visa. Costco pays next to nothing for credit card processing in a Visa deal.

  • New technology will drive down cost. So far blockchain technology is more expensive to process transactions, but to the extent that credit card networks earn outsized profits for the service they provide, and technology costs fall, new players will compete down the cost of interchange.

Lower margins processing transactions means it’ll make sense to spend less incentivizing transactions through the channel, and thus make sense to offer fewer or less lucrative rewards. Debit card rewards – where debit transactions are subject to Durbin amendment caps – are almost non-existent. Some financial institutions, though, have found ways to circumvent debit interchange limits.

Incidentally, it would mean the end to outsized profitability for frequent flyer programs – and the ability for airlines to mortgage those frequent flyer programs for tens of billions of dollars. The value of outstanding loyalty program debt at American, Delta and United would plummet. Delta’s CEO says the federal government has shown it will always be there to subsidized airlines when needed. Eliminating the most valuable asset owned by large airlines creates the much more likely condition for future taxpayer bailouts.

It’s important to note that:

  • Merchants benefit from credit cards. People who spend with card spend more, and the cost of processing credit cards is far cheaper than cash because employees pocket cash, they make incorrect change, having large amounts of cash drives up insurance costs and it attracts outside theft.

  • Consumers don’t benefit from interchange caps. Where caps have been implemented prices haven’t fallen. They didn’t fall in Europe and Australia, and they didn’t fall in the U.S. after rates on debit transactions were capped. But consumers benefit, not just from rewards, but from the protections offered by credit cards including fraud protections, and on cards offering these benefits from price protection, extended warranty, and repair coverages. International experience suggests that capping interchange leads to higher fees on consumer cards in any case.

  • Rewards aren’t primarily for the rich, and don’t come at the expense of the poor. The idea that the ‘rich’ and ‘poor’ are buying the same things at the same store (necessary for the claim that higher prices are the result of higher interchange on rewards cards) doesn’t reflect actual store and consumer experience. Studies suggest merchants aren’t passing all of interchange onto the consumer anyway, it’s a cost of their business. Lower-income consumers frequently have rewards cards! It’s credit score rather than income that correlates with rewards card usage, and wealthier consumers in the general population may pay less attention to the margins at which they can benefit from card rewards.

While this isn’t going to happen today, you don’t want to push the button on Dick Durbin’s pet cause tomorrow either.

(HT: @crucker)

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Good analysis. While I could quibble a bit around the edges, overall I think the points stand up well. This isn’t likely going anywhere, and shouldn’t.

  2. @Frank – Some people are in to schadenfreude. They better hope karma is not a bitch.

  3. This is political showmanship. Now any incumbent who comes out against this will have to defend themselves against being “pro corporate greed”. Either way, interchange fees are too big to fail at this point as stated in the post, too many companies are dependent on them for survival.

  4. Just think of the pointless chase of points, I’d say it is a good thing to Kill Credit Card Rewards. Just what value does manufactured spending add to the economy?

  5. Isn’t the argument that “the poor” subsidize “the rich” re: credit card points/miles because the former are more likely to carry balances and pay interest, thereby making cards more profitable for banks? To the extent swipe fees subsidize rewards programs, I’d have guessed rich folks running everything through their Amex Plat at 1x generate a higher volume of more profitable transactions than waitresses and janitors buying gas and bus fare on their Discover cards. But maybe I missed something.

  6. I respectfully disagree with you. I manage a small business and credit cards do not result in more sales. With a small volume, the fees are through the roof. I wish they were only 1, 2, or 3%. Some months, it’s 10%. During the early pandemic, it was even higher due to low volume.

    This shows that the rewards come out of the skin of the small business, not the credit card companies. They commit legal extortion, saying you have to accept all Visas or MasterCards, even those with high rewards. I am surprised that, instead of 2% cash back, they don’t give 10% cash back and then charge 15% commission to the merchant.

  7. This bill would be good for small business. But for big business it would just pad their profits. It won’t pass, and it won’t benefit the consumer, so why take it up?

  8. Well a lot depends on which lobbying group has the most influence with legislators. The idea sounds good on its surface but as is the case with most decisions there are unintended consequences.

  9. Eliminating credit card rewards (or greatly diminishing their value) might be a good thing for the economy. All the (millions?) of hours wasted by people thinking about how to maximize rewards, all the affiliate bloggers consuming unproductive luxury goods, all the smart guys like Gary who have spent so much time thinking about trivialities like credit cards rather than productive work… who knows??

  10. Never ceases to amaze me how stupid some of the comments. Corporate greed, etc. People at the end of the day, PEOPLE PAY ALL TAXES, not businesses. Sure a C corp might send the IRS a check, but all that does it draw from what could/would be paid to the stockholders. Hello, who is really paying the bill? And to comment about the economy is just money going out one’s hands to another in some form with IRS grabbing some as it goes by. Geez think!

  11. Merchant processing fees are basically a monopoly and should be regulated. The opacity of what a merchant is charged (which can vary on 100 different factors) is astounding and anti-competitive.

    While I am a big net beneficiary of cc rewards, it will be better for the economy if such a bill is passed.

  12. I know it’s in vogue to sh!t on Gary and his fellow bloggers although it always amazes me that these people still seem to need to read his blogs, The game has changed and it is much harder now, but thanks to Gary my wife and I have traveled the world in the front of the plane and stayed in some of the best hotels in the world. Tips on achieving top status often resulted in amazing upgrades. To me his work has been VERY productive and has enhanced my life tremendously. I worked hard at my profession. Thanks to Gary and his friends, I got to play hard to!

  13. @Roy
    If there were no credit cards and everyone had to carry large sums of money, there would be more muggings. Years ago when traveler’s checks were used in Europe, the employees at the local Amex store would/could tip off to their friends? who was carrying large sums.
    One quick phone call to your credit card carrier can stop a payment or fix a problem.
    As for productive work nowadays….it’s a joke! Everybody wants to work remotely…..I wonder why? LOL. TEAM
    Years ago managers stopped jerks who insisted on working alone by themselves in their cubicle.
    Also when the Biden adm. paid people to stay at home, guess what happened. People kinda liked that!! Old saying, when you feed pigeons……you get more pigeons. Duh!
    It made Biden look like Santa Claus…..except that he was using (not his money) but taxpayer money to look good. Same goes for paying off school loans. Heck yeah! Pay off my school loans and I can go P A R T Y.

  14. Interchange fees need to double or triple. That way we can get a 500,000 point sign up bonus.
    With 500, 000 Sky-Pesos we can get a one-way flight from Atlanta to Savana.

  15. Since Republican US Senator Marshall is fully on board with Democratic US Senator Durbin on this matter, I wouldn’t count on the chances of this facing an insurmountable filibuster in the US Senate.

    I’m curious where the Democratic US Senators from Delaware would be on this matter.

  16. Hey, learned a new word today–epicaricasy. Gary’s blog does serve a purpose. In all honesty, I am often in a state of epicaricasy for those that deserve it.

  17. @ Derek – of course credit cards increase sales – because of the ease to use them and the fact that I can’t impulse buy if I am not carrying sufficient cash. Your business is NOT required to take credit cards, so if you aren’t seeing the benefits, then stop taking them. See what happens to your sales once you do that.

  18. Curious how Gary is a libertarian until a bill is proposed that hurts his bread and butter affiliate links.

    Allowing merchants the ability to process Visa and Mastercard transactions over different networks is free market 101.

  19. @James S

    Free market is not government setting interchange fees or regulating in any way. Free market is letting business owners enter into voluntary contracts with credit card network. Free market is letting people build their own credit card or crypto networks for setting payments with onerous restrictions like the govt. place on regular people and businesses while the select globalist few get all the venture capital funding.

  20. Merchants will pocket most of the savings while consumers won’t gain much of anything. Unfortunately.

  21. About time.

    And yes, the poor subsidizing the rich is a real thing: at my no-brand gas station the price is the same whether one pays cash (as the cleaning lady does) or by using a cash-back credit card (which wealthy people use).

  22. @Jackson Waterson

    The bill is 100% free market. It does not set rates.

    “When a consumer pays with a credit card that has Visa or Mastercard listed on it, merchants generally have to route the payment through that network. The bill would mandate that merchants in many cases have the right to route payments through an unaffiliated network. This would apply on Visa or Mastercard credit cards that are issued by banks with more than $100 billion in assets. The Merchants Payments Coalition, which represents merchant trade groups and lobbied for the bill, says merchants should have the choice to send credit-card payments over networks that set lower fees. Visa and Mastercard handled roughly 77% of all general-purpose credit-card spending last year that occurred on cards issued in the U.S., according to the Nilson Report, a trade publication.”

  23. Anyone who still insists that “Democrats are likely to lose the House this fall” hasn’t been paying attention for the past two months.

  24. Always the same BS about Europe! In Europe, merchant fees have NEVER been included in the cash price before the change in legislation! I’ve told you that half a dozen times, Gary! How are cash prices supposed to go down when a fee is reduced that you NEVER had to pay when using cash?

    You can’t compare the two systems! It was a great blessing for Europeans when those fees were capped!

  25. Governments will allow what ever it takes to support a cashless society . . . points are merely the crumbs off the whole loaf.

  26. Anyone who thinks things have changed in the past two months and the Democrats won’t lose the House this fall has obviously been buying the propaganda from MSNBC and CNN. Brandon is less popular than the Orange Man was, inflation is north of 9%, interest rates are rising, and gas is still over $4/gal. As James Carville noted 30 years ago, “It’s the economy, stupid.” Democrats have about a five vote margin in the House, Biden looks and sounds worse every day, and Trump is not on the ballot. None of that is going to change by November.

    The only thing stopping this from being a 50 seat swing is there’s a maximum theoretical limit to Republican seats of about 245-250 due to the way seats are drawn, although the long-term Hispanic drift toward the Republicans could alter that a bit. So expect a 25-35 seat shift.

  27. @ Gary

    My comments relate specifically to Australia in response to your claims:

    “However prices haven’t fallen anywhere that interchange has been limited, such as in Europe and Australia. In fact, in Australia the government followed up price caps on interchange with price caps on the credit card acceptance fees that merchants could charge to consumers, because those pushed prices up.

    This would effectively eliminate credit card rewards as we know it.”

    I refer you to this summary paper from The Reserve Bank of Australia (the entity responsible for regulating card payment fees):

    The NET impact (of the various steps taken in Australia) on merchant fees is that they have trended downwards (see Graph 1).

    Now – a merchant has there choice whether or not to impose a surcharge in a consumer purchase to offset the cost of that transaction – however, they are banned from levying excessive surcharges (your refer to this cap), so limited to cost revery rather than profiteering:

    The rules applying to credit cards encouraged charge card issuers (Amex, Diners Club) to bow to competitive pressure and lower their merchant fees.

    The overall financial burden on the merchant is lower, thereby on the consumer lower.

    But, yes, there is less potential income for the card issuing company.

    So, yes, those high point earn credit cards have been affected. My Amex card returns about half net return based on primarily travel spend. My VISA Prestige has also lost its lustre – no more 5 pts per USD on overseas transactions, etc.

    BUT on the other hand, some sign up bonuses have ballooned to offset the lesser value proposition. My wife’s most recent Amex card attracted a 240,000 point sign up bonus (mapping to 120,000 airline points / miles and thus comparable to pre-regulated bonuses). Amex has sought to introduce more cash back bonuses, dining vouchers, etc., to help members secure value. I recently negotiated a “loyalty bonus” for my own card by threatening to walk.

    So, accepting we have had to adjust to the golden days or very easy card earn / burn the Australian loyalty universe hasn’t collapsed in line with your doomsday scenario.

    Credit card bonuses are still prominently in play, even if the earn / redeem net value has been compromised. You may have to satisfy yourself with a one or two point per dollar earn and that might mean cash back cards come more significant for everyday transactions.

    Meanwhile, new opportunities have presented themselves to Australian loyalty members as the local loyalty programs have evolved.

    Here are some examples:

    – QF FF members can concisely purchase wine with bonuses at the 60 points per USD mark.
    – Weekly groceries shops can consistently attract 15 points per USD (applying Flybuys / Coles / VA and Everyday Rewards / Woolworth / QF )
    – Periodic deals on gift vouchers can offer 15 to 30 points per USD (VA / QF): I upgraded my business Apple computers using such

    One-off deals present themselves, such as:

    – 20,000 QF points for putting USD275 into a new pension account (only to roll over that cash after 3 months into my established private pension account) at a cost (account fees) of about USD25, or earning 800 points per USD on the outlay to secure those points

    – New SIM card with 60,000 QF points after 3 months (thereafter option to cancel), thus USD275 outlay for data being used to stream Netflix, gaining 220 points per USD on cash I’d be spending anyway

    – New BP fuel (business) account securing 100,000 QF points on a USD700 fuel spend, or an earn rate of about 145 points per USD on cash I’d be spending anyway

    Those big point earns periodically present themselves to the astute loyalty member.

    Of course, the flexibility of generic cards is lost to some extent if the earn / burn rates are lowered.

    IMHO the bigger “threat” to the system is through the accelerating “fuel surcharges” we’re seeing.

    For example, QF FF points are now “junk” with respect to EK premium rewards. And to get value out of QF FF points on QR you need to know where to start your itinerary…;

    The game evolves…


  28. Gary, regarding: “Debit card rewards – where debit transactions are subject to Durbin amendment caps – are almost non-existent. Some financial institutions, though, have found ways to circumvent debit interchange limits.”. I have 2 kids in college; for paying tuition with a card, one of them charges credit/debit fees of 2.65% and 0.5%. The other charges the same 2.65% for both. I have argued with the latter that their debit fees are not consistent with other use of debit cards on line, and cited some resources. I know this may be lacking in detail for you, but do you think the debit card charges at this latter university are improper/illegal? Based on my investigations it seems they are clearly making profit.

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