Why Dick Durbin’s Stupid Bill To Limit Credit Card Interchange Might Not Kill Rewards Cards, After All

The ‘Credit Card Competition Act’ from Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) would impose price caps on interchange fees charged to merchants for accepting credit cards. They are trying to attach it to a defense appropriations bill, using the argument that veterans use credit cards and some merchants charge fees to do so. Since the defense bill is expected to be ‘must pass’ it’s a legislative strategy to try to sneak this corporate welfare for retailers in by the back door.

It is a bad bill, and I still don’t expect it to pass. The Points Guy says it is “set to move through Congress” but that’s simply not true. They note that debate on the defense appropriations act begins this coming week, but that’s only with a small group of Senators. The focus has switched to campaigning.

It’s an election year, and firing the starting gun on interchange was a great way to raise campaign cash from lobbyists for both banks and big retailers. The defense bill won’t come up until after the midterms, and if this language makes it into the Senate version – a big ‘if’, neither Durbin nor Marshall are on the Armed Services Committee even – it’s likely to need to be reconciled against the House bill. That puts it in the hands of leadership as they craft a package that can gain passage in both chambers of Congress.

Two key points about the bill,

  • Corporate welfare for retailers. Merchants benefit from taking credit cards. Credit cards are less expensive to process than cash (staff make incorrect change and pocket cash for themselves, large cash transactions can drive up insurance rats) and credit card customers spend more. Large merchants want lower costs, and want government to do the work for them.

  • Doesn’t benefit consumers. When the Durbin amendment limited interchange for debit cards prices did not fall according to research from the Federal Reserve. When Australia capped credit card interchange, prices did not fall. In fact the government of Australia allowed merchants to charge customers the cost of interchange. Prices rose, and the government had to step in to limit how much merchants imposed for these new costs because they were gouging customers.

There is, however, a path where credit card rewards survive this legislation if it’s passed. They’ll just look different. The key is that financial institutions with less than $100 billion are generally exempt from its requirements.

  • Generally banks generate revenue from merchant swipe fees (interchange) and revolve (APR). The better rewards cards are rebating nearly all (or sometimes more than all) of interchange to the consumer, hoping to acquire and service consumer debt. The consumer that does not borrow on their credit card comes out ahead.

  • Chase has about $2.7 trillion in assets. Citibank has about $1.7 trillion. They’ll no longer make (much) money off of interchange and won’t invest in rewards in the same way to encourage transactions.

  • That’s bad for bank proprietary programs like Ultimate Rewards and Membership Rewards. It doesn’t have to be the end of co-brands.

  • Co-brand credit cards can still be issued by those with under $100 billion in assets. That works for a small brand, but a $100 billion asset issuer can’t swallow the transaction volume of a big airline cobrand (with over $100 million per year in annual charge volume).

  • However there are already multiple issuers for some brands like American Airlines and Marriott. Creative lawyers should be able to put together consortiums of issuers, all under $100 billion in assets apiece, to stitch together a large co-brand portfolio.

  • That’s still bad for consumers because co-brands face competition today from bank programs. Without that they could be less generous, since they’d no longer need to compete.

Less interchange means a higher cost of credit. Consumers will have to fund more of credit themselves. That’s what happened in Australia, annual fees for rewards cards went up.

But the loopholes by design in the bill, meant to benefit small financial institutions and build a coalition to favor using government to do the bidding of large retailers, creates some potentially interesting outcomes that may not be as simple as ‘the end of rewards cards.’ It will maim, but perhaps not kill, credit card rewards.

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 InsideFlyer.com, 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. @ Gary — So, why exactly do you not expect this to pass? You say you don’t expect it, but you spill alot of virtual ink explaining what will happen when it does. You don’t seem convinced that the bill won’t pass.

  2. If it’s true that transferable points programs will no longer financial make sense to the big banks, then selling those points by the airlines to those big banks will neither. As the big banks won’t buy them.
    That in turn means that the main revenue stream for airlines would go the way of the Dodo, and THAT means the airlines will collapse EN MASSE, as NONE of the airlines make any money on flying alone.

  3. Sponsors of co-branded cards might view points associated with their respective loyalty programs as a cost of doing business. We might see something like 3X on charges on airline/hotel purchases and 1X on all other charges. We see such lackluster earn rates on a number of such cards already.

    Also, revenues from card issuer travel portals come from commissions and not interchange fees. As such, card issuers might still offer higher earning rates on bookings made via their travel portals.
    Other than that, expect cards to fall to 1X.

    The Amex Platinum and Business Platinum are essentially already there. 5X when booking airfare and hotels via its portal. Their lounge access and coupon books justify the annual fees. The Chase Sapphire Reserve will certainly need an overhaul. As for other cards, all issuers will likely need to thin out their herds.

  4. Agree it isn’t a good bill for airline/hotel points and transferable miles (or things like travel insurance included w cards) as they will go away or be greatly reduced. Also won’t lower cost for consumers. However I do expect it to pass since it is basically piggy backing a bill that will become law.

    If so it will gut the credit card industry (and eliminate many bloggers). Personally I would keep my Anex Platinum card (lounges and “coupon book” discounts would likely survive) but would cancel the vast majority of my cards and just use the points I have.

    Things change and this could easily be the death blow for the points/miles game as we know it. No use arguing why that is bad and r bemoaning the fact as politics will prevail and things will change whether anyone likes it or not

  5. @Gary: ” Credit cards are less expensive to process than cash (staff make incorrect change and pocket cash for themselves, large cash transactions can drive up insurance rats) ”

    Obviously false when we see discounts for cash — not cards, and retailers the world over limit/refuse their involvement with cards, not cash.

    You need to look at the facts.

  6. As a retailer (travel industry) with a margin of 10-12% (operating margin, not profit), a 1% fee was acceptable.

    However, as rewards became increasingly generous the costs were passed on, and the highest transaction fee (premium, corporate, non-US) card – actually a significant portion of our business – reached 4.9% (or nearly 50% of our income stream) we demurred.

    Lavish rewards are paid for by the merchant, not the bank.

  7. @Max Johnson: Why did you (the top 100 merchants) not set up your own card, or buy Discover when it was for sale and accept only that? That would have solved this problem for good.

  8. Why call out Durbin in the headline but not Marshall, since they are both top line co-signers of the bill?

  9. @ L3 — I think this is highly dependent on the retailer’s size. A small business is probably hurt more by the fees than a big one. For example, a Mom and Pop store can run their own register and handle their own cash, so the processing fees eat directly into their bottom line.

  10. @Max Johnson – Stripe charges a flat rate of 2.9%+35c, Square is 2.6% + 10¢ etc. Not sure why you were paying 4.9%

    @L3 – cash is more expensive to process, particularly for any retailer with more than a couple of stores (especially as larger retailers have interchange fees usually below 2% and some below 1.5%). Theft, cash management (POS collection, aggregation, pickup etc) and loss prevention processes and staff all add overhead.

  11. @khatl: Obviously wrong. Look at the examples I cited and explain them ( don’t just contradict the original point like a 5-year old in the school playground).

  12. As a resident of the People’s Republic of Illinois, I apologize for those in this state that keep electing Durbin. This isn’t his first rodeo attacking credit and debit cards.

  13. Booby J, because Gary wants to inflame a certain reader base.

    I’m surprised one commenter has not already posted his trite, repetitious note: Another failure of the Biden regime.

  14. Sorry . . . Bobby J. I apologize. Typing too fast. Didn’t proofread.

    The thing that everyone is talking about is the interchange rate and points earn rate. The thing that no one is talking about is a likely return of foreign transaction fees. In Europe’s restricted interchange fee environment, no foreign transaction fee cards are few and far between. If we’re talking 1X and FTF, we’re talking about losing money.

    That light at the end of the tunnel ain’t the end of the tunnel. It’s a train comin’ the other way.

  15. Understand that the discussions of fees paid, benefits of cards vs cash and how this could wipe out points/miles programs doesn’t matter. I agree this isn’t going to help most customers (merchants will keep any savings) and will hurt many that use points or miles (plus raise travel costs since airlines can’t count on credit card revenue as much). However this is a political issue and with the view of this administration and both houses of Congress Dem (understand a GOO Senator co-sponsored the bill) this will almost certainly become law (especially since rising on as large, routine bill).

    Accept that, see what changes are made and adapt. That is all you can do. All the arguing and hand wringing won’t change the fact this will likely happen

  16. We wonder why North Koreans act differently and may conclude they are brainwashed. We wonder why the Germans did what they did under Hitler. We are guilty of the same. We get rewards from credit cards (or these blogs are partly supported by credit card signups) then fail to see what is really going on.

    The reward cards are rewards, cash back, or miles come out of the skin of merchants, particularly small businesses. It is false to say that people buy more. Do you buy more gas and purposely pump the fuel on the concrete when your tank is full? If you have a co-pay at the doctor’s office, do you voluntarily pay $30 more just because you have a credit card and want to spend more? No!

    Credit card fees hurt merchants and are, if possible, passed along to you and me. Some small businesses really get hit with swipe fees, commission, added commissions, settlement fees, monthly fees, etc.

    I do agree with Gary Leff on one thing. Adding it to a defense bill is dishonest. Each thing should stand on its own. Earlier, politicians tried to do that with Build Back Better, a huge spending bill with good and bad stuffed in.

    In Canada, they just allowed merchants to pass along fees to consumers. Merchants cannot make a profit but must charge only the fees they are charged. Quebec is exempted. See https://www.cbc.ca/news/business/credit-card-surcharge-shop-1.6606997

  17. As usual the government will always make things worse. Less freedom is always bad. Consumers will be worse off. The average household will lose $500-$1000 in rewards earned every year while prices won’t drop for goods or services. We’re at a point where cash use won’t revert so big chains will benefit the most at the expense of consumers. Small businesses already price their products or services for credit card use or charge a 3-4% credit card fee. Prices won’t drop at these small businesses either.

    The big banks will have an opportunity to spin off their credit card divisions into new companies and benefit from increased capital to distribute to shareholders, invest in other areas like corporate/market operations, or shore up capital requirements. People think credit cards are cash cows for banks but they are not. Amex is an example of this with a high PE ratio as they are a credit card centric business. The big banks make more money for a given amount of capital in other areas whether it’s investment banking or market operations. They could consider getting out of credit cards. I don’t think they will because their consumer banking divisions make money by using credit cards to sell other loan, deposit, and brokerage products to consumers. They can sell or,spin-off their credit card portfolios and keep a segment where it can make the most money. That might be like with what BofA does with the 2.62% for keeping money at Merrill Edge. Whatever the case, consumers don’t benefit.

  18. As another resident of PRI, Durbin is a prime example of why we need age limits, if not term limits.

  19. Sooner or later someone – most likely banks themselves – will figure out how to process payments cheaper and cut the “middle man” who feeds on cc business.

  20. @John dogas – all true and I don’t like it either but to put our heads in the sand and deny this will likely happen given the political environment today isn’t smart. It likely will be implemented and the facts you stated will almost certainly occur.

  21. @Kuloko – already happening. Zelle is a bank owned attempt to disrupt the process and Chase is making a major push with a separate approach (even though they are a stakeholder in Zelle). Jamie Diamond even instructed this credit card division to play ball and support this initiative or he will fire anyone that blocks it. In 10 years direct payment, like in many Scandinavian countries, will likely be the norm and credit cards will be for people that don’t have sufficient bank accounts to handle those payments (at a very high interest rate). The US is behind in this movement but we will likely catch up quickly. Standard credit card use will likely go the way of paper checks as a primary payment method.

  22. No credit cards are going to work after nuclear hell happens. So why worry?
    I wonder if you can use Aeroflot miles from Moscow to Pyongyang?

  23. So Synchrony can keep its Verizon visa rewards intact since their valuation is about 95B, but Discover can’t (~115B)? What an idiocy. Banks will sue.

  24. For the record: the reason Dick Durbin gets the flak here and other Dems is they are the ones pushing this. They’ve talked about this for over ten years. They push for more regulation and government mandates when it comes to credit card interchange fees and networks.

    Some rinos of course may cosponsor a bill or even support it but they are not the ones ferociously pushing for it.

    Airlines and the unions of employees should really be lobbying against this bill as the big airlines stay profitable from credit cards. Banks under 100 Billion in Assets probably aren’t able to purchase miles in bulk like the big banks. Even if the airlines go with the smaller banks for their credit cards, it might not allow them to thrive like they do now.

  25. @khatl many “high risk” businesses like travel businesses are not allowed to you stripe or paypal and must pay higher fees.

  26. Cash: if the hired help doesn’t pocket it, the small businessman. can cheat the taxman.
    Will it pass: Biden from Delaware was a creature of the banks/credit card industry, i.e. BK “reform”

  27. > Consumers will have to fund more of credit themselves. That’s what happened in Australia, annual fees for rewards cards went up.

    So what’s wrong with people paying for the services they use? You’re defending the current socialist way of spreading the cost to people who don’t benefit?

  28. Gary,

    I love this website and I am an avid reader.

    I understand that this bill would ultimately hurt your business a lot. Still, it would definitely be beneficial to consumers. I work in Payments in Europe and there was clearly a benefit for merchants that could lower payment costs and ultimately consumer prices.

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