As a Senator, Joe Biden represented Delaware and his most important constituents were big banks. However when he became Vice President, the Obama administration was supportive of limiting credit card interchange rates (the swipe fees charged to merchants) and Biden was supportive. Democrats generally have been supportive of legislation that would limit how much credit card companies could charge to process transactions.
- We saw what happened to rewards debit cards when the Durbin Amendment to Dodd Frank eliminated the profits from debit cards. Rewards debit cards disappeared.
- When a bank makes less money on a transaction, they’re going to spend less to incentivize that transaction.
- Interchange limits reduce the value of credit card rewards.
The 2016 election took any limits on interchange fees imposed at the federal level off the table. The 2020 election could reverse the political dynamic.
Frequent Flyer Programs Would Stop Being Cash Cows For Airlines
Airlines have raised substantial sums on the basis of their loyalty programs, from the $5.5 billion American Airlines pledged the AAdvantage program against with the U.S. Treasury to the $9 billion Delta raised in private markets backed by SkyMiles.
These programs are so lucrative because of the money banks pay airlines for frequent flyer miles to reward to customers. If that revenue dries up, because it no longer makes sense to spend so much on miles, the likelihood of paying back those loans drops. Airlines could literally lose ownership of their frequent flyer programs to creditors.
Put it this way: if a merchant pays 2 cents for every dollar charged, the bank has costs to process the payment, and they might spend a penny for a frequent flyer mile. The rest is profit, and they hope to make money on APR (interest cates charged to customers who don’t pay off their cards in full).
But if all of a sudden merchants are only paying 1 cent per dollar charged, banks can no longer pay airlines 1 cent out of each dollar.
The run up in prices charged by airlines for co-brand deals is a relatively recent phenomenon while co-brand deals themselves are now ~ 34 years old. Legislation could reverse the trend.
We Have A Model For What Happens To Rewards Cards When Government Regulates Interchange
Europe and Australia have regulated interchange rates, and their credit card rewards programs are much less lucrative.
In 2002 Reserve Bank of Australia introduced new credit card processing rules that went into effect a year later.
- capping interchange fees on four party card networks (i.e. Visa and MasterCard)
- merchants were allowed to pass these fees on to consumers
The goal was to get consumers to use cards less by reducing rewards incentives. Unsurprisingly, here’s what happened.
- Interchange fell by 50% – and the return on spending through rewards fell by one-third.
- Rewards card annual fees went up – and the effect was most pronounced for premium rewards cards.
- Consumers shifted their spend to debit cards.
- And they shifted towards American Express, which wasn’t initially covered by these rules. Some Visa and Mastercard rewards card issuers even offered a ‘companion’ American Express customers could use and generate greater rewards.
Issuers in Australia capped the awards that could be earned by consumers. Instead of creating incentives to use the rewards card more to achieve specific additional benefits, Australian credit card issuers began to incentivize rewards card holders to switch cards once they reached the cap. In that way, they generated more annual fees.
Interchange isn’t likely going to go to near zero in any new legislation (the way it did with debit). Instead we’re likely to see lower volume of charges, lower margins, and so lower rewards.
Consider The Logic, Not The Politics
I’m criticized regularly in the comments for my negative outlook on the President of the United States. Anyone who reads this site regularly knows I haven’t been an enthusiastic supporter. So don’t take this as a political post, that I’m somehow carrying water for Donald Trump against Joe Biden. I’m not even telling you this should influence your vote.
Instead I think it’s important to understand the forces at work that will influence how rich rewards programs are, or whether they become less lucrative, in the coming years. And as we’ve seen around the world, limiting credit card interchange rates reduces the value of programs.