Legislation Takes Aim At Credit Card Fees & Rewards

The Wall Street Journal reports on some upcoming legislation that could cap credit card fees, which in turn could destroy credit card rewards in the United States as we know them.

Senate bill could change credit card industry

Over the years we’ve seen quite a few politicians talk about capping credit card fees, as a way of making it seem like they’re looking out for small businesses and consumers. Typically nothing comes of this, though we’re seeing the latest such proposal now.

Senators Dick Durbin (a Democrat from Illinois) and Roger Marshall (a Republican from Kansas) are preparing to introduce a bill that would allow merchants the ability to process Visa and Mastercard transactions over different networks.

This bill would mandate that merchants can route payments through an unaffiliated network, and this would apply to Visa or Mastercard credit cards issued by banks with more than $100 billion in assets. In other words, Visa and Mastercard would no longer have the same power when it comes to merchant fees.

The United States has among the highest merchant fees of any industrialized country in the world. It’s claimed that these fees amount to an average of 2.22% of transaction amounts, making swipe fees the highest operating costs for some merchants after labor. The argument is also made that these fees drive up consumer prices by more than $900 per year for the average American family. I think all of these claims are a bit extreme, but we’ll cover those later.

Now, I’d be surprised if this gets the votes needed to pass, though it is something that always seems to be discussed.

New legislation could greatly cap credit card merchant fees

This would have far-reaching impacts

If legislation like this were to pass, it wouldn’t just impact banks and payment networks. It would also impact all kinds of other industries.

Just take a look at the airline industry, for example. Major US airlines make more in profits from their co-brand credit card agreements than they do from actually flying passengers. Heck, during the pandemic we saw major airlines leverage their frequent flyer programs to secure financing, as they’re so valuable exactly because of these co-brand credit card agreements.

The US airline industry would look totally different if these caps were to be put into place. Delta employees? Your profit sharing check would look a lot smaller. American employees? Well… I mean, do I even need to say?

That’s just the tip of the iceberg…

This would not be good news for airlines

The flip-side of high credit card merchant fees

When we see legislation like this proposed, we often see a couple of narratives that I think are pretty disingenuous:

  • It’s claimed that the current credit card merchant fees are terrible for businesses, especially small
  • It’s claimed that the current system causes poorer consumers (often those without credit cards) to subsidize purchases for richer consumers (often those with credit cards)

I think that’s a very narrow view of the credit card industry, and the overall benefit it brings to both businesses and consumers.

In terms of benefits for businesses:

  • For better or worse, people spend more when paying by credit card than when paying by cash
  • Yes, merchant fees are a significant expense for small businesses, but the cost of handling cash is also expensive, in terms of loss, theft, banking, etc.
  • Big businesses often save significant money with credit cards, as they’re able to get lucrative co-brand credit card agreements that bring their fees pretty close to zero

In terms of benefits for consumers:

  • Obviously credit cards can be extremely rewarding, and savvy consumers can recoup significantly more than the alleged price increases from accepting credit cards
  • Purchase and fraud protection is an awesome benefit that you don’t get when paying with cash, and typically won’t get when paying by debit card
  • Credit cards offer all kinds of other valuable perks, from rental car coverage, to travel protection, to cell phone protection

The argument that costs are driven up by over $900 per year for the average American family seems to be based on an alternate reality where consumers make exactly the same purchases and businesses have no costs associated with collecting cash. It assumes consumers never benefit from credit cards, whether it be from purchase protection, or rewards, or whatever else.

This would be bad news for credit card perks

Bottom line

We’re about to see legislation that would ultimately result in credit card merchant fees being significantly capped. If this were to pass and be fully implemented (which seems unlikely, but who knows), credit cards would look a whole lot like debit cards, in terms of benefits and fees.

Say goodbye to credit card rewards, and say goodbye to credit card protection and other benefits. Businesses can look forward to consumers spending less, and to have increased costs associated with other forms of payment.

That doesn’t even begin to address the impact this would have on so many other industries, in particular the travel industry.

What do you make of this proposed credit card legislation?

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