Are Your Credit Card Rewards Worth the Cost?

How much do you like the rewards you get from your credit cards? Are they worth any additional costs to your purchases? These are questions to consider as the Credit Card Competition Act is reintroduced to Congress, after failing to pass in 2022. The Credit Card Competition Act would require banks of a certain size to give merchants more choices when it comes to which payment network can be used for processing credit card transactions. If passed into law, this bill could result in reduced benefits for credit card rewards programs.

Visa and MasterCard are the two largest debit and credit card transaction processing networks, distantly followed by others like American Express. Together, they control around 80 to 90% of the card transactions not only in the United States, but also around the world. Therefore, card issuing companies such as Chase, Bank of America and Capital One often defer to one or the other issuer, allowing Visa and Mastercard to set fee levels without competition. One of these fees, so-called “swipe fees” paid by merchants, partially fund credit card reward programs. They also incentivize people to keep swiping those cards. The bill would require larger banks to offer more than one credit card issuer, and at least one that is not Visa or Mastercard. If the Credit Card Competition Act passes, banks might have less money available for their credit card reward programs.

Proponents of this legislation argue that credit card swipe fees inflate prices to consumers and competition is necessary to provide merchants better choices and potentially lower prices. In reality “swipe fees” not only fund credit card reward programs, but they also exist to pay for the complex electronic payment system that supports roughly 50 billion credit card payments in the U.S. each year.¹ Major proponents of this measure are merchants themselves, especially big retailers such as Target and Walmart.

Opponents, on the other hand, say that the lowering of “swipe fees” would not necessarily help the end consumer, as retailers may be tempted to keep the benefit instead. As an example, the Dodd-Frank bill that passed in 2010 contained a provision known as the Durbin Amendment which regulated the amount charged for debit card transactions. This provision resulted in banks no longer offering perks attached to their debit cards and resulted in the decline in free checking account offerings across the country.²

Credit card reward programs for points and perks have become very popular with American households. Consumers enjoy the direct benefit from the different perks and loyalty programs that reward their consumption. Credit card reward programs have also helped improve some companies’ bottom line results by selling their loyalty program currency such as points, miles, etc. to a credit card company. Take the airline industry as an example; airline companies like American, United and Delta would sell their frequent flyer miles to banks such as Citi, Chase and American Express respectively. This partnership has helped them stay away from red ink and even post a profit.³ In the case of the airlines, the proceeds from selling mile points to banks have also helped them stay competitive and to keep airline ticket prices low.

Regardless of how legislation like the Credit Card Competition Act plays out in reality, it is always good to know how credit card fees impact both retailers and consumers. Contact your member of congress if you want to voice your opinion. 

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SOURCES

¹ CapitalOne Shopping https://tinyurl.com/39afmj4p
² University of Pennsylvania Penn Carey Law https://tinyurl.com/3n83eebe
³ Forbes.com https://tinyurl.com/bp7398cz

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