Credit Card Deal Could Shake Up Rewards

An agreement reached in a 20-year dispute between credit card issuers and merchants may soon change the way consumers earn loyalty points when using their credit cards. This development, which was first reported by the Wall Street Journal and is pending approval by the Eastern District Court of New York, originated from a lawsuit filed in 2005 by a group of merchants who objected to the stringent requirements imposed on them by payment networks such as Visa and Mastercard.

Payment networks typically charge merchants a fee for processing transactions, a portion of which is then paid to the banks that issue the credit cards. The amount a merchant pays per transaction varies based on factors such as the transaction type (e.g., in-person vs. online) and the type of card used. On average, these fees range from 1% to 3%. The disagreement between merchants and networks primarily revolves around the impact of generous cardholder perks on the fees paid by merchants.

The popularity of rewards cards has surged since the restructuring of the credit card industry in the aftermath of the Great Recession. According to the Consumer Financial Protection Bureau, more than 90% of credit card spending has been on rewards cards since 2019, up from 82% in 2007. As a result, the cost for retailers to process these transactions has significantly increased.

The new agreement between credit card issuers and merchants aims to reduce the fees paid by merchants over several years, with an average decrease of about 0.1 percentage point. While this may seem like a modest reduction, it could translate to substantial savings for major retail chains that handle significant transaction volumes. In 2023 alone, banks issuing Visa and Mastercard credit cards earned a combined $72 billion in interchange fees.

One of the key changes introduced by the agreement is the provision allowing retailers to selectively accept certain cards while rejecting others. This marks a departure from the previous all-or-nothing approach mandated by payment networks, where retailers had to accept all cards within a network if they accepted any. Additionally, retailers will have more flexibility to impose surcharges on customers using specific credit cards, a practice already adopted by some small businesses and organizations.

Legislation such as the bipartisan Credit Card Competition Act, introduced in 2022, could further disrupt the credit card landscape by eliminating the requirement for transactions to be processed exclusively through a specific network based on the card used. Both the new agreement and proposed legislation aim to empower merchants with greater control over credit card acceptance and processing, potentially impacting banks’ earnings from swipe fees and complicating the payment experience for consumers at the checkout counter. As retailers and credit card networks negotiate new agreements on swipe fees, consumers may start to wonder how these changes will impact their shopping experiences. Consumer finance expert Andrea Woroch suggests that more stores may begin to restrict the use of certain cards in order to control costs. However, she also predicts that retailers may take a different approach by offering incentives to customers who use preferred cards, such as providing extra discounts for using a co-branded card.

While retailers may be looking to save money on interchange fees, they also have to be careful not to alienate customers or drive them to competitors. Credit expert John Ulzheimer believes that most customers may not even notice any changes as merchants strive to maintain positive shopping experiences.

One potential outcome of these negotiations is that credit card rewards programs could become less generous. Since banks use a portion of interchange fees to fund rewards, they may scale back on perks like airport lounge access or adjust reward structures. Woroch acknowledges this possibility, but Ulzheimer suggests that banks may be hesitant to make significant changes that could upset cardholders.

In the past, regulatory changes to debit card transaction fees led to banks introducing monthly fees for debit card use. However, public backlash and a shift towards credit unions prompted banks to backtrack on these fees. While banks may find other ways to offset lost revenue, consumers may have to pay closer attention to changes in fees or rewards programs.

Ultimately, the impact of swipe fee rule changes on consumers may not be immediately apparent, as banks and retailers may find subtle ways to make up for lost profits. Despite potential adjustments to rewards programs or fees, customers may need to stay vigilant to spot any changes that could affect their credit card usage. As Ulzheimer notes, banks have a range of options to generate revenue, and consumers may need to stay informed to protect their financial interests.