Credit card rewards provide one of the greatest opportunities for people to enjoy extraordinary things, which they may have never been able to experience using cash. Points can also be a great democratizing equalizer in life, or even a lifeline.
A person who makes $50k a year, but earns credit card rewards efficiently can occasionally enjoy a first class flight worth $10k, or an out-of-sight five star hotel, by cleverly utilizing rewards points. Or maybe — just use them to buy a computer their family needs for school. On points, no problem!
Those rewards are largely funded by the circa 2% fee card issuers get from each transaction. In the free and competitive marketplace that currently is the US credit card market, virtually all of that fee gets reinvested directly into rewards and perks for cardholders, like you or me.
A bill dubiously called the “Credit Card Competition Act of 2023” is now making its way through the U.S. Senate, largely using false narratives and highly flawed data, hopes to change that — pretty much so that big box stores can save a few cents while processing your transactions. And no, those cents won’t be lowering prices for you anytime soon.
The last time a similar bill was passed, only 1% of US merchants lowered prices in any way. When in history has that old trick worked? Here’s everything you need to know about the proposal, and how it would do a lot more harm than good for consumers.
Conflating Cost Of Living Issues
Why is my cheese more expensive? Why is Netflix hiking the prices again and no longer winking and nodding about sharing passwords?
With many elements of life reaching unfamiliar territory, and pricing to go along with it, people are eager to find answers and reasons. People are tired of living through these “unprecedented” times, and would really just like to go back to precedented stuff.
Cost of living worries aren’t something to be taken lightly, but this proposal making its way through the U.S. Senate may be the most illogical, and arguably flat-out stupid way to deal. It certainly won’t help the people, but may help some greedy businesses.
Basically, big box merchants have convinced politically motivated senators to propose a new bill which would strip out credit card rewards, by forcibly potentially lowering interchange fees — aka the fees merchants, but not consumers pay — when you pay with a credit card.
It’s always been a cost of doing business, but merchants want the benefits of accepting cards — aka people spending more — without the fees. That’s called having your cake and eating it too.
With no fees to fund rewards, or create perks, many key benefits to credit cards, like car rental collision coverage, or trip delay protection could come under threat.
The proposed bill would force the best rewards cards to partner with uncompetitive card networks like Pulse or NYCE in addition to Visa, Mastercard, Amex or Discover, so that merchants could enjoy lower fees on the transaction.
After you’ve paid the same old price, of course.
Interchange fees help fund credit card rewards and that’s an example of what truly free competition brings. If a leading card issuer earns 2%, many invest that 2% right back into the customer with points or cash back because the market is so competitive. Some even invest more than they make on the transaction to win loyalty.
Taking things further, Amex, Mastercard and Visa spend countless billions learning how to manage risk, so that as many transactions as possible can be approved, rather than be denied. That learning is thanks to incredible data and investment, which would come under threat. A biased look at many of these topics can be found here.
Senators Durbin and Marshall are taking aim at the credit card industry because it’s an easy target, even if it’s the wrong target. That’s not all that surprising, considering that some of Durbin and Marshall’s largest donors and constituents are big box stores that truly hate paying any credit card fees at all, yet find credit card acceptance vital.
And fun fact, Discover is an Illinois constituent of Durbin and would be exempt from the newly proposed bill. Ha! Non-competitive networks which have never invested in significant rewards or perks for customers want to get a bite of the apple, and rather than competing in a free market, they want someone to change the rules for them.
What’s The Deal With Fees & Rewards?
From the start, know this one thing, if nothing else. Interchange fees haven’t actually changed in a significant way in about a decade, unlike other things! Businesses can’t truly argue that their economics have changed because of card processing. If anything, things like Stripe or Square have lowered processing costs for merchants.
The last time interchange fees were forcibly amended by Durbin, only 1% of merchants made any price adjustment at all. Basically, with this proposal, based on data from the last economic bill Durbin passed, 99 out of 100 stores you visit would still charge you the same or more, despite them making more money.
What’s changed — and created a soundbite these senators are conflating — is that banks and networks like Visa, Amex, Mastercard and Discover are making more money off of interchange than ever, and that’s true, but not in the way it’s been framed.
The reason it’s true is because people are spending more money on credit cards versus debit cards, thanks to the purchase protections and other perks interchange fees help bring. Not because the interchange rates have significantly changed.
If we say US consumers historically spent $100 dollars a year, and card issuers and networks got 2% of that, but now they spend $200 dollars a year and card issuers and networks still get 2%, it’s just a larger gross number. That’s what’s happened.
The gross numbers credit card issuers collect off of interchange fees are just larger because people are spending more on credit cards to earn rewards and enjoy those protections and perks that other products don’t offer. Ready for the kicker?
That’s particularly amusing, because the last Durbin sponsored government economic experiment ruined debit card rewards and forced countless people out of the banking system. A study by George Mason University estimated that the last time Durban intervened in the free market, circa 1 million people lost access to banking.
Credit Card Competition Act: A Whole Lot Of Nothing
Durbin and Marshall have dubbed their (very expensive) and ill fated bill the ‘Credit Card Competition Act’. I can’t help but L-O-L at the notion.
They want to create competition by taking a free market system which already exists, and already affords every opportunity for Pulse and others to be competitive in the space, and force a seat at the table for them at the expense of consumers who enjoy better perks and consumer protections than ever. That’s not competition. It’s strong arm tactics.
In my opinion, this isn’t about helping consumers with the cost of living. It’s about propping up businesses which refuse to compete and invest — at the expense of truly competitive credit card products and rewards, from which the public benefits.