a person holding a credit card and a phone
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And no, those cents saved on the transaction won’t be lowering prices for you anytime soon…

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” continues making its way through the U.S. Senate, largely using false narratives and highly flawed data. When you break down the straw man arguments, it’s all 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.

a close up of a credit card reader

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.

Paying With Credit Card On Laptop

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.

a group of palm trees with the sun shining through

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.

contactless credit card

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.

Gilbert Ott

Gilbert Ott is an ever curious traveler and one of the world's leading travel experts. His adventures take him all over the globe, often spanning over 200,000 miles a year and his travel exploits are regularly...

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      1. He is a rino who is essentially a progressive liberal who is happy for citizens to be controlled by govt power as long as taxes are somewhat reduced and it’s a little easier for businesses to do business overall. There are very few congressmen or Senators who are actual pro freedom conservatives their constituents want.

        1. No, he’s not – Roger Marshall is as conservative as they come. But keep trying to own the libs! It’s really working!

  1. A key point is the fact that the big box retailers actually pay very low interchange fees, around 1-1.5%. It costs them as much or more to take checks/cash, deposit them etc., particularly as the staff in the store are involved in those transactions, whereas there are no staff in stores involved in credit card transactions. This will end up as just increasing retailer profits (which are very low anyway, particularly in grocery), with little effort on their part.

  2. You failed to mention all of the small business owners that would benefit! Square charges 2.75% plus .10 cents a transaction. Thats a big hit to our bottom line. The way this article was written you just mat be a lobbiest for the card industry

    1. How would you benefit? The fees have been the same for a decade. You could accept cash only, and enjoy transaction costs circa 10%, and have half of customers tell you “they’ll come back” or “don’t have cash”, or you pay what’s been the standard, which is lower than the cost of transacting in cash, which creates customers, and keeps rewards in tact. I have respect for anyone who reads my articles to an extent, but I just don’t see any clarity or vision in your comment. So I guess it’s simple: do you want 10% transaction costs dealing in cash, or <3% dealing accepting cards. I'd urge you to read a study on the added revenue accepting cards bring, versus just taking cash. Those are some pretty one sided figures.

      1. This is absolutely correct. I own 2 small companies with 21 employees total. I have lots to say about this subject.

        1. I run my companies the way I think consumers would want me to run it, in certain ways. As a consumer, I really won’t deal with you much if you don’t take credit cards. If you don’t take AMEX, I think you’re cheap and won’t give you first preference. That’s why all my businesses take all cards, no extra fees. We don’t build the cost of the fees into the price of the services. It’s just a cost of doing business, like insurance.

        2. Credit cards and the automated systems that use them make my life easy. in one business I have, we collect 200 invoices per month, probably 30% of them by CC. I can’t imagine hounding these people to get me a check. In addition, I use QB credit card systems, which charges 3%. Could I get a system that charges half that price? Absolutely! but they are clumsy and problematic, and don’t integrate seamlessly into QB. The time it would take to have my office people call repeatedly to get the CC or Check, to go to an outside system to collect the payments would be unbelievably inefficient, not to mention it would piss off my customers. IT would cost me double or triple the cost of the 3% to do this manually. Lots of these people pay in the middle of the night on CC. I wake up to 5-6 payments every day.
        Also, people who pay with CC will pay more.

        3. I get so much benefit from accepting and using AMEX and other cards…. its of great benefit that far outweighs any small fees I have to pay.

        IF you say you are gonna benefit, then you aren’t looking at the whole picture. Its stepping over a dollar to pick up a penny.

      2. The proposed law is not strong enough. Small businesses pay high fees AND are forced to pay for the rewards. It’s like extortion. Credit card companies offer the rewards and force small businesses to accept all cards and pay higher rates when we use reward cards (high enough to pay the entire reward).

        No, the bill should say that fees must be the same for all cards and limited to 1.8%. The article’s 10% claim for cash handling is simply false.

        1. Your argument is short-sighted and incorrect. As the owner of a small business that processes about $1.6M/year in credit cards and in over five years, we’ve NEVER paid over 1.8% for cc processing. If you’re paying more than that, you’re simply not with the right processor. In addition, our customer spend MORE when using a cc. Finally- The cost of dealing with cash and checks is MUCH higher than 1.8%.

    2. Any small business can charge a fee to customers. My pizza shop charges 4%. My hairdresser charges 3%. Small businesses don’t have the cash handling savings as big box retailers but they benefit tremendously from credit cards if they pay the fee. A lot of people won’t go into a small business that doesn’t accept credit cards. If paying the fee is such a big problem they can always do what the above do with charging customers the fee.

  3. This article is simply false. The 1.5% or 2% rewards is not paid for by the credit card company. The credit card companies punish companies, especially small businesses, with high fees. The commission deducted before the small business gets their money is significantly higher if you use a rewards card. Then the credit card companies add a swipe fee and daily settlement fee and either a monthly charge or similar so that small purchases wipe out what the small business gets.

    I know a small business that lost money during the pandemic when people used cards. In some cases, it would be better to give away the product for free than accept the cards. Granted that was for low dollar amounts and very low total sales.

    It wouldn’t be a bad idea if credit card overhead were lowered in exchange for banning rewards. Maybe the only reward is that there’s no annual fee and a few perks, like extended warranty.

    1. While it is true that smaller businesses pay higher swipe fees, if you go and subscribe with a very well known processor today, those fees are 39c +2.9%. If you pay more than that find a new processor. So, while it’s true that on, say, small transactions of <$5 there is an outsize impact, it's simply not true on larger $ amounts. And, retailers can price accordingly. See also Gilbert's comment re the costs of processing cash being 10%. And if you look at the cost of goods purchased by the retailer, there are huge margins. Eg apparel typically costs the retailer is far less than <50% of the cost paid by the shopper (that's why when stores have 25% off everything sales, they're still making significant money. Or just look at how much a farmer gets paid per lb of oranges, tomatoes etc. It's a fraction of what you pay at retail. It's a focus on the wrong problem

  4. Just like Dodd-Frank killed debit card rewards and Dubin’s amendment to that Act shifted the cost of bank fees to consumers this proposed liberal attack on consumers will kill many credit card reward programs. This is just one more example of why the US needs term limits.

  5. Only an ULTRA-LiberalUber-Liberal like Sen. Dick-head Durbin, and a true basket case like Roger Marshall could continue to push a bill that Walmart is bankrolling. For many millions of families, the rewards earned when they buy groceries, or fill up the car, or pay for a service like a doctor appointment, well those rewards fund the family vacation, or getting a new washing machine, or just some extra food on the table. And if “Duck-head Durbin”does away with them, well those precious rewards disappear. And do you really think that all merchants will lower their prices 1-2%???? Dream on. Write you Congressman and Senator today.

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