Is Congress Going to Kill Credit Card Rewards?

Credit card rewards are so common these days — so expected, even — that they can seem untouchable. But that could change.

Legislation known as the Credit Card Competition Act, first introduced in Congress in 2022, is described by its sponsors as encouraging “competition in electronic credit transactions.” But if lawmakers end up passing the measure, opponents say it could also torpedo the rich rewards and perks that cardholders have enjoyed for years.

“Will consumers lose? Probably,” wrote Brian Riley, director of the credit advisory service at Mercator Advisory Group, in an August 2022 post to the Mercator blog. “Their reward programs will dry up, just as they did with debit cards.”

The legislation failed to pass in 2022, but its sponsors reintroduced it in June 2023. Here’s what’s behind the measure and what it could mean for your wallet if it passes.

Merchants push for lower fees

Credit card rewards are funded, at least in part, by fees that merchants pay. When you use a credit card to make a purchase, the retailer is charged somewhere around 1% to 3% of the transaction amount in order to accept your payment and have it processed securely. It’s called interchange, aka a “swipe fee,” and it’s set by the payment network that the credit card runs on — often Visa or Mastercard.

Portions of that fee go to various parties, including the payment network, as well as the bank that issues your credit card.

Interchange fees are largely invisible to consumers. But they’ve long been a sore subject for many merchants — especially small-business owners — who call them burdensome, expensive and restrictive. As of now, if a merchant accepts a Visa credit card as payment, for example, it must be processed through the Visa network. The same goes for Mastercard, Discover and American Express transactions.

But the Credit Card Competition Act would require that banks of a certain size give merchants more choice when it comes to which payment network can be used for processing transactions involving their cards. They'd have to allow merchants a choice of more than one network — and per the bill, those networks cannot be "affiliated" with each other, nor can they be only "the two networks with the largest market share of credit cards issued" (which means Visa and Mastercard, which combine for more than 80% market share).

The measure’s sponsors — including U.S. Sen. Dick Durbin, D-Ill. — argue that competition is necessary and will benefit consumers.

“Credit card swipe fees inflate the prices that consumers pay for groceries and gas,” Durbin said in a news release. “It’s time to inject real competition into the credit card network market, which is dominated by the Visa-Mastercard duopoly.”

Supporters say that if merchants have more choice in payment networks, they’ll presumably choose one with lower fees, and those savings on interchange will filter down to customers in the form of lower prices.

“Swipe fees that drive up costs for small merchants and prices for American families are already the highest in the industrialized world," said Doug Kantor, an executive committee member of the Merchants Payments Coalition, in a June 2023 statement. "This carefully crafted bill will lead to lower fees and better security while helping merchants hold down prices."

Opponents argue the Credit Card Competition Act is designed solely to benefit behemoth retailers, and that lower interchange fees may mean less money for funding credit card rewards programs.

"This bill would allow these large merchants to use the cheapest credit card processing option, with no requirement to keep consumers’ data safe or return savings back to them," said Jim Nussle, president and CEO of the Credit Union National Association, in a June 2023 statement. “Interchange is the cost of doing business. Merchants like Target and Walmart reap the benefits of credit card usage with immediate payments, protection from fraud, and typically larger purchases by consumers — but don’t want to pay the cost of accepting credit cards.”

» READ: Could the Credit Card Competition Act impact credit unions? 

No guarantee that savings will be passed on

If it passes, it's far from certain that this measure would lower prices.

More than a decade ago, Durbin also sponsored legislation that reduced swipe fees on debit card purchases. Known as the Durbin amendment to the 2010 Dodd-Frank Act, it differed from the current proposed measure (the Credit Card Competition Act would not directly "cap" swipe fees). Still, when Durbin's measure passed, supporters made the same argument: Because merchants would now save on fees, they’d pass along those savings to customers.

The results, though, are debatable. Multiple studies conducted in the years since the Durbin amendment became law have concluded that it didn’t have much, if any, effect on retail prices. In fact, a 2015 economic brief published by the Federal Reserve Bank of Richmond included survey results estimating that more than 21% of merchants actually increased their prices after the rule went into effect.

And banks found ways to recoup some of what they lost in debit card fees — an estimated $14 billion, according to the Federal Reserve — by raising fees on checking accounts. A 2017 report from Federal Reserve economists found that banks subject to the Durbin amendment were 35.2% less likely to offer free checking accounts and, on average, hiked monthly fees on both interest and noninterest checking accounts (17% for the former; 20% for the latter). The report also found that the average minimum balance requirement to avoid monthly fees rose by at least 50%.

Meanwhile, debit card rewards programs all but disappeared as the swipe fees that had funded them declined. Opponents of the Credit Card Competition Act say history is poised to repeat itself.

“The debit card interchange limitations that Senator Durbin slipped into the Dodd-Frank Act in 2010 did not result in any consumer cost savings," Nussle said in his statement. "Since that time, credit card fraud rates have doubled. Why would we expect a different result from this legislation? We are going to see retailers lining their pockets with money without reducing prices, leaving consumers and small-business owners in the lurch.” 

How credit card rewards look in other countries

Britain offers a glimpse at where credit card rewards might be headed if interchange is sharply curtailed in the U.S.

U.K. interchange fees have been capped for years at much lower rates — and credit card rewards, too, tend to be lower than in the United States. Common ongoing rewards rates on U.K. cards range between 0.5% to 1%; for anything above that, you might expect to pay an annual fee.

Australia also reduced interchange fees years ago, and according to a 2012 report from the Reserve Bank of Australia, the result was much the same: “Overall, reward points and other benefits earned from spending on credit cards have become less generous while annual fees to cardholders have increased.”

What's next?

The fate of the Credit Card Competition Act is unclear.

The legislation was, for a time in 2022, attached as an amendment to the National Defense Authorization Act (NDAA), which funds military programs and is what many lawmakers view as must-pass legislation. Durbin and co-sponsor U.S. Sen. Roger Marshall, R-Kan., were attempting to tie the Competition Act to surcharges that stores on military bases imposed on credit card users.

The measure failed to make the final military spending bill, however, and when the 117th Congress adjourned at the end of 2022, all unpassed legislation died. In June 2023, though, the Credit Card Competition Act was reintroduced, this time with even more bipartisan sponsorship. There were renewed attempts to add it as an amendment to the NDAA, but yet again it didn't make that bill. The bill's sponsors are now hoping the Credit Card Competition Act will get a standalone vote later this year.

In the meantime, industry groups have lined up against the measure.

“The adverse effects of this bill [include] the disappearance of card rewards programs that families of all income levels use to stretch their budgets,” according to a joint statement issued in September 2022 from multiple banking and trade groups, including the American Bankers Association and the Electronic Payments Coalition.

If it does pass, here are some things to note as a consumer:

• It might not spell an end to credit card rewards entirely. After all, rewards still exist in countries with lower interchange fees — it's just that you might have to settle for less lucrative rates, higher annual fees, or scaled-back perks packaged in a different way. Issuers with an eye on customer loyalty may continue to view certain benefits as a cost of doing business.

• There may be times when debit or cash might make more sense. If a merchant charges a credit card "processing fee" of 2%, but your rewards card is now earning just 1% back, you may be better off reaching for your debit card.

• Routinely evaluate what's in your wallet. Regardless of what Washington does, you don't need to stand pat if your current credit card no longer works for you. Your issuer might grant you a product change to a better card — one with higher rewards or lower fees. And if not, you can shop around for a card that does a little more.