The Interchange Wars Are Back: Whither Card Rewards?

by Robert McGarvey

The credit card interchange wars are back. And the future of your credit card rewards may hang in the balance.

“Interchange” – for those not fluent in the arcane language of banking – refers to the swipe fee merchants pay to banks when they accept MasterCard or Visa. That $1 at retail reduces to maybe 98 or 97 cents in the merchant’s pocket.

Big deal?

Well, yes. Billions of dollars are at play and one of the benefits funded by interchange fees are the rewards offered by many credit cards, from cashback to travel discounts. Basically, banks decide to split the swipe fee with consumers to induce more use of their cards.

Swipe fees have been under attack for years. Merchants despise them. Advocates for low income consumers and those who don’t use credit cards also hate them – because, say many, it’s this group that funds the rewards we reap by paying higher prices at retail.

Enter Dick Durbin (D-Illinois) who has had a loathing for swipe fees literally for a decade, probably longer.

Durbin, a powerful figure in the US Senate, has been pushing his Credit Card Competition Act for some years. What it would do is give merchants a choice of multiple card processing networks and, says Durbin, this will give consumers lower prices because merchants would be able to dodge the Visa and MasterCard rails and use cheaper processing options.

In 2022 that bill went nowhere. But 2023 is a new deal and now Durbin has bipartisan support, including Senator J. D. Vance (R-Ohio).

The bill’s current language applies only to cards issued by banks with more than $100 billion in assets.

That is exactly four banks in the US. Remember that number.

Over at The Points Guy, founder Brian Kelly has weighed in with a bylined piece headlined: Here’s why your credit card perks could be going away Here’s the nub of his argument: “A law with highly unfavorable consequences for those who love credit card points and rewards is currently being reintroduced on Capitol Hill. The Credit Card Competition Act of 2023 (“the Big-Box Bill”) proposed by two U.S. senators — Richard Durbin, D-Ill., and Roger Marshall, R-Kan. — would be disastrous for consumers, especially the millions of consumers who get immense value from cash-back and travel rewards on credit card transactions.”

Opponents of the bill also say – with some accuracy – that a 2010 Durbin bill which resulted in lower swipe fees on debit card charges produced no meaningful discounts at retail for consumers.

Is today different? Stephanie Martz, chief administrative officer of the National Retail Federation, said in a prepared statement: “It’s time for big banks and global card networks to compete the same as small businesses do every day. Skyrocketing swipe fees have been driving up prices for consumers for far too long, and we are confident this is the year Congress is going to say it’s time for that to stop. Competition will bring these fees under control and strengthen security at the same time.”

Over at The Points Guy, Kelly plays another card: “This legislation would allow big-box retailers — like Walmart and Target — to choose cheaper, less safe credit card processing networks that expose private consumer information to foreign networks in China and Russia without regard to the value that consumers derive from rewards and many other credit card benefits.”

And yet…US financial institutions have an enduring record of providing feeble security for consumer data and every year many millions of our records are snatched up at criminals. It just isn’t easy to mount a coherent argument claiming that our current domestic security for credit card data is bulletproof.

Here’s what this argument comes down to: big box retailers love the Durbin bill because they can count literally billions in savings. I doubt many small retailers give a hoot because they probably are too busy fighting for survival to ponder topics like this. Might it still benefit them? Probably, sure, a little bit.

Will merchants pass on lower prices to us? That’s unknown. But if a WalMart passes on even a fraction of its savings that would ripple through the retail landscape.

Will our credit card rewards go away? NRF’s Stephanie Martz, in a statement to Bankrate, pooh poohed that scare: ““Rewards are banks’ main marketing tool for getting a consumer to choose a Visa or Mastercard from one bank over another and they are unlikely to give that up. The $11 billion that would be saved under this legislation is only a fraction of the swipe fees collected on credit cards last year, so banks would still have plenty of revenue left to cover rewards.” 

Remember, the bill applies only to cards issued by the very biggest banks. Most cards would not be affected.

Also remember the Stanford research that says the dirty secret about credit card rewards is that they are enjoyed by the well off but paid for by the poor.

So now are you pro or anti Durbin?