Will Shrinking Credit Card Swipe Fees Mean the End to Rich Rewards for Us?

By Robert McGarvey

On Tuesday Mastercard and Visa dropped a bomb on their swipe fees that had been long expected and yet now we’re left to sort out what it means and, in particular, for those of us who pursue credit card rewards so we can live the high life for less.

You might think this is much ado about small change but the National Retail Federation says the pennies add up fast.  “Applied to millions of transactions each day, swipe fees are most retailers’ highest operating cost after labor, driving up consumer prices by more than $1,000 a year for the average household and hurting retail sales because consumers buy less when prices go up. Swipe fees have grown from about $20 billion a year when NRF began tracking them in 2001 to $160.7 billion in 2022.”

A lot of hands grab change out of this till. Northwestern’s KelloggInsight sums up what happens: “The merchant bank…pays a fee to the network and a fee to the card issuer called an ‘interchange fee.’ The issuer, meanwhile, pays its own fee to the network and delivers rewards to the consumer—rewards funded by interchange fees.”

Those credit card rewards add up of course.

In my case I have bought pairs of tickets from Phoenix to Madrid three times in this decade with points and also a pair of tickets to Dallas. There’s also cashback, I don’t know how much I’ve gotten in recent years but I can tell you I’ve accumulated $1098 in Bitcoin with a Venmo rewards card and that’s just one of a half dozen cashback cards in my wallet.

And then there’s the Visa/Mastercard explosion. What they did, to settle a class action suit, is agree to cut so called swipe fees 20% which will save merchants some $30 billion over five years.

That *may* result in lower prices at retail although there is skepticism in many quarters that we’ll see this happen. But a reality is that merchants of course do pass on swipe fees to consumers, just as they pass on their electric bill and their shoplifting losses and a loud complaint has been that it’s America’s lower income folks who pay with cash who pay the bills that fund our rewards.

So why aren’ merchants cheering this move by the two big card networks?  And they aren’t. “The settlement does nothing to actually bring competitive market forces to swipe fees or change the behavior of a cartel that centrally fixes rates and bars competition,” Christopher Jones, a senior vice president of government relations at the National Grocers Association, told the New York Times.  

But the reality is that the credit card industry will have less cash to toss around and so they will be looking to make cuts in costs and a likely place to look is at credit card rewards.  Will there in fact be meaningful cuts there? Is the era of free flights over?

Well…the era of free flights is largely over anyway except for power players who scoop up card sign up bonuses that indeed can be rich.  Trying to accumulate enough points via spending alone is downright difficult.  Ditto for just accumulating honest miles via flights.

Personally I believe sign up bonuses will continue to be rich as card issuers battle it out to gain top of wallet status in our pockets.  Issuers may make it harder to qualify for their cards but the cards will be out there despite this settlement.

I also believe that airlines, because they know they have issued immense numbers of miles, will continue to raise the tariff for redemption.  When coach tickets to Europe in peak summer months can and do fetch 100,000 miles you know that winning the game has just gotten harder. And it will get still harder.

Another wrinkle to the settlement is that merchants will now be able to charge different fees to process different cards.  Reported the NYTimes, “Merchants will also be permitted to adjust their prices based on the costs associated with accepting different cards, while letting customers know why some cards — typically business cards and those with more rewards and perks — cost more than others.”

Does that mean much? Too early to say. Some merchants are grumbling that implementing a range of charges for cards adds complexities to retail that may not be easy to implement.  Others also worry about consumer grumbles when their favorite card with rich rewards now involves a higher fee for use at retail.  But we already see a version of that where many merchants decline to accept Amex, complaining about the fees.  And we have survived that.

Bottomline: it’s too early to panic about losing out on credit card rewards and it’s pretty much a certainty that this small settlement will not trigger huge cuts in credit card rewards…just as it’s unlikely to produce cost cuts at checkout. 

We may have to shuffle our card use preferences but hasn’t that been an ongoing practice for some years already?  Probably we do need to pay more attention to cards and perks right now, as the impacts of the settlement play out.

But there’s no reason, not based on this settlement, to toss in our cards and stop playing.  Not yet.