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Merchants Win the Credit Card Wars

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In the past year, credit card reform has largely focused on protecting Main Street consumers from those money-grubbing, bailout-taking card companies on Wall Street. But a recent development earlier this week could potentially have a much more far-reaching impact on how Americans pay for their purchases.

The battle over plastic
On Monday, Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) agreed to a proposed settlement with the U.S. Department of Justice and several state attorneys general. In the settlement, which helped the credit card network companies avoid an antitrust lawsuit, Visa and MasterCard agreed to allow merchants to offer discounts and various other incentives to customers if they use cards that cost those merchants less in fees to accept. Before the settlement, merchants were bound by agreements that prohibited them from discriminating among different types of credit cards within the same network, even if some had higher interchange fees and other charges.

American Express (NYSE: AXP  ) , however, did not join the settlement. As a result, the Department of Justice filed a civil antitrust lawsuit against the company, alleging that because the company avoided the settlement, "consumers are being held hostage from receiving the expanded choices and lower prices that they deserve." AmEx, meanwhile, responded that the settlement actually restrains free trade by allowing merchants to push their customers away from using American Express cards, which typically have higher merchant fees.

Consumer impact
Despite the hype over the settlement, it's unclear whether it will actually have any significant effect on merchants or consumers. Currently, merchants have the right to offer discounts to customers who use cash, and some apparently steer buyers to use PIN-based debit card transactions, rather than more costly signature-based ones.

But beyond the occasional gas station offering a lower cash price, different prices for different payment methods haven't really caught on among major merchants. A quick check of large retailers from Home Depot to Amazon.com didn't reveal any discounts available for cash or the right kind of debit card. Instead, the most obvious discounts come from using proprietary store-branded credit cards.

Another hit for rewards cards
If merchants do start being more active about encouraging customers to use lower-cost forms of payment, then the big losers will be people who use credit cards that offer big rewards, such as airline miles or cash rebates. Such cards often carry higher interchange fees, which card companies use to help finance the paybacks to cardholders. If merchants offer discounts to customers in exchange for not using those rewards cards, then cardholders will have a sophisticated calculation to do in figuring out whether the value of the merchant discount outweighs the lost reward from their credit card.

Such a move could also threaten a new revenue source for card companies. Capital One (NYSE: COF  ) and JPMorgan Chase (NYSE: JPM  ) have marketed cards that charge annual fees of $59 and $85, respectively, in exchange for attractive rewards programs. Bank of America (NYSE: BAC  ) announced last year that it would charge an annual fee of $29 to $99 on some of its rewards cards.

Notably absent from the antitrust discussion is Discover Financial (NYSE: DFS  ) , whose Discover card took in just 6% of U.S. credit card volume during the first six months of the year. Its business model was founded on the idea of providing rewards to cardholders in the form of cash-back bonuses. Presumably, the No. 4 card network is too small to raise antitrust concerns, but it will nevertheless still need to stay competitive with interchange fees now that merchants have the upper hand.

What's next
After the proposed settlement is approved, you'll want to look out for changes at the stores you visit. Being flexible with your payment options may be somewhat less convenient than simply using your favorite card everywhere. But if merchants actually follow through on the issues they've complained about for years, they may well make it worth your while. Until that happens, though, keep using the rewards cards that give you a piece of the action -- as long as they keep paying the rewards you deserve.

Our Credit Center has everything you need to manage your debt and make the most of your credit.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Dan Caplinger works hard for his credit card rewards. He doesn't own shares of the companies mentioned in this article. American Express, Discover Financial, and Home Depot are Motley Fool Inside Value selections. Amazon.com is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy takes cash, credit, debit, IOUs, or just plain air.


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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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