Say Goodbye to Your Credit Card Rewards if This Legislation Is Successful

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  • The Credit Card Competition Act of 2022 would require credit card companies to allow alternative payment networks.
  • Retailers could then choose the payment network with the lowest fees.
  • Since card issuers fund their rewards programs using processing fees, this change could lead to cuts in credit card rewards.

Credit card rewards could go extinct due to this proposal.

For many consumers, rewards cards are the payment method of choice for just about every purchase. That way, you can earn cash back, travel rewards, or other types of reward points on every dollar you spend.

Rewards credit cards have been around long enough that it's hard to imagine they could just disappear one day. However, that's a serious possibility if the Credit Card Competition Act of 2022 is passed.

The bill is supposedly designed to save merchants and consumers money by allowing more competition in processing credit card payments. While it could be good for retailers, it's doubtful that consumers will benefit. And now, the senators behind the bill are trying to speed it through the legislative process.

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What is the Credit Card Competition Act of 2022?

The Credit Card Competition Act of 2022 is legislation introduced by Senator Dick Durbin and Senator Roger Marshall. It would prohibit credit card companies from restricting the number of card networks that merchants can use to process transactions.

Under the current system, the banks that issue credit cards can require that transactions are processed with a specific payment network. For example, if you pay with a Chase Visa card, the merchant must use Visa to process the payment. It also pays processing fees, which are a small cut of the transaction, to Chase and Visa.

If the Credit Card Competition Act passes, banks would need to work with alternative payment networks. They couldn't require that a merchant processes transactions with, say, Visa or Mastercard. Retailers would be able to choose whichever payment network offers them the best deal, instead of being stuck with the network the bank demands.

Bye, bye rewards

Credit card processing fees might not seem like something especially relevant to everyday consumers. But if you're using rewards to get rich, or even if you just like to earn some extra cash back on your normal bills, those fees matter quite a bit.

Here's why -- processing fees are a huge part of how credit card companies make money. In 2020, when card issuers made $176 billion in income, transaction fees accounted for $51 million of that. Their only larger source of income was credit card interest.

Credit card companies can pay you 1% back, 2% back, and sometimes much more because they're getting swipe fees from the merchant. In The Ascent's research on the average credit card processing fees, interchange fees ranged from 1.15% and $0.05 to 3.15% plus $0.10, on average.

Being forced to work with other payment networks means card issuers will have to accept lower swipe fees. And if they're making less money, you can bet they're not going to keep offering the same rewards rates and take a loss. After all, we already have a historical precedent with a very similar situation.

Whatever happened to debit card rewards?

It may feel like ancient history at this point, but there was a time when you could earn generous rewards with your debit card. Although rewards debit cards are still around, they're rare, and credit cards offer much more bang for your buck.

The catalyst was the Durbin Amendment, a last-minute addition to 2010 financial reforms. This amendment required that the Federal Reserve cap swipe fees for debit cards at a reasonable rate, which was set at 0.05% plus $0.21. It's named after Dick Durbin, and yes, it's the same Dick Durbin who is now trying to push through this credit card processing legislation.

Since banks had to significantly lower their debit card processing fees, most simply did away with debit rewards programs. To make it even worse, many banks increased checking account fees to make up for lost revenue. On average, checking account fees went up by over 70%, according to a study by the University of Pennsylvania.

Supporters of the Durbin Amendment claimed it was a win for consumers. With merchants able to save money, they could pass that savings on to customers with lower prices. As you may have expected, that didn't happen. According to 2015 research by the Federal Reserve Bank of Richmond, here's what retailers actually did:

  • 77.2% didn't change prices
  • 21.6% increased prices
  • 1.2% reduced prices

Based on the research, restricting debit card processing fees hasn't been beneficial to consumers. If the same thing happens with credit card processing fees, it will probably end up being a net negative. We'll earn far less in rewards, and prices will stay the same or increase.

What happens next

Durbin and Marshall introduced the Credit Card Competition Act as standalone legislation, but they're now attempting to attach it to the National Defense Authorization Act (NDAA), a defense spending bill. The dubious logic behind this move is that credit card swipe fees are causing veterans to be charged more for purchases at military commissaries. But the more likely reason is because the act could get through Congress faster if it's attached to a defense bill.

Debate on the NDAA starts on Oct. 11 with a small group of lawmakers. The final vote isn't expected to take place until after the November midterm elections.

This credit card bill is still far from a done deal. It could end up fizzling out, in which case rewards enthusiasts will be breathing a sigh of relief. If you're worried about its potential implications and want to make your voice heard, you can write to your elected representatives and state senators to let them know you oppose the Credit Card Competition Act.

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