Credit Card Rewards May Be in Danger, But That’s a Good Thing

Credit cards that offer airline miles, cash back, and other rewards create expenses that trickle down to everyone, including people who don’t use or don’t qualify for credit cards.

That’s one of the reasons a new credit card bill in the US Senate is being supported by Robert Triest, president and professor of economics at Northeastern.

Robert Triest, president and professor of economics at Northeastern. Photo by Matthew Modoono/Northeastern University

“The current system results in prices being higher than what consumers would otherwise have to pay,” Triest says.

The bipartisan credit card competition law aims to lower consumer prices by weakening the dominant stranglehold of Visa and Mastercard, which control 77% of the U.S. credit card market (alongside rivals American Express and Discover). The two giants have some of the highest fees in the world, translating into more than $77 billion in payment processing by US merchants in 2021.

The legislation is sponsored by Majority Whip Sen. Dick Durbin, an Illinois Democrat who previously created savings for consumers with 2010 legislation that caps interchange fees paid by merchants on debit card transactions. . Triest, in his former role as a vice president and economist at the Federal Reserve Bank of Boston, oversaw a consumer payments research center that analyzed this law a dozen years ago.

The new bill aims to reduce interchange fees for credit cards by increasing competition within the industry. Triest says the new rules would lead to lower costs and a fairer system that will especially help consumers who don’t qualify for credit cards.

In a chat with [email protected], Triest explains why consumers should care about the proposed changes and why credit card rewards may be at risk. His comments have been edited for clarity and brevity.

Why should people worry about transaction fees?

Interchange fees are passed on to consumers. Prices are marked up due to these costs incurred by merchants every time people pay with plastic. This amounts to an additional tax on everything we buy.

You might be wondering, “I don’t use plastic, why should I care?” Well, merchants usually don’t differentiate between paying cash or plastic – they charge everyone the same price. So even if you’re a cash-only consumer, you’re still paying higher prices because of those interchange fees that banks charge retailers.

Occasionally you’ll see gas stations that have a cash price and then another price when you use a credit card. But these are very rare. Usually the same price is charged to everyone.

What does this have to do with credit card rewards?

In my case, I like to pay for everything with a credit card which gives me a cash-back bonus. The bank charges merchants high interchange fees for processing each transaction, and then the bank gives me some of that as rewards. So I get a good amount of money back because I use my credit card for everything. And the bank keeps part of the commission income as an additional profit.

But someone who doesn’t have a credit card—someone who uses cash instead—contributes to those credit card rewards because they pay the higher prices that result from interchange fees . They don’t benefit from the rewards that I receive.

Do people who pay cash subsidize the rewards of credit card users?

Basically it’s true.

Think of people with low credit scores, who struggle to get credit cards – they end up paying for those of us who get those premium rewards. The same goes for people who barely qualify for a very simple credit card, but don’t qualify for the more sophisticated ones that refund rewards.

So there is a fundamental inequity rooted in the current system. I love getting my cash back bonus every month. But it’s very inefficient economically and also inequitable because these bonuses go to people who have a relatively high income.

The bill proposes that banks must allow retailers to process credit card transactions through a choice of at least two networks, and one of those networks cannot be Visa or Mastercard. How would the new system work?

If this legislation passes, the Federal Reserve will issue regulations within a year. How this will work is not entirely clear.

What is quite clear is that the intention is to provide competition. Banks cannot simply offer the choice between Visa or Mastercard processing. There could be something new [less-expensive] networks that are springing up to undermine the four main players in the credit card market.

For media inquiries, please contact [email protected]

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