The feds are coming for your credit card rewards

According to the Bureau of Consumer Financial Protection, “over 175 million Americans hold at least one credit card,” making them “one of the most commonly-held and widely-used financial products” in the United States. Credit cards have become so dominant in America that card processors like Visa, Mastercard, American Express, and Discover process more than 108 million transactions daily. 

The popularity of credit cards stems largely from the substantial benefits they offer American consumers — easy cash-free payments, cash back programs, and various miles and rewards. Despite these benefits, Congress is considering reforms that, if enacted, would prevent credit card companies from offering these types of rewards. 

Lawmakers in Washington must reject any effort that would see consumers lose access to these popular programs. 

In late July 2022, Senate Majority Whip Richard Durbin (D-Ill.) introduced the Credit Card Competition Act (CCCA) with the support of Sen. Roger Marshall (R-Kan.). If approved by Congress, the act would direct banks to offer the “choice of at least two networks over which an electronic credit transaction may be processed.” Durbin and Marshall reason that by requiring a choice in payment networks, merchants can lower the swipe fees they are forced to pay every time a consumer purchases something on a credit card. 

In a press release announcing the legislation, Durbin stated, “this legislation, which builds upon pro-competition reforms Congress enacted in 2010, would give small businesses a meaningful choice when it comes to card networks, and it would enable innovators to gain a foothold in credit cards. Bringing real competition to credit card networks will help reduce swipe fees and hold down costs for Main Street merchants and their customers.” 

Consumers only need to look to the 2010 Dodd-Frank Act to see the potential dangers of credit card reforms. As part of the Dodd-Frank Act, Congress passed Durbin’s eponymous amendment that capped debit swipe fees and resulted in the decline of reward debit cards, which were no longer profitable for banks to operate. Shortly after the Dodd-Frank Act became law, JP Morgan Chase notified its customers that its debit reward program would end, followed closely by Wells Fargo and Sun Trust. In addition, banks also discontinued free checking accounts, hitting consumers directly in the pocket and pushing some lower-income consumers to be unbanked. 

Just as debit card reforms harmed consumers, so too will credit card reforms. The biggest casualty of this new legislation will be co-branded credit cards, more commonly known as rewards credit cards. While first created by airlines, reward cards are now offered by hotel chains, cell phone companies, coffee chains, tech companies, and even grocery stores. To create a rewards card, a company will typically rely on a single network processor, an agreement that would be outlawed if the CCCA becomes law by allowing merchants to choose which network to process their payments. Such prohibitions will make it almost impossible for rewards cards to be offered to consumers, and it will mean higher annual fees for people who want to keep their credit cards. 

The loss of reward credit cards will result in a significant decline in consumer welfare. According to the Electronic Payments Coalition (EPC), “87% of cardholders owned a rewards credit card,” and 96 percent of rewards cardholders consider their card-based rewards programs “very or somewhat valuable.” These statistics highlight the reality that altering how rewards cards operate would deny consumers access to a product with which they are overwhelmingly satisfied. 

Additionally, eliminating rewards credit cards would also harm merchants, the very people the CCCA was intended to help. According to EPC, “relative to a non-rewards consumer credit card, a rewards card is associated with an average transaction size that is 25–60% higher.” For merchants, increased transaction sizes mean greater revenue and profitability that, in turn, can be reinvested into their businesses. 

There is another serious drawback to this legislative proposal, because the proposal could divert traffic to lower-cost payment networks. However, these networks are low cost because they do not have the same cybersecurity protections that the major credit card networks have. This means that consumers, merchants, and banks are more likely to be exposed to security breaches and fraud. 

Considering that no elected official would intentionally want to make things worse for their constituents, we can only assume that Durbin and Marshall had good intentions when they introduced the CCCA. Unfortunately, good intentions do not always equal good policy. The CCCA will undoubtedly result in the federal government taking away popular credit card rewards programs from consumers. 

For the sake of consumers and merchants, Congress must put a stop to such hazardous proposals as the unintended consequences will hurt those it intends to protect. 

Steve Pociask and Edward Longe wrote this for the American Consumer Institute. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.