A cap on interchange fees might mean a shift in how consumers earn points on transactions.
Picture alliance/Getty Images; Jenny Chang-Rodriguez/BI
One of the great American pastimes — using your credit card to accumulate points — could be about to change.
On Tuesday, Visa and Mastercard settled with US retailers over a longstanding dispute tied to credit-card swipe fees.
The crux of the issue is interchange fees, which networks like Visa and Mastercard charge merchants for processing their transactions. Under the agreement, which still needs to be approved by the courts, these fees would be lowered and capped for five years.
So what does that have to do with your sacred stash of points?
Even though the networks set interchange fees, the card issuers (banks like JPMorgan Chase and Bank of America) get the lion's share of the revenue. Last year the biggest US banks took home $31 billion of interchange and merchant processing income, according to Bloomberg.
Again, you ask, what does that have to do with my points?
Well, a good chunk of that revenue is spent by banks encouraging you to use their fancy cards. And the best way to do that is via points and rewards. Cards with better rewards and cash-back economics typically charge higher interchange fees.
Which gets us back to Tuesday's settlement. Merchants have to accept all types of credit cards from Visa and Mastercard under an "honor all cards" rule. But now, they'd be able to charge consumers more depending on the type of card they're using.
Suddenly, the cash-back you get from your Chase Sapphire Reserve doesn't seem as enticing when paying a premium on the bacon-egg-and-cheese sandwich at your local bodega.
It's not likely that banks will completely punt on rewards. David Morris, principal analyst, payments at eMarketer, said the card programs are too important to banks to stop engaging those customers.
"They can make allowances of their own in terms of the kinds of rewards, adjusting the rewards accordingly. These are highly profitable programs, so there is some flexibility here for the card companies to be able to make some adjustments along those lines," he said.
Morris acknowledged that some changes in consumer behavior might occur as a result, "but that would discount the levers that these credit card issuers do have to be able to ensure that they are providing the card value that premium cardholders expect."
Merchants, especially retailers, don't seem pleased with the settlement. The National Retail Federation, which represents chains from big box stores to supermarkets, said it "amounts to pennies on the dollar" toward their costs. And the Retail Industry Leaders Association called it "a mere drop in the bucket."
Both trade groups expressed support on Tuesday for the Credit Card Competition Act before Congress, which would require large banks to offer multiple payment networks for processing transactions through their credit cards.
While many small businesses already charge an extra fee for those paying with a credit card, David Silverman, a senior director at Fitch Ratings, said most major retailers won't pass the interchange costs directly to consumers.
"These retailers have been absorbing costs across any number of cost functions," such as labor, he said.
It's not yet clear what impact the settlement will have. The agreement hasn't yet been approved, and time will tell how merchants and banks handle the changes.
But the points game can be one of fine margins, and a change to interchange fees could have ripple effects for rewards programs.
Don't be surprised if it starts taking a lot longer to rack up the points required for your next getaway.
