Credit Card News (In Disguise)

Last week, the U.S. Senate shocked credit card companies when it passed an amendment that tasks the Federal Reserve with ensuring that the fees (called “interchange” or “swipe” fees) that merchants have to pay on every MasterCard and Visa debit card transaction are “reasonable and proportional” to processing costs. American Banker magazine described the proposed regulation as “a major blow to the industry.”

This move may, if ultimately enacted, directly affect only certain debit cards (not credit cards), but Friday’s New York Times wasn’t alone in thinking that the most likely consequential outcome would be the cutting back of some credit card rewards programs.

Credit Card Rewards and Debit Card Swipe Fees–the Connection

To some extent, the credit card companies and banks have only themselves to blame for the situation they find themselves in. They run extraordinarily expensive operations, with enormous budgets for marketing, IT, premises, accounting, executive bonuses, and so on. Then, on top of that, they take–most years, at least–huge profits.

And yet they pretend that they have discovered some form of commercial alchemy that allows them to make gold out of nothing. Because they pretend that there is such a thing as free banking, and free credit card use. The reality is very different. Someone pays, but it’s usually the less well off.

Swipe fees are, it could be argued, an especially regressive form of private sector sales tax in that all customers (not just credit card users) pay for them through higher prices. Assistant Senate Majority Leader Dick Durbin (D-IL) claims that these fees totalled–for debit and credit cards–$48 billion in 2008. Meanwhile, The Nilson Report calculates that, for debit cards alone, they amounted to $19.71 billion last year, of which Visa and MasterCard retained only about 20 percent. The rest, some $15.8 billion, was passed back to the banks and card issuers to cover some of those astronomical outgoings and particularly to pay for credit card rewards programs.

Some Credit Card Rewards Programs Unaffected

The Senate amendment is selective in that it will only apply (if it ever becomes law) to debit cards carrying the MasterCard and Visa logos. That means that American Express and Discover, both of which have their own payment processing networks, are likely to be unaffected.

So, if you’re thinking of making a credit card application, and are looking for a rewards program that is less likely to be changed if and when the new amendment becomes law, you should perhaps focus on the latter two issuers.

Published 05/17/10 (Modified 12/20/13)