New Study Says Swipe Fee Bill Would Not Lead to Loss of Credit Card Rewards

The Merchants Payments Coalition welcomed new research showing passage of the Credit Card Competition Act should have virtually no impact on credit card rewards and that banks could easily afford to continue offering rewards.

“This analysis shows the expected savings from competition over swipe fees would have almost no impact at all on credit card rewards and that the card industry has far more than enough profits to make up the difference,” MPC Executive Committee member and National Association of Convenience Stores General Counsel Doug Kantor said. “This is proof that claims that rewards would go away are nothing more than idle threats and scare tactics, the same as they have been in every market around the world where swipe fees have been addressed.”

In a new research paper released last week, global payments consulting firm CMSPI estimated that credit card rewards would be reduced by less than one-tenth of 1 percent “at most” if the legislation becomes law.

CMSPI estimated earlier this summer that the legislation would save merchants and their customers $15.2 billion a year in swipe fees banks charge to process credit card transactions.

When credit card swipe fees were capped at 0.8 percent in Australia in 2003, banks’ revenue fell but rewards were hardly impacted. Based on the proportion between the reduction in swipe fee revenue and the minor reduction in rewards, the drop in U.S. rewards per dollar would be a miniscule 0.097 percent, according to CMSPI.

In addition, CMSPI found that six out of the 10 largest U.S. card issuers have a 30 percent profit on swipe fees. (The other four do not report swipe fee revenues or expenses.) That amount would be “more than sufficient margin” to offset the reduced revenue and “maintain current reward levels,” the consultants said.

CMSPI noted that the average profit margin for general retail was just under 2.4 percent as of this January. By comparison, the money center banks that issue the vast majority of credit cards have an average overall net profit of 27 percent while Visa saw profits last year of 50 percent and Mastercard had 45 percent.

The card industry has repeatedly threatened to eliminate or reduce rewards in other places that have reduced swipe fees but has continued to offer them after reform took effect. A decade after reform in Australia, the Reserve Bank of Australia found banks still offered “significant credit card rewards.” And generous rewards are still offered in Europe, where credit card swipe fees were capped at 0.3 percent in 2015.

“Rewards are banks’ top marketing tool for getting consumers to choose a card from one bank over another and they aren’t going anywhere,” Kantor said. “Small businesses and consumers desperately need relief from high swipe fees and it’s now clearer than ever that they can have relief and still get rewards.”

A recent study by the Federal Reserve and the International Monetary Fund said the combination of swipe fees paid by everyone and credit card rewards that primarily benefit the wealthy transfers money from “less to more educated, poorer to richer and high to low minority areas.”

Without direct competition between payment networks for transaction routing, swipe fees for Visa and Mastercard credit cards rose from an average 2.02 percent in 2010 to 2.24 percent as of 2022, with the amount paid by merchants rising from $26 billion to $93 billion, according to CMSPI.

While averaging 2.24 percent, credit card swipe fees can range as high as 4 percent. Swipe fees have more than doubled over the past decade and rose $22 billion last year to a record $160.7 billion when debit cards are included. They are most merchants’ highest operating cost average labor, driving up prices by an estimated $1,024 a year for the average family.

First proposed last year, the Credit Card Competition Act was reintroduced in June by Senators Richard Durbin, D-Ill.; Roger Marshall, R-Kan.; Peter Welch, D-Vt., and J.D. Vance, R-Ohio, and by Representatives Lance Gooden, R-Texas; Zoe Lofgren, D-Calif.; Thomas Tiffany, R-Wis., and Jefferson Van Drew, R-N.J.

Visa and Mastercard – which control over 80 percent of the market – currently price-fix swipe fees charged by banks that issue cards under their brands, and also restrict processing to their own networks. The legislation would require banks with at least $100 billion in assets to enable cards to be processed over at least two unaffiliated networks – Visa or Mastercard plus well-established, high-security competitors like NYCE, Star or Shazam. That would make networks compete over fees, security and service, resulting in the $15 billion a year in savings estimated by CMSPI.

Adding the second network would have no impact on rewards because rewards are determined by the bank that issues a card, not the network processing a transaction.

In addition to lower fees, the Federal Reserve says the competing networks have one-fifth the fraud of Visa and Mastercard’s networks. Foreign-controlled networks like China UnionPay would be barred from processing U.S. cards, nothing would change about which cards consumers use or how they use them, and community banks and small credit unions would be exempt.

The Merchants Payments Coalition represents retailers, supermarkets, convenience stores, gasoline stations, online merchants and others fighting for a more competitive and transparent card system that is fair to consumers and merchants.