Why Dick Durbin’s Stupid Bill To Limit Credit Card Interchange Might Not Kill Rewards Cards, After All

The ‘Credit Card Competition Act’ from Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) would impose price caps on interchange fees charged to merchants for accepting credit cards. They are trying to attach it to a defense appropriations bill, using the argument that veterans use credit cards and some merchants charge fees to do so. Since the defense bill is expected to be ‘must pass’ it’s a legislative strategy to try to sneak this corporate welfare for retailers in by the back door.

It is a bad bill, and I still don’t expect it to pass. The Points Guy says it is “set to move through Congress” but that’s simply not true. They note that debate on the defense appropriations act begins this coming week, but that’s only with a small group of Senators. The focus has switched to campaigning.

It’s an election year, and firing the starting gun on interchange was a great way to raise campaign cash from lobbyists for both banks and big retailers. The defense bill won’t come up until after the midterms, and if this language makes it into the Senate version – a big ‘if’, neither Durbin nor Marshall are on the Armed Services Committee even – it’s likely to need to be reconciled against the House bill. That puts it in the hands of leadership as they craft a package that can gain passage in both chambers of Congress.

Two key points about the bill,

  • Corporate welfare for retailers. Merchants benefit from taking credit cards. Credit cards are less expensive to process than cash (staff make incorrect change and pocket cash for themselves, large cash transactions can drive up insurance rats) and credit card customers spend more. Large merchants want lower costs, and want government to do the work for them.

  • Doesn’t benefit consumers. When the Durbin amendment limited interchange for debit cards prices did not fall according to research from the Federal Reserve. When Australia capped credit card interchange, prices did not fall. In fact the government of Australia allowed merchants to charge customers the cost of interchange. Prices rose, and the government had to step in to limit how much merchants imposed for these new costs because they were gouging customers.

There is, however, a path where credit card rewards survive this legislation if it’s passed. They’ll just look different. The key is that financial institutions with less than $100 billion are generally exempt from its requirements.

  • Generally banks generate revenue from merchant swipe fees (interchange) and revolve (APR). The better rewards cards are rebating nearly all (or sometimes more than all) of interchange to the consumer, hoping to acquire and service consumer debt. The consumer that does not borrow on their credit card comes out ahead.

  • Chase has about $2.7 trillion in assets. Citibank has about $1.7 trillion. They’ll no longer make (much) money off of interchange and won’t invest in rewards in the same way to encourage transactions.

  • That’s bad for bank proprietary programs like Ultimate Rewards and Membership Rewards. It doesn’t have to be the end of co-brands.

  • Co-brand credit cards can still be issued by those with under $100 billion in assets. That works for a small brand, but a $100 billion asset issuer can’t swallow the transaction volume of a big airline cobrand (with over $100 million per year in annual charge volume).

  • However there are already multiple issuers for some brands like American Airlines and Marriott. Creative lawyers should be able to put together consortiums of issuers, all under $100 billion in assets apiece, to stitch together a large co-brand portfolio.

  • That’s still bad for consumers because co-brands face competition today from bank programs. Without that they could be less generous, since they’d no longer need to compete.

Less interchange means a higher cost of credit. Consumers will have to fund more of credit themselves. That’s what happened in Australia, annual fees for rewards cards went up.

But the loopholes by design in the bill, meant to benefit small financial institutions and build a coalition to favor using government to do the bidding of large retailers, creates some potentially interesting outcomes that may not be as simple as ‘the end of rewards cards.’ It will maim, but perhaps not kill, credit card rewards.

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