While the popularity of rewards credit cards has exploded in recent years, retailers and policymakers have pushed government meddling that could end rewards cards as we know them – and end up harming consumers.
The Wall Street Journal estimates that fully 92 percent of credit card purchase volume takes place with rewards cards, up 25 percent from just 10 years ago. Those rewards are funded in part by “swipe fees”: fees paid by retailers to credit card companies every time a customer swipes their card.
According to the Journal, these fees can range from 1-to-3 percent of a purchase, with rewards cards falling on the higher end of the spectrum. The popularity of rewards cards has contributed to a 68-percent jump in swipe fee payments between 2012 and 2017.
At issue for retailers is the “honor all cards” rule that Visa and Mastercard traditionally hold retailers to, which requires that retailers accept all Visa or Mastercard credit cards if they accept any of them. Retailers want government — either Congress or the courts — to grant the ability to pick and choose which Visa and Mastercard cards they accept by banning “honor all cards” clauses in contracts.
Given this choice, retailers would likely reject the highest-rewards cards. That would mean that retailers can avoid the cards with the highest swipe fees, but consumers would lose a lot of the benefit of high-rewards cards.
Courts have been the main battleground for this fight recently. Visa and Mastercard agreed in September to re-settle a lawsuit (that had first appeared to be settled back in 2012) with retailers who alleged that the companies colluded to inflate swipe fees.
And back in June, the Supreme Court sided with American Express in a case over whether the company could legally prohibit retailers accepting Amex cards from offering promotions to consumers who pay in cash or use a credit card company with lower swipe fees (known as “steering practices”).
Government attempts to curtail swipe fees have backfired spectacularly in the past. The so-called Durbin Amendment, inserted into financial reform legislation in 2010 at the 11th hour, capped swipe fees on debit cards.
The substantial bite this took out of financial institutions’ profitability led them to curtail previously popular initiatives like free checking and rewards programs while increasing fees. Were the government to jump in and demand that credit card companies abandon the “honor all cards” rule, this time, consumers would likely pay the cost in the form of lower rewards.
Retailers contend that lower swipe fees would allow them to lower prices across the board, but the link between higher swipe fees and higher prices is not so direct.
After the Durbin Amendment capped debit card swipe fees, a Federal Reserve Bank of Richmond report found that 98.8 percent of retailers either kept prices the same or raised them. And a Federal Reserve Bank of Boston report found that rewards benefits generally exceed any price discounts that retailers can provide for using debit or cash.
While retailers claim their effort to strong-arm credit card providers is pro-consumer, the reality is that the best thing is to keep courts and legislators out of this argument. Credit card companies should have the right to refuse their service to retailers that don’t abide by certain conditions, such as avoiding steering practices and honoring all cards.
By the same token, retailers should have the right to refuse to do business with credit card companies if they deem their swipe fees to be too high. By voting with their dollars, consumers can help to reach the “right” answer without any need for the government interference sought by retailers.
This fight over swipe fees isn’t going away soon, but it’s best for the courts not to get too involved. It’s in everyone’s interest to reach a compromise on swipe fees, and drastic measures such as major retailers refusing to accept Visa and Mastercard are unlikely, but coercive court action to dictate contract terms could lead to reduced consumer rewards and choice.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to taxpayer policy and education at all levels of government.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.