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Americans could see a reduction in credit card reward schemes if the Credit Card Competition Act (CCCA) comes into effect, although exactly how much is up for debate, as networks weigh up the regulation’s squeeze on their interchange fees against the desire to offer better rewards than their competitors.
The act could also mark a potential reconfiguration of the market away from Visa and Mastercard, in favour of American Express, Discover and others.
In its current form, the CCCA would catalyse a reduction in the value and volume of rewards that issuers are able to offer customers. Credit card rewards have become so prevalent in the country they are often considered among consumer assets when discussing savings and payments, and arguably kept several airlines afloat during the travel bans of the COVID-19 pandemic.
Examples from elsewhere in the world show that a reduction in interchange fees would remove the main source of funding for reward schemes, meaning credit card providers must either cut rewards or source funding elsewhere.
The CCCA would, for the first time, allow a choice of networks to process payments on cards. This would increase competition, bringing transaction fees down and thereby reducing the pot from which reward schemes could be funded.
Chase Bank, a major credit card provider in the US, has said that it recycles as much as 90 percent of its interchange fees into credit card reward schemes and benefits, and has warned against making the changes.
“Banks may then have fewer resources available to fund rewards programs and cardmember benefits, resulting in credit card rewards programs being scaled back,” the bank wrote, also adding that issuers may be less likely to lend as a result.
Nevertheless, this is the main arena in which US credit card companies compete for customers, and therefore they are likely to do everything they can to keep the schemes as large as possible.
Dylan Jeon, a lobbyist at the National Retail Federation, told Vixio that although banks will undoubtedly lose revenue on swipe fees if the proposals go ahead, there are other reasons why banks in the US would continue to offer generous reward schemes.
“Banks are all vying for top of wallet and for people to see their card first and to get it out and use it,” he said. “Rewards are a big driver of consumer behaviour in that way; it is a great marketing and customer retention tool.”
A report from payments consulting firm CMSPI suggested that the CCCA would likely cause “at most a less than 0.10 percent drop in rewards”, following a $15.2bn annual saving for merchants and a 37-basis point reduction in average Visa and Mastercard credit card fees. This would leave credit card issuers with “more than sufficient margin to maintain current reward levels”.
“You could make much more draconian cuts to these swipe fees and it wouldn't affect rewards one bit. In fact, you could cut them in half and it wouldn't affect rewards at all,” said Doug Kantor, general counsel at the National Association of Convenience Stores.
Kantor said banks’ claims that swipe fees are the only revenue source for reward schemes are “not true because they have several other income streams”, including annual fees and interest charges.
“That still allows them [banks] plenty of incentive to offer rewards: banks on 30 percent margins are still going to give people rewards no matter what happens,” he said.
Glen Trudel, a partner at law firm Troutman Pepper and former general counsel at MBNA, said that the changes will undoubtedly trigger a renegotiation of arrangements with airlines, hoteliers and retail companies because “they will no longer have the money to fund the rewards”.
“What are they going to do with those costs? It is a negative for the consumer; the bank is buying points with interchange revenue,” he told Vixio. “There are ways of making points less lucrative, too, like diluting them or slowing the process of honouring them. There are all sorts of things that banks can do when facing lower revenue streams.”
Amex and Discovery stand to gain
Two potential beneficiaries of the CCCA are American Express and Discovery, which will be exempt from the rule changes because they are three-party systems. Currently, they have only about a 10 percent and 7 percent share of the US market, respectively.
Julian Morris, senior scholar at the International Center for Law & Economics, said this could lead to a complete rearrangement of the credit card market. “What could happen is that most will just compete on price, with minimal rewards, while the wealthy people with good credit scores will get Amex and Discover branded cards with nice rewards associated with value,” he said.
This could have a negative impact on poorer US consumers, he said, because Discover currently caters to that end of the market. If Discover is incentivised by the new law to compete with Amex at the top end, Americans with poorer credit scores could be left without a major provider.
The CCCA could also have repercussions for the airline industry, one of the main beneficiaries of reward schemes. In 2023, US airline Delta made $6.8bn in profit from its relationship with American Express, comprising a large proportion of its total $19.67bn profit.
Already the most profitable of the US credit card-airline arrangements, the CCCA could further strengthen Delta and American Express’ hold on the market due to the exemption that Amex has. Critics argue that this arrangement favours the airlines over the consumer, and the “deals” that holders think they are getting are overblown.
Opposition to airlines
Speaking on the Senate floor in early May, Senator Richard Durbin, co-sponsor of the CCCA bill, said that airline industry practices are an existential threat to credit card rewards and that greater competition could help consumers earn better benefits and savings overall.
“It is their own [banks’ and airlines’] questionable practices that threaten American consumers’ ability to redeem rewards,” Durbin said to the Senate. “Modern-day airlines have become credit card companies that also happen to own airplanes.”
The Consumer Financial Protection Bureau (CFPB) issued a report last month suggesting that airlines and banks have “focused heavily on ways to bait people using features other than the interest rate and fees they charge” and that practices can devalue or deny rewards even after requirements are met, at cost to consumers.
“Frequent flyer programs have evolved from a perk for an airline’s most loyal customers to a multibillion-dollar currency market where credit card companies and airlines buy, sell, convert, and issue miles and points throughout sectors of the economy,” said Rohit Chopra, CFPB director, in a speech.
Morris said that the contracts binding existing credit card airline arrangements would likely be voided by the passage of the CCCA, allowing issuers to reconsider reward schemes. “Rewards will probably continue to be there at some level,” he said, “but they will almost certainly diminish dramatically.”
Smaller bonus
Morris pointed to other countries such as the UK and Germany, where interchange fees are capped by regulation, as examples of what the US market might look like if the CCCA is passed: rewards will continue to exist, but will potentially be a marginal bonus to cardholders rather than a pseudo-asset in their own right.
The Reserve Bank of Australia in 2002 imposed a cap on interchange fees, which triggered a drop of about 50 percent in revenue. This was done to correct a market failure, the central bank said at the time, in which consumers had opted for credit over debit to the detriment of economic progress.
The result was significantly reduced reward programmes. Annual fees went up, rewards went down, and the middle classes were directly affected. According to Morris, this caused around a 25 percent spike in the use of American Express cards, and he expects that a similar increase would come with the CCCA’s regulatory impositions.
The situation would still be different in the US, where the proposed regulatory change would stimulate market competition rather than imposing a cap. The impact of the CCCA on the American consumer will still, ultimately, depend on how credit card providers respond to the changing market conditions.
