On Tuesday, the largest credit card companies in the United States reached an agreement with merchants to reduce the so-called swipe fees that retailers pay to accept credit card payments, potentially saving $30 billion.
Those fees also help fund credit card rewards programs that many travelers redeem for things like free flights and hotel stays, leading hawks to wonder: Are rewards programs at risk?
Here’s what we know so far about the changes.
What are the terms of the agreement?
Last year, credit card payments generated about $72 billion in fees paid by merchants, which are generally passed on to customers in the form of higher prices. For nearly 20 years, merchants have sought reductions in the fees they pay Visa and Mastercard to process transactions where the cards are used.
The proposed settlement, pending approval in federal court, reduces and limits those fees for five years. It would also allow merchants to potentially charge consumers more based on the card they pay with. For example, a person paying with a premium card like the Chase Sapphire Reserve, which costs $550 annually, could be charged more than someone paying with the more basic Chase Sapphire Preferred card, which has an annual fee of $95.
Why does it matter?
The majority of fees collected are returned to the banks that issue the credit cards. These banks have used the funds to promote premium credit cards that offer rewards points that can be redeemed for free travel and other perks. The cards with the biggest benefits tend to be the ones that charge the highest swipe fees.
While the cut in fees charged sounds small — averaging at least 0.07 percent — it represents an estimated $30 billion over the five-year life of the deal, which banks could try to cover by reducing points benefits.
“It makes sense to think so,” said Brian Kelly, the founder of Points Guy, a news site dedicated to maximizing credit card points.
While he assumed that banks would be able to “find other ways to make up for it,” he acknowledged that a squeeze on points could occur.
“Opportunities to win are probably not going to flourish,” he said.
The idea that merchants could charge more to holders of premium, perk-rich cards, which are expensive, may also deter consumers from using them. Some experts question the sustainability of the practice given the potential for consumer backlash.
Is the new agreement related to the Credit Card Competition Act?
The legal actions that led to the new credit card agreement date back to 2005. But the newest Credit Card Competition Act, proposed in 2023, aims to introduce more competition into the credit card payment system. By creating a cheaper alternative pipeline for processing payments, the proposed legislation is seen as a greater threat to rewards programs.
In response to the just-announced settlement between the credit card companies and retailers, Senator Dick Durbin, D-Illinois, and the lead sponsor of the Credit Card Competition Act, issued a statement calling for the legislation’s passage.
“I am afraid that this agreement only provides temporary concessions negotiated by a few lawyers behind closed doors,” he said in the statement.
Other experts said the deal could ease pressure on Congress to pass the law.
“I think it’s a way for Visa and Mastercard to show that they’re making a good faith effort to help merchants by reducing the fees they’ve been complaining about for 20 years, and hopefully enough to let senators know they’re doing their part said Chris Hassan, the director of social media and brand for Upgraded Points, a site that tracks credit card benefits.
Separately, the proposed merger between Capital One and Discover, pending federal approval, could create more competition among credit cards and potentially improve rewards for those cardholders.
What to do now?
The points and payment systems will not change until the deal is approved, which is expected in late 2024 or early 2025, according to a Mastercard press release.
But the theme should remind travelers of the reality of the points game: The rules are always changing. Values tend to fall as redemption levels increase, which the companies issuing these coins are free to adjust at will.
If you have points, spend them, say experts like Sara Rathner, travel and credit card expert at the financial website NerdWallet. “It’s not a trophy to dust off and admire.”
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