New Federal Reserve Research Finds Cutting Merchant Swipe Fees Even Hurts Consumers Who Don’t Earn Rewards

You can earn no miles, no points and no cash back from your credit card and still lose if the government cuts credit card merchant swipe fees. Research from two Philadelphia Federal Reserve economists explains why: the money banks collect when you spend helps pay for better borrowing terms. That’s a problem for the retailers’ argument that consumers who don’t collect rewards are simply paying for everyone else’s vacations. I wrote this week about why the legislation threatening card rewards isn’t dead, even with Dick Durbin retiring and Roger Marshall losing his Senate seat. The political sales pitch is that reducing merchants’ payment costs saves consumers money. That isn’t true and has never been true anywhere in the world it’s been tried. It’s cover for retailers who want the benefits of accepting credit cards, but think the government should require the service be offered to them for less money. But credit cards aren’t just a convenient way to make purchases. They also provide financing for those purchases, and the merchant fee helps support that. Even A Card With No Rewards Can Give Something Back Satyajit Chatterjee and Burcu Eyigungor’s Credit Effects of Credit Card Interchange Fees uses bank supervisory data to examine an overlooked part of the debate: what interchange does to credit itself. The June 26 paper was highlighted in a new Bank of Japan summary. In the data, rewards cards have higher credit limits. Cards without rewards have lower interest rates despite higher default rates. They argue that rewards make repayment more attractive because default means losing access to future rewards. And when a bank keeps interchange instead of paying rewards, competition encourages it to offer better rates and limits to attract the customer’s business. They find that both rewards and non-rewards cardholders gain, even after accounting for higher retail prices. A bank earning money when that person buys groceries has another reason to want the account. Eliminate that revenue and the account becomes less attractive at the same borrowing terms. The adjustment could show up in the interest rate, credit limit or card approvals. Limiting interchange hurts access to credit and credit costs for the most vulnerable> Most Cards Earn Rewards—And Most Interchange Already Goes Back Out Rewards aren’t confined to a small group of people flying first class. The Consumer Financial Protection Bureau’s latest market report says that in 2024: 80% of general purpose credit card accounts offered rewards. 92% of spending on those cards was on rewards accounts. And a separate New York Fed study finds that banks receive interchange averaging 1.82% of purchase volume and incur rewards costs averaging 1.57%. That’s about 86% of issuer interchange revenue going back out as rewards expense. Limits on credit card swipe fees actually redistribute from consumers to merchants, even as proponents seek to villify the banks. Points Aren’t The Whole Reason To Use Credit Instead Of Debit If an airline takes your money and doesn’t provide the flight, the card you used matters. So does whether a fraudulent charge has already emptied your checking account while everyone sorts out what happened. Credit cards come with federal billing dispute rights, including for purchases that weren’t delivered as agreed. With a billing error dispute, you can withhold the disputed amount during the investigation. Debit cards have fraud protections, too. But the money can already be gone from your account. Having a claim for reimbursement isn’t the same as keeping your cash available for rent while the claim gets resolved. Then there are the benefits particular cards add: purchase protection against theft or damage, extended warranties, return protection, rental-car coverage and insurance for covered travel disruptions. Interchange helps fund the card’s economics: rewards, fraud losses, dispute handling and benefits. Cutting interchange doesn’t repeal federal consumer protections athough those were imposed on an economic model that included them. And it an change what banks charge for the product, which optional benefits they offer and which customers they want. Topics on this page