One of the lessons my dad taught me early in life was the “law of unintended consequences,” which is that the actions of people — and especially of government — always have effects that are unanticipated or unintended. We saw this a decade ago with the Durbin Amendment from the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in the wake of the Great Recession. It limited the amount of money banks could make from debit transactions. They said this would be great for consumers; it was anything but.
Almost immediately, debit card rewards vanished — and who did that hurt the most? Consumers with lower income and credit scores, who may have a hard time getting approved for credit cards.
And what about prices for consumers? A 2015 economic survey from the Federal Reserve Bank of Richmond found little evidence that merchants passed along their cost savings to consumers. Most respondents (77.2%) indicated they kept prices the same in the wake of the new rules, while a sizable portion (21.6%) actually increased prices. Only 1.2% passed on lower prices to customers. With the Durbin Amendment, the cost-savings went to the bottom lines of shareholders and retailers, not consumers. And now Sen. Richard Durbin is trying to accomplish the same, but on a much larger scale.
Many well-intentioned lawmakers have tried to solve problems, but in the end, created bigger problems. We see this with taxation — state lawmakers may have wanted to raise revenues and increase taxes, but did not anticipate that companies and taxpayers would leave for states with lower taxes. In the end, the states lose jobs and take in less revenue.
What’s the issue?
A law with highly unfavorable consequences for those who love credit card points and rewards is currently being reintroduced on Capitol Hill. The Credit Card Competition Act of 2023 (“the Big-Box Bill”) proposed by two U.S. senators — Richard Durbin, D-Ill., and Roger Marshall, R-Kan. — would be disastrous for consumers, especially the millions of consumers who get immense value from cash-back and travel rewards on credit card transactions. The law, which is heavily backed by the retail lobby, would regulate the rate that Visa and Mastercard charge retailers to process transactions on their networks.
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What does this mean?
This legislation would allow big-box retailers — like Walmart and Target — to choose cheaper, less safe credit card processing networks that expose private consumer information to foreign networks in China and Russia without regard to the value that consumers derive from rewards and many other credit card benefits.
Simply put, it would kill the funding for credit card rewards programs and allow retailers to pocket the savings from lower interchange fees (also known as swipe fees). With lower fees collected, consumers would lose out on rewards, purchase protection and fraud protection while retailers add to their bottom line.
The retail lobbyists are trying to convince consumers that this would lead to lower prices; however, we know that retailers won’t pass along those savings, because we know the impact of the Durbin Amendment, and it was a huge loss for consumers.
This new act would have a ripple effect as well — credit card issuers, including credit unions and community banks, would no longer have the ability to fund the programs and perks we have all grown accustomed to. It would take the value away from consumers and put it in the pockets of retailers.
Another ripple effect could be higher airfare. Airlines like American Airlines and United Airlines, which derive huge sums of revenue from their credit card partnerships, would need to make up for that revenue elsewhere if their cobranded credit card rewards went away. Where do you think they’d go to collect more revenue? Higher airfares and fees would almost certainly be imminent.
This law, if passed, would be destructive for our lucrative rewards ecosystem, and it would take away value from consumer pockets to pad retail corporate profits. If you like credit card points and rewards, learn more about the proposed legislation at Hands Off My Rewards and reach out to your lawmaker to voice your concerns. There are a lot of huge issues our government should be working on, but destroying credit card rewards so retailers can make more money shouldn’t be one of them.