Opinion: The Credit Card Bill That Could Kill Rewards

The credit card world was roiled recently with talk of a 10% interest rate cap, floated by President Trump and spawning a thousand headlines.

The media storm resulted in what sleight-of-hand experts might call “misdirection” — drawing your attention to one area, when the real action is happening elsewhere.

A hard 10% cap is unlikely to happen for a host of different reasons, not least of which that it would likely yank credit access for millions of Americans. But another earthquake is starting to rumble, and the fallout could be more profound.

That’s the Credit Card Competition Act, reintroduced this January after having been stalled several times in the past. Essentially it holds that issuers would have to offer at least two payments networks for cards, thereby boosting competition and potentially reducing swipe fees. 

The proposal has some bipartisan support — from Senators Roger Marshall, a Republican, and Dick Durbin, a Democrat — and in a midterm year, some electoral juice behind it.

The two camps on this debate fall as you might expect, with powerful interests (and lobbyists) on both sides. On one team, retailers and consumer advocates; on the other, big banks and credit unions.

In a vacuum, the notion of increased competition — along with some financial relief both for merchants and for consumers — is a sound one. But tinkering with such a powerful engine is a complex and serious task, and one that could easily go wrong, and leave us all to sort through some unintended consequences.

For example, Americans are very fond of our credit card rewards. There is a whole economy around amassing and maximizing them, and it is a major factor in where, how, and when we spend our money. 

Consumers seem to enjoy and have become accustomed to playing the game, given that rewards menus (particularly on the high end) keep expanding, while annual price tags keep increasing.

Well, that rewards economy is built on the back of interchange fees. Reduce that revenue, and the math may not make sense anymore. Whenever you remove a load-bearing pillar of a structure, it stands to reason that stability becomes threatened.

For proof, look at what happened with debit cards with a similar amendment (also from Senator Durbin) back in 2010 that regulated debit card interchange fees. As a result, you might notice that there is no comparable rewards ecosystem for debit cards.

You might also notice there are no guarantees that merchants pass along any such savings to the general public.

Perhaps consumers would ultimately be OK with slimmed-down rewards, although one study by Oxford Economics Research predicts the legislation capping interest rates would sink consumer discretionary spending by $227 billion and erase 156,000 jobs within a few years of passage.

But similar arguments can be made in areas like fraud prevention — and even, ultimately, credit access for large segments of the population. 

Issuers have developed a solid reputation with consumers in preventing fraud, and dealing with it when it occurs, in part thanks to the funding that comes from network fees. Threaten that source of support, and we’re all suddenly playing a very dangerous game, especially when AI is enabling fraud to become more sophisticated by the day.

Essentially we’re paying financial institutions to take on a fair amount of risk. So here’s a thought exercise: If we’re yanking that rug out and expecting financial institutions to assume the same amount of risk as before, that’s a pretty big ask. 

A more likely outcome is that they trim back their exposure as a result, perhaps by limiting access to credit. That might not affect well-heeled borrowers, but it would certainly impact the subprime space — those who have fewer options and need credit the most.

The timing is key here. If the economy were humming along nicely, with no storm clouds brewing, such a broad systemic change would be simpler to implement and absorb.

As it happens, we are not in such a time. Growth has slowed, layoffs are rampant, private credit is a growing concern, and a large percentage of American households are operating paycheck to paycheck. Meanwhile, no one can say with certainty what will result from the conflicts in the Middle East, with bad outcomes seeming to multiply by the day.

And so, we are in uncharted waters here. The timing to overhaul a key economic engine? Not ideal.

Of course, political concerns are at play, which is why this issue may have been pushed back to the front burner. The midterm elections are getting closer, and the president even went on social media to call these interchange costs an “out of control Swipe Fee ripoff.” 

That’s a populist stance, and an understandable one politically. With affordability now a top concern for the public, it’s no wonder that lawmakers would be turning over every stone to see where they can save small businesses and consumers a little money on their transactions.

But if politicians are truly serious about easing financial pressure on consumers, there are other, larger, quite obvious ways to do that — for instance, getting rid of the new 15% global tariff, or ending the Middle East conflicts that are snarling global trade and pushing gas prices through the roof.

The CCCA may be billed as a simple fix, but it isn’t. When everything in society appears to be breaking doesn’t seem like the opportune moment to rewrite how the financial world operates — and see if that might break, too.