With their flashy bonuses and hefty cash-back payments, credit card rewards have become as American as apple pie . In most other developed nations, by contrast, cards are about as flamboyant as, say, mortgages bank accounts.
Unfortunately, some of the same forces that have made cards so subdued outside the U.S. now threaten to bring America’s card-rewards party to an abrupt end. The causes lie in several legal threats. One of those perils threatens the funding of rewards, while the other could see consumers essentially paying upfront for the rewards they subsequently receive for using their cards.
The Rumble Over Rewards Funding
The entire rewards ecosystem in the U.S. is essentially financed by merchants and business owners. Specifically, rewards are funded by the interchange fees merchants pay when they accept your credit card at their store.
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The biggest chunk of those fees–which even on the most affordable processors can be over 2% of every credit card sale–is passed along to card issuers, who are mostly banks. Those companies then use a portion of that revenue to fund the rewards programs that so many American card holders know and love.
Though banks get to collect interchange fees, those fees are actually set by the card networks–the companies that own such card brands as Visa, Mastercard and American Express. A relatively small number of these networks control a huge portion of the credit-card market, and they’ve been accused of unfairly using that clout to set interchange fees too high.
For more than a decade, then, the networks have been in ongoing legal warfare with merchants over these fees. The war is being fought on two fronts, both of which could spell bad news for card holders if the merchants prevail. The days of $800+ cash back rewards could be numbered.
The Battle Over Interchange Fees
This first fight is over the amount charged in interchange fees, those levies set by card networks. Merchants argue that these charges would be much lower in a credit-card marketplace that was truly competitive–as in one in which Visa, Mastercard and American Express, who set the fees for use of their cards, were less dominant.
Some of the suits are David-and-Goliath affairs–a challenge in New York State was launched by a hair salon–but there is also a multi-state, class-action lawsuit filed by some of the heaviest hitters in retailing, including Amazon, Wal-Mart, and Costco.
The suits seek a reduction in the level of the fees. It’s not difficult to imagine what U.S. credit card rewards would look like if the interchange fees weren’t as high as they are. In countries like England and Germany, regulations prevent credit card companies from charging interchange fees of more than 0.3%. When the EU Parliament first passed these restrictions back in 2015, Capital One Bank immediately responded by severely gutting their cash back programs in Europe