Some of America’s largest retailers want to stop taking premium rewards credit cards. According to the WSJ, the merchants want the option to refuse payments made with a high-cost premium card which can carry an interchange fee as high as 3%. The move could spell serious trouble for the rewards industry since the revenue gathered from these fees goes a long way to paying for all the miles, points, and other benefits that come with these cards.
The Situation With Interchange Fees
Interchange fees are the percentage the merchant has to pay the card issuer for accepting their payment method. It is usually a percentage of each transaction. Currently, merchants cannot discriminate between cards. So a merchant displaying a Visa, Mastercard, or AmEx symbol will have to take payment from any card-carrying the emblem.
At this point, things start to get complicated since not every card has the same interchange fee. A basic Visa credit card will have a much lower interchange fee than a premium Visa Signature card, and yet the merchant’s contract states that they have to accept all Visa cards regardless of how much it costs them.
Merchants want the ability to discriminate and only accept cards carrying the lowest fees while refusing the higher fees ones. The change would drive up the merchant’s profits but would hit the profits of the card issuer.
Interchange Fees–The Lifeblood Of Miles & Points
Simply put, rewards credit cards cannot survive without interchange fees, since it costs the card companies a significant amount to offer all their perks and benefits. If your card provides lounge access, then every time you visit the bank has to pay out. US financial institutions pay out several billion dollars every year in credit card rewards benefits, and this expense has to be covered, mainly through interchange fees.
If you want to see an example of how bad things can be when cards are unprofitable, look no further than Europe. The European parliament capped interchange fees at 0.3% in 2015. Overnight this turned most European rewards credit cards into significant loss makers. In the UK alone, a whole host of co-branded and rewards credit cards were withdrawn from the market as they became unprofitable.
The only exception to the EU ruling is cards issued by American Express and Business credit cards. This exemption is why if you study the European rewards credit card market, you will see that Amex has a virtual monopoly.
Consumer Power May Prevail
Counter-intuitively it may be the case that merchants would harm their bottom line by refusing rewards credit cards. Holders of premium cards with high annual fees and perks tend to attract higher earning individuals with a substantial disposable income. This is precisely the type of high spending consumer merchants want to attract and keep. Refusing their preferred method of payment risks driving these consumers away into the arms of a rival who will accept their cards and pay the fees.
All Things Considered
We are currently at an impasse, and legal wrangling will continue. Whether the financial institutions win, the merchants are victorious, or both parties reach a deal that they are happy with… only time will tell. Until then watch this space!