Why the Regulation of Credit Card Merchant Fees Will Curtail Rewards
Consumers love to receive credit card rewards from their spending. So long as cardholders pay their balances in full and on time, these benefits come at no cost to themselves. At the same time, a different situation exists for merchants who accept credit cards. They must pay merchant fees that typically consume 3-5% of the amount of each transaction made with a credit card. For a long time, these businesses have been trying to have the government regulate merchant fees. If they are successful, it will likely mean the end of reward credit cards as we know them.
To understand why a reduction of credit card merchant fees will undermine cardholder rewards, it helps to understand how banks are able to offer these rewards in the first place. When a cardholder carries a balance on his or her credit card, the bank makes a sufficient profit from the interest paid in order to offer a fraction of that amount as a reward. For those customers who pay their balance in full every month, the banks are essentially offering an interest free loan. The only way that they can lend these cardholders money, let alone offer rewards, is by receiving swipe fees which are paid by the merchants. If merchants achieve their goal of having legislation passed to slash merchant fees, the credit card issuers will have little, if any money to pay their customers rewards in the form of cash back, loyalty points, or frequent flier miles. (more…)


