Credit Card Reform: Will my rewards disappear?

We’ve done some critical theory lately, let’s get back to some real finance, with some equations to make up for it. I’m coming in late to the credit card debate, so I’ll get right to it.

I pay my credit card balance in full every month and enjoy the rewards. Am I going to get screwed by Obama’s Credit Card plan?

In theory, no.

Notice that when this man buys something for $100 in the example above, the merchant receives only $97.50 of it. That $2.50 goes to two types of fees: interchange fees, which is between the banks processing the credit, and assessment fees, which is a flat charge that goes to the credit card copy – like Visa or Mastercard. Part of the interchange fee goes to facilitating the exchange, part to profit, and part to your gift rewards program. Estimates go around 25% of interchange ends up back in the consumer’s pocket in various rewards program.

Interchange fees have been increasing as a precent over the past decade. This has been happening while the volume is increasing and the technology maturing, which would lead one to believe some form of price-fixing is occuring. In response, the industry’s defenders claim that the rewards programs have also been picking up over this time period. This might strike you as counter-intuitive. You pay 2% in order to get .5% back in the form of some sort of gift certificate. We talked about this before as a Nash Equilibrium of using too much credit. Another advantage of financial innovation – you get to join in with credit card companies slashing margins on small businesses.

So your reward program should be safe, since distressed borrowers aren’t paying for it. You are, everytime you go to the store in the hidden tax in prices. To the extent that it is not, and that disorganized or irresponsible borrowers are forced to pay for your rewards, I direct you to Economics 101. Any allocation where someone is made better off by making someone else worse off, moral qualms aside, should be thought of as inefficient.

A Note for Journalists

Obama and the Democrats decided not to go after interchange fees. Now a thing to realize from that graph above, is that the credit card companies – Visa and Mastercard – have no direct consumer exposure. They get a cut of the transactions businesses are charged. So if consumers are paying less in credit card fees to banks, presumably they’ll spend that difference at the store, ringing up profit for the credit card companies themselves. The banks themselves are the only ones who profit from spun out consumers. Was lobbying from Visa weak during this bill’s passing? The banks have all their lobbying effort going to stay afloat. Visa, however, is doing fine, and perhaps could have started a nationwide campaign of misinformation. Did they not because they saw interchange go to the side?

I have no idea, and I don’t keep close watch on the K Street part of these efforts, but if something seemed off about the lobbying effort, maybe that explains part of it.

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3 Responses to Credit Card Reform: Will my rewards disappear?

  1. John the Cheap says:

    I’m one of those freeloaders who pays in full every month, and do get some rewards, but I would be in favor of the reform even if the rewards vanished.

    Been reading you since Felix linked to your blog. Very informative, thank you for this!

  2. Keith Williams says:

    Your rewards wont go anywhere because they are paid for by the merchants you use. You use your rewards card at a merchant and he pays almost %4 to process the transaction. (of course he dosent know this) but thats how rewards cards are set up.

  3. Chased says:

    Well, this morning, my Chase Rewards card was “transformed” into Chase Sapphire. My rewards used to be 5% on gas and groceries, 1% on everything else, with a cap of 78,000 points or approximately $780. Now they give a flat 1% with no cap and some transferrability to other travel reward programs, but I can’t help but feeling shortchanged.
    You may believe that credit card laws and healthcare laws will help everyone, but the socialist mentality of government will only cause big business to look for the loopholes to maintain their profit. These reward programs are simialr to the profits given by ESCRIP and Upromise to give back to your schools and your child’s future education. I wouldn’t be surprised if these programs are soon curtailed.
    Some don’t mind “even-ing things out a little” so that the poor of heart, spirit, and budget sense do not get themselves into debt, but where does it stop?

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