If you’ve passed anyone recently who looked sickly and was breathing into a paper bag, there’s a good chance it was a points-and-miles blogger. After all, Sens Dick Durbin (D-IL) and Roger Marshall, M.D. (R-KS) just introduced the Credit Card Competition Act of 2023 (following the failure to advance the Credit Card Competition Act of 2022) that would change the credit card game completely. Were this to actually happen — and let’s be honest, it’s highly unlikely — it would be bad news for those bloggers who make their money on credit card referrals. But far more interesting is the enormously negative impact it would have on the airline industry.
To start, it’s helpful to understand how credit cards work. And to be fair, I do not fully understand it myself, but I have put together a handy diagram that should help us all.
When someone buys something using a credit card, that card uses a network (Visa, Mastercard, Amex, etc) which keeps a chunk of the purchase. It can vary greatly with cards that have rewards often charging higher fees, but let’s just say it’s 3 percent to make it easy. The rest goes to the merchant, and that’s why you often see stores tack on a credit card surcharge. Those merchants aren’t willing to absorb the cost of using a card.
Of that 3 percent, the card network will keep some for itself. The sheer volume of transactions means that the network is rolling in dough. Let’s take a look at this helpful chart from Visa’s 10-K from last year showing 2022 revenue.
The company made $39.6 billion in revenue, though not all of that comes from processing the transaction itself. But it’s the yellow circle that’s particularly important, because the network kicks back a boatload of cash to those credit card-issuing banks that opt to align with the Visa network. It’s important to understand that each card is tied to one network, so the competition to get that business is fierce. (To understand the gravity of this, look at the big Costco switch from Amex to Visa.)
Those banks then turn around and make it rain. On the small end, a nice chunk of money gets sent out to those who generate new cardholders. There are generous payments for new sign-ups, and that is how many of the points-and-miles bloggers you read earn their money. It’s the entire basis for The Points Guy empire, but that’s small potatoes compared to the airlines.
For the banks, a big part of this construct is paying their co-brand card partners, the biggest of which are airlines. Think about United which has Chase as its sugar daddy. Every time someone spends money on a Chase Visa card, United gets paid for the miles that the user earns. This adds up to huge money, and it’s also strategically important to the airlines. As an example, Chase prepaid for a ton of miles during the airline’s bankruptcy in order to provide a cash infusion.
Delta’s sugar daddy is American Express and in 2023 alone the relationship generated $5.5 billion for the airline. Delta had $45.6 billion in total adjusted revenue, so that means that more than 12 percent of Delta’s revenue came from the credit card. This is not unique to Delta. All airlines have been making big bucks.
The bloggers, airlines, and credit card companies all make more money when there are more, new cardholders coming into the system. The banks and co-brand partners have come up with increasingly big bonuses and benefits to lure more people into signing up for the cards, and for those who play the game it can be very lucrative.
There are plenty of people who aren’t playing the game, however. And that means that some people are getting richer while others are not. That is, unsurprisingly, what this new proposal is all about.
The idea being put forward is that credit cards from large banks could no longer be tied to a single network. Instead, they’d have to be usable on at least two networks where only one can be Visa or Mastercard. One notable exception: banks that are also their own network (Amex, Discover) would not have to allow a second network. So Delta is apparently safe.
The idea is that this would create competition in the networks, and that would lower the fees that end up being charged to accept credit cards. This would naturally be passed on to consumers in terms of lower prices, and everyone would be happy, free to pursue a life of religious fulfillment.
Of course, we know that’s not how it works. And everyone who is against this plan has come out swinging. You can look to even The Points Guy himself, Brian Kelly, who penned a panicky tirade about how bad this would be for everyone.
As he notes, this has already happened in the debit card world, and the results showed that more than three-quarters of merchants just pocketed the difference when fees were lower. No surprise there. But of course, having lower fees could also prevent or delay future price increases if merchants feel they’re making adequate profit. This is a squirrelly one to pin down.
Let’s assume this happens and it works in lowering the fees. With less money coming in, the banks will not be able to spend as much on acquisition. All those big card bonuses would presumably be scaled back. The payments to affiliates would drop. Airlines would have to raise fares. The whole eco-system starts to break down.
This doesn’t mean it goes away completely, but it would be cut back. For those who play the points-and-miles game, it would be a big loss. For everyone else, it could go a few different ways. No-annual fee cards could become more scarce if there’s less money to be made, but then again, interest rates wouldn’t change so banks would still be profiting nicely.
In the end, I’m probably wasting my time even talking about this. The chances of this passing are slim to none since we know the powerful banks will find a way to stop this. But hey, it’s still fun to ponder the potential ramifications of it all.
