A Proposal to Crush Rewards Credit Cards… and Airlines… is Introduced

Government Regulation

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.

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40 comments on “A Proposal to Crush Rewards Credit Cards… and Airlines… is Introduced

  1. The current status quo benefits a number of corporations with plenty of Capitol Hill connections & lobbying bucks to throw around.

    It also benefits (or, perhaps more precisely, the proposed changes will likely lead to immediate and tangible changes to the detriment of) some very vocal influencers and consumers… I’m not just thinking of points/travel bloggers like TPG, but also consumers who pay off their credit card statement each month and who are not going to like giving up the 1-3% rewards “rebates” that they have become accustomed to receiving with nearly everything they buy, even if doing so does eventually lead to lower prices (which may or may not happen, and which will be far harder to measure and make a convincing argument about).

    For that reason, as Cranky pointed out, yes, this is likely to be dead in the water.

    1. I’m no expert on this subject. But bi-partisan support is probably necessary for this bill to pass, given the fact that each political party has control over a significant portion of the government. The fact that one senator from each party introduced this bill might mean that it has bi-partisan support.

      1. It has bipartisan sponsors, but is so far down the priority list of either party that no one is going to pay attention to it especially in the House. The co-sponsors might be able to get a Senate hearing or two, but neither party’s leadership is going to spend time worrying about this bill.

  2. “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.”

    Never realized having a branded credit card would lead to as you said Brett, ” religious fulfillment.” Anyway it appears the number of branded credit cards has exploded in recent years. Everyone & their mother from Macy’s to AMC theaters has a card today.

    1. Sean – the number of branded cards has expanded because merchants are absolutely getting screwed by credit card fees, and the larger retailers are deciding that they may as well get in on the game to offset their ever-rising credit card expense budgets. I used to manage the credit card fee expense line for one of the smaller majors back in the day (which has now been swallowed by a bigger player). We did not have a branded card at the time and realized we had *no* leverage when it came to card fees, as it’s not like you can just decide to not accept Amex or Visa since you have major corporate accounts using all three different major card providers. And in most cases, the corporate accounts are *also* getting kickbacks from the card providers. And as these acquisition or “incentive” fees grew, the card providers knew that they could always raise their merchant fees to cover their increased costs, because the merchants have so little leverage and consumers are not impacted. We looked at various scenarios, including direct pay and UATP, but nothing would pencil without pissing off at least a few corporate accounts, so we never implemented them. The one idea that would have actually moved the needle was to charge a credit card fee surcharge, as Cranky described above. Unfortunately, the card providers had specific clauses in the airline agreements forbidding us from charging such fees. Dealing with those card companies got me so angry that, to this day, I will always offer to pay cash when I’m at a small merchant because I know the exorbitant fees they pay for card transactions. And I will never have an Amex card.

      1. Cash isn’t necessarily great for merchants either, especially as they deal with less and less of it. You can get the convenience of credit, with low cost to the merchant, by using PIN-debit. Most card terminals accept PIN-debit, and the fees are much, much, lower.

        1. I agree, SirWired, but no one is using PIN-debit to buy an airline ticket. And I use whatever payment method the (non-airline and hotel) merchant prefers, but always try to offer cash first.

      2. One of the reforms in Dodd-Frank was forbidding clauses in merchant agreements that prohibit discounts for cash or debit payment, a significant (but insufficient) improvement over the old status quo.

      3. @ Muskoka,

        Was in a restaurant in Hoboken NJ this past weekend & the server said to me when I paid the check it was $12.75 cash or $13.26 with a card as they calculated the 4% into the price.

      4. Credit card buyers also spend more than cash buyers, so while a merchant may have to pay fees for the credit card buyer, they’re also increasing their overall business. That’s the whole incentive to accept credit cards in the first place.

        1. Good point, Bravenav, and I agree. Again, though, it’s irrelevant in the airline space, where card usage doesn’t change behavior, especially for business travelers.

  3. Can you give more info of how much goes to “Hookers and Blow” or did a draft of the graphic not get cleaned up prior to publication?

    1. controller1 – Well, it’s not publicily disclosed, but I believe it’s about 90-95% of all revenues go to hookers and blow.

  4. Can you make a t-shirt with that credit card diagram on it? I still wear the ten airport t-shirts (+ Godzilla’s home) that I bought a few years ago, would love to add another Cranky Flier original to the collection.

    1. HT – I have really resisted getting back in the t-shirt game, but I’ll think about it. (It’s a real pain in the butt when that’s the only thing I have to pay sales tax on. )

      1. Would a “print on demand” T-shirt service be able to take care of sales tax & fulfillment, such that you could basically just design the shirts and make a few bucks each time someone ordered one?

        Most of the printed T-shirts that I buy from Amazon these days are made on demand, for example, as are many paper books.

        1. Kilroy – I did print on demand before, and they don’t handle taxes. But I actually think I can make a go of this. Stay tuned, and I’m going to try to put some of these back out there.

    2. Yes. My Cranky Flier shirts from 2019 are starting to lose some of the print on them. I’d love to buy more.

  5. “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.”

    It’s not so much redistribution from those not earning credit card rewards to those that are.

    * It’s usually talked about as redistribution from poor to wealthier consumers, but that’s not right. The argument is that interchange fees are high, and prices the same whether you pay by card or not, so those paying with cash subsidize card users. But that’s not true because it’s more expensive for merchants to accept cash than to accept card (employees pocket some of the cash, employees make incorrect change, insurance costs are often higher for businesses holding lots of cash etc).

    * Banks rebate the majority of interchange they receive to cardmembers in the form of rewards. For the most lucrative cards they can rebate *all of it*. They’re doing this in order to find customers who revolve balances. Credit card rewards is a redistribution from within cardmember portfolios – from those who pay interest, to those who do not. (Those that do pay interest are getting a service – financing – that would often be more expensive through other channels, eg payday loans).

    What this proposal is: big retailers lobbying for the government to require payment networks and banks to offer services at a lower cost to them. Accepting cards is a benefit to retailers, it generates sales because of convenience and because customers paying by card spend more. Limiting the profitability of that service will also limit credit, which some will see as a positive (a paternalistic view-fewer consumers getting in trouble with credit) but also limits economic activity and growth.

    Why are we seeing this now? It’s not going to *pass* in an election year. And we have a divided Congress. It’s not even a priority for this administration, which is led by a former Senator from Delaware where the big banks are based.

    But it’s a GREAT political fundraising tool for both sides! It’s a starting gun that raises cash from retailers like Amazon and Walmart and well as from financial services companies as we lead into a presidential election cycle.

    1. First, the choice isn’t between “Rewards Credit Cards” and “Cash”. There’s plenty of non-rewards credit cards out there, not to mention debit cards (both swipe and PIN debit) yet everybody has to pay in to the system. And be serious… would people really stop paying via plastic/electronic methods entirely if the rewards weren’t present? Plastic is more convenient than cash, whether I get a subsidy for my spend or not. Rewards lead people to pick one card over another; they aren’t much of a reason to choose non-cash payments to begin with.

      I don’t see why merchants (and by extension, all their customers) should forced to subsidize airlines, cash rewards, etc. for a subset of customers. I can’t disagree with the notion that credit cards (and other non-cash payment methods0 do indeed provide a valuable service, but the price charged for that service should be in line with the costs of the actual service, not with a huge overhead kicker added to pay for banks, airlines, etc. to bribe their customers.

      I enjoy my 2% cashback from Citibank, sure… but I wouldn’t get overly worked up if that all went away either.

    2. “But that’s not true because it’s more expensive for merchants to accept cash than to accept card (employees pocket some of the cash, employees make incorrect change, insurance costs are often higher for businesses holding lots of cash etc).”

      Really Gary? Is that the reason why merchants often charge extra for purchasing goods / services with a card versus using cash because its MORE expensive for them to accept cash?

      The reality is, depending on type of card and size of transaction, that accepting card payments for merchants generally costs 2.5% to 4% more on average for merchants. All of the other items you call out (incorrect change, employee theft, etc.) are insignificant and anecdotal at best.

      1. “Is that the reason why merchants often charge extra for purchasing goods / services with a card versus using cash because its MORE expensive for them to accept cash?”

        Many merchants like cash because it’s easier not to report the income. Cash discounts often accompany tax fraud.

        1. Bingo! This is the number 1 reason small businesses like cash, so they can underreport income and cheat on their taxes.

  6. Additonally I’d point out that “more than 12 percent of Delta’s revenue came from the credit card” is misleading in how it understates the importance of card. Revenue from American Express isn’t the same as revenue from a ticket, it’s much better, because it’s much higher margin.

    – Delta SkyMiles margins are over 30%
    – Possibly much higher, American reports their own AAdvantage margins at 52%
    – Delta reported “Operating income of $3.7 billion with an operating margin of 7.2 percent” for the full year 2022, Amex represents at least half that, maybe more.
    – In a given quarter at American Airlines sales to cobrand card partners has often represented the entirety of their profit, with CASM > PRASM (and even PRASM + Cargo).

    This has been true for a long time but the dollars and margins have grown substantially over the last decade. Even back 20 years ago, when United entered bankruptcy it was said that they continued flying to support the underlying credit card business. One SVP at the time told me their first call after every hearing before the judge was to Jamie Dimon’s office.

    AAdvantage was appraised at $18 – $30 billion early in the pandemic. The market cap of the entire enterprise is less than $12 billion currently (although potentially better to compare to enterprise value).

    Ultimately American, Delta, and United each raised $6.5 billion to $10 billion in debt against the future income streams of their loyalty programs, which is mostly driven by cobrand card revenue.

  7. I’ve opted out of the whole points-chasing game, preferring to spend my time just pocketing the 2% cashback from Citibank and calling it a day, but I totally see the appeal of tearing down this tower of forcing the merchants to pay for the whole system. (And lets be real here; this is forcing the merchants… not accepting credit these days is not a realistic option.) This is a shining example of wealth-transfer, since the most-rewarding cards go to people with the best credit, money to afford annual fees, etc., but pretty much everyone pays into the system. (Even though merchants can charge them, it’s still the case that fees are relatively rare, for fear of angering customers.) And would it really be such a bad thing to confine frequent flyer programs to actual flying? Might help re-focus attention on service, if they can’t simply bribe people with credit card points. And, as an added bonus, they might actually start collecting more cash revenue for all those premium seats they are building into fleets, instead of all of them being “free” upgrades of various sorts.

    I’d miss my 2%, but I think it’d be churlish to whine about it. Not to mention it’d be nice to not have credit card applications pitched to me every single flight. Yes, airfares would probably go up to make up for the lost revenue, but just like I don’t expect everyone at the grocery store to subsidize my cashback, I also don’t expect them to subsidize airline tickets.

  8. Airline loyalty programs as they currently exist will be transformed, into irrelevance, in 3-5 years. The model and the mechanisms for accruing loyalty are no longer sustainable for airlines, credit card companies, and passengers. They will all be spun out to banks most likely.

    1. Well, the current loyalty programs are super-sustainable for the airlines right now… they are fantastically profitable, because of all the miles they sell, the continuing decline in their value to flyers, and how many never get spent. It’s the sustainability of everyone else that’s the issue… the treadmill of every-increasing sign-up bonuses that the banks pay out to attract customers, and the retailers (and their customers) that pay into the system.

  9. Is the credit card network fee lower in other countries or do they already have regulations on the industry?

    In most of Europe and Asia, airline-branded credit cards aren’t nearly as lucrative and they aren’t pushed nearly as hard as in America. (And I think this is part of the reason for the spending waivers for international members of frequent flyer programs recently, since they aren’t eligible for the credit cards that would waive or count towards dollars spent).

  10. Well said, Brett! :-)

    Glad you resisted the charms of the Wall Street / big finance recruiters when you got your MBA years ago.

  11. Have you seen what happened in Australia? Every merchant charges to use a credit card, but studies showed that prices did not drop, just new fees for consumers.

    1. Nearly every gas station in my area (in the US) chargers a fee for using a credit card, by having prices that are 5-10 cents higher for plastic purchases. What did I do? Bought an EV :)

  12. Gary is spot on in his comments above.
    This is just a populist wealth transfer proposal and you have to look at who benefits at whose cost and the likelihood of the ones that lose to win over the legislative process.
    Add in that the US economy is so heavily driven by consumer spending and any tinkering w/ any part of the mechanism that fuels that process is highly risky and the chances of this going anywhere are slim to none.
    Although this isn’t an airline specific bill, it is also clear that Amex and Discover would win at Visa/MC’s which is even more reason why Visa/MC don’t want it and there are a whole lot more entities associated w/ Visa/MC than Amex or Discover.
    And then you have to look at the airline implications and any changes could increase the benefit for Delta relative to everyone else. DAL’s billions more in revenue already helps pay for spending such as higher labor costs that other airlines don’t have – and that is clear w/ the United pilot contract which is larger than every other airline labor contract before it. Given that United gets the least amount of credit card revenue of the big 3, they of all people do not want to see anything tipped in a competitor’s favor.

  13. “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” is not a trend that I have observed in recent years. The more I am seeing is “Get 5 cents back for every $20,000 you spend”.
    Also, the cafes and shops a few blocks away from my house “pocketing the difference when fees were lower” is the least I’m worried about.

  14. Ya know, as someone who was for a while shut out of the rewards game, but who is now back into it, I’d rather have a chance at lower prices, instead of that money going to banks and airlines. I actually managed on a fairly meager income to get over $1,000 from rewards last year, but I definitely worked multiple programs. (Oh and debit card rewards are STILL a thing!)

    I also just read The Points Guy editorial, and it gets pretty unhinged. “Your data is going to go through CHINA!” Thats a completely unfounded assertion, and there already other US networks that handle transactions for debit purchases, they undoubtedly would expand into handling transactions for credit cards.

    That being said, I do try strongly to avoid using my debit card for anything but at an ATM, since if it is used fraudulently I’m out of money, versus the bank being out of money.

    And TBH, we already buy enough stuff in this county, making it a little more expensive wouldn’t be a bad thing to lower our imports of cheap stuff, as well as reduce the amount of stuff that gets thrown out.

    Sure, the airlines will have to adjust, but maybe somewhere in there they still have an understanding of how to run a loyalty program, and not just manage a revenue source from the banks.

    1. Oh and one more thing while we’re at it, lets roll back some of the 1986 tax reform law, and make credit card interest tax deductible, perhaps as a deduction in addition to the standard deduction.

      Just a reminder that government does always carry out social engineering. That really is its core purpose.

  15. Banks processing credit card payment has become a public utility, just like telecom companies providing Internet access… but the utility companies (banks) are not competing on price (interchange fees) to the customers (merchants) when providing a service. The result is a corrupt system where everyone pays more for daily life activities

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