Credit-card rewards programs have long been a staple of the industry, but new legislation could lower the benchmark on such programs by tamping down on a revenue stream that helps fund them – the fees businesses pay to accept plastic.

In May, the Senate voted to limit interchange fees, transfer fees paid for by merchants to cardholders’ financial institutions each time shoppers pay with plastic. The measure was attached to the financial services reform legislation.

Although the House’s version of the bill doesn’t include the limit, negotiations over a compromise bill could rein in transaction fees on some debit cards, cutting into industry revenue. Consumers could end up paying for some of the price. Rewards programs are largely subsidized by interchange fees. If those funds are suddenly slashed, some issuers may scale back their rewards or shut down their programs entirely.

“The new downward pressure on interchange—particularly debit cards—will put a serious dent in a bank’s ability to offer debit-card rewards programs,” says Emmett Higdon, a senior analyst with Forrester Research who covers consumer financial services. Until recently, “we were in an arms race for richer and richer rewards,” he says. “We’ve escalated so much so that for any bank to offer rewards with shrinking fee revenue would be very difficult.”

Now, some issuers are starting to take a closer look at so-called merchant-funded rewards, says Higdon. Such rewards programs are similar to loyalty programs offered by…

Read the entire article, featuring Loyalty 360’s Mark Johnson, here.

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