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The Credit Card Competition Act of 2023 is a bill before Congress that would allow merchants to choose the payment networks they use to process card transactions. Currently, merchants who accept major credit cards (Visa, Mastercard, American Express, Discover) must use the card company’s payment network. According to the Merchant Payments Coalition, merchants pay card companies an average of 2.24% of each transaction, known as a swipe fee, for using their payment networks. The legislation would open the market to other networks, ostensibly driving down the cost of swipe fees for merchants — which usually fund cardholder rewards.
Loyalty360 spoke with supplier members and loyalty strategy experts on how the pending legislation could affect the economics of credit card reward programs, merchant pricing decisions, and the customer experience.
Kelli Hobbs, Vice President, Business Development, Valuedynamx
Aidan Lundy, Senior Vice President, Capillary
Ben Stirling, Senior Vice President, Rewards+, Capillary
Mike Nolan, Vice President, Marketing, Banyan
Adapting to Regulation
The Credit Card Competition Act of 2023 currently has bi-partisan support in Congress, led by Senators Dick Durbin (D-IL) and Roger Marshall (R-KS). If the legislation passes, industry leaders have said publicly it will drive down swipe fees to an extent that could significantly impact credit card rewards. When debit card swipe fees were capped by Congress in 2010, many issuers reduced or eliminated rewards associated with those cards.
While there is precedence for believing credit card rewards might dry up if the legislation passes, Valuedynamx’s Hobbs is more optimistic. “I believe we will see an adjustment to programs to highlight areas that can be supplemented by partnerships and a redistribution of budgets that will provide rewards to keep members engaged.”
Card rewards will continue despite the legislation, according to Banyan’s Nolan. He notes such rewards have long been a driver of card use and customer loyalty, and customers appreciate the opportunity to earn rewards on everyday purchases.
“Most issuers will likely explore alternative ways to fund rewards programs that might include adjustments to card fees, interest rates, or new revenue streams through merchant partnerships and collaborations,” says Nolan.
Recent history supports the assertion that passage of the bill would cause issuers to rethink their programs rather than abolish them. In 2015, the E.U. passed legislation that significantly reduced revenue from swipe fees. This prompted issuers to examine their rewards programs to ensure they were impacting KPIs as intended. Programs were optimized to deliver the desired customer behavior, which helped cushion the loss of revenue.
Capillary’s Lundy predicts issuers will also find ways to offset any lost revenue on swipes. “There will be an emphasis on supplier or merchant funding of offers to help bridge the gap,” he says. “Credit card companies will need to offer merchants clear insight into the customers they can help them reach.”
Lundy continues, “On the premium end, you may see more card products with fees attached offering better access to rewards and benefits, creating more distance between the top premium end and the value end of the market.”
“I don't think programs will go away,” concludes Stirling from Capillary. “They will just evolve in the way they generate business value, namely revenue, and consumer value in the form of benefits and rewards.
Lower Prices Promised, Not Guaranteed
Supporters of the bill say it will lower prices for consumers, a claim that has strong appeal as Americans grapple with the cost of living and inflation worries.
“This is quite possible,” agrees Lundy. “Where customers choose low-cost and value-centric card products, they are likely to see some savings. The bill may enable some merchants to reduce their costs, which is hopefully passed on to customers.”
Whether merchants will indeed pass on the savings is uncertain. “I don’t believe they will,” counters Stirling. “It's more likely that smaller merchants will put the savings toward staffing or bank the upside to help improve their cash position.”
“I have a hard time seeing this legislation delivering a noticeable impact on prices,” adds Hobbs. “While the proposal requires alternative networks to be available, thus introducing a level of competition and, in theory, reducing swipes fees, it does not promise that fees will go down or merchants will reduce prices.”
Avoiding Diminished Rewards
If brands must restructure their programs in response to the legislation, it’s likely that some monetary benefits will be reduced. It’s critical for brands to understand the effects of diminished rewards and be prepared to mitigate them with alternative benefits and strategies.
“A reduction in the rewards offered would inevitably have a negative impact on goodwill and brand perception,” Lundy asserts. “The challenge is to find new ways to fund rewards so that doesn’t happen.”
Hobbs advises brands to consider how to keep customers engaged without relying so heavily on monetary rewards. “Brands should look at ways to deepen the customer relationship that aren’t directly tied to swipe fees,” she says. “Brands could explore gamification, travel benefits, card-linked offers, and other opportunities to bring relevant discounts to customers. There are many routes to building customer lifetime value.”
Stirling sees an opportunity for merchants to develop their own loyalty programs that benefit customers of participating brands. “Merchants can invest swipe fee savings in an in-house loyalty program that offers rewards tied to certain brands. Such programs foster loyalty to both the merchant and the brands featured in the offers.”
Outlook on Co-Branded Credit Cards
Many brands offer co-branded credit cards linked to their loyalty programs, especially in the travel and retail sectors. Cardholders earn points and bonuses on purchases that can be redeemed for rewards or other perks. If it becomes law, the bill may raise doubts about the financial viability of offering rewards through these cards.
“The commercial dynamics of co-branded cards will be put under pressure,” states Lundy. “There’s a real possibility some products will go from potential sources of revenue to marketing costs. The positive impact of co-branding in terms of customer behavior may outweigh any loss resulting from the legislation.”
Stirling adds, “This highlights the importance of data analysis to establish the value derived from the programs by merchants, like increased spend and frequency. Some merchants are happy to pay higher swipes fees in return for these advantages.”
“Co-brands will need to reexamine who their customers are and what is most important to them,” says Hobbs. “This exercise should help identify alternatives beyond consistent category rewards, like 3% cash back on gas, and lead to new types of rewards to keep customers satisfied and engaged.”
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