Credit card rewards are not free. Buyers don’t care.

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The US credit card market is the oldest and largest in the world. It is also the least regulated and the most expensive. In other countries, policymakers control card companies by setting price caps or funding public sector alternatives. The result is lower prices. In the United States, credit card fees are between 1.3% and 2.7% of the transaction value; in Europe they are as low as 0.3%.

Dick Durbin, the senior senator from Illinois, wants to change that. Last week, alongside Kansas Republican Roger Marshall, he unveiled the Credit Card Competition Act of 2022. “It’s time to inject real competition into the credit card network market, which is dominated by the Visa-Mastercard duopoly,” he said.

Whatever its merits, Durbin will likely find it difficult to pass his bill. Swiping a card may seem simple enough at checkout, but behind the scenes, the interests of multiple parties – consumers, merchants, banks and network companies – have to be reconciled. Over the years, ties have formed between these parties, making the model difficult to change.

Initially, the closest alliance was between network companies and banks. Prior to their IPOs in the mid-2000s, network companies were owned by banks. Visa founder Dee Hock, who died last month, was an employee of the National Bank of Commerce in Seattle when he was tasked with bringing together the interests of card-issuing banks. The fees charged by banks are set by the card networks at a level that encourages them to invest in payment technology.

Increasingly, stronger ties have been forged between card companies and consumers. Although they invest heavily in marketing, it’s not Visa or Mastercard advertising that cements the relationship. Rather, they are rewards, funded by card-issuing banks from fees they collect from merchants.

Ever since Diners Club launched an airline miles program in 1984, rewards have been a powerful mechanism for driving card usage — and Americans love them. For many, they represent a source of tax-free income. Card companies now pass around two-thirds of their gross fees back to customers through rewards. One of the largest card issuers, Capital One, paid out $6.4 billion, or nearly 20% of total revenue, in 2021. And the rate has been rising. Discover’s reward rate has grown from less than 1% of sales volume in 2013 to 1.38% in 2021.

The awards are not without controversy. In 2020, economists at the Federal Reserve Bank of Boston concluded that because merchants do not differentiate prices at checkout, more expensive transactions are subsidized by cheaper debit and cash payments. Since higher-income consumers are more likely to hold rewards cards, these subsidies become a transfer from lower-income groups to higher-income groups.

Yet the reward culture is so entrenched that it’s hard to undo. Durbin probably knows this, which is why his bill does not propose price caps, unlike his 2011 debit card reforms and similar price controls introduced in Europe, Australia and elsewhere.

Indeed, Durbin’s foray into the debit card market has underscored the complexities and unintended consequences of this opaque space.

Debit fees have dropped dramatically. In his 2021 letter to shareholders, Jamie Dimon, chairman and chief executive of JP Morgan Chase & Co., estimated the impact on his bank to be around $17 billion over 10 years. But according to researchers who looked at the impact in 2019, banks are making up for their losses by charging higher fees on other products, which doesn’t benefit consumers.

In the credit card proposal, the big banks would have to offer merchants an alternative network over which transactions could be routed – one that is neither Visa nor Mastercard.

The problem is that there is no credible alternative. And the investment required to build one is huge. In Europe, 31 banks signed on to an initiative last year to create an alternative to Visa and Mastercard, but banks have since shied away from putting together the 1.5 billion euro ($1.53 billion) package. initial funding.

“Public funding would be nice,” said the project’s chief executive, Martina Weimert. “Let’s face it, it’s going to be a massive investment. It’s expensive.”

Given their 77% market share of US credit card volume, it’s no surprise that Visa and Mastercard aren’t keen on tinkering. “This is an attempt by the government to get involved in pricing in private markets,” Al Kelly, Visa’s chairman and CEO, told investors recently. “It’s not the government’s job. Markets should determine the price, not governments. And I’m very committed to that, and it’s something that we will continue to defend. »

Kelly may not have to worry – he has the American consumer on his side, and there are fewer as strong allies.

More from Bloomberg Opinion:

• Buy now, pay later joins the club of subprime losers: Marc Rubinstein

• Is the $695 AmEx Platinum card really worth it? : Alexis Leondis

• Visa’s Amazon Blues to Shape the Digital Money Debate: Andy Mukherjee

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Marc Rubinstein is a former hedge fund manager. He is the author of the weekly financial newsletter Net Interest.

More stories like this are available at bloomberg.com/opinion

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