Legislation Puts Credit Card Rewards at Risk

Proposed federal regulation could jeopardize the future of cash back credit cards and other rewards for account holders. Every credit card transaction carries an interchange fee, or a service charge deducted from a merchant's revenue. In the United States, interchange fees average around two percent. Those fees not only cover the costs of security, accounting, and transmission, they also provide issuing banks with the margin necessary to offer popular credit card rewards, like frequent flyer miles and cash rebates.

  • Merchant processing banks set their own interchange fees based on a combination of factors, such as:
  • the size of a business accepting credit cards,
  • the overall transaction volume of a merchant,
  • the average ticket amount on transactions,
  • the risk factors inherent in a particular merchant or industry, and
  • the security features in a merchant's processing system.

Although larger merchants enjoy significant processing discounts, some small business owners assert that interchange fees above two percent reduce their ability to compete effectively. Proponents of industry reform support new rules that cap interchange fees or enforce broader bargaining power for merchants. Opponents note that similar legislation in Australia forced banks to scale back on reward programs while increasing other merchant fees. The Government Accountability Office has already started its own impartial examination of credit card interchange fees.

About the Author


Joe Taylor Jr. is an internal business consultant for a Fortune 500 company, who writes about finance, culture, and design. He holds a Bachelor of Science in Communications from Ithaca College.