For years, a major American industry has been earning billions by peddling an addictive product for profit. Legislative proposals to reform the industry have been met with major PR blitzes aimed at the public and millions of lobbying dollars aimed at Washington, both designed to scare Congress away from action. The proliferation of this product has hit poorer, less educated, and minority communities particularly hard while costing American small businesses billions annually. The industry consistently insists that their product is not only not harmful but actively good, flashing reams of industry-funded research confirming its product’s positive benefits. Earlier this month, the industry’s nonprofit front group went so far as to release a report claiming that “New Data Reveals Credit Card Rewards are a Lifeline to Working Class Americans.”

Credit card reward programs have become the central front in Washington’s biggest financial sector war. Despite industry claims of benevolence, the current system allows a corporate duopoly to extract enormous profits from small businesses and working-class cardholders, while using dubious claims of consumer benefits to shield itself from reform.

For context, every time you swipe your credit card, the business where you’re shopping pays a fee to the relevant payment network for processing the transaction. A Visa and Mastercard duopoly control over 80% of this market; card-issuing banks also get their cut.

This system passes on huge costs to small businesses, who already operate on extremely tight margins. Merchants pay about 2–3% on each transaction for the privilege of accessing credit card networks, amounting to billions of dollars in annual tribute to the credit card industry, which leverages its duopoly power to charge whatever it chooses. “Swipe fees” have become retailers’ single greatest cost after wages. Visa and Mastercard enjoy net profit margins of around 50%.

Efforts to reform this practice have prompted outrage from Wall Street. Rather than follow Europe’s example and cap swipe fees at 0.2–0.3% (an order of magnitude lower than American rates), a group of senators brave enough to challenge the financial lobby argue that American-style market competition could solve the problem. The bipartisan Credit Card Competition Act (CCCA) would prohibit issuing credit cards that only work on one payment network and require cards be operable on at least one other non-duopoly network. This would give merchants a choice; the free competition would bring costs within reason. This is a far more market-friendly measure than what other jurisdictions like the European Union do.

But that reasonable tweak to incorporate competition is unacceptable to the industry. Wall Street has spent $51 million and counting to lobby against the CCCA, in what one Congressional staffer told me was the most intense “trench warfare” he’d ever seen from the financial industry. Wall Street’s most powerful strategy has been to try to use consumers as pawns in this battle, framing everyday Americans as the supposed victims of reform efforts, which industry claims are an effort to eliminate or ban reward programs.

Their latest report is an illustrative case-in-point. The paper, which calls reward points a “lifeline” for the working poor, is mostly a compendium of sloppily deployed statistics that distract and mislead more than illuminate the realities of either the industry’s battle with small businesses or its supposed consumer benefits.

The paper reminds us that accepting credit cards will increase a merchant’s transaction volume, that this transaction increase will generally offset swipe fee costs, and that retailers are therefore better off accepting the current arrangement. It is intuitively true that most businesses cannot afford to reject credit cards as a payment method. To support its point, the report cites a six-year-old article from the National Federation of Independent Businesses (NFIB) on the benefits of accepting credit cards. 

The report goes on to claim that “rewards are for everyone” because high- and low-income cardholders earn rewards points at the same rate.

Perhaps most ridiculously, the report wants us to understand that “[r]ewards are especially important to lower-income consumers” because although their “accounts earn and redeem rewards at similar rates to middle and upper-income accounts, [so] rewards have a greater impact on LMI [low- to moderate-income] household finances.” It goes on to claim:

The boost in income from rewards redeemed is three to four times larger for LMI cardholders than for upper-income cardholders. LMI cardholders also have a stronger preference for redeeming rewards for cash, indicating a greater reliance on rewards to offset everyday expenses, especially during times of inflation.

These statistics are technically true but entirely irrelevant. When it comes to small businesses, the report elides the financial burden to small businesses and fails to note that the NFIB, which represents small business interests, is a chief supporter of the CCCA, has key voted the bill, has found that 92% of its members want the option to choose between multiple payment networks, and has vocally savaged the way fees “increasingly cut into the razor-thin profit margins of small businesses.” Swipe fees are higher in American than in any other major economy, presenting small businesses with unique pressure on their typically already-tight profit margins. As one shop owner described swipe fees, “You know you’re going to get screwed, the only question is how to get screwed the least.”

The claims about consumers are similarly specious. An hourly wage earner with their last $15 dollars in the bank and a CEO with, say, $25.7 million in the same bank are not in equivalent positions, even if their accounts earn interest at the same rate.

The mathematically correct observation that poor people are poorer than rich people, and therefore that $15 represents a greater share of their income, is unlikely to be particularly compelling anyone paying attention to the current condition of the American working poor, especially in a moment of high inflation. But the broader question for the credit card industry is the cost to the working class for those minimal annual “rewards.” In a 2023 paper, economists at the Federal Reserve Board offered an answer to that question, finding that the industry is exploiting naïve users with low credit scores by using rewards as part of a deliberate play to induce higher debt.

“We have created an ecosystem where we have kind of essentially been giving a drug to the consumer, which is these rewards cards,” explained Sumit Agarwal, one of the paper’s authors. “And the reason we keep giving this drug is we know it’s highly profitable and we know the consumer is addicted to it.” The paper elaborates: “[C]redit card rewards induce sub- and near-prime consumers to overspend and subsequently overborrow on their credit cards,” adding that “reward cards do not only induce low FICO consumers to overborrow, but also to engage in sub-optimal repayment behavior.”

The paper compares the dollar value of rewards that users receive with what they pay in fees and interest payments, to produce a “net reward rate.” If the value of rewards received is higher than fees and interest paid, the net reward is positive. If not, it’s negative. Net reward rates for users with lower credit scores are deep in the red. The credit card industry revenue share from low-FICO users is mostly interest payments, made on debt accumulated by the deliberate lure of reward points that end up costing the less savvy far more than they are worth. The Fed economists conclude that rewards programs redistribute “$15 billion from less to more educated, poorer to richer, and high to low minority areas.”

Whether the CCCA really would spell the death of credit card rewards is hotly debated. The industry claims it needs swipe fees to fund reward programs and has threatened to cut rewards if its fees are reduced. Other analysts point out that reducing swipe fees in other places, like Australia, has not produced a proportional drop in rewards. As things stand, rewards programs earn the credit card industry far more profit than they cost; whether the industry is likely to make good on its threat to kill such a beneficial revenue stream seems like a reasonable question.

But regardless of what this industry chooses to do in response to free and open competition, as Congress debates the CCCA, it should not let credit card industry PR efforts obfuscate the realities of the current state-of-play. The credit card industry is gouging small business with swipe fees, claiming it’s doing so to help working-class Americans, while taking many of those same cardholders for far more in payments than they ever see in rewards.

Whatever you choose to call that, it is certainly not a lifeline to the working class.

Chris Griswold
Chris Griswold is the policy director at American Compass.
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