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In what could spell bad news for the industry, large merchants like Amazon and Walmart want the right to be able to refuse premium reward credit cards according to The Wall Street Journal. The key to the merchant’s desire is mitigating the interchange fees they pay for accepting various credit cards.
Interchange Fees
The interchange fee is the fee paid by merchants to card issuers, with the biggest names being Visa, Mastercard, and American Express. Currently, merchants cannot discriminate which cards they accept or not. For instance, if they accept Mastercard, they have to accept all Mastercards, from a basic no fees card that costs them a small interchange fee, to a World Elite Mastercard that costs them a much higher interchange fee per transaction.
Essentially merchants would like the option only to accept (Mastercards for instance) that charge the lowest interchange fees and stop accepting the cards that charge higher fees. Most premium rewards credit cards fall into this category—after all, it costs the card issuer a lot of money to pay airlines and hotels for all those points, miles, and free night certificates.
A Lesson From Europe
The European Union capped interchange fees (the fees issuers charge merchants) at 0.3% in 2015, and the cap applies to all consumer credit cards. For complex legal reasons, the only exceptions to the cap are business credit cards and cards issued by American Express. This move has hit rewards credit cards in Europe pretty hard especially in the UK which had the most developed market.
As the reward cards became unprofitable, over a few short months the loyalty card market was devastated as cards were canceled and withdrawn. The UK market now only has around ten reward credit cards, with most of those issued by American Express. While there is currently no threat of a cap in the US, card profitability may be hit hard if the large merchants win.
Consider that Amazon alone is set to land 50% of all e-commerce in the US by the end of the year, it already accounts for 4% of all retail sales in the US. Losing the ability to use a premium rewards card at such a dominant market player could seriously hit the cards' bottom line.
Blatantly put, if a credit card becomes unprofitable, or not profitable enough, then the issuer is very likely to pull it from the market.
Our Take
If merchants win their battle, this could be a big hit for card issuers and would damage the premium rewards credit card industry. One possible glimmer of hope is that premium rewards cards tend to be in the hand of wealthier consumers, with high income and purchasing power to match. Retailers will have to ask themselves, do they really want to turn away card holders?
Source: Doctor Of Credit
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