Since the passage of Dodd–Frank, which—among other things—capped the interchange fees that large debit-card issuers could charge, merchants and activists have advocated measures to reduce credit-card interchange fees, including the Credit Card Competition Act’s routing mandate.
A common rationale is that the increasing prevalence of credit cards offering rewards—such as airline miles, hotel points, or cash back—has made credit cards regressive, with a disproportionate share of the rewards going to the wealthy. An interchange-fee restriction, advocates argue, would mainly reduce or end credit-card rewards, primarily inconveniencing the wealthy households that receive the largest benefits.
However, the notion that an interchange restriction would benefit low-income households makes little sense, and the idea that rewards cards are used only by the wealthy is off the mark. Low-income earners have much to lose from steps that reduce rewards or restrict access to credit cards.
Limiting interchange revenue would have a predictable result: credit-card issuers would cut rewards, increase other fees, tighten credit limits, or stop serving some of their least profitable customers. Banks do not automatically make money from every customer to whom they provide a credit card. They bear fraud losses, servicing expenses, and losses from unpaid debt, and those risks tend to be higher for borrowers with weaker credit profiles. The Federal Reserve estimates that, by late 2021, transaction income before rewards equaled about 1.3 cents per dollar of purchases, while rewards expenses equaled about 1.5 cents. Little transaction margin remains to absorb a regulatory reduction in revenue.
The burden would likely fall most heavily on lower-income consumers. When the Durbin Amendment reduced debit-card interchange revenue, affected banks partially replaced the lost income through higher deposit-account fees. Lower-income consumers have less ability to avoid higher fees by maintaining minimum balances; Federal Reserve research finds that minimum-balance requirements and maintenance fees are already higher in low- and moderate-income communities. A credit-card interchange restriction would create similar pressure to recover lost revenue through lower rewards, higher fees, reduced credit limits, or tighter underwriting. Those adjustments would place consumers already closest to the margin of mainstream credit at the greatest risk.
The broader experience with the Durbin Amendment supports this concern. Banks reduced the availability of free checking, and one study estimated that the resulting changes increased the number of unbanked households by roughly one million. Research I did with my colleague Chris Richardson also found little evidence that merchants passed their savings through lower retail prices and estimated that many consumers would lose rewards or access under a credit-card interchange cap.
Nor is there much reason to assume that lower interchange fees would translate into lower retail prices. A Federal Reserve Bank of Richmond survey found that roughly two-thirds of merchants reported no change in their debit-card costs after the Durbin Amendment, nearly one-quarter reported higher costs, and fewer than 10 percent reported lower costs. Cardholders would bear any reduction in rewards or increase in banking costs directly, while any benefit from lower retail prices would depend on merchants passing their savings through.
A recent NBER study estimates that interchange fees transfer resources from cash and debit users to credit-card users and points toward lower credit-card fees as a remedy. The authors are candid that their analysis holds payment choices fixed and abstracts from credit-card lending and access. Their own estimates of the impact of the Durbin Amendment show why those omissions matter. Because the amendment reduced debit interchange but left credit-card interchange untouched, banks cut free checking and other debit-account benefits while credit-card users did not lose their rewards. Middle-income households, which rely more heavily on regulated debit cards, lost the most, while higher-income credit-card users gained.
The lesson is straightforward: estimates of redistribution under current prices, rewards, and payment choices do not establish that reducing interchange revenue would help the households policymakers intend to protect. Policymakers must consider banks’ responses—not just merchant fees—when judging who benefits from interchange restrictions.
Today, over eighty percent of American adults have a credit card and roughly four-fifths of all cardholders own a rewards card, amounting to about 175 million people—more than the roughly 169 million people in the U.S. labor force. Rewards cards are also mainstream: by the end of 2022, 75 percent of general-purpose credit cards were rewards cards, and more than 90 percent of general-purpose credit-card spending occurred on them.
A Morning Consult survey found that 92 percent of low-income cardholders consider cash-back rewards valuable in their everyday lives. A Bloomberg analysis that used Consumer Financial Protection Bureau data found that even consumers with deep-subprime credit scores place more than 60 percent of their credit-card purchases on rewards cards.
The evidence does not support a simple income-based account of who gains and loses from rewards programs. A Federal Reserve study found no clear pattern in net rewards across income groups and concluded that its findings were inconsistent with the “reverse Robin Hood” hypothesis. High-FICO, high-income consumers received the largest gains, but largely at the expense of low-FICO, high-income consumers. Credit quality and repayment behavior therefore play central roles in determining who benefits.
The idea that we can reduce credit-card interchange revenue and leave low-income consumers unaffected is unsupported by evidence and recent research. Issuers would likely respond by reducing rewards, raising fees, tightening credit, or limiting service to marginal customers. The households most vulnerable to those changes are precisely those the policy purports to help.
