'Untaxed kickback'? Washington goes to war over rewards programs

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The Biden administration and key lawmakers are stepping up their fight against credit card fees that they say are slamming consumers and stifling competition.

But their ability to hack away at more than $130 billion in swipe fees and late penalties that banks and card companies charge each year could hinge on something Americans love — rewards programs that subsidize everything from airline travel to groceries.

The issue is sparking a major lobbying battle in Washington, with Wall Street unleashing a wave of ads across television, radio and social networks to convince consumers that the push to curb fees would sharply limit funding for the rewards programs.

The goal is to convince “thousands of people to reach out to their elected representatives, to let them know how disappointed they are and how concerned they are,” said American Bankers Association President Rob Nichols. “We'll spend whatever is needed."

Washington’s attempt to reshape the credit card industry is the latest clash between the Biden administration's top regulators, Congress and the financial industry over the lucrative fees. New rules and enforcement actions from agencies like the Federal Reserve and Consumer Financial Protection Bureau have already taken aim at practices ranging from debit payments to misleading advertisements promising major card bonuses.

The dispute has even touched on the debate over income inequality, with critics arguing that credit card fees disproportionately hurt lower-income Americans while rewards programs benefit higher earners.

Those rewards are “an untaxed kickback,” said Brookings Institution senior fellow Aaron Klein, a former Treasury official and congressional economist. “The payment system is silently becoming a reverse Robin Hood, generating billions in untaxed side income for rich people.”

President Joe Biden and CFPB Director Rohit Chopra say that paring back late penalties on credit cards is critical to eliminating unnecessary charges — which they’ve labeled “junk fees” — that banks have used to pump billions of dollars from their customers. Sen. Dick Durbin (D-Ill.) — the architect of several legislative efforts targeting swipe fees — says banks and payment networks are driving up prices on consumer goods by charging a percentage on each transaction.

The situation grew even more heated after Durbin and co-sponsor Sen. Roger Marshall (R-Kansas) filed two credit card-related amendments to the annual defense legislation — a bill that Majority Leader Chuck Schumer wants to pass this week — in a move that industry lobbyists blasted as a cynical ploy.

The money that banks and payment networks like Visa and Mastercard collect from swipe fees supports efforts to make transactions faster, more secure and less susceptible to fraud. But the bankrolling of expensive reward programs has spurred criticism, with economists from the Federal Reserve and International Monetary Fund saying they redistribute $15 billion annually from “less to more educated, poorer to richer, and high to low minority areas.”

Durbin, Chopra and their allies have framed their policies as populist attempts to clamp down on Wall Street banks and payment networks that raked in cash as retail prices climbed and consumers fell behind on their bills.

Wall Street’s lobbying campaign against those efforts is an attempt to flip that argument on its head, maintaining that credit card customers will lose out on billions in benefits if Washington gets its way.

That campaign became more urgent after Durbin reintroduced a bill last month to force payment networks to compete on the swipe fees that merchants pay in exchange for accepting credit cards. Those fees are set by the payment networks and vary depending on the card and transaction, but they typically average a little more than 2 percent. That's divided between the network and the bank or credit union that issued the card.

Durbin’s bill would require the largest banks to make their credit cards usable across at least two networks — one of which can’t be one of the two largest payment networks, currently Visa and Mastercard.

Merchants would then be able to select the network that routes the transaction. In theory, giving the merchants a choice would push the payment networks to drive down swipe fees and, potentially, consumer costs.

Bipartisan support for Durbin’s bill has grown. The latest version picked up Sen. J.D. Vance — a populist Republican from Ohio allied with Democrats on certain banking issues — as a co-sponsor. While Durbin's amendment may not make it into the defense bill, sources close to the Illinois senator said he'll push to attach it to any amendable piece of legislation.

“That they’re dialing up this digital media blitz as the Credit Card Competition Act gains bipartisan support tells me we’re onto something,” Sen. Peter Welch (D-Vt.), one of the bill’s co-sponsors, told POLITICO.

Banks and payment networks argue that any savings generated by the shift would simply be pocketed by the merchant. They point to academic studies that contend Durbin’s debit rules failed to lower retail prices and prompted some financial institutions to cancel rewards programs and raise other fees.

The lobbying effort around the bill has been frenetic, according to congressional staffers.

Alfred Kelly, Visa’s executive chairman, met with possible sponsors in a bid to stanch support as Durbin and Marshall prepared the bill for reintroduction. Outreach from the Electronic Payments Coalition — which represents banks, credit unions and card companies — has been “nonstop,” one staffer said. The American Bankers Association spotlighted the possible damage to credit card rewards in targeted ads that ran in districts belonging to Durbin’s allies.

Those groups also had a hand in bringing in Brian Kelly — a travel influencer and publisher behind the popular travel and credit rewards site The Points Guy. Kelly has leveraged his widely followed platform to blister Durbin’s efforts.

“When I heard about this, I thought it was too silly — with so much affecting our country and world — that there would be senators who’d try to take away our rewards,” Kelly said. “Our readership is almost unanimously against this legislation.”

Durbin said banks will still have powerful incentives to offer customers credit rewards if his bill becomes law. Those programs have expanded rapidly in the decade-plus since the Fed instituted the Dodd-Frank rules affecting debit transactions.

The point of those programs is to “attract cardholders to use their banks and not other banks,” he told POLITICO in a statement. “Increasing competition among networks will not diminish banks’ competition for cardholders. Notably, many merchants offer rewards programs to win customers even though their profit margins are far lower than banks.”

Nichols and other bankers say the sharp decline in debit usage — and the availability of debit card reward plans — that followed Dodd-Frank is a harbinger of what’s to come if the government meddles with credit card fees. Other groups like the Bank Policy Institute have made the preservation of card benefits a talking point in their attempts to weaken the CFPB’s proposal to cap credit card late fees at $8 — something Chopra has said he wants to finalize this year.

A Morning Consult poll commissioned by BPI found that more than 90 percent of adults think it’s important that financial institutions continue to offer credit cards with rewards.

Still, that message is more likely to land with wealthy consumers. Credit cards are much more commonly used for everyday purchases by households making more than $150,000 annually, according to Federal Reserve Bank of San Francisco data. Wealthy cardholders use credit for about 50 percent of their purchases, more than double the rate of those whose income is closer to the national median.

“What we're doing is alerting the general public — which appreciates and benefits from rewards programs — that those would potentially go away,” said Aaron Stetter, the executive director of the Electronic Payments Coalition.