In the past year,
credit card reform
has largely focused on protecting Main Street consumers from those
money-grubbing, bailout-taking card companies on Wall Street. But a
recent development earlier this week could potentially have a much
more far-reaching impact on how Americans pay for their
The battle over plastic
) agreed to a proposed settlement with the U.S. Department of
Justice and several state attorneys general. In the settlement,
which helped the credit card network companies avoid an antitrust
lawsuit, Visa and MasterCard agreed to allow merchants to offer
discounts and various other incentives to customers if they use
cards that cost those merchants less in fees to accept. Before the
settlement, merchants were bound by agreements that prohibited them
from discriminating among different types of credit cards within
the same network, even if some had higher
and other charges.
) , however, did not join the settlement. As a result, the
Department of Justice filed a civil antitrust lawsuit against the
company, alleging that because the company avoided the settlement,
"consumers are being held hostage from receiving the expanded
choices and lower prices that they deserve." AmEx, meanwhile,
responded that the settlement actually restrains free trade by
allowing merchants to push their customers away from using American
Express cards, which typically have higher merchant fees.
Despite the hype over the settlement, it's unclear whether it will
actually have any significant effect on merchants or consumers.
Currently, merchants have the right to offer discounts to customers
who use cash, and some apparently steer buyers to use PIN-based
debit card transactions, rather than more costly signature-based
But beyond the occasional gas station offering a lower cash
price, different prices for different payment methods haven't
really caught on among major merchants. A quick check of large
didn't reveal any discounts available for cash or the right kind of
debit card. Instead, the most obvious discounts come from using
proprietary store-branded credit cards.
Another hit for rewards cards
If merchants do start being more active about encouraging customers
to use lower-cost forms of payment, then the big losers will be
people who use
credit cards that offer big rewards
, such as airline miles or cash rebates. Such cards often carry
higher interchange fees, which card companies use to help finance
the paybacks to cardholders. If merchants offer discounts to
customers in exchange for not using those rewards cards, then
cardholders will have a sophisticated calculation to do in figuring
out whether the value of the merchant discount outweighs the lost
reward from their credit card.
Such a move could also threaten a new revenue source for card
that charge annual fees of $59 and $85, respectively, in exchange
for attractive rewards programs.
Bank of America
) announced last year that it would charge an annual fee of $29 to
$99 on some of its rewards cards.
Notably absent from the antitrust discussion is
) , whose Discover card took in just 6% of U.S. credit card volume
during the first six months of the year. Its business model was
founded on the idea of providing rewards to cardholders in the form
of cash-back bonuses. Presumably, the No. 4 card network is too
small to raise antitrust concerns, but it will nevertheless still
need to stay competitive with interchange fees now that merchants
have the upper hand.
After the proposed settlement is approved, you'll want to look out
for changes at the stores you visit. Being flexible with your
payment options may be somewhat less convenient than simply using
your favorite card everywhere. But if merchants actually follow
through on the issues they've complained about for years, they may
well make it worth your while. Until that happens, though, keep
using the rewards cards that give you a piece of the action -- as
long as they keep paying the rewards you deserve.
Our Credit Center has everything you need to manage your debt
and make the most of your credit.
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Fool contributor Dan Caplinger works hard for his credit card
rewards. He doesn't own shares of the companies mentioned in this
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