Increasing threats to credit card rewards as states consider regulation

The fight against swipe fees is intensifying.

If you've been following TPG over the last year and a half, you might have come across our coverage of the Credit Card Competition Act, a bipartisan initiative in Congress designed to cap swipe fees and interchange fees.

This legislation would mandate that banks issuing credit cards provide at least two networks for merchants to process electronic transactions. According to the bill's authors, this move aims to enhance competition within the credit card sector while reducing the interchange or swipe fees that merchants incur when customers use credit cards.

Card issuers impose charges on merchants whenever consumers use credit cards at their establishments; this affects a wide range of businesses, from local shops to hotels, with fees applied each time a customer pays using a credit card.

However, the national initiative isn't the only challenge facing major credit card companies. At least three states have proposed legislation aimed at reducing excessive swipe fees at the state level.

Here’s an overview of the current state legislation as of July 9.

Illinois

The Illinois state legislature has included a measure in its fiscal 2025 budget that bans swipe fees on sales taxes, state excise taxes, and tips — marking a pioneering law of its kind in the nation.

The Interchange Fee Prohibition Act enables retailers to be reimbursed for swipe fees on taxes and tips starting July 1, 2025. This bill was signed into law by Democratic Governor J. B. Pritzker in June.

Senate Majority Whip Dick Durbin, a Democrat from Illinois, has been instrumental in advocating for federal legislation aimed at significantly curtailing swipe fees. He expressed strong support for the Illinois legislation.

"The Illinois state legislature has made significant progress in challenging the swipe fees imposed by credit card companies — fees that are nonnegotiable for merchants and contribute to the already substantial profits of large banks," Durbin stated. "Now, the federal government should learn from Illinois' example."

New York

As of February 11, the Credit Card Surcharge Law mandates that sellers in New York State who impose a credit card surcharge must clearly disclose the total price for credit card transactions, including the surcharge.

Moreover, the law forbids sellers from charging a final price that exceeds the displayed price and prevents them from imposing credit card surcharges higher than those levied by the credit card company on the seller for the use of such cards.

The Credit Card Surcharge Law is applicable whether the surcharge is a percentage or a flat fee.

Pennsylvania

As of June 27, the Pennsylvania House of Representatives is reviewing a bill to prohibit interchange fees on sales tax when merchants accept credit or debit cards as payment.

House Bill 2394 seeks to reduce credit card swipe fees by excluding them from being applied to state sales tax. Comparable legislation has been introduced in over a dozen other states.

"The developments in Pennsylvania and Illinois would lead to credit card confusion," stated Richard Hunt, executive director of the Electronic Payments Coalition, a trade group opposing the bill, to Politico. "It would be a logistical nightmare."

Bottom line

As of July, supporters have consistently struggled to push the Credit Card Competition Act forward, most recently through the fiscal year 2024 spending bill. Nevertheless, they are likely to persist in their efforts.

"Similar proposals have been put forth — and turned down — in almost 30 states. These experimental measures are unprecedented globally and would disrupt the U.S. payment system," remarked Nick Simpson, managing director at the Electronic Payments Coalition. "Since this has never been attempted before, it's difficult to predict its exact effects on rewards programs. While it might not completely dismantle these programs like the Durbin-Marshall bill could, it would likely undermine them and certainly compromise consumer convenience and privacy."

Such legislation could significantly affect consumer rewards, prompting TPG to vigorously oppose this bill. The proposed national law would probably restrict consumers' ability to earn (and redeem) points and miles for travel or receive cash back that helps mitigate their everyday expenses.