The New Law That Could END Credit Card Rewards...

Is this the end of credit card rewards as we know them? >> The $30 billion deal to settle a decades old lawsuit against credit card giants Mastercard and Visa. Pretty soon, your Visa credit card may no longer be accepted at every store. >> They could basically say, "Hey, we're going to take the lower tier version of a Visa and Mastercard, but we're maybe not going to accept uh airline miles cards or cashback cards." So, Visa and Mastercard have reached a settlement with merchants who launched a class action lawsuit against them 20 years ago. This has to do with swipe fees and the so-called honor all cards rule where any merchant who accepts say Visa cards for example must accept all Visa cards even though different types of Visa cards may charge higher or lower fees with Visa cards that are very basic cards that don't earn rewards charging lower fees and your premium rewards cards charging higher merchant fees. Now, this could be really bad news for my audience since we really advocate collecting those credit card rewards like points and miles to use for free travel. So, in this video, we are going to look at what exactly has been decided, how it might affect you, and if it will even become law at all because this still has to be signed off on by a judge. Hey credit warriors, welcome to the show. My name is Ben Hedges aka the credit shifu and on this channel I cover US credit cards, personal finance, and travel hacking. If you like the sound of that, please subscribe. But let's get into the video. Oh, and this video is brought to you by Silo, but more on that later. So, there is a problem, and that is that merchant fees, those small fees that retailers pay to accept your credit card are going up. >> Credit and debit card swipe fees have more than doubled over the past decade and soared to a record 172 billion in 2023. Now, that is partly fueled by inflation, but also partly by card issuers raising the percentage rate of these fees as they bring in more rewards and benefits on the cards because guess what? It's merchant fees that pay rewards like airline miles and cash back that customers get on their spending. How much they currently charge? Well, there is no one price, but you can see on this table, look at supermarkets, for example. Visa Infinite, that's a highlevel Visa card, charges more than a Visa Signature, and Visa Signature charges more than traditional rewards. And then the all other products column is even lower. At restaurants, the fees are even higher, up to 2.6% on Visa Infinite, Visa Signature, etc., but less for traditional rewards and other products. The average fee across all spending in 2024 was 2.35%. So, what is happening? The companies have agreed to lower the rates they charge merchants known as interchange fees or swipe fees and are agreeing not to raise those rates for at least 5 years. And how much are they lowering them by? 0.1%. And they are agreeing to not raise them for 5 years. But that's just on rewards cards. Standard consumer rates will be lowered to 1.25%. That's a little bit more of a decrease and kept there for 8 years. And this gets us to the worrying part of this, the end of the so-called honor all cards rule. But first, I know that you are a credit card enthusiast. >> Credit card? Visa, Mastercard, American Express, Discover Card. >> You love rewards points and cash back. >> I bought credit cards ready for broke people. >> No, not at all. Actually, I make thousands doing it this way as I earn points that I can exchange for free flights and cash back. But your bedroom perhaps looks like this because you're also spending a lot of your time investing. And perhaps you always wished that you could get more from those investments. Perhaps rewards on your investing balances like you can earn points on credit card transactions. Well, now you can. You may have heard me talk about Silo in previous videos. Silo is an investing app where you can buy US stocks, ETFs, and both corporate and government bonds. Silo is working with Interactive Brokers to bring in their first ever credit card star rewards program for brokerage accounts. You can earn up to one point per dollar up to 500,000 points per year on your portfolio balance paid out monthly. For the launch of this program only until the end of the month, they're offering an insane 300,000 point welcome bonus for new members. Right now, these points are redeemable for cash back at a 1 cent per point rate, but Silo is currently working to bring on a suite of transfer partners. Think Hyatt Points, Delta Sky Miles, etc. This launch offer is only available until the end of the month. So, if you want to get a 300,000 point welcome bonus and earn up to 500,000 points every year, go to siloarket.com/ben or click the link below. So previously, Visa and Mastercard have both had rules where if you accept any Visa or Mastercard credit cards or debit cards, you must accept all of them. So some of the cards you accept will have higher fees and some will be lower and they average out at about 2.35%. But now Visa and Mastercard have agreed to do away with this rule. Here is the compromise that they agreed upon summarized by the Wall Street Journal. Under the settlement, credit cards will fall into three buckets that merchants can choose to accept or reject. Those buckets are wide, however, and the most popular cards that make up a majority of spending are grouped together in one category, making rejection a risky prospect for a store. And these are the three buckets. Commercial cards, okay, that's going to include business credit cards, premium cards, okay, including rewards cards, and standard no rewards cards. I I want to understand a little bit more though about what card would be in each bucket. Certainly things like the Chase Sapphire Reserve, the Capital One Venture X, they would count as rewards cards. They're going to be in that premium bucket. But what about the Chase Freedom Unlimited or City Double Cash, okay? No annual fee cards that earn just a a basic flat rate of 1.5 or 2% cash back on everything. That's a lower rewards rate. Are they standard or premium? Okay. The impression I'm getting from these articles is that if a card earns any rewards at all, it is in the premium bucket, but I haven't seen anything to 100% confirm that yet. According to a report by the Bureau of Consumer Financial Protection, 90% of credit card spending is done on rewards credit cards. So, if all those rewards cards are in one bucket, if you choose not to accept that bucket, you are turning away 90% of credit cards. For many merchants, that could seriously impact their revenues. Since some people may choose to shop elsewhere so that they can earn rewards. Meet Kevin brought up a good point in his video on this saying that many big merchants like Amazon all have their own co-branded credit cards. The Amazon one lets you earn 5% at Amazon for example. And Amazon get a portion of the merchant fees on those cards anyway. So they're making profit from them too. So you would at a minimum be able to use Amazon's own credit card. But if their own credit card is in that premium cards bucket, then they'd have to accept all the other premium rewards cards as well. So basically, all of the big stores are probably going to still accept rewards cards if they have their own store card. And that may force smaller retailers who don't have their own store cards to keep on accepting rewards credit cards in order to not lose business to the stores that have their own cards. I hope that makes sense. And then also listen to what one of my favorite points and miles bloggers, the points guy, had to say about this, too. This could mean that merchants could accept the cheap cards and not the high-end ones, but I don't see why merchants would do that because the people with those premium cards are generally buying a lot more stuff. >> So, I really don't think that this is a clear win for merchants that's going to make them stop accepting rewards credit cards on a large scale. Another thing actually that has been agreed upon in this new settlement is that merchants can now charge up to a 3% fee to customers for using a credit card. But this isn't really ideal for merchants either, since it could drive customers away or to other stores that don't charge that fee. Research has shown that consumers do spend more money when they use credit cards. So, rewards cards really drive sales. It's probably better for businesses just to make everything 3% more expensive, even cash transactions. And most businesses do that already. To be honest, handling cash has costs associated with it, too. Medium to large stores normally pay for cash to be picked up in armored vans and taken to the bank, which obviously costs money. And for small stores, carrying a large amount of cash out of the store when you lock up at night is risky. You could get robbed. So making everything 3% more expensive covers credit card fees, but it also might cover secure pickup for cash fees as well. Then when does this go into law? Well, a judge still has to sign off on it. And that is the same judge that refused to approve an earlier version of the settlement. So this may not be finished yet. But even if it gets signed off on, I think the only thing you're really going to notice is rewards rates and benefits kind of maybe get a little stagnant. They don't start getting added onto for a few years. Basically, banks will develop new rewards products a little slower, I think, since those fees are capped for 5 years. Some stores may experiment with not accepting rewards cards, but I don't think it's going to work out well for them and they probably will give up on it. I think Visa and Mastercard are taking a calculated risk with these three buckets of payment cards because they know that it will probably end up being impractical for merchants to actually refuse their rewards cards. I mean, this is 90% of Visa and Mastercard's business. I don't think that they're just going to surrender their business so easily. Shareholders don't seem to care either with both Visa and Mastercard stock down less than 1% this week where the market has been down as a whole anyway. So I think that counts as basically the stock is flat. This is usually a good sign that it won't affect business much if it hasn't affected the stock. Okay, that means shareholders aren't selling. So I don't think that you really have anything to worry about and your credit card rewards are probably safe. It'll be interesting to see if any stores try the whole accepting one type of card but not another thing. We'll keep an eye on this and let you know if it actually gets signed off on by a judge. All right, guys. That is the video for today. A big thank you to Silo for sponsoring. Don't forget to get a bonus of up to 300,000 points and earn up to 500,000 points every year on your portfolio balance. Link is down below. Please subscribe to the channel if you're new and we'll see you next time. Bye-bye.