The Catalyst Code

Card rewards are going to disappear and fees are going to return according to a recent research report Disruption in the Payments World. That’s a distinct possibility. Between the interchange fee lawsuits and Congressional pressure for the card associations to get rid of interchange fees it is possible that the US could go the way of Australia and Spain—two countries where interchange fees were slashed and fees were raised. (A technical paper of mine documents what happened in Australia—The Effect of Regulatory Intervention in Two-Sided Markets: An Assessment of Interchange-Fee Capping in Australia.)

Unfortunately, it is hard to predict what is going to happen in the US. It is possible that the interchange fee lawsuits and legislation will force interchange fees down, but it is also quite possible that MasterCard and Visa will dodge this bullet. The law is arguably on their side and it is hard to understand why American Express should be able to charge a merchant discount while MasterCard and Visa can’t. What we can say, however, is that there is a significant risk that interchange fees will fall and banks need to be prepared for that scenario.

In the meantime, interchange fee revenues provide a strong incentive for banks to offer reward programs and schemes for getting people to use their cards and drive this revenue stream to them. Just because there might be a tornado doesn’t mean we should live in the basement, and just because there is a risk that interchange fees will go away doesn’t mean that we should act like they are already gone.