Interchange revenue constriction for card issuers and banks is likely to result from the settlement between Visa, Mastercard, and U.S. merchants reducing rates and guaranteeing no increases for at least five years. What will happen when the lowered fees take effect? 

These reductions in interchange fee revenue might ultimately threaten the revenue models that underpin loyalty rewards. That is where Loyalty 2.0, which describes a new, expanded approach to traditional loyalty program capabilities, could drive alternate revenue streams for financial institutions and issuers to offset expected revenue losses.

A Limit to the “Swipe Fees” Paid by Merchants

On March 26, 2024, a landmark settlement was announced, in which Visa and Mastercard agreed to lower the interchange fee rates they charge merchants to process transactions on their networks (aka “swipe fees”), and capping those rates until 2030. 

The settlement is a result of a class-action lawsuit brought by merchants, alleging they paid excessive fees to accept Visa and Mastercard credit cards, and that Visa and Mastercard and their member banks acted in violation of antitrust laws. 

While the settlement has yet to be approved by the U.S. District Court for the Eastern District of New York, it is expected to help merchants realize almost $30 billion in swipe fee savings through 2030. On the flip side, that’s $30 billion less in swipe fee revenues for Visa and Mastercard. 

Many smaller merchants already try to mitigate credit card fees, according to a USA today article. That is backed by a Strawhecker Group survey that revealed 23% of small businesses in 2022 surcharged customers utilizing credit cards (or provided discounts to cash customers). The survey indicated additional businesses would probably follow suit. 

Threatening Rewards

A major concern is that restricting interchange fees could severely inhibit the revenue financial institutions and issuers make on credit card transactions, and also make credit card cashback rewards programs (often funded from interchange fees) more difficult to maintain. 

A 2022 Federal Reserve study revealed issuers get about 1.3 cents in transaction fees (including interchange) for every card purchase equaling a dollar. Expenses tied to rewards programs, the Fed discovered, came in at 1.5 cents for every card purchase equaling a dollar.

Backers of the Durbin amendment (Durbin 1.0) to the 2010 Dodd-Frank Act, which decreased debit card swipe fees, made the same argument about merchants passing on savings from reduced fees - many pledged that the decrease in swipe fees would result in lower consumer prices. It remains to be seen if merchants will pass on their swipe fee savings to consumers.  

Indeed, according to PYMNTS, Home Depot admitted in a 2011 earnings call that instead of passing on these savings to customers, they actually had a $35 million net margin increase from keeping the savings on debit interchange fees. And, a 2015 Federal Reserve Bank of Richmond brief projected more than 21% of merchants raised prices after the original Durbin regulation took effect.

Why Loyalty 2.0 Can Help

FIs and retailers need value-added services such Loyalty 2.0 capabilities, to inspire improved consumer usage and drive incremental system economics - especially as payment infrastructures evolve to include the forthcoming settlement-driven interchange fee rules. 

What is Loyalty 2.0? According to BCG, Loyalty 2.0 capabilities can help invigorate rewards programs by enabling FIs and issuers to add new revenue streams, which are typically funded by third parties (for example, online retailers and travel vendors.) 

These new capabilities can also deepen consumer loyalty by adding value and extending the customer relationship beyond the typical banking “interface.” 

Some of the best examples of value-added services in Loyalty 2.0 include:

• Travel platforms integrating the travel buying experience with consumer deals (see Chase Travel - Chase earns commissions from sales driven through this portal and consumers get better deals on travel through their Chase-branded experience)

• Browser and app-based offers embedded in the digital shopping experience (see RBC’s ShopPlus browser extension and Citi’s CitiShop extension)- the banks earn commissions from consumer purchases and their customers earns cashback rewards through these branded extensions)

The ultimate Loyalty 2.0 program comprised of value-added services creates consumer, merchant, and financial institution benefits. The consumer earns savings on their purchase in the form of rewards, the merchant generates additional sales, and the FI earns incremental revenue funded by merchants from the sales it drives to the merchants.