After years of debate, a landmark settlement between merchants and credit card giants Visa and Mastercard will soon reduce swipe fees. Credit card swipe fees (interchange fees) are a significant expense for merchants, and how much they pay depends on a complex system involving card networks and banks. These fees impact consumers, too, as they are either passed on through higher prices or a visible surcharge for every credit card transaction. According to the National Retail Federation, U.S. retailers and (in turn their consumers) paid more than $170 billion in swipe fees during 2023.
While lower swipe fees will benefit consumers in the form of lower costs, retailers will also see potential benefits – with the ability to use the savings to invest in enhanced customer experiences, further boosting spend in their physical or digital storefront. The wild card in this new world will be how the upcoming limitations will impact the financial services brands that issue the cards and charge the fees to use them. On one hand, banks will generate lower revenue, which can impact profitability and curtail their investment in their card-based loyalty programs. On the other hand, with consumers spending less on fees, they will have more disposable income to purchase more goods and services on their cards. The argument is that what the banks lose in fees, they will make up in volume.
The challenge will be for banks to ensure consumers keep spending on their cards—not their competitors’. This means they will need to reevaluate how they deliver value to their cardholders, a large portion of which is through their loyalty programs.
Although no date has been set for court approval, which is the final step before the change becomes official, it will have a ripple effect on the entire credit card ecosystem. Given the likelihood of reduced credit card swipe fees once the decision is approved, what are the pros and cons for banks, retailers, and consumers, and how will these factors impact loyalty programs? Let’s take a look.
The Shifting Landscape: A Loyalty Program Renaissance?
The recent swipe fee settlement is a potential game-changer for loyalty programs. While this legislative change will shake up the ecosystem, it heightens the imperative for financial services brands to build lasting loyalty and enhanced engagement with their cardholders.
Capped swipe fees will force banks to be more competitive. They must invest more in program enhancements, attract new cardholders, retain existing ones, and leverage innovative rewards beyond traditional points and miles to capture a larger share of wallets.
Banks will also need to compete more fiercely through rewards and benefits, giving their cardholders flexibility to tailor programs to specific demographics and spending habits. With a more engaged cardholder base, banks can more than offset the decrease in fee revenue with consumers' increased spending in other areas.
Lower swipe fees for merchants could also lead to lower prices for consumers. This creates a double win for loyalty programs: retailers can implement more competitive pricing, and consumers can get more bang for their buck. Some retailers might invest in enhanced shopping experiences, like faster checkouts or loyalty-member-only discounts, further boosting program value.
By understanding the changes and choosing the right programs, consumers can maximize their rewards like never before. With potentially more diverse reward options and faster earning rates, they have the power to earn more benefits that align with their spending and saving goals.
Contrary to prevailing wisdom that suggests credit card programs will limit the benefits they offer without swipe fee revenue to fund them, the swipe fee settlement could spark loyalty program expansion. To better compete for consumers, banks will create new opportunities, and retailers will potentially offer lower prices and enhanced experiences. This development may usher in an era of greater personalization, more value, and more ambitious customer retention strategies.
What do we make of the decision’s potential impact on loyalty programs?
Savvy Credit Cardholders Rejoice
With knowledge as their greatest asset, savvy cardholders can navigate the evolving loyalty landscape of benefits and personalized experiences to maximize the value they get from their cards. Understanding the current legislative changes and how card issuers react to them will empower these consumers to analyze program offerings and choose the card that perfectly complements their spending habits.
This newfound knowledge enables them to strategically swipe for optimal rewards earning. Gone are the days of the one-size-fits-all card; the educated super-user will find themselves earning bonus points on groceries with one card, securing travel insurance for a dream vacation with another, and extending warranties on electronics products with a third.
Capped swipe fees might lead to a shift in reward structures, but even this presents an opportunity. Banks, eager to attract and retain cardholders, will innovate by offering a world of perks beyond points and miles. Think travel insurance, purchase protection, exclusive event access, or rewards tailored to specific interests. These new perks will enhance the card ownership experience in entirely new ways.
Banks must also create innovative rewards catering to their cardholders’ unique earning and redemption preferences. This necessitates building robust rewards portfolios accommodating microburn redemption opportunities and aspirational, big-ticket travel rewards. Expanded rewards portfolios make it easier for loyalty programs to deliver personalized value by analyzing individual spending habits and targeting rewards accordingly.
The swipe fee settlement isn’t just about cost savings; it's a catalyst for innovation and member value. As loyalty programs compete for business, consumers can expect more (not fewer) benefits, personalized experiences, and a genuine focus on feeling valued.
Loyalty Strategies for Banks, Card Programs, and Financial Services Brands
The recent swipe fee settlement also presents an opportunity for financial services brands, provided they can strategically pivot to seize it. Tactically-minded cardholders will dictate an evolution in loyalty programs and prompt card programs to rethink their value proposition. Here are three ways financial services brands and credit card loyalty programs can adapt:
#1. Leverage cardholder data to create bespoke rewards: Financial services brands must tailor rewards directly to individual spending habits and preferences. For example, while frequent shoppers may value rewards redeemable with retail brands, travel enthusiasts will find exclusive resort bookings or unique destination activities most resonant. If brands can personalize and target their reward programs effectively, they can allow members to choose their own reward structure (rather than ascend to pre-defined tiers) and redeem points for a variety of options that cater to their tendencies and desires.
#2. Highlight exclusivity and target more narrowly: Brands can develop targeted promotions that tap into cardholders’ desire for status and exclusivity. For example, offering exclusive discounts and early access to sales events can create a sense of privilege for the cardholders. Tiered memberships with varying rewards or premium features for a fee can also boost engagement. For example, a gold tier could offer airport lounge access, while a platinum tier could include travel insurance and statement credits.
#3. Create a broad pool of rewards: Brands can align with consumer expectations and broaden their reward portfolio to add rewards that can enhance the cardholder’s experience on the vacation they booked, provide value, and keep the financial services brand at top-of-mind during their everyday lives. Offering rewards for dining, for example, allows a cardholder to redeem both at a restaurant while traveling or at their favorite establishment near home, keeping the rewards program relevant in all circumstances.
According to our recent Tipping Point report series, 37% of U.S. consumers say they would engage more with their loyalty program if offered a broader selection of rewards, and 27% said they would engage more frequently if offered more non-travel rewards. Financial services brands should be listening and are expanding options for consumers to earn and redeem rewards.
Many are reacting to this consumer demand; our recent State of Loyalty: 2024 Credit Card Rewards Report found several issuing banks expanding the number and types of rewards they offer cardholders.
Our study shows a focus on offering rewards in charitable giving, dining, wellness, and gas. Banks like PNC Bank and American Express are adding dining and wellness rewards through gift cards. Other programs, like Chase, are shifting from statement credits to directly redeeming points for dining and food delivery. Charitable giving also receives a makeover: Chase, Wells Fargo, and BMO Harris Bank now allow cardholders to redeem points directly for donations instead of just via gift cards in 2023. Gas rewards are also seeing a surge in popularity, with the number of programs offering them jumping from 15% in 2023 to 36% this year.
The swipe fee legislation represents a sea change for the industry, but credit card issuers and their loyalty programs can navigate it with the right strategy. Rewards initiatives were never about passing swipe fee revenue through to cardholders via discounts; they are retention and recognition mechanisms and critical ways for financial services brands to differentiate themselves from their competitors.
Recent legislative changes do not impact these fundamental truths. By working with a partner that can help develop broad, tailored rewards portfolios and facilitate personalized engagement strategies, financial services brands can continue pursuing the rewards initiatives that help them meet their performance goals.
To learn more about our work with financial services brands and their loyalty programs, contact us here.
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