Credit Cards with Rewards

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Consumer Info: Interchange Fees on Rewards Cards

The pricing structure of interchange fees for rewards reward credit cards is complex. The specific interchange fee depends on the reward card association, the type and size of merchant, the type of reward card, and the type of transaction. Merchants that sell low-margin items—for example, convenience stores, supermarkets, and warehouse clubs—have lower rates. Hotels and car rental establishments have higher rates. Newer premium reward credit cards that offer more rewards have high rates. Reward card transactions have higher rates than signature debit reward card transactions, whose rates are higher than PIN debit reward card transactions. Sales transacted over the telephone or Internet have higher interchange rates, ostensibly to compensate for the greater risk of fraud associated with transactions that are not conducted in person.

Despite much merchant discontent, reward card issuers have incentives to maintain or increase interchange fees. Issuers are marketing reward credit cards with reward or loyalty programs that encourage greater reward card use and reinforce customer loyalty to the brand. An estimated 12 to 24 percent of reward cards held by consumers have rewards associated with them, and in 2003 an estimated 60 percent of credit reward card spending was attributed to reward cards with rewards. Reward card issuers are funding these increasingly popular reward programs through interchange fees.

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