As lawmakers mull over new caps on merchant interchange fees, fans of cash back credit cards and other incentives might see their favorite plastic perks disappear. Whenever a merchant accepts a credit card, they pay an interchange fee to a processing company. Issuing banks often collect as much as half of interchange fees collected, which they often use to cover the cost of cardholder incentives.

Merchant Interchange Fees: Caps Could Affect Rewards

Under current guidelines, merchant interchange fees usually amount to about two percent of each transaction. Because credit card processing agreements prohibit merchants from passing interchange fees directly to customers, most retailers and service providers account for those costs when setting prices. However, many merchants can already negotiate interchange fees with payment processors, who often set rates based on:

• The amount of transactions processed each month
• The typical size of a merchant's transaction
• The security measures merchants use to reduce risk
• The type of products or services paid for with credit cards

Larger companies, such as national retail chains and utility companies, already enjoy significant discounts on credit card processing fees. By convincing lawmakers to set caps on interchange fees, small business advocates could inadvertently eliminate the margin that credit card issuers use to pay for customer rewards. Although the Government Accountability Office has launched its own investigation into the potential impact of reduced interchange fees, Australian banks radically scaled back reward credit cards after similar limits were enforced.