A federal government budget pledge to reduce the amounts businesses pay to accept credit card transactions will likely result in reduced funding available for credit card loyalty reward programs.

In last week’s federal budget, the government noted that the amounts businesses pay to accept credit card transactions are among the highest in the world, and pledged to lower those fees. The relationship between credit card costs to businesses and loyalty programs rewards is not well understood by most consumers, as reported in Stuck in the Middle: Consumers, Transaction Fees and Loyalty Programs, a 2015 study by Consumers Council of Canada. A significant portion of these credit card transaction fees fund the loyalty reward programs offered by banks that issue credit cards.

The government committed to a series of engagements with market participants to determine how to lower the costs to merchants, ensure that small businesses can benefit from similar pricing as larger businesses, and protect the existing rewards points of consumers. Following the consultations, the 2021 Fall Economic Statement is to include legislation to provide authority to regulate these fees, if necessary.

Although preserving existing points for consumers was outlined as one of the objectives, the reduction of merchant transaction fees will reduce the funding available to loyalty programs. One likely outcome is that spending will result in a slower future accumulation of rewards. However, the Consumers Council report noted that loyalty plan providers generally prefer to alter loyalty payouts – require more points to be redeemed to earn benefits – than to slow the rate at which spending accumulates points. This desire may conflict with the government’s objective of preserving the value of existing points.

These lowered fees would also help address an inequity in payment choices. Merchant fees for debit cards are significantly lower than for credit cards, and merchants cannot change prices based on payment choices, so the transaction costs are reflected in the prices all consumers pay. As a result, consumers who pay with cash and debit cards effectively subsidize those who pay with credit, according to a recent research white paper released by the Bank of Canada.

The paper Distributional Effects of Payment Card Pricing and Merchant Cost Pass-Through in Canada and the United States found payment card costs have “regressive” distributional effects, sometimes known as “Reverse Robin Hood” – a small wealth transfer from lower income consumers to higher income consumers at the point of sale.

The Bank of Canada report included reducing credit card rewards as one way to mitigate the cross-subsidies across payment methods that effectively transferred wealth from low-income to high-income consumers.