What Happens if Credit-Card Points Go Away

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Visa

and

Mastercard

have so far defied worries over an economic slowdown. Right now, the only thing that seems able to slow them down is Congress.

Both Visa (ticker: V) and Mastercard (MA) posted strong earnings this week, showing how the card companies are benefiting from consumers’ determination to travel despite higher ticket prices and broader inflation. At Visa, cross-border transactions climbed 17% year over year while Mastercard showed a 24% increase over the same period, noting that volume stood at 154% of prepandemic levels.

While the stocks were both down a little more than 1% on Thursday, they have held up admirably this year because investors believe that consumers will keep on spending. Mastercard shares had gained 14% so far in 2023. Visa had rallied 13%, while the

Financial Select Sector SPDR

exchange-traded fund (XLF) was only up 3.6%.

A new bill in Congress appears to be the only potential headwind for the stocks, but even that isn’t raising much concern. The Credit Card Competition Act, proposed by Sen. Dick Durbin, an Illinois Democrat, would change how credit- card transactions are processed. 

Under the current system, payments made using a Visa card generally must be handled through the Visa network, while Mastercard has a similar arrangement for its transactions. That gives the companies significant control over the fees they can collect.

The new bill would allow merchants to route payments through other networks, thereby increasing competition. It could reduce the swipe fees merchants pay, which can be as high as 2% to 3% per transaction.

But because those swipe fees help pay for the rewards points shoppers can collect on card purchases, the change Durbin is proposing could mean those perks would be phased out. That would eliminate a way for people to get discounts, or cash back, from their credit-card spending.

Of course, it could be argued that even though consumers don’t pay the swipe fees directly, they may feel the sting of them in terms of higher prices. In New York City, it is fairly common for small businesses have a minimum transaction size for card payments or to offer a lower prices for cash purchases.

The legislation has moved the stocks occasionally over the summer, but many on Wall Street are dismissing its likely impact. Passing the bill would require Congress to pick between merchants and financial services companies—two important constituencies. Critics also note that while card companies like to tout their security networks, in a purely open system, they might have less incentive to continually invest to protect cardholders.

“We remain bearish on this bill’s prospects given the combination of complicated politics, potential security risks, and its negative impact on credit card rewards programs,” Isaac Boltansky, managing director at BTIG, wrote in June. He put the odds that the bill will pass at “no higher than 20%.”

For now, that slim chance may be the only thing that can get in Visa and Mastercard’s way.

Write to Carleton English at carleton.english@dowjones.com