This Shocking Settlement Could Make Your Rewards Cards Worthless

A landmark legal settlement is poised to shake up the world of credit card payments, and your wallet is at the center of the storm. For years, you’ve swiped your premium rewards cards to earn points, miles, and cashback, but that convenience may be coming to an end. We’re diving deep into the monumental changes that could allow stores to reject your favorite cards, leaving you to question the value of those hefty annual fees.

The Silent Fee That Started a War

Every time you make a purchase with a credit card, a small, often invisible transaction takes place behind the scenes. It’s called an interchange fee, or a “swipe fee,” and it’s the central figure in a two-decade-long battle between merchants and the financial giants who run the payment networks. This fee, typically between 2% and 2.5% of your purchase, doesn’t go to the merchant. Instead, the merchant pays it to your card’s issuing bank to cover the costs and risks of processing a credit transaction.

For consumers, this fee has been largely out of sight and out of mind. The price on the tag is the price you pay, regardless of whether you use cash, debit, or credit. But for merchants, these fees represent a significant operational cost, slicing directly into their profit margins on every single credit card sale. For small businesses, in particular, these costs can be staggering, amounting to thousands or even tens of thousands of dollars each year.

The core of the dispute, which dates back to a lawsuit first filed in 2005, is the merchants’ claim that the major payment networks and large banks operate as a duopoly, engaging in anticompetitive behavior. They argue that these networks collusively set interchange fees at artificially high levels, leaving merchants with no power to negotiate and no choice but to accept the terms if they want to accept credit cards—a necessity in today’s economy.

Understanding the Hierarchy of Swipe Fees and Rewards Cards

Not all interchange fees are created equal. The fee for a basic, no-frills credit card is relatively low. However, the fees for premium rewards cards—the ones that offer generous cashback, airline miles, and luxurious travel perks—are significantly higher. Why? Because those valuable rewards aren’t free. The high interchange fees associated with these cards are precisely what funds the perks you enjoy.

In essence, merchants are indirectly subsidizing your rewards program. Every time a customer uses a high-reward card, the merchant pays a higher fee to the issuing bank. This has created a system where all customers, including those who pay with cash, debit, or low-fee cards, effectively bear the cost of rewards enjoyed by a subset of premium cardholders, as merchants often bake these costs into their overall pricing.

This is the frustration that has fueled the merchants’ long legal fight. They feel they are being forced to pay for the marketing and loyalty programs of massive financial institutions, and the current rules leave them powerless to do anything about it.

A Landmark Settlement: What’s Changing for Rewards Cards?

After years of legal maneuvering and a previously rejected deal, a new settlement is reportedly on the horizon. According to sources cited by a prominent business publication, this new agreement could fundamentally alter the payment landscape in two significant ways.

First, the settlement proposes a modest reduction in credit card interchange fees. The reported deal would see the two largest payment networks lower their swipe fees by an average of around 0.1 percentage point over several years. While this may sound small, the sheer volume of transactions means this could translate to billions of dollars in collective savings for merchants across the country.

However, the second component of the deal is the true game-changer, and it’s aimed directly at premium rewards cards.

The End of the “Honor All Cards” Rule

For decades, merchants have been bound by what is known as the “honor all cards” rule. This rule, enforced by the major payment networks, requires that if a store accepts any credit card from a specific network, it must accept all cards from that network. They cannot pick and choose. A merchant couldn’t accept a basic, low-fee card from a major network while rejecting that same network’s high-fee, premium travel rewards card.

The new settlement seeks to dismantle this rule. Under the proposed terms, merchants would gain unprecedented freedom to differentiate between card types. The new arrangement could divide credit cards into distinct categories, such as:

• Standard credit cards with no rewards
• Cashback and basic rewards cards
• Premium and super-premium rewards cards
• Commercial and business cards

This change would empower merchants to make a critical choice: they could choose to reject entire categories of cards, most notably the high-fee premium rewards cards that cost them the most to process. Imagine walking into your favorite local restaurant or boutique and seeing a sign that says, “We do not accept premium travel rewards cards.” This could soon be our new reality.

Why Merchants Might Start Rejecting Your Favorite Rewards Cards

The motivation for a merchant to turn away a customer’s preferred payment method seems counterintuitive. After all, isn’t the goal to make the sale as seamless as possible? To understand this, you must look at the difficult calculation merchants will face.

On one hand, accepting a premium rewards card means paying a higher interchange fee, directly reducing the profit on that sale. For a small business operating on thin margins, a fee of 2.5% or more is a significant expense. The ability to reject these cards offers a direct path to lowering operating costs and increasing profitability.

On the other hand, rejecting these cards carries a substantial risk: alienating valuable customers. The demographic that uses premium rewards cards is often more affluent and tends to spend more. Turning away their card of choice could lead to a lost sale in the short term and a lost customer in the long term. If a customer has to put away their favorite card and use a different one, it creates friction and a negative customer experience. If they don’t have another suitable card, they may simply walk out.

This creates a complex dilemma. A high-end restaurant might decide that alienating its affluent clientele isn’t worth the savings on fees. Conversely, a discount retailer or a local coffee shop might conclude that the cost savings from rejecting high-fee cards outweigh the risk of losing a small percentage of sales. The decision will likely vary from one business to another, creating a fragmented and potentially confusing payment environment for consumers.

The Added Complication of Surcharging

The settlement also reportedly involves surcharging. Surcharging is the practice of adding an extra fee at checkout for customers who choose to pay with a credit card. Instead of baking swipe fee costs into their overall prices, merchants can pass the cost directly to the customers who use the more expensive payment method.

While surcharging is already legal in most states, the new agreement could give merchants even more freedom and clarity in how they implement it. You might see more businesses offering a “cash discount” or adding a “credit card processing fee” of 2-3% to your bill. This makes the cost of credit card processing transparent, but it also means your purchases will cost more if you use a card.

For a rewards cardholder, this presents a frustrating calculation. If your card gives you 2% cashback, but you have to pay a 3% surcharge, you are now losing 1% on the transaction. This could quickly erode the value proposition of many rewards cards, forcing consumers to reconsider whether their rewards are actually rewarding them at all.

How Will This Impact the Future of Rewards Programs?

This potential settlement sends a clear signal to the banks and financial institutions that issue rewards cards: the era of unchecked, merchant-funded rewards may be ending. If a significant number of merchants start rejecting their most expensive products, the business model for these cards is threatened.

We could see several potential outcomes:

• Devaluation of Rewards: Card issuers may be forced to reduce the value of their rewards programs. That could mean lowering cashback percentages, increasing the number of points needed for a flight, or cutting back on perks like lounge access and travel credits.
• Shift in Reward Structures: We might see a move towards different types of loyalty programs that are not as heavily reliant on high interchange fees. This could include partnerships, brand-specific offers, or rewards tied to using a bank’s broader ecosystem of products.
• Increased Annual Fees: To make up for the potential loss in interchange revenue, card issuers might increase the annual fees on their premium cards. They would be shifting the cost of the rewards program more directly onto the consumer who benefits from it.

Interestingly, research from a leading financial technology publication, PYMNTS Intelligence, shows that while many consumers value loyalty rewards, their actual redemption habits vary. The report found that only 20% of cardholders redeem their credit card rewards at least once per month. This suggests that a large portion of the rewards being generated are either hoarded or forgotten. Merchants may look at data like this and feel more confident in rejecting high-fee cards, gambling that the most vocal objectors will be a minority of “power users,” not the average customer.

How to Prepare Your Wallet for the Great Rewards Shake-Up

While this settlement still needs court approval to go into effect, the writing is on the wall. The relationship between merchants, consumers, and card issuers is about to change. As a savvy consumer, you can take steps now to prepare.

1. Diversify Your Payment Methods

The most important takeaway is to no longer rely on a single card, especially if it’s a premium rewards card. Ensure you have a variety of payment options in your wallet.

• A Debit Card: Always a reliable backup, as it has much lower processing fees for merchants.
• A No-Annual-Fee Credit Card: A basic, non-rewards card from a major network is less likely to be rejected.
• Cash: In a world of increasing surcharges, cash might once again become king for smaller purchases.

2. Re-evaluate Your Credit Cards

Take a hard look at the cards you hold and the annual fees you pay. Ask yourself some tough questions:

• Is the annual fee on my premium card still justified if I can’t use it at some of my favorite stores?
• Am I actually using the rewards and perks enough to offset the cost?
• Would I be better off with a simpler, no-fee cashback card that is more widely accepted?

This settlement could be the catalyst for a major “spring cleaning” of your wallet, forcing a more realistic assessment of the value you get from your cards.

3. Stay Informed and Observe

Pay attention to what’s happening at the places you shop. Look for new signs at the register regarding card acceptance policies or surcharges. Read the notices and emails you get from your credit card company, as they will be required to inform you of any changes to your card’s benefits or acceptance.

The rollout of these changes, if approved, will likely be gradual. By being observant, you can adapt your spending habits without being caught off guard at the checkout counter.

The impending settlement represents not just a legal resolution but a seismic shift in the power dynamics of the payments industry. For decades, the system has been tilted in favor of the major card networks and issuing banks, with merchants and consumers absorbing the costs. This new chapter promises to give merchants more power and choice, but that choice will inevitably create new complexities and frustrations for consumers. The golden age of effortlessly earning lavish rewards cards on every purchase may be drawing to a close, ushering in a new era where every swipe will require a little more thought.