Based on publicly reported issuer margins on interchange and experience from other markets, CMSPI estimates that credit card rewards are unlikely to disappear as a result of network competition for U.S. credit card transactions.
U.S. credit card fees are some of the highest in the world. with credit card fees representing over 70% of the estimated $224 billion in card fees paid in 2023.1
Despite the rise in card fees, the margins on interchange revenues net against rewards have remained largely unchanged. This begs the question; can the credit card industry benefit from more competition while maintaining consumer rewards?
Six of the top ten credit card issuers report gross interchange revenues and rewards expenditure. From an analysis of public records ranging 2017-2024, the average net margin on interchange income was over 30%, with rewards expenses accounting for less than 70% of overall interchange revenue in this period (Figure 1). For comparison, the general retail industry maintained an average net margin of less than 5% as of January 2025.2
Despite the healthy margins on interchange revenues, falling interchange revenue may result in a decrease in rewards. But based on experience, how large is that drop?
From a review of available data, markets that have drastically cut interchange fees through caps have not seen a like-for-like drop in rewards expenditures. For example, in Australia, average credit card fees sat at 2.01% as of 2002.3 Interchange caps were introduced in 2003, and today an individual credit card transaction cannot be charged more than 0.80% per transaction, representing a 121 basis point drop in average interchange. Despite the significant reduction in interchange fees, the impact on rewards has been moderate. From 2003 to 2013, the average rewards per transaction fell from 0.81% to 0.49%, representing a 32 basis point drop in average rewards.4 From Australia’s experience we estimate that for every 10 basis point drop in interchange revenue, there’s an associated 2.6 basis point drop in rewards.
CMSPI estimates that merchants could save at least $17.4 billion annually from credit card competition as of 2024, which could represent a 37 basis point reduction in credit interchange rates in 2024. Based on the experience of Australia, a 37 basis point drop in interchange would imply a 9.6 basis point reduction in average rewards (less than 0.10% drop in rewards). Bringing this back to the six credit issuers analyzed, these six issuers maintain margins on interchange exceeding 30%– sufficient margin to maintain near current reward levels were average credit interchange fees to fall 37 basis points.
