The 5% and higher rewards programs you mentioned may not even disappear. The CC companies are already losing money on them because the interchange fees are closer to 2% for Visa/MC and maybe 3% for Amex. The expectation, of course, is that a significant percentage of consumers will end up paying interest which will make up the lost profit. Considering how long such programs have been operating, I assume this is true and it's profitable.
I'm a bit torn on the interchange rate argument altogether. Here's how I see it:
- From a merchant's PoV, the service credit cards offer to them is "customers can purchase something now for up to $XXXX (or higher), the merchant will get paid and won't have to worry about credit risk."
- On one hand, you have your "essentials" merchants, such as grocery stores. Such merchants sell products that consumers would be purchasing no matter what, whether they pay via CC, check or cash. They aren't getting much value for that interchange fee.
- On the other hand, you have more luxury merchants. Think along the lines of Apple. How many $2000 computers does Apple sell simply because of the pay-over-time ability? I'm willing to bet it's a decent amount. Obviously, merchants like that are receiving a lot more value from the credit card system.
I think the fairest way of doing this would be to classify merchants into those two categories. Even doing that can be difficult, though, because what is "luxury"? For example, is McDonald's "luxury"? IMO, the best answer would be "does the merchant actually benefit from customers being able to pay over time?" Going by that definition, McDonald's doesn't - nobody buys a burger and expects to pay for it over time, even though McDonald's may be considered by some to be a luxury for a less-than-middle-class person.
Finally, you have the issue of coming up with a fair rate. It's not fair to directly compare with cash and checks because those have their own expenses too. Counterfeit cash, bounced checks, and the expense of processing both, not to mention having cash on hand is a robbery risk. Also, cash does have "processing" costs - someone has to deposit that in a bank usually every day, and for larger stores that would normally be an armored car service which costs money.
Here's my take on fair rates: Capital One has a Visa CC that offers 1.5% cashback on all purchases with no limits. (That's the highest rate I'm aware of for Visa/MC besides the "loss leader" category rewards or promos.) Obviously the rates are currently high enough for that. Going by the current rates being in the 1.6%-2% area, it would seem 0.3-0.5% should be a fair enough rate to adequately cover the CC companies operating costs, make a fair (not exorbitant) profit, etc.
Now, should there be a premium over that for "luxury" merchants? Debatable. And so is the issue of what it should be.
