“Trump’s 10% Rate Cap Will Kill Rewards Programs.” No, It Won’t. Here’s Why.
Who Pays for Credit Card Rewards?
When Trump proposed capping credit card interest rates at 10%, the internet collectively lost its mind. Bank stocks tanked. Industry groups fired off warnings. And nearly every comment section filled with some version of “there goes my travel rewards.”
The proposal is based on bipartisan bills introduced by Bernie Sanders, AOC, and Republican Josh Hawley. Strange political bedfellows, but credit card rates are one of those rare issues that unite people across the spectrum.
Here’s the thing, though: everyone’s freaking out about the wrong part of the equation.
The Misconception Everyone’s Making
The panic assumes credit card rewards are funded by interest income. Cap the interest, kill the rewards. Simple math, right?
Except it’s not that simple.
Credit card rewards are largely funded by something most people have never heard of: interchange fees. While there’s debate about exactly how much comes from interchange versus interest, the interchange system is the primary mechanism — and it’s where the real story gets interesting.
How Rewards Actually Work
Every time you swipe your credit card, the merchant pays a fee to accept that transaction. This is called an interchange fee, and it’s how the entire rewards system actually works.
These fees vary based on card type. A basic no-rewards card might charge merchants 1.22% plus 5¢ per transaction. But that premium Sapphire Reserve earning you 3x points on dining? The merchant is paying closer to 1.48% plus 10¢, or even more for business and luxury cards.
The higher the rewards you earn, the more the merchant pays. It’s a direct transfer from the business to your points balance, with the bank taking a cut in the middle.
And banks don’t buy your airline miles at retail prices, either. When Chase gives you 100,000 United miles as a sign-up bonus, they’re not cutting United a check for $1,000. They buy those miles in bulk at a fraction of the value you’ll eventually redeem them for — often 30–50% less.
Airlines are happy with this arrangement because it allows them to control award seat availability. They can make sure most people redeem for lower-value domestic economy flights, not business-class flights to Tokyo, which actually cost them more. The whole system is designed to look more generous than it actually is.
The Hidden Cost Nobody Talks About
Here’s what makes this system particularly interesting: those merchant fees are baked into the prices everyone pays. Cash, debit, premium credit card — doesn’t matter. You’re all paying the same sticker price. But only the credit card users are getting something back.
A 2010 Federal Reserve study found something uncomfortable: the average person using cash or debit cards pays about $149 per year in higher prices to subsidize credit card rewards. Meanwhile, rewards credit card users receive an average of $1,133 in annual rewards value.
That’s not a typo. Cash and debit card users are subsidizing rewards card users by over $1,000 per year.
How does this happen? Visa and Mastercard have “no surcharge” rules in most states. These rules force merchants to charge one universal price, whether you pay with cash, debit, or a premium rewards card. The merchant can’t pass the higher processing costs directly to rewards card users, so they raise prices across the board to cover the highest fees.
Some states have started allowing merchants to add credit card surcharges, but most merchants don’t bother because it creates friction at checkout and risks losing customers to competitors. So the single-price system persists, and with it, the wealth transfer from non-card users to card users.
The only people who lose under the current setup are those who don’t use rewards cards. They’re paying elevated prices to fund benefits they’ll never see.
This is the actual mechanism funding rewards — a wealth transfer most people don’t even know exists.
Why Your Rewards Will Survive
So what does Trump’s 10% interest rate cap actually threaten?
Bank profitability, sure. Credit availability for subprime borrowers, probably. The business model for store cards with 30% APRs, absolutely.
But rewards? Probably not as much as people think.
While both interest income and interchange fees contribute to funding rewards, banks rely heavily on interchange fees — and those fees aren’t threatened by an interest rate cap.
This isn’t speculation. We have a test case. The Durbin Amendment in 2010 capped debit card interchange fees at 21¢ plus 0.05% of the transaction amount (way lower than credit card fees). What happened to debit card rewards after that? They mostly disappeared.
But here’s the critical part: the Durbin Amendment explicitly excluded credit cards from the fee caps. Credit card interchange fees remain unregulated and high, which is exactly why credit card rewards still exist while debit card rewards don’t.
The Deeper Economics
When industry groups warn that a 10% interest rate cap will “devastate” rewards programs, they’re not lying exactly. They’re just being strategically vague about what they mean.
Yes, a rate cap would hurt bank profits. Banks would respond by tightening credit standards, reducing limits for riskier borrowers, and maybe trimming some rewards benefits on the margins. Maybe the airport lounge access gets a little less generous. Maybe the travel credits get slightly more restrictive.
But eliminating rewards entirely? That would require Congress to pass something like a credit card version of the Durbin Amendment, capping interchange fees the way they did for debit cards.
What This Means For You
If you’re not using a rewards card for everyday spending, you’re already paying the premium that funds everyone else’s vacations and cash back. The system is structured to extract money from you regardless of whether you participate.
The logical response isn’t to hope rewards go away so prices drop (they won’t). Merchants won’t cut prices just because they’re saving on fees. Why would they? The logical response is to stop subsidizing other people’s rewards and start collecting what you’re already paying for.
Get a no-annual-fee rewards card. Even a basic 2% cash-back card puts you ahead of paying cash. You’re not gaming the system, you’re just stopping the system from gaming you.
Trump’s interest rate cap might pass, might not, might end up as some watered-down compromise that satisfies no one. But regardless of what happens with interest rates, the fundamental structure of credit card rewards isn’t going anywhere.
As long as merchants pay higher interchange fees for rewards cards, and as long as they can’t pass those costs directly to card users, rewards will exist. The money funding them comes primarily from the fees merchants pay.
The real question isn’t whether rewards will survive. It’s whether you’re going to keep subsidizing everyone else’s rewards while getting nothing in return.
Your choice.
Originally published on Medium.com
This analysis draws on economic research by Adam (u/Buddy5000 on Reddit) originally published on Loophole Travel in 2017, along with Federal Reserve data on interchange fees and payment systems.
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