Imagine swiping your credit card for everyday purchases—groceries, gas, a new pair of shoes—and no longer seeing points pile up toward a flight or hotel stay. Now, picture logging into your bank app only to find that your once-free checking account now carries a monthly maintenance fee. While these changes may seem hypothetical, a wave of state-level proposals to cap credit card interchange fees may soon make them a reality for millions of Americans.
At the center of the debate is a growing coalition of states pushing to regulate the fees that merchants pay to process credit card transactions—fees known as interchange fees or “swipe fees.” While the goal is ostensibly to lower costs for small businesses, critics warn that the unintended consequence could be a drastic reduction in consumer benefits and increased banking costs, all while skirting legal boundaries in the form of what some call an “illegal interstate compact.”
The Interchange Fee Tug-of-War
Interchange fees are the small percentages—typically between 1% and 3%—that merchants pay every time a customer uses a credit card. These fees help fund the infrastructure behind payment processing, fraud protection, and importantly, consumer rewards programs. Airlines miles, cash back, retail discounts—these perks exist largely because card issuers are able to share a slice of those fees with their customers.
Now, several state legislatures are working to cap or regulate these fees, claiming that high transaction costs are hurting local businesses. While the motivation to help small merchants is understandable, the broader implications of such regulatory moves are less rosy.
Patrick Brenner of the Southwest Public Policy Institute argues that what’s happening isn’t just piecemeal legislation—it’s a coordinated attempt at price controls disguised as consumer advocacy. These efforts, he says, could erode the foundation of the modern credit card ecosystem.
The Rewards You Love? They’re On the Chopping Block
One of the most immediate consequences of capping interchange fees would be the reduction—or outright elimination—of rewards programs. These perks are not free gifts from banks; they’re funded directly by the revenue generated from interchange fees. Cut off that funding, and issuers will have no choice but to scale back or discontinue rewards altogether.
This isn’t speculation—it’s precedent. After the Durbin Amendment, part of the Dodd-Frank Act, capped interchange fees on debit cards in 2010, many banks eliminated debit card rewards and introduced new fees on checking accounts to make up for lost revenue. Credit cards have remained a haven for rewards because they’ve so far been largely exempt from such fee caps. That may soon change.
And while high-end rewards cards—those charging annual fees—might survive, it’s the average user, the family budgeting with cash back or the student building credit with points, who stands to lose the most.
Free Banking? Say Goodbye
In addition to rewards, free banking services could also become a casualty. The revenue from credit card fees helps banks offer services like no-fee checking accounts, overdraft protection, and financial literacy tools at little or no cost. A major disruption in interchange income may force financial institutions, especially smaller banks and credit unions, to reconsider how they subsidize these offerings.
In essence, regulators may inadvertently shift the cost burden from merchants to consumers—many of whom can least afford it.
Are States Crossing the Legal Line?
Beyond the economic consequences, there’s a constitutional wrinkle that deserves attention. Critics argue that when multiple states coordinate policy efforts in a way that impacts national markets, they risk forming what amounts to an illegal interstate compact. Under the U.S. Constitution, states cannot enter into formal agreements or compacts with one another without Congressional approval.
When state attorneys general and legislators across the country align to pass near-identical regulations aimed at a specific industry, it raises questions about the legality of such coordination. And in a system designed to ensure that interstate commerce is governed at the federal level, these state actions could end up in court.
The Illusion of Savings
Supporters of interchange fee caps argue that reduced costs for merchants will trickle down to consumers in the form of lower prices. But that theory doesn’t always bear out in practice. After similar fee caps in Australia and the EU, consumers didn’t see meaningful reductions in retail prices, but they did see a decline in rewards and higher banking fees.
In other words, the savings aren’t guaranteed—but the losses are very real.
A Better Path Forward?
Rather than imposing sweeping fee caps, there may be a more balanced way to support small businesses while preserving consumer benefits. Increased transparency around merchant fees, innovation in payment processing, and targeted support for low-margin retailers could offer relief without upending the entire financial ecosystem.
Moreover, if policymakers want to address national concerns around credit card fees, the conversation should happen at the federal level. Piecemeal state legislation may not only create legal confusion but also fragment a system that works best when it’s unified.
Final Thoughts
The push to cap credit card interchange fees might sound like a small policy tweak, but it carries big consequences. Rewards programs, free banking services, and consumer choice are all at stake. What’s more, the legal maneuvering behind some state efforts raises serious constitutional concerns.
For the average consumer, the danger is not some abstract regulatory debate—it’s the very real possibility that the perks and conveniences they’ve come to rely on could disappear. And once they’re gone, getting them back may be far more difficult than anyone anticipates.
