Investing.com -- Proposed changes to U.S. credit-card interchange fees could disrupt the financial structure of airline loyalty programs and slow growth in co-branded rewards cards, according to analysts at Barclays assessing an industry that has increasingly relied on bank partnerships for revenue since 2019.
The brokerage examines a third proposed legal settlement in a nearly 20-year class-action lawsuit against Visa and Mastercard regarding interchange pricing practices.
Barclays says the potential settlement could alter how merchants accept and price premium rewards cards, reshape consumer spending patterns, and affect loyalty-plan economics that now supply a double-digit share of major carriers’ revenue.
The proposed settlement would allow relief from the long-standing “honor all card” rule, giving merchants the option to refuse higher-cost rewards cards or apply differentiated surcharges based on card type, including what Barclays describes as a possible “rewards card surcharge.”
The plan includes an average reduction of roughly 10 basis points in interchange fees over five years, mainly affecting basic cards.
Basic interchange rates would be capped at 1.25%, while the fee spread for restaurant merchants between basic and premium rewards cards could reach 140 basis points, a level Barclays says may incentivize smaller merchants to steer customers toward lower-cost payments.
Barclays notes that loyalty revenue has risen more than 50% since 2019 across the six largest U.S. airlines.
These loyalty and marketing revenues represent more than 20% of total revenue at Southwest Airlines and between 11% and 14% at Delta Air Lines, American Airlines and United Airlines.
Delta maintains the largest loyalty program by total revenue through its long-standing agreement with American Express.
Southwest generates the highest loyalty revenue as a share of operating revenue at over 20%, while network carriers lead in total dollars, reflecting the scale of their brands.
Barclays says loyalty-marketing revenue generally carries limited associated operating expense, making it a high-margin contributor to airline profitability.
The brokerage explains that most loyalty revenue comes from banks buying airline miles or points at negotiated rates that are then awarded to cardholders.
These payments flow to airlines immediately in cash, increasing air-traffic-liability balances until the points are redeemed as passenger travel, yielding revenue that Barclays says typically approaches average network profitability.
Barclays cautions that reduced acceptance or surcharges on rewards cards could diminish the utility of co-branded cards and constrain future growth.
However, higher-tier cards offer non-spending benefits, including elite status and airport lounge access, that the analysts say may maintain consumer demand even if interchange-based earnings decline.
The brokerage also highlights that premium cards at American, Southwest and United generally earn equal or lower rewards rates than lower-tier cards, suggesting that users at the highest end value status and benefits more than points accrual.
Barclays says changes are unlikely to affect the market until at least 2027. Delta’s agreement with American Express would not be directly affected by the settlement.
The analysts added that the settlement could reduce momentum for the bipartisan Credit Card Competition Act, despite criticism from Sen. Dick Durbin and merchant-advocacy organizations.
