Credit cards are one of the easiest ways to accrue points on a regular basis.
This year is looking like many Australian banks reevaluating the benefits of the credit cards they offer, with some making changes already.
The reason for these changes? Interchange fees. We outline what they are, and what is going on.
What is an Interchange Fee?
When you sign up for a credit card, most people pay careful attention to the fees involved.
So you’ve no doubt heard of annual fees, cash advance fees and card surcharges – but chances are you’ve never heard of interchange fees.
That’s because interchange fees aren’t charged directly to you, but they have a direct effect on your points and new changes may end up costing you.
To be able to accept card payments, a store has to have a payment system set up by a bank. But the store’s bank, which sets up the payment system, and your bank, which issues your card, may not be the same bank.
For example, you might use your ANZ credit card to pay for something at a store which has a payment system set up by NAB. Surprise surprise, both banks will want to get paid for their role in making the sale happen.
Every store pays its bank a number of different fees in order to have a payment system that works. One of these fees, the interchange fee, then gets paid from the store’s bank back to the bank that issues your credit card.
While the store’s bank uses their fees to cover the cost of setting up the payment system, your bank will use the interchange fee they receive to pay for the features of your credit card, including the rewards points.
How does it affect my points?
So the interchange fee isn’t necessarily bad news for you. It doesn’t get paid by you, it gets paid by the store where you shop. It then goes from the store to their bank and from that bank to your bank. Your bank uses it to pay for things that benefit you, like interest free periods and more importantly, rewards points.
The amount that your bank recovers through the interchange fee will therefore determine how much money they have to spend on those benefits like rewards points.
Premium credit cards (such as Platinum or Black cards) attract a higher interchange rate, so your bank gets more money every time it’s used compared to an ordinary card.
That’s why premium cards usually have a higher earn rate than ordinary cards. Since the bank gets more money for every dollar you spend with it, they can afford to offer you more rewards points (and complementary insurances etc) with that card.
Similarly, American Express cards also attract a higher interchange fee. That’s why they will generally be able to offer higher earn rates than Visa or Mastercards.
Of course, just like every other business expense, a store might choose to increase their prices or introduce a surcharge to makeup for the bank fees the have to pay. That’s why it is not uncommon to find stores which charge a surcharge for American Express cards, but not for Visa and Mastercard.
What is going to change? It’s a behind the scenes tweak, but with impacts that banks are passing on to consumers
The Reserve Bank of Australia (RBA) is responsible for regulating card payment systems, and they have recently announced that they are considering changes to the way interchange fees are regulated.
Whilst no decisions have been made yet (and won’t be until at least May this year), it seems that the RBA is at least considering capping the amount of interchange fees a bank can charge a store.
Actually, it was already capped in 2003, but it was a soft (average) cap and now they are proposing to tighten that rule. Even if the RBA doesn’t make these changes, it’s possible that banks will voluntarily start making these changes because of the threat of an RBA decision.
I don’t want to bore you (any further) with the figures or technicalities that are being suggested, but suffice it to say that this may lower the amount that banks can charge for an interchange fee. The one important number to keep in mind is 0.8%, that is the proposed max interchange fee.
What will the changes mean for rewards points?
The interchange fees are set by Visa and MasterCard, and they may have to come down if these regulations are made.
At the moment interchange fees vary depending on a whole range of factors, including what type of card is used, what type of store it is used at, as well as the amount of the purchase and they way it was done (PayPass, chip etc).
For simplicity, I’ll just mention two current interchange rates:
- Standard cards (e.g. Silver and Gold cards) have a rate of about 0.27% – 0.32%
- Premium cards (e.g. Platinum and Black cards) have a much higher rate of about 0.70% – 0.92%
Earn rates
One likely effect of these changes is that the earn rate on certain cards will go down.
As you can see from the rates above, if all interchange fees were capped at 0.8% the biggest effect would be on premium cards. This means that if the cap comes into place, we are likely to see a reduction in the earn rate on premium cards.
This already happened recently with ANZ Platinum and Black cards and also announced by Citibank and Virgin Money. But it may also affect other cards and non-rewards cards as banks try to make up for their losses in other places.
This may also mean that annual fees for cardholders go up to make up for losses, or other benefits are changed and added to justify a higher annual fee.
Bank points values and earn rates will be looked at and will likely reduce
The next obvious change we can expect is that the value of points may go down. If banks are getting less money to buy points, it makes sense for them to make the points cheaper.
So even if your earn rate remains the same, you might find that you need more points for redemptions than you previously did. So a case of wine might go from 20,000 points to 25,000 or 30,000 to help the bank maintain their profits.
As the cost of things in the points store goes up, we may also find the value of other inclusions going down. Banks may start restricting the scope of their complimentary insurances and other benefits that previously accompanied cards.
Airline pricing and redemptions may be impacted in the long run
Whilst it’s easy for banks to adjust the value of their own points schemes, it’s not as easy for a bank to adjust the cost of purchasing airline points, since that is up to the airline.
However since this regulation is going to affect all banks at the same time, there will probably be pressure on airlines to adjust the value of their points.
In the long run, there could be less overall demand for points from banks, which in turn would reduce revenue to the frequent flyer program from banks. If this happens, in the long run we might expect the price of airline redemptions to change and become more expensive to make up for lost revenue from fewer points issued.
This could affect all frequent flyers, not just credit card points earners.
Companion Cards from American Express are likely to get the chop
Finally, this regulation is widely tipped to mean the end of the American Express companion card.
At the moment, many banks offer you an additional American Express companion card when you sign up for any of their rewards cards.
American Express pays the card issuing bank an undisclosed amount to send out the companion cards which offers a higher earn rate than its Visa and MasterCard counterparts.
If American Express was forced to cap its interchange fee at 0.8% then this arrangement may no longer be worthwhile and we might see these companion cards disappearing.
Summing up
Interchange fees are paid by merchants to card issuing banks to cover the cost of rewards programs and other benefits.
The RBA may make changes to interchange fee regulation this year which would mean lower fees for merchants, and lower value for reward card holders.
If that happened, it may result in lower earn rates on premium cards and the end of the American Express companion card.
The value of rewards and airline points may also go down to account for the interchange fee cap, and this would impact ordinary (non premium) card holders as well as frequent flyers.
The RBA is likely to consider making these changes at their meeting in May this year. We will keep you informed about the decision and any effects that come with it.
We don’t like to speculate much here at Point Hacks, but we have already seen some banks show their hands without the changes becoming formal, so it seems a given that other rewards cards will also see some changes in future.
Maybe one day the application of credit card comes with “menu” like options or “standard inclusions”. Pick what you want to include with you card. 15, 30, 55 days interest free; rewards points x1, x1.5, x2; with or without travelling insurance, concierge, extended insurance, etc. This will give consumer more choice and possibly better rewards points conversion to frequent flyer points.
Nothing in life is free, accepting Credit card for payment helps the business grow and is a tool, which the store owner greatly benefits from, other wise why would would they accept it as a payment option.. Fees charged by the banks for the service are ALL tax deductible. The mark ups on some merchandise Eg say clothing is in the hundreds of % if not more hence 70% sales or more one see’s etc.
Its a tool, a business, expense claim it, absorb the fees, but don’t add it on top of a purchase, leaves a sour taste in the customers mouth and a good chance you wont get a repeat
If I spend $100 at a store. I have a Black Credit card.
Does this mean the interchange fee of $0.92 is taken from the store owner?
Is this also on top of the admin/transaction fees they pay as part of the payments system?
If so I can imagine them losing $2-3 off a $100 transaction!
There are benefits to both merchant and consumer for using a credit card which go some way to justify increased pricing, such as fraud protection for both parties, deferred payment for consumers, points earn, and reduced handling of cash by merchants. So these fees aren’t inherently a bad thing as they fund useful features.