Australians spend around A$25 billion each month using credit and charge cards. The rewards associated with those cards are about to change. It’s time to check if your card is the best value for you.
By Jan McCallum
Banks are reviewing their card programs ahead of July 1, when new interchange fee reforms will affect how they fund their credit card rewards programs.
Cardholders may see reductions in the value of rewards programs as bank issuers decide they need to respond to a reduction in interchange revenue on the rewards cards to recoup lost revenue under a new interchange standard.
The changes are happening because the Reserve Bank of Australia (RBA) is reducing and placing caps on interchange fees, which are charged by banks and card schemes for transferring card payments within the banking system.
What do interchange fee changes mean for consumers?
Some cardholders may see limited impact. The RBA expects little effect on non-rewards consumer cards and so there could be few movements in interest rates and interest-free periods on such cards.
The changes will be felt by holders of bank-issued premium cards – i.e., those that offer rewards programs – says Canstar group executive financial services Steve Mickenbecker.
Mickenbecker says bank revenue models for these cards are quite different from lower-rate cards, with banks earning their revenue from interchange fees rather than interest payments and using that revenue to fund rewards programs.
The RBA is capping credit card interchange fees at 0.80 per cent. Mickenbecker says no one knows what some fees currently are but the cap means the revenue to banks will certainly fall.
“They are not going to pass on the benefits they currently offer,” he says.
“There is no way they can keep supporting rewards programs as they currently are so they will have to wind back on some of the rewards they are paying.”
What do new interchange fees mean for cardholders?
American Express head of consumer proprietary cards Kent Tai says banks are already starting to cut back on rewards programs ahead of the July 1 changeover.
Tai says it is important for people to take the time to read information from their bank on how programs are changing.
Changes could include:
- A reduced points earn rate on the whole or at certain industries, lowering the rate at which cardholders can accrue points
- a rewards points cap or expiry
- a higher number of points required to redeem certain rewards
- changes to other benefits such as airport lounge access.
Mickenbecker agrees that people with premium cards need to watch out for any letter that arrives from their bank stating there will be changes to the terms and conditions with their card.
“You have to make sure you read it this time.”
Cardholders should be prepared to shop around, he says.
Will all cards be affected?
Not all cards will be impacted. Cards issued directly by American Express are not part of the interchange regulation, while credit cards issued by banks are subject to the reforms.
How will interchange fees affect corporate cards?
The RBA says commercial and corporate card products often provide significant benefits free of charge to the company cardholder and there could be changes to either the pricing or services provided with these.
There may be “some reductions in the generosity of rewards programs on premium and companion cards for consumers”.
It says this is part of the process of improving price signals to cardholders and creating a more efficient and lower-cost payments system.
Tai says businesses often use rewards to buy or upgrade flights or to buy gift cards for staff or clients.
“Research by American Express has found about a third of small to medium enterprises (SMEs) spend more than A$10,000 a month on cards. That can rack up rewards very quickly,” he says.
On some cards, that could earn enough rewards points to redeem two return flights from Sydney to Los Angeles, or quite a few business class flights between Melbourne and Perth.
“Many business owners also use their points to upgrade, which is a smart use of frequent flyer points if you want to treat yourself” he says.
“These rewards really add up if you are on the best program. This comes back to considering what value your card delivers and whether that’s going to change with the new reforms.”
How are bank interchange fees changing?
Weighted-average benchmarks are used for interchange fees and this system will remain in place, but the benchmarks will change.
The benchmark for credit cards will stay at 0.50 per cent but there will be a fee cap of 0.80 per cent.
The fee for debit cards will be lowered from 12 cents to 8 cents per transaction.
The RBA says the changes should reduce significantly the extent to which small- an medium-sized merchants are disadvantaged relative to preferred merchants in the MasterCard and Visa interchange systems.
Find out how you can maximise your rewards with any of the CPA American Express cards available here.
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