I fear I am beginning to sound like a broken record on the subject of payments card interchange fees, with the needle stuck on “We told you so.” Interchange fees are essentially the fees charged by a customer’s bank to the merchant when a customer uses the bank’s debit or credit payment card to buy goods or services. Merchants hate these fees, so regulators around the world have been pressured to cap them. The trouble is that banks have to make up their revenue stream somewhere, so raise fees on or cuts services to their customers. Customers end up worse off. One example we have warned about is that banks will lower the value of rewards cards. That happened in Europe last year, and is happening now in Australia.
The Sydney Morning Herald reports that the Commonwealth Bank of Australia has raised the number of awards points needed to redeem for a flight, effectively devaluing their points:
Comparison website Mozo pointed out this was a cut of 20 per cent in the "earn rate". It said a CBA customer with a "diamond" awards card would now need to spend an extra $2286 on their credit card to get enough frequent flyer points for a flight from Sydney to Melbourne.
This may seem like an attack on a luxury good, but many people around the world manage their finances effectively by putting all their spending on rewards cards, paying the balance off every month, in order to get these reward flights that they use for business or leisure. Having to spend an extra $2000 to get one short flight is a pretty big deal for them.
Nor is it just the banks that are affected by this cap. Rewards points are a significant source of revenue for the airlines. It is likely that their finances may be affected, potentially resulting in higher fares for everyone else.
As the Herald noted last December, this may just be the beginning:
It's thought the changes might also spell the end of the American Express "companion" cards that earn more frequent flyer points for a customer than the MasterCard and Visa cards used for the same account.
Airlines' frequent flyer points cost the banks more than any other reward scheme they offer customers, making them ripe for cuts as banks look to claw back lost credit card income.
"For consumers, the biggest change is going to be to the rewards points they can earn per dollar spent," said one senior bank executive.
One senior banking executive said the biggest potential risk to the airlines' reward programs posed by the RBA changes was in fact playing out.
"What has been their greatest risk under these changes is happening. The most expensive rewards are the frequent flyer points and so a large proportion of the fees that are likely to be cut go to Qantas and Virgin," the banker said.
Based on the views of senior bankers, analysts and industry experts, Fairfax Media estimated the combined impact of the surcharge and interchange fee cuts could amount to between a $600 and $800 million hit to banks' and airlines income.
CEI has been involved in this fight internationally for a long time. The danger to American consumers is that international financial regulators tend to copy what other regulators are doing. The Federal Reserve has the power to regulate debit card interchange fees under the Durbin Amendment to Dodd-Frank, which is why debit card rewards programs have almost disappeared in the US (here’s a list of the few that still exist).
It is probable that competition from new technology such as cryptocurrencies will significantly reduce merchant payment transaction costs over time, leading the banks, payments, and/or fintech firms (and airlines) to find a new model other than card reward programs to retain loyalty. However, that is a different process from regulators imposing a reduction based on their view that rewards programs represent poor value for consumers.
As it currently stands, the predominant international interchange fee regulatory model is one that punishes consumers by raising their costs.
You can learn about the Don’t Pass The Buck campaign against regulation in Australia here.