The announcements by some major banks that they have agreed with key parts of the Reserve Bank’s credit-card agenda will be good news for some consumers, but for others it will mean an end to subsidised loyalty programs.
There are several pernicious elements to the present scheme. At present, retailers are not permitted to charge extra to those people who pay with credit cards, despite the fact that retailers are charged usually between 1 and 2 per cent. When money is paid by the card-issuing bank to the bank of the retailer, the banks charge each other interchange fees of about 1 per cent – which amounts to about $1 billion a year. The interchange fee covers the costs of loyalty schemes under which card holders get points towards free flights and other goods. These fees are not disclosed at the time of transactions and are not well known in the community.
The upshot of the way credit cards work in Australia, is that some consumers use their cards as often as possible to obtain loyalty points and pay the card of every month so they do not incur interest costs. Often banks waive card account fees, too. These people’s loyalty rewards, such a free flights, are indirectly being paid for by others in the community who pay cash, or debit card or who run up credit card debts they cannot pay immediately.
This week, the banks agreed to changes, though the Commonwealth was more reluctant than the other three majors and the regional banks. There will some further discussions and the Reserve Bank will put out a final position at the end of the month. The Reserve Bank is the final arbiter. Under the Reserve Bank Act it has wide powers to prescribe rates and conditions in banking services. By and large it allows competitive forces to operate, but with credit cards both the Reserve Bank and the Australian Competition and Consumer Commission have been exasperated at the degree of non-disclosure.
The changes will mean that major retailers will be able to have their own credit cards; retailers will be able to charge extra for credit card use; and the interchange fee will be reduced so it does not cover the cost of loyalty programs.
The dynamic is quite complex. One variable will affect another. It is impossible to predict precisely what will happen. It will depend as much on the behaviour of consumers and retailers as the banks. It may well be that retailers do not take up the option of charging for credit card use (or giving discounts for cash or debit card use). Competitive pressure might cause many retailers to avoid appearing to “”discriminate” against credit-card users. It may be that banks will be reluctant to carve into loyalty schemes too heavily or impose realistic user-pays fees on credit-card accounts. However, the notorious similarity of banking charges and services among the four majors suggests that they will find ways to increase card fees and cut loyalty programs once they realise there are no interchange fees to support them. When that happens, it is likely that the number of people who use the card for everything to get the points and then pay it off to avoid interest charges will fall. They may move to low-fee debit cards.
The critical question will be whether the unjustified indirect subsidy of loyalty schemes by unknowing cash and debit-card users ends and whether the cut in interchange fees flows out of the banks to retailers and ultimately consumers. If the trend does not go that way, the whole exercise will have been a waste of effort.