Last week the Reserve Bank of Australia (RBA) released three new standards that will have impacts across the credit card system. The new standards are outcomes from an investigation into credit card regulations, with a ‘Conclusions Paper’ being released in conjunction with the three new standards.
The three new standards are the result of an investigation into how changes to regulation may improve the efficiency of the payment system. The three main changes are:
- Changes to the standards to reduce the interchange fees
- Changes to bring the American Express companion cards under the interchange fee standards
- Restrictions on surcharges that exceed the costs of acceptance of a credit card, together with stronger legal backing to the restrictions
These changes are going to impact on various aspects of the way credit cards are used for travel. In the following sections, we will take a look at how these changes may affect those of us that use credit cards and their rewards programs heavily in out travels.
Of course, these are only our predictions on what will likely happen. Until the affected banks and merchants make their moves in response to the changes, we can not be 100% sure.
Note that these are three separate changes that are being made, and I will discuss them in these terms. Some of the news reports have tended to conflate the three changes suggesting that the reduction in interchange fees will result in lower surcharges. This may or may not be true, and we probably won’t know the full story until it is fully implemented.
A quick Primer on Fees
To understand what these changes all mean, I will first give a quick primer on the way the credit card system works. In a Visa or MasterCard credit card transaction, there are a number of parties:
- the merchant receiving the payment (“merchant”),
- the bank that the merchant uses to provide processing services (“acquiring bank”),
- the bank that issued the card to the customer (“issuing bank”) and
- the customer (“customer”)
- the Credit Card scheme (“scheme”), which is Visa or MasterCard
When making a payment on a card, in general the fees are
|Interchange Fees||These are the fees paid to the issuing bank when a transaction occurs. They vary widely depending on the type of card used, the way in which the payment was made, and by the type of business accepting the card
These are the fees that the RBA will be limiting to a weighted average of 0.5% and a maximum of 0.8% of the transaction value
|Merchant Fees||These are the fees that the merchant is charged by its acquiring bank for processing the credit card transaction.
These are the fees that the Merchant is recovering when they apply a credit card surcharge to a transaction
|Assessment Fees||These are the fees received by Visa or MasterCard when processing a transaction.
The current set of regulations do not address these fees.
From the perspective of points earning, it is the changes to the interchange fees, and the regulation of American Express companion cards that will have the most impact.
Changes to Interchange Fees
Under the new RBA rules, the credit card schemes will need to ensure that the weighted average of interchange fees does not exceed 0.5%, and furthermore the maximum allowable interchange fee will be 0.8%. These changes are set to take effect from July 1, 2017.
Some high end cards, have an interchange fee of between 1.3 and 1.5%. These will be dropping to a maximum of 0.8%. The significance of this for the point collector, is that largely it is the interchange fee that funds the rewards program that is attached to the credit cards.
To give some idea of how this may flow through, consider some of the recent reductions that have occurred at banks such as Citibank. In November last year, the credit card schemes adjusted some interchange rates as the growth of premium cards has resulted in the weighted average fee increasing above 0.5%. This resulted in Citibank adjusting its rewards program in line with the changes.
The likely affect of the changes to the interchange fees will be a reduction in the value of the reward programs that are attached to credit cards.
American Express Companion Cards
American Express companion cards are the American Express cards issued by banks in conjunction with a Visa or Mastercard account. Typically, these cards have had a higher points earning rate than the Visa or Mastercard account that they are associated with. This is due to the issuing bank receiving a greater fee for spend on the American Express cards.
For the first time, American Express Companion Cards will come have a similar standard applied to them, as applies to the Visa and Mastercard systems. Note that this new restriction does not apply to American Express cards directly issued by American Express.
The effect of this will be to reduce the number of points earned by a companion card. Indeed, it would seem likely that the points earn rate on an American Express transaction to be similar to the Visa or Mastercard earn rate. On the surface, this appears to have the effect of making companion American Express redundant, as there is no advantage in using the American Express card.
It remains to be seen how the banks will react to this change, but it would not be surprising to see one or more of the banks withdraw the American Express companion cards from their offerings.
Changes to Credit Card Surcharges
A credit card surcharge is that annoying extra payment you get charged when you use a credit card. The RBA has given guidance and rules around ensuring that the surcharges reflect the cost to the merchant of accepting the cards.
Cost of acceptance has previously been quite broadly defined, indeed so broadly that there has been no way of telling whether a merchant is only recovering their costs or are adding a bit on. On top of that, there has been no real enforcement regime – as the restriction is basically a contractual one.
Due to suspicions that some companies, such as airlines, have been overcharging on credit card surcharges there have been changes to both definitions, and with legislative changes, an ability to legally enforce the limits on surcharges.
The ACCC has been given power, through amendments to the Competition and Consumer Act 2010 to ensure that companies restrict any surcharges to the cost of acceptance. One important change, is that a payment surcharge has been defined in functional terms – so that a surcharge that applies to one form of payment but not to another is under the law, a payment surcharge.
This change was in reaction to airlines and the like giving names to their surcharges that suggest that they are not credit card surcharges, when they only apply to credit card payments.
In addition, the RBA has tightened the definitions of what acceptable costs of acceptance are. Generally speaking, they have been restricted to what might be called ‘observable costs’. These are merchant fees and the like that are easily determined. The definition now largely excludes the ability to add on a lot of the behind the scenes administrative costs (that would apply to other forms of payments)
The RBA also took aim at the fixed price surcharges that are charged by airlines, and it is likely that they will need to review the way that their charges are calculated. I would expect that they will move to a fee that is a percentage of the fare. Whether they adjust fares upwards to account for any possible reduction any revenue remains to be seen.
From a timing point of view, large merchants will be required to comply with the new surcharging standard from 1 September 2016. Other merchants will need to comply with the standard from 1 September 2017.
The changes to the standards announced by the RBA are a bit of a mixed bag for travellers. The likely result is the the value of credit card reward programs will be reduced, particularly for premium cards. On the other hand, the credit card surcharges on cheaper airfares is likely to come down.
The changes are slated to come into effect at various times over the next 15 months or so, rather than as one big hit, so we may see some of the changes trickling through for a while.