In May 2016 the Reserve Bank (RBA) released its Review of Credit Card Payments final decisions, stemming from a review that commenced in March 2015. Essentially, and as was expected, it limits the interchange fees that can be charged between MasterCard and Visa and merchants. American Express cards that are issued directly by American Express are not affected by the RBA announcements. CANSTAR caught up with Robert Gunning, Director Public Affairs and Communications, Australia and New Zealand American Express, for his views.
Q: Did any of the decisions in the RBA’s Review of Credit Card Payments report surprise you or was it as expected?
A: I think it’s safe to say it was expected, while we don’t think that the regulation was required; the sector has all been experiencing regulatory changes since 2002, we have been working closely with the RBA to express our views.
Q: Companion cards will also now be subject to interchange fee caps – do you expect that the banks may decide not to offer companion cards going forward?
A: Companion cards will actually be subject to interchange regulation – maximum cap of 0.8% and an overall weighted average of 0.5%. Companion cards are American Express cards that are issued by the banks. Cards that are issued by American Express directly are not impacted by the regulation and it’s this which enables us to have an unrivalled rewards program compared to Visa and MasterCard.
In terms of what the banks may or may not do with companion cards – I can’t really speculate on this, as it’s an issue for the banks specifically.
Q: Almost certainly institutions will need to make further adjustments to their rewards programs – how quickly would you expect that to occur?
A: Again, hard for me to talk about other institutions as I’m obviously not privy to their plans. However what is clear is that an outcome of the interchange regulation is that there’s less money available for the schemes that are impacted to fund reward programs and that is only going to continue over the course of time with the changes to interchange.
We have already seen the tip of the iceberg this year in terms of changes that have been announced by a range of Visa and MasterCard schemes where they have devalued redemption rates (i.e. 1 point = 0.5 air miles at best vs our issued cards where 1 point = 1 air miles), capped earn rates etc. It’s fair to assume the devaluation of rewards schemes are going to continue to get more profound by those that are impacted – we think it’s the biggest change in a generation potentially, which is why we want people to check their rewards programs and to be vigilant.
Given that the cards we issue directly are not impacted by regulation we are able to continue to invest in a rewards rich program and maintain the outstanding value that we provide.
Q: Rewards are extremely popular – we know that from CANSTAR visitor search behaviour – do you think banks will be under pressure to maintain their level of rewards or will it simply become unviable?
A: A good question for the banks! We know that Australians love their rewards, and clearly interchange regulation impacts this as there will be less money around for rewards.
Q: American Express cards issued by American Express directly are not be impacted by these reforms – why?
A: In a nutshell, when a person pays for something with their American Express issued card at a merchant that accepts American Express, we own the relationship i.e. the acquiring relationship with the merchant and the person who is purchasing the goods as they’re doing so with a card that we issued directly.
The RBA cannot regulate for payments that are made in a closed system like the one that we operate. What they can do is regulate for payments between financial institutions – not within them. An example of this would be a person buying something say on a CBA issued Visa credit card say for $100, at the merchant who, for example, banks with Westpac. The merchant’s bank pays a proportion of the cost (say 2% – ie in this example $2) of this in interchange to the bank (in this example CBA) and keep $98 for the goods – this 2% example is the interchange which funds rewards. Because this is an example payment between financial institutions the RBA can regulate here.
I realise it’s a hard one to get your head around, and sometimes just explaining it can be confusing. What consumers really need to know is if they have a card that is issued directly by American Express, which are not subject to interchange regulation, they will continue to enjoy a superior reward proposition, and we expect that over time this gap is only going to get bigger, so CANSTAR readers – be aware!