Co-author: James Hurwood
The Reserve Bank (RBA) has released its long-awaited Review of Credit Card Payments final decisions, stemming from a review it commenced in March 2015.
Essentially, and as was expected, it limits the interchange fees that can be charged between MasterCard and Visa and merchants. This means that it will be more difficult for banks to recoup the cost of the rewards programs that they offer on many of their premium credit cards.
There are also some ramifications for American Express cardholders, and some good news for anyone tired of airlines charging a fixed cost surcharge for the privilege of using your credit card.
What do the credit card changes mean for you?
The changes are unfortunately likely to reduce the value of the rewards program on your credit card if you have a MasterCard or Visa or an American Express card issued by bank.
Rewards are funded by a number of sources, but in the traditional banking environment, rewards are primarily funded by the interchange fees paid between the customer’s bank and the bank of the business where the customer’s purchase is made.
There is a good chance that we will see a lot of issuers changing their credit card reward programs as a result of this.
When the changes were first announced, CANSTAR’s Research team had already seen card changes from a number of providers as of May 2016, including ANZ, Commonwealth Bank, Virgin, Suncorp Bank, and Macquarie Bank. Some of those changes were relatively minor, though, and probably don’t reflect the full implications of these decisions.
A summary of the RBA credit card decisions
|The weighted-average benchmark of 0.5% for credit card transactions will be maintained but will be calculated quarterly rather than every 3 years.||No significant change here.|
|There will also be a cap on individual interchange rates: 0.8% for credit cards.||This will likely lead to a reduction in rewards on premium cards, especially premium cards such as Black, Diamond, and Prestige cards. Currently, interchange rates on these cards can be as high as 2% – with some of this forming revenue that issuers pass on to consumers in the form of rewards.|
|Interchange-like payments to issuers in the American Express companion card system will be subject to equivalent regular caps as applies to the MasterCard and Visa credit cards systems.||It is possible that the Big Four banks may take decisions to limit or end the issuance of Amex companion cards. Since revenue from these arrangements will likely be reduced, there may also be reductions companion card reward schemes.|
|Surcharging standards will change so that “permitted surcharges” on credit card transactions will need to reflect the merchant’s average cost of acceptance. These numbers will need to be provided to merchants.||Definitely a win for consumers – it effectively bans fixed cost surcharges (e.g. Airlines) and will mean credit card surcharges for MasterCard and Visa will likely need to be more reflective of the 0.5 – 0.8% interchange frees.|
You can download the full RBA document here, or read our detailed summary below.
Current benchmark for credit card transactions
The RBA made the decision that the current weighted-average benchmark of 0.5% for credit card transactions will be maintained; however, going forward it will be calculated quarterly rather than every 3 years.
This doesn’t represent a huge change, but it does mean that smaller merchants will incur smaller payment costs, which may in return result in reduced costs to consumers.
The other ramification of this change is that any potential significant change to the benchmark may arrive sooner rather than later, which would have a larger impact on the costs paid by both merchants and consumers.
Capping of individual interchange rates
The RBA elected to place a cap of 0.8% on individual interchange rates, which will also work towards driving down the payment costs incurred by smaller merchants (and potentially those incurred by consumers as well).
However, it will also have a negative impact on the rewards systems attached to many premium and premium cards, as these systems are usually largely funded by higher interchange rates on those cards. Premium cards previously had interchange rates as high as 2%.
Caps placed on Amex companion card payments
Fees within the American Express Companion Card System that were “functionally equivalent” to interchange fees but technically separate will now be treated as interchange fees. Amex companion card payments will therefore be subject to the same caps that apply to the MasterCard and Visa schemes:
- Maximum interchange fee of 0.8%
- Cap of 0.5% of transaction value on the weighted average of interchange fees
These changes to how Amex is treated were expected to lead to the Big Four banks placing restrictions on American Express companion cards, or even ceasing to issue Amex companion cards.
The revenue that can be earned off of said cards has also been capped, meaning that their respective reward schemes may also see reductions.
Changes to surcharge standards
The RBA announced planned changes to surcharging standards which will force “permitted surcharges” to reflect a merchant’s average cost of acceptance. These numbers will need to be provided to merchants.
This represents a huge win for consumers because it means that merchants can’t charge inflated or arbitrarily large fixed cost surcharges (as airlines were so often reviled for doing).
It will also mean that credit card surcharges for MasterCard and Visa will need to change in order to be more reflective of the 0.5 – 0.8% interchange fees.
Directly issued American Express Cards not affected
Users of American Express cards that are issued directly by American Express can breathe a sigh of relief in the knowledge that the new RBA rulings don’t apply to their rewards card.
While we mentioned changes to how American Express companion cards will be treated when it comes to interchange fees, note that said changes only apply to Amex cards issued by a third party such as an Australian bank.
American Express cards that are issued by American Express directly will not be impacted by these reforms. This is because American Express issued cards do not rely on involving banks to manage the transaction between the cardholder and the merchant business.
A number of American Express cards receive a 5-star rating for outstanding value in the CANSTAR credit card ratings.
While you should never choose a credit card solely for the reward on offer (unless it’s the perfect fit for your spending habits), it does make sense to get the best rewards based on your needs.
Keep an eye on your credit card statements for the next few months and check whether your credit card rewards program is losing its lustre. If so, don’t hesitate to shop around and find the best type of rewards card for you:
CANSTAR is an information provider and in giving you product information CANSTAR is not making any suggestion or recommendation about a particular credit product. If you decided to apply for a credit card, you will deal directly with a financial institution, and not with CANSTAR. Rates and product information should be confirmed with the relevant financial institution. For more information, read CANSTAR’s Financial Services & Credit Guide (FSCG), our detailed disclosure, important notes and legal disclaimers.