History shows that some of the worst decisions are made on altruistic motives.
This year, the Reserve Bank of Australia’s decision to regulate interchange fees between banks comes into effect.
For those playing at home – interchange fees are incurred when you make purchases on your credit card. Simply put, merchants pay a merchant service charge to their bank every time you use your credit card for a purchase and this usually factors into the price of what you’re purchasing. Some of this payment is used to fund an ‘interchange fee’ to the purchasing customer’s bank which ensures that both banks equally shoulder the transaction.
This interchange fee is then used to subsidise your credit card fee, pay for your frequent flyer or rewards scheme, pay for your fraud protection scheme and your interest-free period. What the RBA is doing from this year onwards, is placing a cap on that interchange fee.
Sounds good, right? After all, what could be bad about keeping transaction fees artificially low – wouldn’t that lower the prices of goods and transactions while encouraging commerce?
A capped interchange fee simply means that the banks and credit card providers move the cost elsewhere. That means higher credit card fees, scrapped or scaled back rewards points of frequent flyer programs, shorter interest-free periods or simply, higher interest rates on your card.
To make matters worse, the supposedly lowered transaction cost is also highly unlikely to benefit you because the price differential involved is so small. Even If the merchant’s bank passes on the entire cost reduction to the merchant rather than simply pocketing it since there’s nothing stopping them from doing that, it is unlikely to pass to you. A 2 cent discount on the cost of a transaction for a $9.99 good for example, isn’t going to realistically result in a new retail price of $9.97.
Unfortunately, credit card holders and frequent flyers or rewards points holders have already been hit by the changes.
These rewards programs don’t just benefit individuals – many businesses pay for expenses on business credit cards, paying higher fees but relying on the accumulation of rewards points to fund other business initiatives. There are even consultancy businesses built upon advising other businesses on making the most of their rewards scheme.
These rewards programs are a key factor in encouraging customers and businesses to engage in transactions across the economy by rewarding just that – commerce. Rewards points also encourage innovation and strategy, a key component of the agenda the current government seeks to promote.
Some of the major rewards programs slashed already are:
Other banks and rewards programs impacted include NAB, Westpac, Bank of Melbourne, St. George, Virgin Velocity and Bank SA. A full list of programs which have been slashed can be viewed here.
For more information on our campaign to fight the interchange fee to keep the buck from passing to you or to show your support by petitioning your local MP, visit www.dontpassthebuck.com.au
Satyajeet Marar is the Director of MyChoice Australia.