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Are rewards cards in trouble?

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Be careful what you wish for! We've been wanting reforms to credit cards for some time and thankfully they're coming - but not without some pain. Two key changes announced by the Reserve Bank have the potential to result in the opposite of what cardholders may want.

From September 1 this year, large retailers will no longer be able to slug you with a ridiculously high fixed credit card surcharge (smaller retailers have until September 1, 2017, to conform). From this date the fee has to be reasonable and be a percentage of the purchase price. Great news for low-ticket items but not so good for higher-cost items.

As Keith Mason, a rewards card expert from Point Hacks, notes that if an airline sets a surcharge at 2%, a $50 flight will attract a $1 fee but for a $2000 international flight it will be $40.

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"Business-class passengers and long-haul international flights will be the losers in this equation but budget domestic travellers will come out on top," he says.

One would hope, though, that retailers will cap their surcharges - for example, 2% of the ticket price capped at $30. Unfortunately, this will only become clearer as retailers reveal their new fees.

The second key change that's already affecting credit card holders relates to interchange fees. Card companies pay banks these fees each time you use your credit card. This revenue pays for a significant proportion of Australian rewards programs.

From July 1, 2017, Visa, MasterCard and bank-issued American Express cards will be subject to a maximum cap of 0.8% for interchange fees and a weighted average cap of 0.5%, significantly lower than the 2.2% maximum interchange fee currently being charged on some premium products.

And there's the problem! Reduce the revenue that funds the rewards and it could just be the death of rewards credit cards. For the time being, cards issued directly by American Express come out of this unscathed, as the Reserve Bank does not regulate payments within a single company. American Express negotiates its fees directly with merchants.

In the month after the Reserve Bank announced its intention to lower interchange rates, Canstar research analyst James Slack noted a number of changes from credit card issuers.

The earn rate on the ANZ Rewards Visa, for example, was cut from 1.5 to 0.75 points for each $1 spent, and there were also changes to redemption rates, meaning that the spend required to redeem a $50 gift card went from $6660 to $14,820. Commonwealth Bank also changed the redemption rates on its credit cards for gift cards and cash. The spend required to redeem a $50 gift card on the Commonwealth Bank Awards MasterCard went from $9800 to $10,700. Citibank, Virgin Money and Macquarie Bank also either cut earn rates or introduced caps on the number of points that can be earned.

No doubt more rewards programs will suffer. In the meantime, if you're wondering what to do with your points, Slack says hoarding them always puts you at the risk that they will be devalued before you can redeem them.

"Frequent flyer programs are not immune from devaluations either," says Slack. "The number of points required for a one-way flight from Sydney to Melbourne on Virgin Australia recently increased by 13% from 6900 points to 7800 points."

Slack does believe that airlines are generally seen as safer custodians of points than credit card issuers. So transferring your points out of a bank program might not be such a bad idea. Alternatively you could use those points now.

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Effie Zahos is editor-at-large at Canstar and a financial commentator. She is the author of A Real Girl's Guide to Money: From Converse to Louboutins, and a regular money commentator on TV and radio across Australia. In 1999, a background in banking Effie helped kickstart Money, which she edited until 2019. Effie holds a Bachelor's degree in economics.
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