Shake-up for fees on the cards

Wednesday, 2 November 2016

MBIE says people who spend less on their credit cards are partly paying for the rewards big spenders get.

Credit card reward schemes could become less generous if a Government investigation into retail payments leads to official intervention.

The Ministry of Business, Innovation and Employment is looking at the fees charged by banks and credit card companies using retail payment systems.

Claire Matthews says regulation might make rewards schemes less generous, but that's not a good reason not to do it.

It is concerned that some of these charges add to business costs, which are then passed on to consumers.

It is becoming more of an issue because New Zealanders are increasingly using debit and credit cards for their shopping, at the expense of the cheaper eftpos system.

Peter Chisnall, country manager for Mastercard in New Zealand, has warned that international experience shows regulation can mean cardholders pay more.

Banks are also competing hard for customers using more and more generous rewards schemes.

MBIE said the level of reward being given per dollar spent on a credit card was flat between 2009 and 2014 but had accelerated rapidly since then, probably due to competition for BNZ credit card-holders, after the bank ended its Airpoints deal with Air New Zealand.

* New Zealanders' credit card habit costs $2m a day

* New survey compares credit card reward schemes

* Shoppers told to 'game the system' to maximise loyalty points**

American Express recently launched an attack on the rewards market with an Airpoints card that it said would yield a flight to Hawaii in the first year for people who spent $800 a week on their cards.

Retail NZ estimates that New Zealand retailers pay about 1.7 per cent of transactions on credit card and 1 per cent for debit transactions, more than what is paid in Britain and Australia, which are both regulated.

The United States is unregulated and its retailers pay similar fees to New Zealand's.

MBIE released an issues paper designed to give a better understanding of how payments work in this country.

One of the issues it has identified is that much of the interchange fee – the fee paid by the bank that issued a credit card to the bank that handles the transaction for a retailer – is going on paying for rewards schemes.

But these schemes generally only benefit people who are big credit card users. For smaller spenders, the amount they pay in annual fees usually cancels out any benefit.

MBIE said people who were less well off were effectively paying more for their shopping to fund rewards schemes that benefited those who were wealthier.

'We estimate that merchants have to increase their prices to all consumers by around $187 million per year to fund rewards paid to certain credit card users.'

But Peter Chisnall, country manager for Mastercard in New Zealand, said there would be consequences for cardholders if fees were regulated.

He said the overseas experience indicated that customers could end up paying more for a product that had less value.

Some international schemes had had to dilute their rewards when regulation was introduced, he said.

Many merchants did not end up passing on the reduction in fees to their customers via prices, either, he said.

'That benefit the merchant received has gone purely into their back pocket.'

Brent McKenzie, of the Co-Operative Bank, was involved with running credit card businesses for banks in Australia during their reforms. He said credit card schemes had become less generous as a result and people had paid more for them.

'If interchange fees were reduced that means the card issuer would have to alter the earn rate, interest rate or annual fees charged to try to maintain profitability. That's the experience that happened in Australia and in Europe, where fees went up.'

He said consumers could expect to see the value proposition of credit cards decline overall if the payment systems were regulated.

But Claire Matthews, a banking expert at Massey University, said that was not a good argument to justify a lack of regulation.

'There are already questions about the value of loyalty schemes. If consumers benefit from lower interchange fees, that should offset any deterioration in loyalty scheme rewards. Higher fees may be harder to justify - the fees should reflect the fixed costs of providing the cards, and therefore shouldn't change, and interchange fees should reflect the variable transaction costs.'

Jessica Wilson, of Consumer NZ, agreed regulation could be a positive step.

'Based on our analysis to date, we think regulation of interchange fees is likely to result in better outcomes for consumers. Regulation would be expected to reduce the merchant service fees faced by retailers – fees that are ultimately passed on to all consumers at the till,' she said.

'These fees also help fund credit card reward schemes, hence card companies argue regulation would reduce the generosity of rewards available. But the value of these schemes is often over-stated. They don't benefit all consumers and you have to be a big spender to earn big. According to MBIE's paper, low income households effectively subsidise reward schemes to the tune of $59 million a year.'

Each year consumers make approximately 1.5 billion electronic card transactions, representing more than $76 billion in spending.

To get the best out of your rewards scheme:

Think about how much you spend on your card. If it's less than $15,000 a year, you probably won't benefit from a rewards scheme and would be better looking for a card with the cheapest annual rate possible.

If you spend significant amounts on your card, look for the type of reward you want – cash back, travel or merchandise – with the highest earn rate.

Compare the annual fee charged - earning rewards at a great rate won't pay off if you are paying a lot extra for the privilege.

Set up all your direct debits to go from your card for things such as rates, insurance, power. Then add in your daily spending, too.

Keep track of whether you have any points due to expire and use them before they do.