Loyalty programs under pressure from credit card fee cap

The new cap on credit card fees will put pressure on the frequent-flyer points schemes, but could drive innovation.

Velocity Frequent Flyer chief executive Karl Schuster. Picture: Jane Dempster.

The Reserve Bank’s new cap on credit card interchange fees is set to put short-term pressure on frequent-flyer points schemes but will also unlock innovation.

The head of cards and loans at credit card issuer Citi, Alan ­Machet, said he expected the sweeping change “is really going to be a trigger for driving a tonne of new innovation into the space”.

From tomorrow, a new cap will be imposed on “interchange fees”, which is expected to see many banks buying fewer frequent-flyer points from the airlines. (Interchange fees are paid between a merchant’s and consumer’s banks when credit cards are used.)

“In terms of absolute dollars, there’s a short-term softening,” Mr Machet said. “But in our mind it’s actually an opportunity for innovation. This is going to be sort of a jolt and I think it’s going to create the opportunity for a bunch of change.”

For instance, more non-traditional entrants could move into the financial services sector.

Velocity Frequent Flyer chief executive Karl Schuster said there was “a lot of innovation that’s kind of hidden under the covers in a lot of these programs and I think you’ll see a lot more flowing as the true impact of these regulatory changes begin to take effect over the course of the next six to 12 months”.

(Velocity is the loyalty program for the Virgin Australia group.)

Mr Schuster said there could be a “bit of a points recession for the next few months as the market adjusts to these new regulations”.

In 2003, when benchmarks for credit card interchange fees were introduced, there was a short-term impact but “it recovered”, Mr Schuster said.

“I don’t think it’s going to dilute the appetite for loyalty that Australians exhibit,” he said.

Ahead of the changes, Qantas has launched its own branded platinum card, via a partnership with Citi and Mastercard.

The advertising campaign for the card does not start until next month.

At the Qantas investor day last month, Alan Joyce said the loyalty division would continue to grow next year but the change on interchange fees would have an impact.

“It’s going to have a hit with this transition,” Mr Joyce said.

Qantas Loyalty chief executive Lesley Grant said at the investor day that financial services was “a market in transition for us” and about 35 per cent of credit card spending had been on Qantas co-branded credit cards.

Mr Schuster pointed to Velocity’s strategy of having an “indirect earn” model, where customers can opt to have their credit card points to the loyalty scheme.

“The change will affect us, but we’re impacted to a much lesser degree because there’s a big back-book of points ... although the pie will be growing more slowly because of these changes, there’s still a back book and that’s the space we operate in,” he said.

“That’s where you could expect to see some innovation and change as the banks seek to enrich their travel propositions for their existing loyalty members.”

The cap on interchange fees has prompted many banks to cut the loyalty points that can be earned on purchases, although some have sweetened this by including other changes that are favourable to consumers.

Under the changes, American Express “companion cards” issued by banks will now fall within the same interchange fee rules that apply to Visa and MasterCard. Before, banks tended to get higher fees for Amex cards. From tomorrow the interchange fees will be capped at 0.8 per cent. However, there are no interchange fees on cards issued directly by Amex, so those will not be affected.