Our obsession with frequent flyer points faces a key test
Frequent flyer points are almost like a second currency in Australia.
Qantas’ loyalty program, which issues more than 200 billion points a year, has more than 18 million members, while Virgin’s program has 12 million members.
The two programs have tentacles throughout the economy. You can collect points when you spend on your credit card, through a supermarket loyalty program or by changing your electricity or phone provider.
However, according to some experts’ predictions, the love of earning points for credit card spending may be tested later this year. This is due to changes made by the people in charge of our real currency, the Central Bank.
As a result of RBA reforms announced last week, it will become harder for banks and credit card companies to add sneaky costs to payments on debit and credit cards that help fund reward perks such as Qantas points. These changes may result in banks making their credit card rewards programs less generous.
What happens to rewards programs and whether airlines’ loyalty programs will take a hit as part of this will be an interesting test of the strength of banks, airlines and consumer behavior.
The appeal of credit card rewards programs is that you’re getting something for seemingly nothing.
When you tap your card, like magic, the bank “rewards” you with points that can be converted into all kinds of gifts, often including airline miles.
In reality, of course, there are people who pay the price for these privileges. Rewards are a cost to the bank, and the bank makes money to cover those costs (plus a little extra for its shareholders) by charging you fees, charging you high interest if you don’t pay on time, and collecting “interchange fees.” These are fees paid by the merchant to the bank that issued the credit card every time you tap your card to buy something.
It sounds mysterious, but it’s relevant because interchange fees will be cut from October, thanks to payment changes the RBA announced last week. The RBA estimates that interchange revenues collected by card issuers (mostly banks) would fall by $660 million a year under its plan.
Why would the RBA want to deal this blow to the banks? There are compelling reasons. The RBA is responsible for keeping our payment system efficient and wants to reduce the fee charged by the store’s bank every time a customer pays by card so that the store has less tax to pass on to customers. Ultimately, the store will not be allowed to add card surcharges when these changes go into effect starting in October.
But leaving aside these legitimate reasons for the RBA’s change, it is also true that it could have significant consequences for banks’ credit card business and the services they offer to customers.
Banks will inevitably try to offset some of this hit as clearing revenues are disrupted. Reducing the generosity of rewards programs is a clear area where banks can save money; In addition, it is also possible to increase card interest rates, reduce interest-free periods or remove annual fees.
Given that banks generally try not to shake things up too much, they’re likely to do a little bit of all of these.
An interesting question raised by the RBA review is what this might mean for Qantas, which makes around a quarter of its profits from its loyalty arm Qantas Loyalty.
You might think that a potential bank crackdown on credit card rewards would be bad news for the national carrier; after all, it is estimated by UBS that banks bought around 40 per cent of all points issued by Qantas.
But the airline maintained its profit target, arguing it could weather the RBA’s credit card change.
Essentially, Qantas appears to believe it can protect its lucrative points business from an RBA-induced hit to its credit card business because it thinks people will continue to demand points no matter what.
As UBS noted in a note last week, whether Qantas takes a big hit will depend on “consumers’ resilience”; This reflects customers’ sensitivity to any changes that economists say banks may make in their credit card offerings.
Ultimately, we’ll see banks miss out on the generosity of airline rewards programs this year because they won’t be able to make as much money on credit cards.
In other words, how many customers could they lose if banks erode the value of airline loyalty plans? But would that stop them from cutting too much of their frequent flyer mile offers to customers?
Analysts think Qantas has a few things working in its favour. They argue that for many customers, what banks offer in airline points may be more important than other features such as interest-free period, interest rate or even the card’s annual fee.
They also point out that Qantas and Virgin are arguably in a strong negotiating position when the banks try to pass some of the hit from the RBA’s reforms onto frequent flyer businesses, as the airlines are monopoly providers of their respective loyalty points.
Ultimately, we’ll see banks miss out on the generosity of airline rewards programs this year because they won’t be able to make as much money on credit cards.
In fact, this is part of the RBA’s intention to change payments. While they may seem free, rewards programs are paid for in part by the merchant footing the bill for the “interchange fee.”
As the RBA puts it: “Merchants should not have to subsidize benefits such as rewards points offered to cardholders to encourage them to use more expensive credit cards.”
The RBA would obviously be happy to see credit card rewards schemes rolled back. But it remains to be seen whether this will be enough to curb consumers’ strong appetite to rack up airline miles with daily card spend.
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Clancy Yeates is deputy business editor. He covered banking and financial services and was previously a national business correspondent in the Canberra bureau.Connect with: X or email.
