What RBA regulation means for frequent fliers

Frequent fliers will no longer have access to the same benefits and perks that credit cards currently offer. Interchange fees are going to be capped and this is what it will mean for you:

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10 Myths and Facts about Interchange Fees

Learn more about what interchange really does and how it facilitates the global worldwide payments system.Originally sourced from MasterCard Merchant.

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Interchange Fee Regulation and ‘The Death of Rewards Programs’

A review of interchange fee regulation was made by Money Magazine’s Effie Zahos, spelling out many new changes including the end of credit card rewards programs. This is no surprise given the significance of interchange fees in providing revenue for banks and upholding the system for credit and debit card transactions.

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Interchange Fee Regulation in the US: A Case Study

Interchange fees are transaction costs merchants pay to banks for customers to pay for goods and services via card payments. Many merchants insist that lower interchange fees will reduce their overall costs and benefit customers, calling for regulation. Regulating interchange fees however, causes massive distortions in the payments system and does not lead to lower overall fees for merchant nor does it benefit customers. An in depth look at regulation implemented in the United States shows why.

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RBA Market Distortions Will Hurt Frequent Flyers, Credit Card Consumers and Banks

From the 1st of September, new regulations will be enforced by the RBA to cap the price of interchange fees. This will be going ahead despite the numerous global studies which show that these types of legal distortions will have appalling financial impacts on credit card consumers.

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New RBA Regulations to cost Australian Consumers Billions

Yesterday, 26 May 2016, the Reserve Bank of Australia announced that it will move to increase regulation of interchange fees from 1 July 2017. The move follows the RBA’s publication of Draft Standards in December 2015, and a Senate inquiry which considered interchange fees as part of a broader inquiry into credit card interest rates – which recommended a Productivity Commission review. The RBA’s new regulations will particularly impact on premium credit cards.

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The corporate welfare of European interchange fee regulation

Since 2013, the European Commission determined that interchange fees on all card-based payments should to be regulated by the European Central Bank. It justified intervening on these hidden payments in the belief that this would reduce transaction costs for merchants and enhance transparency for card transactions. 

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The Australian Taxpayers' Alliance Submission to the Reserve Bank of Australia's Consultation

Last week the Australian Taxpayers’ Alliance made a formal submission to the RBA’s Changes to the Bank's Standards for Card Payment Systems.

We argued that:

  • the RBA have put forward no economic evidence justifying proposals to increase regulation of interchange fees – indeed, all of the economic evidence from around the world supports the case for deregulation;

  • RBA proposals incorrectly assume that the higher the interchange fee, the higher the efficiency costs – the RBA fails to properly recognise the benefits of interchange fees and the negative effects of interchange fee regulation on consumers; and

  • RBA proposals explicitly target – and have the effect of banning – premium credit cards tied to reward and frequent flyer programs, severely limiting competition.

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RBA changes set to cut credit card frequent flyer rewards

Credit card holders face having to spend more to get their frequent flyer points thanks to major reforms to credit card fees proposed by the Reserve Bank of Australia.

The changes could cut hundreds of millions of dollars in revenue the banks make from facilitating credit card payments for merchants through what's known as interchange fees, revenue they use to buy frequent flyer points from airlines to pass on to customers as rewards.

Airlines' significant credit card revenue is also set to slide as a result of the new rules, which will change the way airlines can apply credit card surcharges on tickets.

"The reduction in interchange fees, especially the cap on the highest credit card rates, is likely to result in some reduction in the generosity of rewards programs on premium cards," the RBA said in a statement announcing the draft of its new rules.

The proposed changes mean it's quite likely Australia's millions of credit card users that link their cards to airlines reward schemes will get fewer points for every dollar they spend.

It's thought the changes might also spell the end of the American Express "companion" cards that earn more frequent flyer points for a customer than the MasterCard and Visa cards used for the same account.

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British customers worse off after interchange fee regulation

European limits on interchange fees have hit customers the hardest. Retailers no longer pay the market interchange fee to the banks and the banks have responded by increasing their fees to consumers.

From the 10th of March 2015, the European Commission announced that interchange fees will be capped at 0.2% for debit cards and 0.3% for credit cards. The commission said this will “end increased costs for merchants and consumers” when it has done exactly the opposite.

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Productivity Commission to settle interchange fee debate

Media Release: Australian Taxpayers’ Alliance response to Senate Economics Committee Report

“The Senate Committee did not recommend any further regulation on interchange fees. This is massive win for credit and debit card consumers,” said Aaron Lane, National Campaign Director of Don’t Let Them Pass the Buck.

Today, the Senate Economics Committee released its report ‘Interest rates and informed choice in the Australian credit card market’ following its inquiry into credit cards and interest rates. The Senate Committee examined interchange fees amongst a range of issues. The Australian Taxpayers’ Alliance and the International Alliance of Electronic Payments made a joint submission to the inquiry, and the ATA appeared before the inquiry on the 16 October 2015 at a public hearing held in Sydney.

“Credit card consumers have had their interests represented in this inquiry through the strong advocacy of the Australian Taxpayers’ Alliance in conjunction with our Don’t Let Them Pass the Buck campaign. The ATA’s submissions received good coverage in the Senate Committee report, with the committee referring to both the ATA’s written submission and our evidence before the inquiry,” said Mr Lane.

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Credit Where Credit Is Due?

by  on 4 December, 2015

Vikas Nayak explains why interchange fees should be left to the market, not regulated by the RBA.

The Coalition has passed laws that restrict the ability of merchants to charge surcharge fees on cards that only cover their costs. As a serial credit card user, I’m understandably happy to reduce my surcharges by as much as possible. Some may therefore think that I would be the biggest proponent of this legislation. Unfortunately, this bill is a clear example of the “homeopathic legislation” that plagues Australian parliament.

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RBA smokescreen regulates credit cards by stealth, threatens low-income Australians

“Credit and debit card consumers have cause for concern over the RBA’s proposed changes to interchange fee regulation,” said Aaron Lane, National Campaign Director of Don’t Let Them Pass the Buck.  

Today, the RBA’s Payment Systems Board released a consultation paper on changes to the RBA’s Standards for Card Payment Systems.

“The weighted-average benchmark interchange fee for credit cards will remain at 0.50 per cent. This is a small victory for consumers because it was widely feared that it might be further regulated. However, on closer inspection this is just a smokescreen: the RBA is seeking to reduce the weighted-average benchmark for debit cards, and to introduce a 0.80 per cent cap on credit card interchange fees.

“This is a price-ceiling by stealth,” explained Mr Lane.

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Transparency in Card Fees: Where Does the Argument Stop?

There are three ways banks that issue credit and debit cards can gain revenue from them: interest rates (in the case of credit cards) charged to consumers, fees charged to consumers via their bank accounts, and something called an interchange fee that the customer’s bank charges the merchant’s bank when the card is used. The interchange fee has long been the subject of resentment by merchants and so various arguments are used to promote the idea that these fees should be capped through regulation.

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Why the Reserve Bank isn’t the right regulator for our payments system (The Conversation)

Sometimes boring debates are important. Mind numbing detail gets in the way of good policy. So it is with an obscure feature of credit cards known as “interchange fees”.

At the moment these fees are both highly regulated, and inappropriately regulated by the Reserve Bank of Australia (RBA) and not the Australian Consumer and Competition Commission (ACCC).

People tend to overlook the complexity of the market economy. It seems all so easy. People trade goods and services all the time. The Payments System is how we actually pay for things. It isn’t simply a matter of handing over cash - the Payments System is a complex technological infrastructure, a web of interconnections and protocols between consumers, merchants, and banks. Cash makes up a part of that system but most of it runs on payments technologies that include debit cards, eftpos, and credit cards.

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The Economics of Interchange Fee Regulation

Both cardholders and shops benefit when credit or debit cards are used rather than cash. Cardholders benefit from the convenience of using them; shops (merchants) benefit from the lower cost of having them used, relative to cash. In markets of this sort, both parties should pay, reflecting the benefits they receive. Shops therefore should make a payment to card issuers, to support the payment system, not just cardholders. In a four-party card system such as Visa or MasterCard, the payment from shops to card issuers goes via shops’ own banks (the “acquiring bank”). Acquiring banks receive payments from shops (the “merchant service charge”), take their own cut (reflecting their costs and risks), and then pass on the rest to banks that issue cards. The fee passed on is the interchange fee.

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Who Should Regulate the Bank Interchange Fee - The RBA or the ACCC?

Since 1959 the Reserve Bank of Australia has occupied dual statutory functions in: (1) the central bank role of the setting and conduct of monetary policy, including ancillary roles of banknote provision and banking services to the Federal government; and (2) the regulation of the payments system. The case for RBA regulatory control of the payments system (including the bank interchange fee) was always based on its relation to the first function – its ability to promote stability and control risk in the financial system through a secondary role of promoting efficiency and competition in the payments system.

Yet there has never been a strong case for these two distinct functions – monetary policy, and regulating the payments system – to be contained within the same agency. It is a holdover from a more protectionist era. Indeed, economic theory suggests these are distinct functions should be separated because they draw upon distinct theory, specialization, and experience: the monetary policy function drawing on monetary economics and macroeconomics, and the payments function drawing on theory of competition and industrial organization. 

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Australian Interchange Fee - A Regulation in Search of Market Failure

The Reserve Bank of Australia has been a world leader in interchange fee regulation. In this paper we suggest that this regulatory intervention has been based on wishful thinking at best and represents a failure to understand the actual working of the market economy.

In short, the Reserve Bank of Australia engaged in an extensive regulatory intervention based on poor theory, and no empirical evidence. Theory has not provided an unambiguous indication of market failure, and there is no empirical evidence to support the notion of monopoly pricing – other than a vague notion that interchange fees were “excessive”. What the Reserve Bank identified as being “externality” any fair minded observer would label “gains from trade”. 

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Submission of the Australian Taxpayers Alliance and the IAEP to the Australian Senate Inquiry into Credit Card Interest Rates

Credit card interest rates and other features are only partly driven by factors such as the Reserve Bank of Australia’s (RBA) cash rate. Other factors, such as interchange fees (the fee paid by a merchant to the bank of a customer when the customer uses a payment card to pay for goods or services) are extremely important. These fees are the subject of increasingly stringent regulation that is restricting the development of the credit card market and harming consumer welfare. 

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RBA got it wrong and regulated credit card fees upwards (AFR)

Few consumers would have noticed a very important reform discussion taking place in Australia. It is a debate relating to credit card interchange fees. The fact that most consumers have never heard of interchange fees is the reason regulators think that they might be a problem.

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