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.

Amongst credit card consumers most adversely affected those who use generous frequent flyer programs. Following the cap on interchange fees, there will be a severe loss in the points-per-dollar earning rate on most cards.

Reward programs that are intrinsic to the benefits of credit cards will be abolished under this new regulation. This is because higher interchange fees are the reason why rewards are funded in the first place, as interchange revenue will be reduced from 2% to a far lower 0.8%.

Even the RBA Conclusions Review, which erroneously praised further regulatory procedures noted "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 some premium cards."

The only alternative for banks not to slash reward programs entirely is to instead raise annual credit card fees, according to Canstar senior research analyst James Slack. Ominously noting that “the advantage for the consumer will disappear,” it is clear that credit card consumers will be liable for this policy transition.

Stricter enforcement measures from the Australian Competition and Consumer Commission will accompany the increasingly inflexible regulation of interchange fees. Not only are businesses banned from charging above the government mandated amount, they are also now forced to express these surcharges as percentage rather than a simple flat fee.

So if these changes have huge financial costs for consumers, why are they going ahead?

There is an assumption made that the cuts to rewards programs are merely “an ill side effect” to what is otherwise good news in lowering interchange fees for consumers. This is a false understanding that underestimates the long term consequences of involving the RBA in credit card transaction costs. The micro-management of interchange fees reduces the flexibility of banks and merchants to adapt to market prices and to offer generous incentives for their consumers. Banks forced to cut their losses will transfer these losses to consumers, as interchange fees have previously been one of the most important sources of revenue. Instead of customers paying for the benefits they receive, they will now be paying for the RBA’s mistakes without any form of compensation.

This comes amidst the Turnbull’s government false promises not to regulate interchange fees further, going ahead with proposals that avoided the full scrutiny of the Productivity Commission, recommended by the Senate.

This extremely poor policy decision must be reversed in order to limit the harmful consequences for credit card consumers. Make your voice heard by signing this petition