Anybody in New Zealand who has a credit card will be well aware of the intense competition over the last few years for credit cards aligned with Air New Zealand’s Airpoints program. ANZ and Kiwibank have been aligned with Airpoints for a number of years, and in 2015 BNZ were dumped as a partner and replaced by Westpac who have aggressively marketed their cards over the past year. Simply by spending money on your credit card you will earn Airpoints Dollars and Status Points.
What most people don’t realise is how those Airpoints Dollars and Status Points are actually funded. It’s not your bank being kind - ultimately it’s you, the consumer who is funding these, in what can only be described as a huge “money go round” funded by credit card interchange fees.
In December 2015 the European Commission announced a major restructuring of credit card interchange fees, and last week Australia also announced changes to credit card interchange fees. These are currently under review in New Zealand, and I’ve heard from a few sources that pretty much identical changes will be announced in New Zealand by the end of the year.
When you use a credit card to pay for a product or service, the retailer or company you’re dealing with has to pay a fee for credit card processing to their bank or company processing their credit card transactions. This fee will depend on the size of the retailer, the number of transactions they process, and the type of card you have. For the vast majority of businesses in New Zealand this will range from around 1% up to 3% depending on whether they have opted for blended or non blended transactions (blended allows a retailer to pay the same % for all card types rather than paying a different rate for each card type), the type of merchant they are, and the type of card used. This fee includes all processing fees and the credit card interchange fee. Many retailers and companies now charge a credit card fee to recover these costs, and those that don’t simply build it into their cost of doing business. Retailers hate credit card charges which can be a significant cost of doing business, and customers hate having to pay credit card surcharges. At the end of the day as a customer you’re ultimately paying this fee, regardless of whether it’s a surcharge or built into business costs.
So what is an interchange fee? That’s a very good question, and rather than trying to reinvent the wheel I’ll simply copy the following few paragraphs from Wikipedia which sum things up pretty well :-
Interchange fee is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card based transactions. Usually it is a fee that a merchant's bank (the "acquiring bank") pays a customer's bank (the "issuing bank"); however there are instances where the interchange fee is paid from the issuer to acquirer, often called reverse interchange.
In a credit card or debit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, usually smaller, fee for the acquiring bank or independent sales organization (ISO), which is often referred to as a discount rate, an add-on rate, or passthru. For cash withdrawal transactions at ATMs, however, the fees are paid by the card-issuing bank to the acquiring bank (for the maintenance of the machine).
When you use your credit card to purchase something, your bank generates revenue from you by way of interchange fees. These fees pay for processing, marketing and upkeep of the credit card platforms, but they are also a huge source of revenue for banks. Many people assume banks make their money from interest from people not paying their credit cards off in full, but revenue from people paying their cards off in full each money is very significant. If you spend $25,000 per year on your credit card your bank will easily be making a minimum of several hundred dollars per year just off the interchange fees they receive from your transactions.
Interchange fees in New Zealand are public knowledge and displayed on all bank and credit card websites -
Now that you understand interchange fees, you’ll now understand how banks can offer airline frequent flyer points on their cards. Banks such as ANZ, Westpac, American Express and Kiwibank who are all affiliated with Air New Zealand Airpoints buy Airpoints Dollars, Status Points and Koru lounge vouchers for a fixed price from Air New Zealand. They’re keeping a % of the interchange fee for themselves as profit, and giving you a % of this interchange fee back to you in the way of Airpoints Dollars and Status Points.
In recent years banks have heavily started pushing Platinum cards over regular or Gold cards. Ever wondered why? It’s because the interchange fees on these premium cards are nearly double those on a regular card or a Gold card. Simply by giving you a new card your bank is actually making more money from you every time you purchase something, and companies accepting your Platinum card are paying a higher fee than another customer using a regular credit card or Gold card if they’re not on a blended rate plan.
By now you’ll probably see why interchange fees have become a big money go round. At the end of the day you’re paying a surcharge to simply get a percentage of that surcharge given back to you. It’s an issue that competition regulators and central banks around the world take issue with, and something they’re now doing something about. In 2006 in New Zealand and Australia both the ACCC and Commerce Commission took action against the credit card companies in what can now be seen as a dismal failure for both competition regulators. Their legal action has backfired and ultimately sent fees upwards.
In 2006, the New Zealand Commerce Commission issued proceedings against Visa and MasterCard, alleging that interchange fees constitute price fixing and result in a substantial lessening of competition. Shortly before the court case was due to start in Autumn 2009, the suit was settled out of court; the "no surchage rule" was prohibited, allowing retailers to pass on the cost of MasterCard and Visa transactions to the customer, and card issuers were allowed to set their own interchange fees, within a maximum limit set by Visa or MasterCard. All issuers of MasterCard cards in New Zealand announced they would be charging the maximum rate. The Commission released a report in 2013 reviewing the outcome of the settlement, showing that many merchants were paying higher fees for accepting credit cards than before the settlement.
In 2015 the European Commission announced a significant clampdown on credit card interchange fees to improve transparency in the marketplace. Interchange fees were slashed to a maximum of 0.2% for debit cards and 0.3% for credit cards.
In Australia this week the Reserve Bank of Australia announced the outcome of it’s long awaited review and has slashed interchange fees to a maximum of 0.8%, a drop of over 50% from the rate of many premium cards today. It has also announced that flat rates for credit card surcharges (such as those charged by airlines) will be outlawed and all credit card surcharges must be a percentage component, and cannot exceed the true cost the retailer pays for credit card processing.
Interchange fees are currently under review in New Zealand and it’s expected that we’ll see similar changes announced by the end of 2016. This will be a significant win for retailers who will see processing fees drop, but it’s going to be a very difficult time for banks. They’ve sold customers on Airpoints cards and earn rates that will simply no longer be sustainable, and it’ll be realistic to see earn rates on Airpoints Dollars and Status Points cut significantly, potentially slashing earn rates by at least half.
Likewise for Air New Zealand there will be plenty of change for their business – selling Airpoints Dollars and Status Points to banks is a multi million dollar business for the airline that will be significantly disrupted as banks give away far fewer Airpoints Dollars and Status Points. Assuming that flat rate credit card surcharges are outlawed in New Zealand, Air New Zealand will also see it’s credit card surcharge replaced by a percentage fee, something that will no doubt be both loved and hated. Right now if you’re a passenger buying a $39 airfare you have to pay $4 (nearly 10%) to pay that airfare with a credit card, a fee that means the airline are profiteering from you to subsidise a business class customer who’s paying $17.50 (.35%) on their $5000 Business class airfare. Air New Zealand deny that credit card surcharges generate a profit and that they “all average out” at the end of the day. Such a change will ensure that all such charges are fully transparent to customers and that Business class customers pay the true cost of their credit card payment and are not being subsidised.
Such changes are going to be equally liked and hated by customers but at the end of the day it delivers transparency to the payments process. If you’re addicted to points then it’s time to enjoy the ride while it still lasts, because its likely to end very abruptly in the not too distant future.
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