Are your credit card rewards in for a cutback?
Last November, it was announced that Canada would be the latest nation to cap credit card interchange fees. The fees, which are behind-the-scene charges paid by merchants to credit card issuers every time a card is used in a transaction, will be capped at an average of 1.5 per cent for five years, to go into effect this coming April.
The reduction is meant to benefit both retailers, who will pay less for the ability to offer credit card payment, and consumers who will theoretically enjoy lower prices passed down from retailers’ savings.
However, the precedent set in other countries with fee caps paints a different picture: interchange fee reduction efforts have been criticized in both Australia and Spain for resulting in reduced credit card benefits and higher fees. And, as the deadline approaches to implement the changes in Canada, questions arise as to whether cardholders here will see their rewards credit card offerings shrink in size and quality.
Why Would the Fee Reduction Hurt My Rewards?
Canadian retailers have long lobbied against Visa and MasterCard, arguing that their rates are non-competitive and damage their bottom lines.
As of November, under pressure from the Canadian government, the credit card behemoths agreed to implement the reduction to fees, which are estimated to generate $5-$7 billion in revenue annually. However, it’s not Visa and MasterCard who profit from the fees – the issuing banks do.
Interchange fees are a substantial source of income for Canada’s banks, and exist as an incentive for them to offer credit cards in the first place. They also make it attractive for banks to develop and offer premium credit cards, as offerings in higher tiers command a higher fee charged with every swipe.
Cutting that $5-7 billion from bank revenues has to be made up somewhere – and in other countries, it has come out of consumers’ rewards offerings.
This was witnessed both in Australia and Spain, which implemented interchange fee caps in 2003 and 2005, respectively. A European report (which, full disclosure, was commissioned by MasterCard) to asses the potential impact of a fee reduction in the UK found that, in both countries, anticipated “vigorous competition” failed to prompt retailers to pass any savings down to the consumer, and that lenders reduced credit card rewards and hiked fees. Consumers were squeezed from both ends as they saw their rewards power dwindle and prices remain the same.
The Rewards Impact Remains to Be Seen Here
However, there isn’t consensus that Canada’s interchange fee reduction will result in reward cuts and fee hikes. Dan Kelly, president, CEO and Chair of the Canadian Federation of Independent Business, a driving force behind the fee reduction, is optimistic the impact will be minimal. In a November interview with MoneyWise he stated, “(This) will be a big change, but not a world-changing one for the banks and credit card companies. This has been an intensely profitable business and so… it’s going to go from being grossly profitable to just extremely profitable, so I don’t think that the banks will necessarily pull back on rewards programs.”
Kelly expects the reduction will instead limit the growth of rewards offerings in Canada. “Already the banks each have three tiers of premium consumer cards, and I suspect, and our fear was three would become four and four would become five, I think that this decision will soften that potential.”
How Should I Expect My Credit Card to Change?
It remains to be seen just how the fee reduction will be spread out across an average of 1.5 per cent. Visa and MasterCard could choose to focus on cuts to lower tier card fees in order to reduce the impact on premium offerings.
One sliver of insight was presented in the release issued at the time by MasterCard, which highlighted petroleum and independent grocery merchants to see the greatest fee reductions.
Stated MasterCard Canada President Betty DeVita in the release,”We continue to maintain the balance for all our stakeholders in the payments industry. We brought forward a voluntary solution that avoids the unintended consequences of regulation as we have seen in other countries.”
Stay tuned as more specifics are released on how the fees will be doled out, and the potential impact to your credit card rewards.
*Italic emphasis is ours