Frequent flyer points are almost like a second currency in Australia.
More than 18 million people are members of Qantas’ loyalty scheme, which issues more than 200 billion points a year, while Virgin’s scheme has 12 million members.
The two programs have tentacles throughout the economy. You can rack up points for spending on your credit card, via a supermarket loyalty scheme, or for switching your electricity or phone provider.
However, the love of earning points for spending on credit cards may well be tested later this year, according to some expert predictions. That is because of changes from the people responsible for our actual currency, the Reserve Bank.
As a result of RBA reforms announced last week, it should become harder for banks and credit card companies to insert sneaky costs into payments on debit and credit cards that help to fund reward perks, such as Qantas points. These changes may well result in banks making their credit card reward schemes less generous.
What happens to reward schemes – and whether the airlines’ loyalty schemes take a hit as part of this – will be an interesting test of the power of the banks, the airlines, and of consumer behaviour.
The allure of credit card reward schemes is that you’re seemingly getting something for nothing.
You tap your card and then, like magic, the bank “rewards” you with points that can be converted to all sorts of goodies, often including airline miles.
In reality there is of course someone footing the bill for those perks. The rewards are a cost to the bank, and it makes money to cover those costs (plus a bit extra for its shareholders) by charging you fees, high interest if you don’t pay on time, and by 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 arcane, but it is relevant because interchange fees will be slashed from October, thanks to payment changes announced last week by the RBA. Under its plan, the RBA estimates that interchange revenue collected by card issuers (mainly banks) will fall by $660 million a year.
Why would the RBA want to inflict this hit on banks? It has compelling reasons. The RBA is responsible for keeping our payment system efficient, and it wants to lower what a shop gets charged by its bank every time a customer pays on a card, so the shop has less of an impost to pass on to customers. After all, the shop won’t be allowed to add a card surcharge once these changes kick in from October.
But putting aside these legitimate reasons for the RBA’s change, it is also true that there could be significant consequences for the banks’ credit card businesses, and what they offer customers.
With their interchange revenue set to be slashed, the banks will inevitably try to offset some of this hit. Cutting into the generosity of reward schemes is an obvious place for banks to save money, alongside raising card interest rates, cutting interest-free periods, or lifting annual fees.
Given banks often try not to rock the boat too much, it’s likely they’ll do a bit of all those things.
An interesting question sparked by the RBA review is therefore what this might mean for Qantas – which generates about a quarter of its profits from its loyalty arm, Qantas Loyalty.
You might assume a potential bank crackdown on credit card rewards would be bad news for the national carrier – after all it’s estimated by UBS that banks buy about 40 per cent of all points that Qantas issues.
However, the airline has maintained its profit guidance arguing it can manage through the RBA’s credit card shake-up.
Basically, Qantas appears to believe it can shield its lucrative points business from an RBA-inflicted hit on the credit card business because it thinks people will keep on demanding the points regardless.
As UBS put it in a note last week, whether Qantas takes much of a hit will depend on the “elasticity of consumers,” which is economist-speak for the customers’ sensitivity to any changes banks might make to their credit card offerings.
Ultimately, we will probably see banks cut into the generosity of their airline reward schemes this year, because they simply won’t be making as much money from credit cards.
In other words, if banks erode the value of their airline loyalty schemes, how many customers might they lose? And would this deter them from cutting too deeply into their offering of frequent flyer miles to customers?
The analysts think Qantas has a few things working in its favour. They argue that for many customers, what banks offer on airline points can be more important than other features such as the interest-free period, the interest rate, or even the card’s annual fee.
They also point out that Qantas and Virgin are arguably in a powerful negotiating position when banks try to pass on some of the hit from the RBA’s reforms to the frequent flyer businesses, as the airlines are the monopoly provider of their respective loyalty points.
Ultimately, we will probably see banks cut into the generosity of their airline reward schemes this year, because they simply won’t be making as much money from credit cards.
Indeed, this is part of the RBA’s intention for its payment shake-up. While they appear to be a freebie, rewards schemes are in part paid for by the merchant who foots the bill for the “interchange fee.”
As the RBA says: “Merchants should not have to subsidise benefits, such as rewards points, that issuers offer their cardholders to encourage them to use more expensive credit cards.”
The RBA would clearly be happy enough to see credit card reward schemes wound back. But whether this is enough to dampen consumers’ strong appetite for racking up airline miles with their everyday card spending remains to be seen.
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Clancy Yeates is deputy business editor. He has covered banking and financial services, and was previously national business correspondent in the Canberra bureau.Connect via X or email.
