The Reserve Bank’s latest intervention in the credit card market is likely to expose just how unsuitable rewards cards are for many people.
From July 1, Australia’s central bank will cap the transaction fees that card companies charge merchants. These fees subsidise frequent flyer and other rewards programs.
The change is not to be confused with Treasurer Scott Morrison’s credit card reforms announced on Thursday, which have not yet been legislated.
The Reserve Bank expects the fee cap to reduce the generosity of flashy top-end cards while leaving mid-market rewards cards, no-frills credit cards and debit cards largely untouched.
The intention of the cap, according to consumer group CHOICE, was to prevent regular Australians from being forced to subsidise premium cards like American Express.
The change will also expose the fact that rewards cards aren’t suitable for most people, CHOICE head of campaigns and policy Erin Turner said.
“Basically, the credit card system is so distorted and there’s so much stuff happening in the behind-the-scenes world of credit cards, it’s hard for consumers to know if they’re getting a good deal,” she said.
“This pushes all of those factors into the sunlight. It’ll be much easier to see: Is it worth it? Do I need a rewards card? For most people the answer is no.”
Ms Turner urged Australians to consider credit cards with low or no annual fees, or to ditch credit altogether.
“If you need a credit card at all, get a no-frills card. Better yet, don’t get a credit card because they have some of the worst interest rates out there of any banking product, and some of the highest fees,” she said.
“Even if middle-class Australians are using fancy high-end rewards points cards, they’re only really getting benefit from it if they’re putting all of their money through those cards and paying it off every month.”
The average credit card spend required to earn a $100 gift card or cashback is now $22,426 a year, up from $18,765 in 2015, according to comparison website Mozo.
To really make a rewards card worth it you probably need to spend at least $60,000 a year on the card, Mozo estimated.
The RBA has predicted the interchange fee cap will also help small businesses, which it found were paying almost five times more in transaction fees than big businesses.
Mozo director Kirsty Lamont said July 1 was a good opportunity for Australians to reassess whether they need a rewards card.
“In this changing rewards card landscape, the hard facts are that if you aren’t spending at least $60,000 on your card each year, it’s likely you aren’t generating enough value to outweigh the huge annual fees charged on many of these cards,” she said.
“July 1 is crunch time for rewards card lovers to have an honest look at their rewards card and if the value they’re getting from the card does not outweigh the annual fee, consider switching to a low rate card.”
Beware the big banks
Nick Emery, head of deposits and transactional banking at ME, was less optimistic that the transaction fee cap would only impact premium credit card holders.
“We’re going to see [premium cards] become absolutely less value for the consumer, which do tend to skew to higher demographics. What I don’t think we can say with any surety is that that will be confined to just those products or just those consumers,” Mr Emery said.
“How that is already playing out is that [big banks] are decreasing the amount of give-back to customers on rewards. But they will also be taking it from customers across the board, in terms of things like the interest rate, the balance transfer period, so on and so forth.”
Treasurer’s changes ‘don’t go far enough’
To coincide with the Reserve Bank’s new cap, Mr Morrison promised on Thursday to force the banks to use stricter affordability assessments before they approve a card.
He also promised to ban unsolicited credit increase offers, simplify interest calculations, and require the banks to allow customers to reduce their credit limits and cancel cards online.
Both Mozo and ME bank said the changes did not go far enough, and urged the government to lift the minimum credit card repayment above the current 2 per cent per month.