Hands Off Our (Rather Unethical) Credit Card Rewards

Rob Stock is a Stuff business journalist specializing in money and consumer issues.

OPINION: ASB’s U-turn on its credit card rewards program was as swift as the government’s backtracking on adding GST to KiwiSaver’s service fee.

The bank sent an email to its cardholders telling them that they would soon receive less generous rewards.

The next day, a second email was sent. Everything was off.

The plan offended ASB customers the same way the government’s KiwiSaver plan offended.

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The government collects a fortune in taxes and tried to pass a new tax without even telling us, only being exposed when Stuff broke the story.

Similarly, ASB’s email smacks of disdain.

He makes a fortune from his clients, but hasn’t even explained why he downgrades his credit card rewards.

Financial research website Moneyhub has compiled 12 credit card “sacred rules” that every cardholder should follow, if they don’t want to fall victim to easy and costly consumer debt.

A furious response from his customers exposed his communication failure, but in fact, the explanation for the demotion plan was a bit embarrassing.

Bank credit card reward systems are funded by the fees that merchants (stores, restaurants, etc.) pay to accept credit card payments.

These fees are ridiculously high in New Zealand because the banks and their fellow credit card companies had no competitive pressure to charge less.

The government lost patience and passed laws to cap them, and the caps come into effect on November 13.

This will change the economics of credit cards, and ASB was only the first bank to take steps to preserve the profitability of its credit card business.

I expected others to follow. Now, to do that, they have to be brave enough to risk a backlash from customers.

The message ASB received was: you make so much money from us, taking our rewards away from us just doesn’t fly.

We love our rewards. We like the feeling that we are getting something for nothing.

But rewards programs, whether at the gas station (discounts), at the electric company (prompt payment fees), at the insurance company (flat rate discounts on annual premiums) or at checkout (coffee rewards, Flybuys, etc.), are tightening economy.

Rewards and discounts change prices in companies to benefit those who are best able to collect those rewards.

These are the rich, the biggest spenders and the people who are diligent with their money.

The less wealthy, the less spenders and the less diligent end up paying more, through several mechanisms.

Banks have been pushing credit cards and allowing eftpos to slowly wither away as they might earn more from credit card payments than from eftpos payments.

PROVIDED

Banks have been pushing credit cards and allowing eftpos to slowly wither away as they might earn more from credit card payments than from eftpos payments.

The first is that merchants pass merchant fees on to higher prices, which people without a credit card don’t even realize.

The second is to charge more interest on credit card debt than I consider reasonable, given the low level of credit card arrears.

This is why some people say credit card rewards programs are unethical.

They make the rich richer and the poor poorer.

We can see this at work in American Express’ financial statements.

Last year, Amex recorded $45 million in expenditure in New Zealand, including $21 million for “marketing, promotion, rewards and card member services”.

He had $47 million in revenue, of which $22 million was that “refresh fee,” which is Amex’s word for merchant fee, it seems. Another $14.7 million in income for American Express was credit card interest.

Those who win in the Amex rewards round are higher spenders who redeem their card in full each month.

In 2009, merchants were allowed to start adding surcharges for accepting credit card payments, something credit card companies had resisted for years.

It’s made things less unethical, but credit card surcharges aren’t ubiquitous.

ASB’s turnaround shows that people won’t give up their squeeze rewards easily. This may mean that they survive in their current form.

But the rule of rewards is: someone else has to pay to fund your rewards.

Banks are masters in the art of achieving this.

A small surcharge on the interest it charges cardholders. Slightly less paid to depositors. A little more on the mortgage.

And the beauty of it is that you’ll never notice it.

GOLDEN RULES:

  • Pay off your credit card every month
  • Treat rewards like a bonus
  • Don’t change your spending to earn rewards

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