Capping Interchange Fees: A Costly Move for Consumers

A look at the Macdonald-Laurier Institute’s Study on Interchange Fees in Australia

There’s been recent discussion about the fees merchants pay on credit card transactions, with the Federal NDP calling for a cap on interchange fees.Here Canadians can draw on lessons learned when such a cap was introduced in Australia, where there was a significant impact on the ability of consumers to earn reward points using their credit cards.

According to a study by the Macdonald-Laurier Institute, because of the cap on interchange fees, Australian consumers no longer have access to the kinds of rewards and benefits we enjoy in Canada.

The Background

In 2002, the Reserve Bank of Australia (RBA) forced a cap on interchange fees.

The RBA maintained these regulations were necessary to correct a “market failure” caused by credit card companies. According to the RBA, credit cards were being made too attractive and consumers were using credit cards with associated rewards programs instead of the allegedly more “socially efficient” debit system.

The RBA sought to switch consumers away from using credit cards that offered rewards programs and instead use debit cards. Their rationale was that this would generate savings for merchants that would be passed on to consumers. However, this is not how the system operated in practice.

The Reality – A Middle Class Left with Significantly Less Purchasing Power

After introducing the regulation, interchange fees in Australia fell by about 50 percent. Due to the reduction in interchange fee revenue, banks that issue credit cards were forced to reduce reward offerings.

This had devastating effects on consumers and their reward points, with consumer benefits on rewards cards falling by 33%. Between 2003 and 2011, the average spend required to obtain $100 worth of goods through a credit card program went from $12,400 to $18,400.

After these changes, the average fee for a standard reward card increased by 40%, which had a direct impact on the middle class. Cards used by individuals with higher incomes saw their fees increase by 30% over the same period.

To make matters worse, it didn’t stop in 2002. In 2017, Australia took further steps to cap this fee. The Australian Business Traveler called this a “points apocalypse“.

It Could Happen Here

The RBA’s rationale for interchange fee regulation is in many respects similar to that put forward by the Federal NDP.

As seen in Australia, the unintended consequences of these changes have been fewer reward points and higher fees, with no price reductions for consumers. Can we really expect Canadian businesses to pass along their cost savings to consumers?

That’s why the CCRC is here. We want to ensure that Canadian consumers are protected from the unintended consequences of intervening on interchange rates. With your engagement, let’s help ensure that governments stay away from changing our access to points and rewards.

To read more on this, click here to access the study by the Macdonald-Laurier Institute.