Things are “inter”changing and it’s great

Hey team,

Put your hand up if you’ve got a credit card. Ok, keep it up if, when you got your credit card, you also opted in for a companion American Express (Amex) card so you could maximise your point-earning power? So most you hey? Nice one. We’ll that gravy train is about to end, it’s a good thing and here’s why.

Visa, MasterCard and Amex. Who are they really?
Visa, MasterCard and Amex are essentially just payment networks. They allow banks, businesses and consumers all over the world to communicate, without the need to actually set up direct relationships with each other. Think about it, there are tens of thousands of banks in the world, millions of businesses and billions of people. Without a payment network to connect everyone, the whole world would still be operating in cash. Visa, MasterCard and Amex are just the middlemen in any electronic transaction.

So whenever a transaction goes down, three parties get involved. There’s you and your bank, there’s the business and their bank and there’s the payment network. Here’s an example:

You head over in your active wear to Earthfood Vegans R Us, who banks with the Commonwealth Bank, and order your standard turmeric almond soy skinny organic farm-fed latte. You pay for it with your ANZ Visa card. Visa “pings” ANZ to make sure there’s enough credit in your account. Once it confirms there is, Visa sends a payment instruction to ANZ to pay it 5.50 and then sends a receipt instruction to Commonwealth to receive 5.50. Job done.

So what’s the catch?
The network aint free. There is a charge, known as the interchange fee, for using the network. Historically it’s been pretty high. 1-2% for Visa and MasterCard and 3% for Amex. The fee whilst collected by the credit cards, is actually predominantly earned by the issuing bank of the credit card (ie the bank you got your credit card from). The fees are split roughly like this:

  • 0.2% to the credit card payment network used (i.e. Visa, MasterCard or Amex)
  • 0.05% to the businesses bank (i.e. the bank which is receiving the money)
  • the remainder to the issuing bank (i.e. your bank)

Do the maths and what’s left over for the issuing bank is pretty huge, somewhere between 1 and 2.5%. So it’s lucrative right. Hence why all the banks want you to have a credit card. And even more so why they were wanting you to get a companion Amex card given Amex interchange fees are so much higher. And, it’s why the banks have historically been able to give you such attractive points benefits for using their cards. Because they are making a fortune off them.

And then everything changed
Earlier this year the government put a cap on the interchange fees allowed to be earned by the issuing banks. The cap? 0.8%. So banks have gone from being able to earn up to 2.5% on the value of your purchases to just 0.8%. Given they are earning less, they are now less able to provide you with the chunky points benefits you’ve become oh so accustomed to. And so, one by one the banks have been cancelling your Amex companion cards given they are no longer profitable for them. And worse, they have been massively scaling back the points benefits you can earn on your MasterCard and Visa cards too.

The thing is, I don’t see this as a bad thing. These points, whilst they sound good and feel great to use, are really just a means of banks reimbursing you for increased costs of your purchases. Think about, how often have you gone to pay for something on your credit card only to find out that the business is going to put a surcharge on you for using it? Exactly. That surcharge is you paying for your points. And, yes you’re right, not all business pass on this surcharge to you, but they do build it into their cost of doing business (because if you’re not paying for it, then they are). So with the interchange fees falling, business costs will fall, and these savings hopefully, maybe, fingers crossed, will eventually get passed on to you.

Super quick side note
Whereas MasterCard and Visa are just payment networks and do not issue credit cards themselves, Amex does. I.e. you can get yourself an Amex, which is actually issued by American Express bank itself. Amex credit cards, issued by American Express bank are not caught up by this interchange fee regulation by the government. So if you’re a points fiend, you’ll need to get yourself one of those. But, I wouldn’t.

Anyway, that’s 5 minutes. Hope it helped. 



Categories: General Finance

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