Credit card interchange fee changes, winners and losers

From 1 July 2017, new credit card regulations recommended by the Reserve Bank of Australia (RBA) will come into effect, including a cap on interchange fees – the fees that credit card providers charge banks to cover the cost of processing credit card transactions.

The credit card market is already being shaken up in anticipation of these changes, with banks preparing for the new regulations to take effect. But who exactly will end up better or worse off as a result? 

What are interchange fees, and how are they changing?

cropped image of hands with credit card

Currently, lenders use interchange fees to help cover the costs of providing credit cards to consumers, including the costs of transferring money from one bank to another. Up until now, interchange fees have been a lucrative business for some lenders, who have been charging interchange fees of up to 3% of the transaction value for some premium credit cards. It has been estimated that banks currently earn approximately $2 billion annually in credit card interchange fees.

When you buy something with a credit card, the merchant’s bank pays the interchange fee to the bank providing your credit card. However, some banks pass the cost of interchange fees on to merchants in the form of Merchant Service Fees, which can cut into the bottom lines of some sellers. As a result, some merchants pass these costs on to customers in turn, whether by raising prices, putting surcharges on credit card transactions, or requiring a minimum spend for credit card payments (often $10 or more).

From 1 July, the RBA is mandating a cap on interchange fees of 0.8%. This means that for a $100 credit card purchase, a credit card’s issuer can only charge up to 80c from a merchant’s bank, rather than up to $3 as was previously the case for some premium credit cards.

This change to interchange fees is likely to have a significant impact on how banks and merchants generate revenue from credit card transactions, and on how everyday consumers use their credit cards.

Who wins and who loses?

Winning?
  • Credit cardholders – fewer extra charges
  • Merchants – reduced merchant service fees
  • People seeking CCs – lots of competition
Losing?
  • Reward cardholders – harder to earn points
  • Banks – losing interchange fee revenue
  • Everyday cardholders – fees may increase

Smiling young woman holding a credit card and typing on a laptop.

The question of whether credit card users will ultimately be better or worse off from these new interchange fee regulations may ultimately depend on whether they’re using their credit cards as a simple and affordable way to buy now and pay later, or as a means to earn premium rewards.

Consumers with rewards credit cards could be in for a tough time, as from mid-2017, it may be much more difficult and/or expensive to earn a free flight to the Gold Coast simply by regularly spending on your credit card. The forecast reduction in revenue from interchange fees means that banks may need to limit, reduce, or remove some of the extra benefits and services they offer, including credit card rewards. For example, ANZ recently got rid of high-reward American Express companion cards.

American Express Reward Cards:

Changes to interchange fees are expected to hit credit cards with rewards programs the hardest, and American Express credit cards are renowned for their competitive rewards.

Some banks issue American Express companion cards with their credit cards, where an Amex is linked to the same account as your Visa or MasterCard, so you can access its reward program. The new caps on interchange fees could lead to many of these Amex companion cards being withdrawn from the market.

However, credit cards issued by American Express itself deal directly with the merchant’s bank rather than going through a separate issuing bank, so interchange fees aren’t involved. You’ll still need to pay above-average interest rates and fees in some cases, but you’ll continue to enjoy access to the competitive Amex rewards program.

For consumers with simpler low-rate credit cards without a rewards program, the new RBA regulations could make flashing the plastic at the checkout a much more viable option, no matter the transaction.  

Bartender receiving credit card of customer for payment in cafe

The new caps on interchange fees should help to keep the corresponding merchant service fees relatively low, thus providing merchants the flexibility to offer more competitive pricing and eliminate minimum spend amounts for credit card payments. Credit card surcharges may remain, but a separate set of regulations (effective September 2016 for large businesses, and September 2017 for small businesses) should limit these to just cover the cost of the merchant service fee.

Another potential outcome of these regulations could end up affecting many credit cardholders. If banks start looking for other ways to raise the revenue they once got from interchange fees, it’s possible that they may start increasing the annual fees, late payment fees, and other charges on credit cards.    

Because it’s likely that many banks and lenders will make changes to their credit card offers as a result of these regulations, it’s also likely that many consumers may start considering alternative credit card options – the perfect time for smart lenders to unveil competitive new credit card deals.

Currently, there are 180 different credit cards to choose from on the Australian market, including 83 credit cards with rewards programs. If you find yourself in the market for a new or replacement credit card, remember to compare credit cards to find the options that will prove the most suitable for your unique financial situation.

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Learn more about credit cards

Can a pensioner get a credit card?

It is possible to get a credit card as a pensioner. There are some factors to keep in mind, including:

  • Annual income. Look for credit cards with minimum annual income requirements you can meet. 
  • Annual fees. If high fees are a concern for you, opt for a card with a low or $0 annual fee. 
  • Interest rate. Make sure you won’t have any nasty surprises on your credit card bill. Compare cards with a low interest rates to minimise risk.

How easy is it to get a credit card?

For most Australians, there are no great barriers to applying for and getting approved for a credit card. Here are some points that a lender will consider when assessing your credit card application.

Credit score: A bad credit score is not the be all and end all of your application, but it may stop you being approved for a higher credit limit. If your credit score is less than perfect, apply for the credit limit that you need, rather than the one you want.

Annual income: Most credit cards have minimum annual income requirements. Make sure you’re applying for a card where you meet the minimum.

Age & residency: You need to be at least 18 years old to apply for a credit card in Australia, and most require that you are an Australian citizen or permanent resident. However, there are some credit cards available to temporary residents.

What should you do if your credit card is compromised?

Credit card fraud is a serious problem. If your credit card is compromised and you’re wondering what to do, here are a few precautionary steps to take.

Contact you credit provider – Get in touch will your credit card provider. If you feel your card has been compromised, you should be able to lock or block it.

Monitor your accounts – Keep an eye on your credit card accounts. Any unauthorised transactions could be a sign your credit card has been compromised.

Check your credit rating – It’s also important to check your credit rating, to ensure you’re not a victim of identity theft or some other financial mischief.

What should you do when you lose your credit card?

Losing your credit card is a serious situation, and could land you in financial trouble. Here is a simple guide detailing what to do when you lose your credit card.

Lock you card – Contact your provider and inform them about your lost credit card. From here lock, block or cancel your card.

Keep track of transactions – Look out for unauthorised credit card transactions. Most banks protect against fraudulent transactions.

Address recurring charges – If your card is linked to recurring charges (gym membership, rent, utilities), contact those businesses.

Check credit rate – To ensure you’re not the victim of identity theft, check your credit rating a month or two after you lose your credit card.

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.

How do you apply for a credit card?

You can apply for a credit card online, over the phone or in person at the bank. Once you’ve compared the current credit card offers, the application process is quick and easy. Before you get your application started, you’ll need to gather your personal information like proof of ID, payslips and bank statements, proof of employment and details of your income, assets and liabilities. To be eligible for a credit card, you’ll need to be an Australian citizen over 18 and earn a minimum of $15,000 each year. Once you’ve applied for a credit card, you should get a response fairly instantly. If your credit card application has been approved, you should receive a welcome pack with your new credit card within 10-15 days.

How do you cancel a credit card?

It’s important to cancel your old cards to avoid any additional fees. Unless you’re doing a balance transfer, you’ll need to pay the outstanding balance before you cancel your credit card. If you’ve opted for a card with reward points, make sure you redeem or transfer the points before you close your account. To avoid any bounced payments and save yourself an admin headache, redirect all your direct debits to a new card or account. Once you’ve done all the preparation, call your bank or credit card provider to get the cancellation underway. Once you receive a confirmation letter, destroy your card and make sure the numbers aren’t legible.

How to get a credit card for the first time

A credit card can be a useful financial tool, provided you understand the risks and can meet repayment obligations.

If you’re a credit card first-timer, review your options. Think about what kind of credit card would suit your lifestyle, and compare providers by fees, perks and repayments.

Once you’ve selected a card, it’s time to apply. Credit card applications can generally be completed in store, online or over the phone.

When you apply for a credit card for the first time, you must meet age, residency and income requirements. As proof, you must also provide documentation such as bank account statements.

How do you use a credit card?

Credit cards are a quick and convenient way to pay for items in store, online or over the phone. You can use a credit card as a cashless way to pay for goods or services, both locally and overseas. You can also use a credit card to make a cash advance, which gives you the flexibility to withdraw cash from your credit card account. Because a credit card uses the bank’s funds instead of your own, you will be charged interest on the money you spend – unless you pay off the entire debt within the interest-free period. If you pay the minimum monthly repayment, you will be charged interest. There are many different credit card options on the market, all offering different interest rates and reward options.

Should I get a credit card?

Once you've compared credit card interest rates and deals and found the right card for you, the actual process of getting a credit card is quite straightforward. You can apply for a credit card online, over the phone or in person at a bank branch. 

How to pay a credit card

There are a few ways to pay a credit card bill. These include:

  • BPAY - allows you to safely make credit card payments online.
  • Direct debits - set up an automatic payment from your bank account to pay your credit card bill each month. You can choose how much you want to pay of your credit card bill when you set up the auto payments.
  • In a branch.
  • Via your credit card provider's app.

What's the best credit card for rewards?

There is no one-size-fits-all best rewards credit card. It's best you research what type of rewards program you'd like, as well as the fees, interest rate and conditions associated with those types of cards before making a choice. 

Rewards credit cards can also come with high annual fees that may end up nullifying the rewards, so think how often you use the card to decide whether the benefits outweigh the extra cost for you. A card with a lower annual fee might require a lot of spending to get any useful rewards, while another card with a higher annual fee might need fewer purchases to get a reward. 

How to make a credit card online

If you’re wondering about how to make a credit card online application, here are some steps to follow:

  • Test the market. Many credit card options are available online. Compare providers by fees, interest and perks to ensure you’re getting the best deal.
  • Complete the application. Once you’ve selected a card, head to the provider’s website and complete the online credit card application form. Forms vary by providers.
  • Provide details. Most cards require you to meet age, residency, income and credit status condition, and you need to provide details like a bank account statement to prove this.
  • Review details. Ensure the information you’ve entered is correct.

Do you need a credit card to get a loan?

You do not need a credit card to get a loan, but you usually need to have a credit history. Without a credit history, a financial institution cannot assess your ‘credit worthiness’, or your capacity to pay off the loan.

If you don’t have a credit card, your credit history can reflect any record of paying off an asset. Without any credit credit history, you’re limited in the type of loans you can apply for. But you may be able to obtain a secured loan against an asset. For more information on improving your credit score, go here