Getting frequent flyer points on credit cards is about to get a lot harder

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The opportunity to collect frequent flyer points via credit card spending is expected to be a lot thinner next year.

Changes coming to the ways banks are allowed to charge for processing credit cards from other banks will reduce the amount of fees they collect from each other to fund the purchase of airline points.

“The free ride to easy points is going,” says Tim Hughes, a travel industry veteran and currently VP Business Development at online travel agency Agoda.

The frequent flyer earning capacity could be cut by as much as half. Hughes recommends planning ahead, using both credit card and store opportunities, to make sure each dollar spent attracts the maximum benefit.

Behind this impending fall in frequent flyer point earnings are changes due on July 1 next year to the way merchants charge customers for using a credit card and the bank fees faced by those merchants.

Consumers will be better off because stores won’t be allowed to charge more than their costs for credit card use. And merchants benefit because they can’t be charged more than 0.8% by banks for accepting a credit card.

But this cut in the ability banks to earn fees will have a big impact on the number of frequent fluyer points out there.

Previously, banks charged each other 2% to 3% to accept another bank’s credit card at a point of sale. These funds were then typically used by the banks to buy frequent flyer points from airlines, either Qantas or Velocity, to attach to their credit cards.

This chart shows how the banks typically use the interchange fees to fund frequent flyer points:

The higher the interchange fee paid to card-issuing banks, the greater the rewards to cardholders to encourage them to use the cards.

The Reserve Bank, in announcing the changes earlier this year, said: “The reduction in interchange fees, especially the cap on the highest credit card rates, is likely to result in some reduction in the generosity of rewards programs on premium cards.”

The Reserve Bank had left interchange fees, those charges banks hit each other with to process credit cards which don’t belong to them, relatively unregulated for quite some time.

Normally there are two banks involved in each transaction and the fees for that are 2% to 3%. But from July 1 next year that gets capped at 0.8%.

“It doesn’t sound like a lot … but that difference is what they use to buy frequent flyer miles,” says Hughes.

The big question is by how much the banks will cut their frequent flyer earning opportunities.

The banks currently like to issue a companion American Express card with a Visa or Mastercard. The interchange fees are larger on these and hence the point earning capacity for the card holders.

But Hughes believes the banks will have to stop issuing Amex cards because the points will be too costly for the banks.

“They (the banks) are going to rip the guts out of the amount of points that they are going to buy on behalf of credit card holders,” Hughes told Business Insider.

“The banks haven’t yet officially said what they will do but, I suppose, they could decide to continue to fund these things by dipping into their profits. It doesn’t sound like something the banks would do.

“If they want to maintain the same sort of margins they will have to cancel companion Amex’s … there’s no reason to have them anymore. And secondly they will have to drop the number of points you can earn on the credit card.

“At the moment for the average bank it’s half a (frequent flyer) point per dollar or something like that. I suspect they will drop that to a third of a point per dollar spent, or one point every three dollars, but they may go even lower.”

Currently, if you spend $150 a week on the family shop at Coles (Velocity) or Woolworth (Qantas), you would earn 3393 points for the year, according to calculations by Agoda.

But if you did that with a companion American Express, you would earn another 11,700 points. But next year that opportunity will disappear.

The sale of points is also a good source of revenue for airlines.

At Qantas, its loyalty program reported in 2016 a record underlying EBIT of $346 million, up 10%, the eighth consecutive year of double-digit earnings growth.

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