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Over the past couple of years the value of miles/points/cashback for every dollar spent on a credit or charge card has increased as card issuers battled for your business. Card holders benefited with rewards returns ranging from 1.5%, 2% to as high as a 4% on your card spending. That will change on some if not many of the cards in Canada from two of the three main credit card types by April of this year. In the 14 years since I’ve been covering the credit card rewards industry, this is the first time a self initiated industry change will have a large scale negative impact on the rewards industry.
Why is this the case?
As you probably know, both Visa and MasterCard have voluntarily bowed down to pressure from the Canadian Government and the retail industry to limit the interchange fees charged to retailers each time a purchase is made with one of their cards. This agreement is set to start in April 2015 and will have the Visa and MasterCard interchange rate set at an average of 1.5% for five years. There aren't a lot of details surrounding this agreement but just a simple look at the numbers suggests card issuers can't give rewards of 1.5%, 2% or higher when they are only earning 1.5%. When this same situation arose in Australia, rewards were cut back and card issuers also took other measures to make up for the loss in revenue. How much will rewards be cutback? We don't know yet but if you read into the agreed upon interchange rate, the word 'average' is used which leads us to believe Visa and MasterCard may actually still charge a higher rate for premium cards and a rate below 1.5% for non-premium or non-rewards cards to achieve that average 1.5% rate.
How do we know this is going to happen? Australia is a great example but sources at one of the top rewards cards have indicated to us that they'll be lowering the per dollar earn rate when interchange changes kick in.
What about American Express?
American Express is not part of the interchange agreement and as result their reward offerings shouldn't change. In fact, the interchange fallout could translate into a boon for American Express since, theoretically, they should be able to provide higher reward earnings per dollar spent than Visa or MasterCard. Of course, a potential pitfall for Amex may come in the form of a retailer revolt as other major players (and there are rumours) follow Costco’s lead in parting ways with the more expensive card issuer.
Ultimately though, if I were American Express, I'd be mapping out an aggressive marketing plan to capitalize on the disgruntled Visa and MasterCard card holders looking for the highest reward returns. Just saying...
What does this mean to MasterCard and Visa cardholders?
It means that while it may take you longer to earn credit card rewards you shouldn’t give up those premium reward cards just yet. There are ways to make up the shortfall. For example, if your annual credit card spend is $30,000 and you’re currently earning 2%, then your current return of $600 may fall to $300 or $450 per year. Making that up will depend on staying plugged in and taking advantage of the thousands of bonus offers issued by reward programs each year. Any point optimizer will tell you, to maximize your earning potential, you need to work your credit card and the bonus offers. Maybe these pending changes will force you to put those best practices to the test!
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