CREDIT CARDS: Surcharge ban could cost you airline loyalty points

Australia’s hated credit-card surcharge is heading for departure. Unfortunately, some frequent-flyer points and travel benefits may be boarding the same flight.

In reality, working with credit cards to amass frequent flyer points is unlikely to be as profitable from later this year as it was previously. That’s the reality we all must face.

Reserve Bank of Australia legislative changes

From 1 October 2026, the Reserve Bank of Australia (RBA) will allow Visa, Mastercard and EFTPOS to prohibit merchants from adding surcharges to debit, prepaid and credit-card transactions. At the same time, the maximum interchange fee on Australian consumer credit cards will fall from 0.8 % to 0.3 %.

For ordinary shoppers, this will be excellent. The price displayed should finally be the price paid, rather than the price before bank fees.

The RBA estimates consumers currently pay about $1.6 billion of the $1.8 billion collected annually through card surcharges. It expects the reform, combined with lower merchant payment costs, to produce clearer pricing and savings for businesses and customers.

For travellers who fund their Qantas, Velocity and other frequent flyer ambitions through credit-card spending, however, that won’t be quite as good news.

Where your points really come from

Banks do not award airline points out of affection for their customers. They buy them from Qantas, Velocity/Virgin Australia, and other loyalty programs. To pay for them, credit card companies rely on revenue from annual fees, interest charges, and interchange fees.

Interchange is paid through the merchant’s bank whenever a card transaction is processed. Reducing the maximum merchants can charge from 0.8 to 0.3 % removes a substantial part of the revenue available to fund points, sign-up bonuses, insurance, lounge passes, and other premium credit card benefits.

Banks can respond in several ways. None involves accepting lower profits with anything like quiet dignity.

They can reduce points earned per dollar, impose lower monthly caps, worsen airline points transfer rates, shrink sign-up bonuses, increase annual fees, or remove other benefits. Some may combine a reduction in all benefits while announcing an ‘exciting card refresh’.

NAB shows what is coming

NAB has provided one of the first clear indications of how the new economics may reach cardholders.

From 1 October, its Qantas Rewards Signature card will reduce its standard earn rate. The first $3,000 of monthly spending will earn 0.75 Qantas Points per dollar, replacing the current one point per dollar on the first $5,000. New customers will also pay an AU$449 annual fee, up from AU$420.

Velocity collectors face an equally obvious haircut. NAB Rewards currently converts to Velocity at two NAB Rewards Points for one Velocity Point. From October, cardholders will need three NAB Rewards Points for the same single Velocity Point.

That is a one-third reduction in the transfer rate.

NAB is partly cushioning the blow with category bonuses and, on some cards, additional lounge passes. This points to the likely future of rewards cards. We can expect less generous everyday earning rates, but a handful of adevertisable conspicuous benefits in the advertising.

Travel insurance could also shrink

Westpac is taking another route. From October, it will scale back several credit card insurance benefits, including coverage for trip cancellation, travel delay, luggage, rental-vehicle excess, and accidental death. Its international travel insurance will be reduced largely to medical cover.

Although many of us concentrate on the airline points, other benefits might be worth more. Complimentary travel insurance, airport lounge passes, flight credits, hotel status, smartphone insurance and fee-free foreign transactions can collectively be worth more than the points earned from everyday purchases.

These benefits are also expensive for banks to provide.

Even American Express, which is not currently subject to the same Visa and Mastercard interchange cap, is tightening lounge access. It has reduced guest allowances at several Centurion and Plaza Premium lounges and will withdraw Priority Pass membership from additional Platinum cardholders from 1 October.

Business cards may become the better earners

The RBA has retained the existing 0.8% interchange cap for commercial credit cards.

That gives banks more revenue to fund rewards on eligible business products than on personal Visa and Mastercard accounts. Small-business owners may therefore find that commercial cards offer higher earn rates and larger bonuses, while personal cards become progressively less rewarding.

American Express may also become relatively more attractive because its closed-loop structure currently sits outside the same interchange regime. You will need to judge whether the accompanying annual fees are worth the cost.

2PAXfly Takeout

Removing surcharges is good policy. Card payments are now so dominant that telling customers to use cash to avoid a fee is increasingly unrealistic.

But travellers should not confuse the end of surcharges with free money. Perks that appear free were never free. Someone was always paying for them

If you use only a debit card or don’t rely on earning points, you will probably come out ahead. Heavy users of premium rewards cards are more likely to pay through lower earn rates, poorer conversions, increased annual fees, and have reduced insurance or lounge access.

We will all just have to recalculate the benefits of our cards as the changes are announced.

Credit-card rewards will survive. They are too valuable to airlines and too effective at keeping customers attached to banks.

My prediction is that there will be a comparatively radical recalculation by the financial institutions, which will not be good. Then, over time, hopefully, as competition for customers heats up, some of those benefits will return.

We live in hope!