The art of making someone else pay

OPINION: ASB’s U-turn on its credit-card rewards scheme was as quick as the Government’s back-down on adding GST to KiwiSaver management fees.

The bank emailed its cardholders telling them they would soon get less-generous rewards.

The next day, a second email went out. The whole thing was off.

The plan offended ASB’s customers in a similar way that the Government’s KiwiSaver fees plan offended.

The Government collects a fortune in tax, and tried to sneak a new tax through without even telling us, only being outed when Stuff broke the story.

Similarly, ASB’s email smacked of disdain.

It makes a fortune from its customers, but didn’t even explain why it was downgrading its credit-card rewards.

A furious response from customers exposed its communications failure, but in fact, the explanation for the downgrade plan was a little embarrassing.

Bank credit-card reward

GOLDEN RULES:

■ Pay your credit card off each month

■ Treat rewards as a bonus

■ Don’t alter your spending to earn rewards

schemes are funded by the fees merchants (shops, restaurants, etc) pay to accept credit-card payments.

These fees are ridiculously high in Aotearoa because banks and their mates at the credit-card companies had no competitive pressure to charge less.

The Government lost patience, and passed laws to cap them, and the caps come into place on November 13.

That’s going to change the economics of credit cards, and ASB was just the first bank to make a move to preserve the profitability of its credit-card business.

I fully expected others to follow. Now, to do so, they have to be brave enough to risk a backlash from customers.

The message ASB got was this: You make so much money from us, taking away our rewards just does not fly.

We love our rewards. We love the sense we are getting something for nothing.

But rewards schemes, whether they be at the petrol station (discounts), the power company (prompt-payment rates), the insurance company (lump-sum annual premium discounts) or at the checkout (coffee rewards, Flybuys, etc), are squeeze-up economics.

Rewards, and discounts, shift the pricing in businesses to benefit those most able to collect those rewards.

That’s the rich, higherspenders, and people who are diligent with their money.

The less-rich, the lowerspenders, and the less-diligent end up paying more, through several mechanisms.

The first is that merchants pass on the merchant fees through higher prices, which people without credit cards don’t even realise.

The second is charging more interest on credit-card debt than

I consider reasonable, given how low the arrears are on credit cards.

This is why some people say credit-card rewards schemes are unethical.

They make the rich richer, and the poor poorer.

We can see this at work in American Express’ financial statements.

Last year, Amex had $45 million of expenses in New Zealand, $21m of which were for ‘‘marketing, promotion, rewards and card member services’’.

It had $47m of revenue, of which $22m was these ‘‘discount fees’’, which is Amex’s word for merchant fees, it seems. Another $14.7m of revenue for American Express was credit-card interest.

Those who win in the Amex

Got a question for Rob Stock or an issue you want him to tackle? Contact him by going online to Neighbourly and typing the name of our newspaper into the search bar. Click our name and select Contact from the menu bar and ‘‘message our reporter’’ from the drop-down menu. rewards-go-round are higher spenders who pay off their card in full each month.

In 2009, merchants were allowed to start adding surcharges for accepting creditcard payments, something creditcard companies had resisted for years.

That made things less unethical, but credit-card surcharges are not ubiquitous.

ASB’s U-turn shows people won’t give up their squeeze-up rewards easily. That may mean they survive in their current form.

But the rule of rewards is this: Someone else has to pay to fund your rewards.

Banks are masters at making that happen.

A little extra on the interest it charges cardholders. A little less paid to depositors. A little extra on the home loan.

And the beauty of it is, you will never notice.