“To Affinity and Beyond!” may be an apt rallying cry for credit card issuers facing the prospect of new interchange fee regulations.
Affinity credit cards – cards that target consumers with an ‘affinity’ for a favorite club, sports team or charity by sharing card revenues with that group or by granting special perks to the cardholder – may be in the best position to ride out looming fee changes that could trigger product changes and antagonize cardholders.
But what are interchange fees? These are fees deducted from the amount a merchant gets each time their customer makes a purchase with a credit card. The merchant’s bank collects the fee to cover processing expenses and then pays part of this interchange fee to the issuer of the credit card used by the shopper. These interchange fees represent substantial revenues to credit card firms.
Regulators in Australia and Spain have already eliminated or capped interchange fees and other countries are considering similar actions, causing the credit card payments industry to argue that such rules will do more harm than good.
“Regulation of interchange fees in Australia has been great news for retailers and bad news for banks, but it is consumers who’ve had the worst deal,” explained Richard Koch, an executive at the UK Cards Association, when asked to comment on new rules proposed by European regulators1.
His group notes that Australian card issuers responded to similar rules in 2003 by introducing annual fees, raising interest rates and reducing card perks. This view was reinforced by a report commissioned by MasterCard2 that said UK card issuers’ revenues would drop by £2.4 billion and cardholder fees would rise by £25 per year. The European Banking Federation voiced similar concerns earlier this month.
While the exact impact of interchange fee rules is debatable, it’s probable that new regulations will cut into an important revenue stream for credit card issuers, forcing some to introduce customer fees or change their product features significantly. This in turn could prompt customers to cancel their cards.
Affinity credit card providers may have an easier time weathering this storm, since their customers typically signed-up for a card out of loyalty to a favorite organization as opposed to specific product features alone. Thus, they are less likely to jump ship than regular bank cardholders who are easily angered by fee hikes.
Affinity credit cards may also have an advantage over co-branded credit cards, those cards that are affiliated with another commercial brand and offer retailer discounts, travel points or cash-back offers. The reason? To offset lower interchange fees, co-brand credit card issuers may need to cut back on their costly reward programs, once again displeasing customers. In contrast, affinity credit card programs are often less expensive to operate, due to lower marketing and administration costs, so negative impact – from the cardholders’ perspective – could be minimal.
While affinity cards may gain the upper hand, they can’t sit back and relax either. In a crowded market – where countless glitzy cards come and go quickly due to poor customer response – an affinity credit card must build a strong brand, a large customer base, and a distribution model that combines retail, online and on-the-ground sales channels.
As for traditional credit cards offered by high street banks, they must find ways to hang on to customers, potentially by cross-selling other products and offering preferred rates and fees to cardholders with multi-product relationships, in effect creating an “affinity” to the bank itself.
The big message for credit card issuers: learn from the strategies deployed by affinity credit cards to build customer devotion, before interchange rule changes put loyalty to the test.
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