Montreal, January 28, 2016 – Regulating credit card loyalty programs in order to protect Canadian consumers would entail perverse effects that would harm those consumers, as experiences elsewhere in the world have shown, explains an Economic Note published today by the MEI.
Loyalty programs aim to encourage customer loyalty to the stores and brands that finance them. Many critics want them to be regulated for a variety of reasons. They claim among other things that the interchange fees paid by merchants for credit card purchases are too high, and that these programs are responsible for the over-indebtedness of consumers.
Yet several attempts to regulate interchange fees, and thereby also the loyalty programs financed by those fees, have had perverse effects in other countries, as highlighted in the publication. In each of these cases, the regulations directly benefited merchants without leading to price reductions for consumers. Furthermore, given that the payment system must be financed somehow or other, the reduction in interchange fees pushed banks to look for other sources of revenues, which fell even more heavily on consumers.
In Australia, where the authorities imposed an interchange fee reduction of approximately 50%, the annual fees paid by consumers for cards like Visa and MasterCard without loyalty programs increased by 22%, whereas those for standard cards with loyalty programs and for “gold” cards increased by 77% and 47% respectively. As for the value of rewards, it fell by 23% from 2003 to 2007.
When it comes to household indebtedness, the connection with loyalty programs simply does not exist, adds the author. A Bank of Canada study shows instead that the outstanding balance on Canadian households’ credit cards at the end of each month is declining, even while they are increasingly using their credit cards to make purchases.
“The fact that these arrangements are voluntary, and the programs optional, should be enough to demonstrate that consumers believe they are getting a good deal when they use these programs,” points out Mr. Bédard, Economist at the MEI and author of the Economic Note.
There are advantages for merchants as well, since they can not only increase their market shares by encouraging customer loyalty, but also enjoy the benefits of credit card systems, partially financed by loyalty programs.
Today, 89% of Canadians adhere to at least one loyalty program, and 41% adhere to a program that is connected to a credit card. In other cases, such programs are connected to stand-alone loyalty cards or smartphone applications.
“Regulations adopted in certain countries, intended to protect consumers, in fact ended up costing them quite a lot. Government intervention in the economy often has unintended consequences that end up harming the people they are meant to help, and this is a perfect example of that,” says Mathieu Bédard. The perverse effects that result from certain laws are just the kind of thing the MEI studies, using concrete examples from daily life like this one.
The Economic Note entitled “Are Loyalty Programs Bad for Consumers?” was prepared by Mathieu Bédard, Economist at the MEI. This publication is available on our website.
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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.
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