Textes d'opinion

Loyalty program critics protect you from yourself

At first blush, you might well wonder why anyone would be against loyalty programs. Whether you earn points by shopping at a particular store or by using a particular credit card, you are rewarded for your loyalty. Maybe you exchange your points for a discount on airfare for a sun-filled vacation. It’s all voluntary, and everyone involved seems to benefit.

Yet several interest groups, such as the Public Interest Advocacy Centre, have recently taken aim at loyalty programs. One criticism is that the benefits consumers receive are not worth as much as what the program operators get out of it. Canadian consumers seem to disagree, as 89% of us adhere to at least one loyalty program.

Another concern is that the data collected will be sold to third parties and that it will be possible to identify each consumer individually. The major loyalty program operators all assert that they do not sell this data, however. They are also required by law to obtain prior consent from consumers should they choose to do so.

Some also argue that credit card loyalty programs, which 41% of us adhere to, are to blame for the over-indebtedness of consumers. Yet this connection simply does not exist. 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 as a payment mechanism. This phenomenon is the opposite of what the critics denounce.

In addition to all of this paternalistic concern about consumers, associations such as the Canadian Federation of Independent Business also believe that the fees merchants pay for credit card transactions are too high, in part because of loyalty programs.

Experience abroad has shown that efforts to regulate these fees, always couched in the language of consumer protection, have indeed benefited merchants, but to the detriment of consumers.

For example, in 2003, the Australian authorities imposed an interchange fee reduction of approximately 50% and allowed merchants to apply a surcharge to purchases made with a credit card. Although merchants benefited—an annual gain estimated at A$870 million—the regulation entailed no reduction in prices for consumers.

Worse, the annual fees consumers paid for standard credit cards with loyalty programs jumped by 77% in anticipation of the new regulation, versus a 22% increase for cards without loyalty programs. And the value of rewards fell by almost a quarter in the four years following the change.

The Spanish authorities imposed a similar reduction of interchange fees a few years later, with similar results: Average annual fees grew from €22.94 to €34.39, credit card interest rates went up, and there was no drop in prices attributable to the regulatory change.

Same story in the United States, where authorities adopted rules leading to an interchange fee reduction of nearly 50% in 2010. Merchants registered an estimated US$8 billion of savings, but this measure did not lead to lower prices for consumers.

Instead, once again, consumers suffered. In this case, banks eliminated many free chequing accounts in order to make up for lower interchange fee revenue. Whereas 76% of chequing accounts offered by banks were free in 2009, this proportion fell to 38% by 2013 after the new law had come into effect. This increase in banking fees played a prominent role in the 821,000 additional households without a bank account in 2011 compared to two years earlier—a change that disproportionately affected the least fortunate.

Time and time again, those who support such regulations claim that they will lead to savings for consumers, and time and time again, it is merchants who benefit while consumers suffer. The same thing would surely happen were Canada to go down this interventionist road in the name of protecting consumers from the rewards they want.

Mathieu Bédard est économiste à l'Institut économique de Montréal. Il signe ce texte à titre personnel.
Ce texte d'opinion a aussi été publié dans le Calgary Sun, le Ottawa Sun, le Edmonton Sun, le Winnipeg Sun et le Daily Herald-Tribune.

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