Australia scraps card surcharges, opening the door for smaller lenders like

• Interchange fee cuts put bank rewards under pressure
• MoneyMe eyes a slice of the big banks’ turf
• Smaller lenders could cash in on the shake-up

Australia has given credit card surcharges the boot, and while that’s good news for shoppers, there’s a much bigger shake-up happening behind the scenes.

New payment rules could squeeze traditional credit card rewards programs, giving smaller lenders a chance to grab a bigger slice of the market.

For investors, the shake-up could create some interesting opportunities beyond the big four banks.

Goodbye surcharges, hello competition

From October 1, Australians no longer have to cop an extra fee simply for paying with their credit or debit card.

That annoying surcharge on your morning coffee, restaurant bill or online purchase? Gone.

The changes cover Visa, Mastercard and eftpos cards, with other major payment providers also adopting no-surcharge rules.

But the bigger story for investors is what the Reserve Bank of Australia (RBA) has done to interchange fees.

These are the fees a card issuer receives from a merchant’s payment provider whenever someone makes a purchase.

For domestic consumer credit cards, the maximum fee has been cut from 0.8% to 0.3%. On a $100 purchase, that’s a drop in the cap from 80 cents to 30 cents.

Sounds like pocket change, until you multiply it across billions of dollars in transactions.

Banks use this revenue, alongside interest and annual fees, to help fund credit card rewards and frequent flyer points.

With less interchange income available, some may have to trim those perks or find other ways to pay for them.

And that’s where MoneyMe (ASX:MME) sees an opportunity.

The fintech has been expanding its credit card business, and CEO Clayton Howes sees an opportunity in the shake-up.

“The interchange cut matters most to card programs that depend on interchange to fund rewards, which is why we’re seeing the major banks scale back their offers,” Howes told Stockhead.

Why MoneyMe could come out ahead

MoneyMe offers products including its Cashback Rewards card and the co-branded Luxury Escapes Société card.

Unlike some traditional rewards programs, MoneyMe says its card business isn’t built around interchange revenue.

“Our cards were built differently. Interchange has never been the engine of the model; our economics come from responsible lending, efficient funding and low-cost digital distribution,” Howes said.

In simple terms, MoneyMe relies more on its lending business, keeping funding costs competitive and finding customers efficiently.

The fee cuts still affect MoneyMe, but Howes believes the company is less exposed than some established players.

“So while the change does affect us, the relative impact is much smaller than for incumbents, and it opens up the field,” he said.

If the major banks become less generous with their rewards, customers could start shopping around.

And for smaller lenders offering competitive products, that’s a chance to win business from the big end of town.

Could Australians use credit cards more?

Removing surcharges could also encourage more people to reach for their credit cards instead of debit cards or cash.

But while shoppers no longer see that extra fee at checkout, the cost of accepting cards hasn’t disappeared.

“From 1 October, customers can’t be surcharged for paying by card, anywhere. But the cost of accepting cards hasn’t gone away; it now sits entirely with the business,” Howes pointed out.

Businesses may therefore encourage cheaper payment methods, particularly for larger bills.

Howes pointed to the ATO’s planned move to stop accepting credit cards and the government’s temporary intervention as an example.

For everyday spending, however, he sees an advantage for MoneyMe.

“For everyday purchases, though, paying by credit card is now simpler and more consistent for customers, and that’s where customers get the most out of our Cashback Rewards card and the Luxury Escapes Société card.”

More card usage could also help MoneyMe build longer-term customer relationships.

The bigger prize for investors

MoneyMe is more than a credit card provider.

Its consumer lending business had a $2.24 billion loan book in the September quarter, up 36% year on year.

Behind it sits Horizon, the company’s technology platform, which automates much of the lending and servicing process to help keep costs down.

MoneyMe also uses warehouse funding facilities to finance its loans. The cheaper that funding, the more room it has to protect its lending margins.

Howes said the company has seen strong competition among domestic and international banks to provide that funding.

And rather than spending heavily to find every new customer, partnerships like Luxury Escapes give MoneyMe access to an existing audience.

“On acquisition, partnerships like Luxury Escapes give us access to a large, engaged member base.

“And as the majors pull back, there’s a clear opening for issuers offering straightforward, tangible value,” Howes said.

Now read: MONEYME grows loan book to $2.24bn with record-low credit losses

The views, information, or opinions expressed in this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article. At Stockhead we tell it like it is. While MoneyMe is a Stockhead advertiser, it did not sponsor this article.

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