Thus Ends the Era of Credit Card, E-Wallet, and Pre-Paid Card Rebates
On 30 November 2020, the Monetary Authority of Singapore (MAS) announced that DirectFAST will be launching in February 2021. This would allow non-bank financial institutions (NFIs) to leverage on PayNow to allow their e-wallets to be funded directly from bank accounts, bypassing the more typical route of using a credit card (and occasionally, a debit card) to fund the account.
For the uninitiated, PayNow runs on top of a bank-to-bank payment system (FAST, which allows instant bank transfers) that allows Singaporeans to transfer money to each other using their phone numbers or NRICs. To do so, Singaporeans first need to link their phone numbers or NRICs to their bank account. Then, they can pay anyone by just keying in their phone number in the bank’s payment app (instead of having to key in a long string of numbers which forms the person’s bank account). The recipient also benefits because, frankly, who remembers their bank account number? PayNow makes bank-to bank transfers (and sending small amounts of money to someone) very easy and convenient.
Now, why would DirectFAST have anything to do with credit cards and pre-paid cards?
The Pre-Paid Card Revolution
Well, in 2019, a wave of FinTech companies landed in Singapore and launched their pre-paid cards. I wrote a previous article on how they stack up against existing bank cards, and in that article, I alluded to some methods whereby you can use a credit card to double dip your spending for maximum rewards.
Now, this concept isn’t new. It’s actually very old. Miles hackers (such as Milelion) have analysed and optimised the credit card reward industry to death, and I’m sure many of them would also have discovered the double dip possibilities once the FinTechs landed with their pre-paid cards that required you to use a credit card to top-up their card. The initial e-wallets also required you to use a credit card to fund them (e.g. GrabPay, when they first rolled out).
Now, with DirectFAST, you can bypass the credit cards and top up the e-wallet / pre-paid card directly and conveniently. While this is definitely a boon to the FinTechs, it is not as much of a boon to the end-consumer who is trying to double dip from the credit card rewards. To see why, let’s first take a step back and see how a basic transaction for these FinTechs work.
Do note that I am only covering this at a very high level, and there are likely other business considerations at play here for why the FinTechs do this, so do view this as an isolated example to compare credit cards and FAST top-ups.
Credit Cards and MDRs
Typically, when you use a credit card to pay a merchant, the merchant will have to pay a “processing fee”, known as the Merchant Discount Rate (MDR). This MDR is then split amongst the payment intermediaries (such as Visa / MasterCard), the card issuing bank, and the bank that acquired the merchant. This MDR represents a cost to the merchant, because it will receive less than the dollar amount you paid with your credit card.
Typically, merchants will factor in the MDR when pricing their products (so if you use cash to pay, they would actually earn more). However, when it comes to pre-paid cards and e-wallets, there is no product. Since you are just funding the account, the merchant has two choices — to bear this cost or to pass it on to the customer.
Even amongst the FinTechs, the practice differs. For example, Transferwise passes on the cost to the customer (so if you use a credit card to fund their account, they will charge you an extra 4% or so), whereas other FinTechs will absorb the cost. So, let’s say I use a credit card to top-up $100 into a FinTech, and the MDR is 4%. The cost breakdown would be something like this:
So, as you can see from my crude diagram above, the FinTech would actually lose money (i.e. the MDR) every time someone tops up the pre-paid card or e-wallet.
Of course, one way that they can offset this loss is by encouraging the consumer to spend using their e-wallet / pre-paid card. In that manner, some portion of the MDR that will be charged for the spending transaction will flow back to the FinTech itself. The best case would be the customer using the e-wallet to pay a merchant that the FinTech has onboarded (think about using your GrabPay e-wallet to pay a merchant using GrabPay — that is the best MDR capture for Grab).
However, this is not a long-term solution because even with a full circle of transactions, there will be some leakage out to the payment intermediaries, especially during the top-up stage.
Enter DirectFAST
With DirectFAST, the FinTech will no longer have to bear the MDR cost. This immediately improves their margins for the top-up scenario above, because that 4% or so MDR that they have to bear? That disappears. Yes, there are still some charges when consumers top-up with FAST, but they are negligible compared to 4% of the transaction.
The FinTech will then be able to earn the MDR from the other end of the transaction, when consumers use the e-wallet / pre-paid card to spend.
Thus, it would only be logical that once DirectFAST rolls out, the FinTechs will no longer need to bear the cost of the credit card top-ups and would likely move to the Transferwise model, which is to pass on the cost to the consumer should they decide to use credit cards to top-up.
Of course, this doesn’t mean that the FinTechs have to change their business model — they could very well continue to allow credit card top-ups for other reasons, such as to grow their market share. However, given that payments itself is a low margin business and they need to start to turn profitable (particularly those that want to apply for the Digital Banking Licence), this would be the inevitable shift.
Consumer Impact
Of course, the consumer impact is still positive, because DirectFAST will not only allow more people to participate in the e-wallet / pre-paid card ecosystem, it would democratise the e-wallet market.
Why?
This is because of the new feature that is coming along with DirectFAST — to allow consumers to transfer balances between e-wallets. This would open up the closed-loop ecosystems even more, especially for e-wallet providers that do not allow the customers to use traditional channels to spend their money (for e.g., you can use the Grab card to spend your GrabPay wallet balance, but you can’t do that with other e-wallets that do not have a supporting card).
The big “BUT” here is the impact to the credit card segment, particularly those that try to optimise spending and double dip rewards. There is now no incentive to top-up the e-wallets / pre-paid cards, especially so if the FinTechs pass on the MDR to consumers.
The decline of this market has already happened. Both the banks and the FinTechs are quite sensitive to the strategies that the miles hackers employ, and many banks and FinTechs have already adjusted their Terms and Conditions (T&Cs) to put an end to these strategies once the miles hackers start to discuss them openly (e.g., via forums accessible to everyone), or once they have been uncovered by their respective product managers.
Killing the proverbial golden goose, anyone?
I didn’t discuss some of these strategies before (even those that have been addressed) because there may still be some opportunity to double dip. But, given that DirectFAST is the final nail in the coffin, I will now discuss one of the most popular defunct strategies that provided arbitrage opportunities to those who were willing to put in the effort. After all, arbitrage is a risk-free reward, not an effort-free reward.
The Humble AXS Machine
This trick is as old as the AXS machine itself. For those who have not heard, AXS is a standalone machine that allows you to pay bills, including credit card bills. It is also available online, and as an app for both Apple and Android devices.
What miles hackers would do is top-up their e-wallet / pre-paid card with their miles card, earn the miles from that transaction, then pay their credit card bill at the AXS machine using the e-wallet / pre-paid card. Thus, the money just moved one circle and the miles hacker received free miles for essentially queuing at the AXS machine (or using the AXS app).
Of course, the first thing to go (from the banks’ end) was the miles awarded for topping up an e-wallet / pre-paid card, which essentially killed the practice for the miles hackers, since they were after the miles.
However, the FinTechs didn’t move as quickly to disable the AXS machine payments, until they noticed another group of people using their cards to pay bills — the cashback collectors.
Like the miles hackers, cashback collectors also optimise their spending but to a lesser degree, generally because there are typically caps on the amount of cashback one can accumulate during a month.
Thus, the cashback collector tends to cast the net more widely, and in this case, also zeroed in on the rewards that the FinTechs were offering for spending on their card. This was also in part because the banks stopped offering cashback for topping up an e-wallet / pre-paid card (similar to the miles).
So, what the cashback collector would do would be to use the e-wallet / pre-paid card at the AXS machine to pay bills that you typically couldn’t use a credit card to pay. This helped the cashback collector achieve the following:
i. Hit the minimum spending on the credit card (if top-ups were not already disallowed from counting towards the minimum spending in the T&Cs);
ii. Earn rewards / points from the FinTech that issued the e-wallet /pre-paid card; and
iii. Get a one-month free float for the expenses, since they are now being paid via a credit card instead of FAST.
Again, once the FinTechs realised that this was happening, they stopped that practice by not awarding any rewards / points for AXS payments on the e-wallet / pre-paid card, or just disallowing the use of their e-wallet / pre-paid card to pay bills from the AXS machine.
What about other strategies?
Well, I’m sure that there are other strategies out there (and some I would rather not discuss), especially since I am not a miles hacker, so I only investigate if I see arbitrage potential (after all, as a finance nerd, arbitrage is the golden grail, but only obtainable by a select few). Again, this means a risk-free way to obtain free perks (usually cashback).
Miles hackers differ in this regard because they are willing to spend money on their cards for miles, whereas if you are looking for cashback arbitrage, you are not going to go out of your way to spend more money (you would rather find ways to reduce spending and optimise the cash sitting in the account, if it wasn’t already invested).
Just to give you a flavour of how deep this rabbit hole goes, miles hackers in other countries (mainly in the US) have pushed the system to its limits, for example:
- This guy, who managed to rack up so many miles that he can fly non-stop in first class (the article was dated in 2015, so now with COVID, it would be interesting to hear how he coped);
- This other guy, who bought 12,150 cups of pudding to claim over one million miles, due to the conversion ratio of a promotion they had for pudding;
- And, my personal favourite (because hey, true arbitrage), yet another guy, who took advantage of a government program to buy $1 coins with his credit card, only to deposit the coins and pay off the card (very similar to the AXS trick, actually).
Again, I’m just scratching the tip of the iceberg here… there are too many ways to do this.
When One Door Closes, Another Opens…
When the pre-paid card craze hit Singapore, the T&Cs for the cards and the rewards were not tight enough to escape the eagle-eyes of the miles hackers or cashback collectors, particularly for AXS.
However, with DirectFAST, it is very likely that the FinTechs will start encouraging their users to top-up using FAST instead, since that greatly improves their margins (something like what Transferwise is currently doing — by making the customer bear the MDR cost).
Thus, this ends the era of using credit cards to top-up e-wallets / pre-paid cards and double dipping the benefits.
But, there is still a silver lining. As mentioned in the announcement, DirectFAST will allow consumers to transfer the contents from one e-wallet to another, which is something not really feasible right now. Also, new digital banks will be announced by the end of 2020, and they would also enter the market with funky new products, which may then again open doors to some innovative ways to double dip.
In the meantime, as always, enjoy the ride and keep your eyes peeled for interesting opportunities!
