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In Competition

Not so loyal – ACCC focuses on loyalty schemes

16 December 2019

Background

On 3 December 2019 the ACCC released its final report into customer loyalty schemes calling on market players to improve their data handling practices and the way they communicate with consumers. After flagging a desire to tackle issues surrounding loyalty schemes in early 2019, the ACCC raised several concerns in its final report across areas of data practices, consumer issues, and competition issues.

Key Take-Aways

  • Scheme operators should continue to improve the transparency of their data practices, for example by disclosing to consumers the sources of third party advertising and the sources of the consumer data used to inform that advertising
  • The collection, use and disclosure (Data Use) by the operator and third parties of consumers’ data should be more transparent and consumers’ ability to control their Data Use should be improved
  • Loyalty scheme terms and conditions (including their privacy policies) require simplification and should include specific consents for the use of consumer information
  • Communications with consumers should improve and changes to the loyalty scheme should be adequately notified
  • The ACCC recommends reforms to the Australian Consumer Law so that unfair contract terms are prohibited (not just voidable), and they include a prohibition against unfair trading practices. Reforms to strengthen Australian privacy law are also recommended
  • The ACCC highlighted that there is a potential for competition issues to arise out of certain practices common amongst loyalty schemes – for example where a dominant firm exercises a loyalty scheme that has market saturation and locks-in customers, or the collection and use of data has the effect of raising barriers to entry

Key Recommendations

The ACCC recommended that loyalty scheme operators should review how they present terms and conditions to consumers. One particular area of concern was that consumers were not being notified properly that their points were going to expire or the need to remain active in order to maintain a current balance. Likewise, the ACCC had a concern about loyalty schemes that do not adequately notify consumers of a points devaluation and recommended that more prominent and timely notice of such changes should be implemented.

The ACCC highlighted that in many cases, Data Use is not adequately communicated to consumers. It was identified that some loyalty program terms and conditions would take consumers over 90 minutes to two hours to read.  Further, some loyalty scheme privacy policies disclose that they may continue to track their members’ purchases even when they do not scan their loyalty card at the checkout (by linking the customer’s payment card to their profile) – the ACCC specifically recommended that this practice should cease on the basis that it is inadequately disclosed and is unlikely to reflect consumer preferences.

The ACCC has identified areas where problematic data practices were being used to impact on market efficiency and cause consumers harm. These included seeking broad consents and making vague disclosures about the collection and use of consumer data, providing users with little insight into how their data was being shared with third parties and providing users with limited ability to opt out of targeted advertising. The ACCC recommended that key documents relating to data processing be simplified and made more accessible to consumers.

The ACCC also recommended broader amendments to Australian privacy legislation to strengthen consent requirements for data collection including that any settings for additional data collection be ‘off’ by default.

They also highlighted the need for individuals to have direct rights to pursue actions before the courts for interference with their privacy.

Competition Issues

Whilst acknowledging that loyalty schemes can have positive effects for competition (for example by intensifying competition and leading to loyalty discounts and lower prices for consumers), the ACCC identified that they can also impact on consumer buying habits and reduce responsiveness to competing offers. High switching costs and consumer lock-in effects were the primary issues highlighted by the ACCC. The competition regulator observed that:

  • loyalty schemes can have an effect similar to exclusive dealing through providing strong incentives to direct purchases towards a single firm.However, the ACCC noted the submission of one scheme operator, who argued that consumers are often members of many loyalty schemes and in that sense, each scheme is complementary to one another indicating that switching costs are not perceived by consumers to be a high enough barrier; and
  • large, national loyalty schemes have the potential to ‘lock up’ customers, strengthening the scheme operator’s market power and increasing barriers to entry and expansion for rival firms.

The ACCC also raised concerns about the anti-competitive effects that loyalty schemes can have on related markets, for example, where an airline loyalty program has an exclusive partnership with a car rental service.

This article was written by Matthew Harris with support from Tamara Hunter and Peta Stevenson.

Image Credit: I just hate the whole supermarket experience by Paul Townsend  / Flickr / CC 2.0 / Remixed to B&W and resized

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