The Australian Competition and Consumer Commission (ACCC)
final report on Customer Loyalty Schemes notes that the ACCC
has examined consumer and competition issues that are associated with consumer-facing customer loyalty schemes (loyalty schemes) in Australia, including the way in which loyalty schemes collect, use and disclose consumer data.
Consumer and competition issues arising from customer loyalty schemes are a current priority for the ACCC. The operators of loyalty schemes must ensure they comply with the Australian Consumer Law (ACL) and make sure their terms and conditions do not include any unfair contract terms. It is also paramount that the operators of loyalty schemes ensure consumers have a genuine opportunity to review and understand the policy and operation of loyalty schemes to avoid misleading and deceptive conduct.
A significant number of Australian consumers have reported experiencing a variety of issues participating in loyalty schemes.
The ACCC’s report on the major loyalty schemes in Australia focused on the following key issues:
• Consumer issues: whether consumers are properly informed and receive the benefits advertised by loyalty schemes.
• Data practices: the collection, use and disclosure of consumer data by loyalty schemes and their partners.
• Competition issues: the potential impact of loyalty schemes on competing firms, in particular on new entrants.
The report highlight the consumer and competition issues associated with loyalty schemes 'to both educate consumers and inform the industry of the ACCC’s concerns with certain practices'.
Based on the information gathered during this review, the ACCC is concerned about a range of business practices in the loyalty scheme industry which have the potential to cause widespread consumer detriment.
They include loyalty schemes:
• that do not present their terms, conditions and privacy policies in a way that consumers can readily understand
• that make unilateral changes to their terms and conditions in a way that may be unfair to consumers
• collecting, using and disclosing consumer data in ways that do not align with consumers’ preferences.
This includes loyalty schemes not providing sufficient transparency and meaningful consumer control over the collection, use and disclosure of consumer data, and engaging in the following practices:
o seeking broad consents from consumers and making vague disclosures to them about the collection, use and disclosure of their data
o providing consumers with limited insight and control over the sharing of their data with unknown third parties
o providing a limited ability for consumers to opt out of targeted advertising delivered by third parties on behalf of loyalty schemes.
The report states
The ACCC has outlined in this report its concerns and views on certain practices, and calls on operators of loyalty schemes to review and consider these practices in the context of the ACL. In particular, loyalty schemes should consider whether consumers are being misled or subject to unfair contract terms. Further, loyalty schemes should review their approach to presenting terms and conditions to ensure consumers have a genuine opportunity to review and understand their policy and operation.
The ACCC notes that following the release of the Customer Loyalty Schemes draft report (draft report), some loyalty scheme operators have implemented or announced changes to their schemes, most with the aim of improving consumer understanding.
While acknowledging these changes, the ACCC remains concerned about a range of practices which persist within particular schemes and therefore continues to recommend changes to particular industry practices and consumer and privacy laws. The ACCC considers that these recommendations will both protect consumers and ensure consumer trust in the digital economy and data based innovation.
Having placed the industry on notice, the ACCC encourages consumers to contact us and report concerns where these practices are continuing with their loyalty schemes. The ACCC will consider these reports taking into account the principles and priorities in its compliance and enforcement policy before deciding whether enforcement action will be required to effect broader change.
The objectives of customer loyalty schemes
Loyalty schemes are ubiquitous in many sectors of the Australian economy and are particularly prevalent in the airline, supermarket, credit card, hotel and car rental industries. Consumer participation in loyalty schemes is high and the average Australian carries four to six loyalty cards.
Fundamentally, loyalty schemes are a marketing device with the primary objective of attracting and retaining customers. Many firms invest in loyalty schemes with the aim of gaining a competitive advantage over rivals by influencing customer behaviour to encourage repeat purchases and introduce customer resistance to competing offers or products. In this sense, loyalty schemes have a dual strategy—an offensive strategy of acquiring new customers as well as a defensive strategy of retaining existing customers.
Increasingly, some larger loyalty schemes also earn significant revenue from their schemes, including by allowing affiliated retailers and other companies to purchase points for their customers. In addition, some loyalty schemes collect and use their customers’ data in order to develop consumer insights, which may be shared with or sold to other businesses, and to target customers with tailored advertising. Some loyalty schemes may also use this data to deliver targeted and personalised advertising to their own customers on behalf of other businesses.
Consumer issues
Consumers may benefit from their participation in loyalty schemes by receiving rewards such as discounts on products and services, and access to exclusive offers and service levels. They may receive these benefits on purchases they would have otherwise made.
Loyalty schemes can provide consumers with a range of options to earn rewards and, increasingly, customers of loyalty schemes are able to earn and spend points directly with a number of different merchants that participate within a loyalty scheme’s partner network.
The ACCC has received complaints from customers of loyalty schemes that alleged they had not earned, maintained or redeemed their points in the manner they anticipated, with many consumers reporting that they did not obtain any benefits from participation at all. Complaints included that some operators of loyalty schemes:
• failed to adequately advise them about critical components of their loyalty schemes, including the need to remain ‘active’ by earning or redeeming points within a specified period to avoid the expiry of points, or about the restricted availability of redemption opportunities, and
• made unilateral changes that unfairly restricted the benefits available under a loyalty scheme, for example, by unilaterally reducing the rate at which they could earn points, or the value of their points previously accumulated.
In response to the draft report, several loyalty scheme operators submitted that they are in the process of investigating certain measures, or in some cases had already implemented them, to help facilitate well-informed consumer engagement. For example, the ACCC notes that submissions to the draft report from Virgin Australia, Flybuys, Woolworths and Qantas have highlighted changes these loyalty schemes have made, or are seeking to make, some directly in response to matters raised in the draft report.
Despite these changes, the ACCC is concerned about a range of business practices in the industry and calls on operators of customer loyalty schemes to review and consider their practices in the context of the ACL.
Recommendation 1: Improve how loyalty schemes communicate with customers
Loyalty scheme operators need to review their approach to presenting terms and conditions of loyalty schemes and ensure changes are fair and adequately notified.
Loyalty scheme operators should review their approach to presenting the terms and conditions of loyalty schemes to ensure consumers have a genuine opportunity to review and understand their policy and operation.
More specifically, loyalty scheme operators should provide consumers with relevant information at the right time and in the right way to make informed decisions, for example:
• Loyalty scheme operators should ensure that any notification about the approaching expiry of consumers’ point balances (or detrimental changes to the rate consumers earn points or the value of those points) is sufficiently prominent and appropriately targeted. For instance, the subject line of any email notification about the approaching expiry of point balances might include a statement similar to ‘Your points are about to expire’.
• Frequent flyer schemes should consider disclosing any particular routes, or corresponding seasons, or classes of travel on a route, where ‘free’ seats are not available.
If loyalty scheme operators contemplate a unilateral reduction in either the earn rate or redemptive value of points, then prior to making such a change, loyalty scheme operators should:
• provide existing members with prominent and timely advance notice and a genuine opportunity to redeem their existing point balance, and
• consider providing existing members with some form of compensation (potentially in the form of an increased point balance).
Loyalty scheme operators must ensure they comply with the ACL, including by avoiding statements that are incorrect or likely to create a false impression, and avoiding unfair contract terms.
The ACCC also notes that the findings in this report reinforce those of the ACCC’s Digital Platforms Inquiry. In particular, the ACCC considers that certain conduct by customer loyalty schemes has the potential to cause substantial consumer detriment, which should be considered as part of proposed reforms to the ACL.
Recommendation 2: Prohibition against unfair contract terms and certain unfair trading practices
The ACCC’s findings in this report reinforce the Digital Platforms Inquiry Final Report’s recommendations for the need for a prohibition against unfair contract terms and certain unfair trading practices. Consistent with the Digital Platforms Inquiry Final Report’s recommendations, the ACCC recommends that the Australian Consumer Law be amended:
• so that unfair contract terms are prohibited (and not just voidable)
• to include a prohibition against certain unfair trading practices.
The scope of a prohibition on certain unfair trading practices should be carefully developed such that it is sufficiently defined and targeted, with appropriate legal safeguards and guidance. The ACCC notes, and is actively participating in, the current work on this issue being undertaken as part of the Consumer Affairs Australia and New Zealand (CAANZ) process, and will progress its support for the recommendation through that forum. The ACCC’s current view is that the prohibition should be directed at unfair conduct that has caused, or has the potential to cause, substantial detriment to consumers. The ACCC will continue to work through CAANZ in relation to this issue.
Data practices
Membership of a loyalty scheme is voluntary and generally provided at zero monetary cost to the consumer. In exchange for the benefits provided by loyalty schemes, many loyalty schemes derive value from consumers by collecting data, including personal information, about them. Increasingly, some loyalty schemes generate revenue from the data they collect about the habits, interests and preferences of their customers, which can be used to profile consumers to produce insights about their purchasing behaviour.
Loyalty schemes may collect consumer data both actively, for example, information voluntarily provided by the consumer when joining the loyalty scheme, as well as passively, for example, the background collection of data through a consumer’s use of a platform, apps on a device or use of third party websites.
The data collected by some loyalty schemes about a consumer can be further enriched by linking it with external data sources, including from data brokers or through data-sharing platforms. These external data sources collect masses of information on consumers, which can be combined with relevant data a loyalty scheme holds about its customers.
The combining of data allows greater value to be extracted from many loyalty schemes’ databases for the purposes of generating insights about consumers to enable targeted advertising and personalised marketing. This data can also be used not only to improve the offerings of the loyalty scheme operator, but also to share insights with other partners or sell those insights to third parties.
While Australian consumers have different preferences, attitudes and levels of awareness when it comes to the data they share with loyalty schemes, a number of surveys have suggested that many are concerned about sharing their data with companies, including loyalty schemes. The surveys reviewed in this report suggested that many consumers are concerned about the sharing of their data with unknown third parties, targeted advertising, and whether their data is being used responsibly. Many consumers are also seeking more transparency and control over the data they provide to loyalty schemes as well as improved data practices, legislative protection and greater individual rights over their personal information.
The terms and conditions of loyalty schemes’ privacy policies often prevent consumers from making informed choices that align with their privacy and data collection preferences.
An imbalance of bargaining power and significant information asymmetries exist between consumers and the major loyalty schemes examined in this report. These are primarily seen in the broad consents that these loyalty schemes seek from consumers about the collection and use of their data, and the vague disclosures they make to consumers about how their data could be used and with which entities it could be shared.
In one example, the ACCC is aware that Flybuys and Woolworths Rewards disclose in their privacy policies that they may continue to track the purchasing behaviour and transaction activities of their loyalty scheme members when they shop at Coles or Woolworths Group stores, respectively, even if they do not scan their loyalty card by automatically linking any payment card used by the member to their profile.
The ACCC’s view is that such practices affect the ability of consumers to make an informed choice that aligns with their privacy and data collection preferences by removing consumers’ ability to control how and when their data is collected. When consumers no longer want to participate in a loyalty scheme they are unlikely to actively cancel their memberships due to the effort and time required to do so—rather, they will simply stop scanning their loyalty card when they shop. The ACCC considers that irrespective of disclosure in terms and conditions or privacy policies of this practice, consumers are unlikely to know that their data is collected and used by supermarkets in cases where they have chosen not to scan their loyalty card.
The ACCC is of the view that Coles, Flybuys and Woolworths Group should end the practice of automatically linking members’ payment cards to their profile.
Problematic data practices, in addition to impacting market efficiency, can cause consumer harm. These harms include decreased consumer welfare from decreased privacy, and risks to consumers from increased profiling and from discrimination and exclusion. More broadly, they may also lead to decreased consumer trust necessary to enable the continued economic and social benefits of personal data flows.
Recommendation 3: End the practice of automatically linking members’ payment cards to their loyalty scheme profile
Coles, Flybuys and Woolworths Group should end the practice of automatically linking customers’ payment cards to their loyalty scheme profile to track their purchasing behaviour and transaction activities when they do not scan their loyalty card.
Recommendation 4: Improve the data practices of loyalty schemes
Loyalty schemes need to review their approach to presenting consumers with information about how they handle consumer data and provide consumers with meaningful control over their data.
Privacy policies of the loyalty schemes examined in this report are opaque and consumers are often unable to make informed choices about, and have limited control over, the collection, use and disclosure of their data.
Loyalty schemes should continue to take steps to address a number of the ACCC’s concerns, including by:
• reviewing their clickwrap agreements for unfair contract terms, including by assessing the potential consumer detriment of unilateral variation terms
• improving the clarity, accessibility, navigability and readability of privacy policies, including by standardising definitions to be consistent with those in the Privacy Act 1988 (Cth) (Privacy Act)
• minimising information overload for consumers by prominently presenting relevant aspects of their terms, conditions and privacy policies to consumers during key interactions
• outlining clearly with which entities consumer data is being shared and for what purposes, and drawing to consumers’ attention how their data is being handled
(including, for example, by providing a prominent notice during relevant interactions with customers)
• disclosing to consumers the sources of third party advertising, the sources of the consumer data used to inform that advertising, and the channels through which they may receive targeted advertising and how their consumer data may be used to generate leads (including, for example, via a regularly updated online notice)
• providing consumers of loyalty schemes with more meaningful controls over the collection, use and disclosure of their data which respond to consumer demands to align the data practices of loyalty schemes with the data preferences of consumers (including, for example, pre-selected and meaningful opt-outs for targeted advertising)
• where there are limitations to the controls (e.g. in relation to collection, use or disclosure settings such as opt-outs) that currently exist, these should be made clear to consumers.
Further, the ACCC’s concerns identified in this report have direct parallels with those identified in the ACCC’s Digital Platforms Inquiry Final Report. These include:
• insufficient transparency and meaningful consumer control over the collection, use and disclosure of consumer data
• a lack of informed and genuine choice for consumers engaging in the digital economy
• a lack of consumer protection and effective deterrence under existing laws governing
data collection.
The ACCC is of the view that the findings from this review of loyalty schemes reinforces the ACCC’s findings from its Digital Platforms Inquiry, and further supports our recommendations for economy-wide changes in relation to privacy law.
Recommendation 5: Strengthen protections in the Privacy Act and broader reform of Australian privacy law
The ACCC’s findings in this report reinforce the Digital Platforms Inquiry Final Report’s recommendations for privacy law reform.
Consistent with the Digital Platforms Inquiry Final Report’s recommendations, the ACCC recommends strengthening the Privacy Act by:
• updating the definition of ‘personal information’ in line with current and likely future technological developments to capture any technical data relating to an identifiable individual
• strengthening notification requirements to ensure that the collection of consumers’ personal information directly or by a third party is accompanied by a notice of the collection that is concise, intelligible and easily accessible, written in clear and plain language, provided free of charge, and accompanied by appropriate measures to reduce the information burden on consumers
• strengthening consent requirements to require that consents are freely given, specific, unambiguous and informed, and that any settings for additional data collection must be preselected to ‘off’
• ensuring that consents are required whenever personal information is collected, used or disclosed by an entity subject to the Privacy Act, unless the personal information is necessary to perform a contract to which a consumer is a party, required under law, or otherwise necessary in the public interest
• requiring entities subject to the Privacy Act to erase the personal information of a consumer without undue delay on receiving a request for erasure from the consumer, except in certain circumstances
• introducing direct rights for individuals to bring actions or class actions before the courts to seek compensation for an interference with their privacy under the Privacy Act.
As well as these recommendations for targeted amendments to the Privacy Act, the ACCC is also recommending broader reform of the Australian privacy regime to maintain effective protection of consumers’ personal information in the longer term. This includes consideration of the current objectives and scope of the Privacy Act, and the introduction of a statutory tort for serious invasions of privacy as recommended by the Australian Law Reform Commission. The relevant recommendations as proposed in the ACCC’s Digital Platforms Inquiry are reproduced in full in appendix F.
The ACCC notes it has undertaken enforcement action in relation to alleged misleading and deceptive conduct or misleading representations made by entities engaged in the digital economy. In particular, in relation to HealthEngine’s alleged sharing of consumer data without adequate disclosure to consumers and Google’s alleged representations around the data it collects, keeps and uses. These proceedings are being defended and are currently before the Court. The ACCC will continue to consider whether any other conduct of entities engaged in the digital economy raises concerns under the Competition and Consumer Act 2010 (Cth) and whether it is appropriate for the ACCC to take enforcement action.
Competition issues
Loyalty schemes have the potential to raise competition concerns. This can occur depending on the extent to which loyalty schemes ‘lock up’ customers and introduce switching costs that increase barriers to entry and expansion for rival firms. If barriers are enduring and induce exit or deter entry, consumers are likely to be worse off.
While not all consumers are active members of the loyalty schemes they belong to, for a significant number of consumers, loyalty schemes can strongly influence their buying behaviour. This can have implications for the ability of smaller companies or new entrants without a well-established loyalty scheme to compete.
These risks to competition could be particularly concerning given the prevalence of loyalty schemes in many concentrated markets in Australia.
Competition issues may arise not only in the primary market in which the loyalty scheme predominantly operates (for example, domestic air travel), but may also be extended to related markets through exclusive partnerships with firms supplying complementary products (for example, domestic airlines and car rental services). The barriers to competition arising from large national coalition loyalty schemes may be particularly high for smaller, regional businesses.
Frequent flyer schemes have the potential to result in significant customer lock-in effects, as has occurred overseas. It appears that Qantas Frequent Flyer might have a significant impact on barriers to entry and expansion for the domestic business traveller segment. However, Virgin Australia has been successful to date in growing its Velocity loyalty scheme and market position and it is not clear that such customer lock-in effects and switching costs associated with frequent flyer schemes have resulted in major barriers to entry in this case.
In the case of supermarket loyalty schemes, while customer loyalty in this sector is currently limited, there is the potential for stronger exclusivity effects to occur in future as the major supermarkets seek to leverage their growing digital and analytical capabilities using extensive customer data.
Coalition loyalty schemes bring together a variety of partners under their programs, which allow members to earn and redeem points with a number of different merchants across the economy. The major coalition loyalty schemes in Australia are likely to assist in maintaining current market structures, while also producing consumer benefits.
The ACCC will consider any competitive effects of loyalty schemes on a case-by-case basis, including with respect to analysing any substantial market power a firm holds, and the height of barriers to entry in a market in competition law matters.
