How Reward Points Work: Retail, Interchange, Bonus Points, Exclusions

Understanding how points are calculated allows you to avoid pitfalls, but also to exploit certain flaws related to the parameters allowing calculations.

The transaction you just made at IGA with your BMO AIR MILES Mastercard may seem simple, but IGA and BMO do not have the same information to credit your AIR MIL ES miles and the number of miles credited will likely be different on your two statements.

In this article, I want to show you the nuances to know about points.

Whether you buy in-store or online, when a merchant credits you with points for your purchases, they have a lot of information about what you’ve bought, starting with the information about each product on your bill.

Since they have access to the transaction details, a merchant can therefore exclude certain lines when calculating the number of points obtained. Often, the same exclusion rules will also apply to senior and employee discounts.

The exclusions are something that you have to watch out for, even if you have to go and read the fine print. There are several categories of exclusions, each with its own history and rules of application.

Some products cannot be discounted by laws or regulations. This legally prevents the merchant from giving you points on these products.

Merchant may also specifically include or exclude product categories/ranges.

The main reason is that the business does not make enough profit margin on the sale, for example public transport tickets, stamps, etc.

Example: Aeroplan and Amazon

For a merchant, there is a big difference between selling a gift card from another banner (e.g. Netflix, Amazon) and a gift card from their own banner.

In the first case, we are talking about a product like any other, the store will make a margin (between 5% and 15%) when selling.

In the second case, the store will not make any money on the transaction, it will simply receive a payment from the customer that it will exchange for a gift card and place this amount in trust (the clearinghouse).

When the customer uses the gift card, the merchant will make a profit on the sale of the goods and will be paid with the money in the trust.

This is why, in most cases, the two purchases are not treated in the same way.

Finally, the merchant may decide to exclude the transaction entirely under certain conditions. For example, if a coupon or another promotion is used, or if the transaction is already subject to an invoice reduction such as an employee purchase or senior discount.

This is the case for Uber Eats when using the Aeroplan eBoutique.

Example: Amazon and Uber Eats

Base points are calculated on the transaction once exclusions are removed, and once discounts are applied (i.e. promotions, employee discounts, etc.).

The amount calculated this way will be used to establish the number of points you will receive for the transaction according to the scale pre-set by the program for this merchant.

Each loyalty program has its own currency and, as with foreign currencies, each currency has its own value: for example, a PC Optimum point does not have the same value as an Aeroplan point or an AIR MILES mile.

So each program will award points based on the currency value it uses.

Some programs will have a very strong currency and only offer 1 point for $10, $20 or $25 while other programs will offer a weaker currency and even give 100 points for $1.

Each program (and merchant) has its own rounding method when calculating the number of points you should receive.

The majority of the programs will however use a rounding down and therefore to the advantage of the merchant.

For example, if all your purchases add up to $39.99 and the basic bonus is 1 point/$1, you will get 39 points, whereas if the accumulation is 1 point/$20, you will only get 1 point for this transaction.

And if your transaction is only $19.99, in the first case, you will receive 19 points while in the second case, you will receive no points.

The merchant may decide to apply a bonus (often temporarily) to the entire transaction, to a category of products in the transaction (e.g. cosmetics) or to specific products.

These bonus points are often linked to a specific campaign, and for campaign analysis and investment reasons, they are often counted separately from base points.

When the points on a transaction (or a category or a product) are multiplied, the principle is always the same: there is what the advert says (10x the points) and how this will be translated on the statement, i.e. the base points and a bonus to get 10x (so 9x the base).

For example: if we have a $100 transaction and the regular earning rate is 1 point/$, then we will see on the statement 100 base points and 900 bonus points for a total of 1,000 points (i.e. 10x the base total of 100 points).

There are also promotions in the form of bonus points on specific products (e.g. 5 AIR MILES bonus miles). In this case, the bonus is triggered when the specific product is purchased and is added to the points earned on the total transaction.

There are also some promotions that will be triggered after a certain purchase threshold, the goal always being to get you over that threshold.

Example: if the average grocery cart is $80, why not force the purchase of a few more products by offering a few extra points when the customer exceeds $100.

In the case of credit cards, the “product” on which points are given is not what is in your shopping cart but the “payment solution”, i.e. what the merchant will pay as a fee so that he can collect the money from the transaction: interchange fees.

Let’s dispel a myth right away: in Canada, the credit card issuer does not have access to the contents of the shopping cart (the “Line Item Detail of Purchase”).

Although Level 3 processing exists in theory, it does not apply to our Canadian credit cards (unlike American credit cards).

Contrary to the merchant’s part, when calculating a transaction, the whole transaction is either eligible or not.

So, for example, at the restaurant, it is the total amount paid, including taxes and tip, that is sent to the card issuer and on which the calculation is made.

For the same reason, you can earn points via your credit card on the purchase of medication even in Quebec.

Often certain types of purchases will earn you extra points.

To do this, the issuer will use the information it receives from the merchant to determine if the transaction allows for additional accumulation (2x, 4x, 5x) whether it is for a specific merchant (Apple, Amazon, Expedia, Petro Canada, Ultramar, Walmart, Marriott, etc.) or a type of business (Grocery, pharmacy, gas station, Traveletc.).

The Merchant Category Code (MCC) is a standard for categorizing what a business sells.

MCC codes exist in two forms: codes identifying the category of the store (5912: Pharmacies) or in the travel field, codes with the name of the company directly (3007: AIR FRANCE).

There are about 1,000 different codes to classify businesses. For example, there are two codes for restaurants (5812: Food Service Establishments, Restaurants and 5814: Fast Food Establishments) and a specific code for Bars (5813).

The bonus is therefore calculated at the merchant level, which is why purchasing a litre of milk in a pharmacy is coded as “Pharmacy” and purchasing a toothbrush in a grocery store is coded as “Grocery”.

Experience helps you learn the categorization of a store, but there are some tricks to help.

First of all, Visa cards.

Even though these cards only give codes for the Visa network, normally the store is coded identically for Mastercard and American Express.

You can also use American Express cards which are much less precise in categorization but give a good idea for example for restaurants or travel.

Classification information can also be found on credit cards statements when the purchase is charged to the account.

Example with CIBC:

The calculations are not perfect and are based on the information available from the merchant, card issuer or portal.

As the systems process millions of transaction lines per day, this results in “errors”, some of which benefit the merchant and some of which benefit the customer.

Errors that benefit the customer result in losses to the program, but those that benefit the merchant result in dissatisfaction and possibly customer churn, and that is a big risk for the card issuer.