Peter Mair, who spent decades with the Reserve Bank, is a regular Crikey contributor and someone who has done more than anyone else in Australia to bring the banking cartel to account. This is his early reaction to the landmark report into credit card rorts released by the Reserve Bank on Friday.
The report warrants careful perusal and thoughtful responses. Nonetheless I had a couple of quick reactions on the day it was released.
In considering your reaction to the report, bear in mind that the direct costs of producing it were substantial for the Reserve Bank and all those involved in writing and presenting their submissions.
On a quick read, there is nothing much of practical consequence by way of conclusions and recommendations that could not have been determined equally confidently some years ago. And bear in mind also that the benefit to the banks of the delay in developing a proper response to their collusive price-fixing behaviour runs to some $1 billion per annum in Australia (and some $A50 billion worldwide).
Another six months, another $500 million for the banks, is in prospect. Even then the banks are very likely to appeal any actual decision in the courts where they will be trading a couple of hundred thousand dollars a week on big-hitter lawyers for the benefit of keeping $1 billion per annum.
This process is an absolute farce. It does not reflect with credit on the Reserve Bank or anyone else involved. The Parliament needs to act decisively and stop it.
Nothing has actually been done or is about to be done
The community has reason to object to a public policy process that is so clearly ineffective.
The process of reviewing bank credit card schemes has been on foot for some 4 years that the RBA openly acknowledges and some five years prior to that that it does not. During this time nothing practically effective has been done to rein in the excesses of credit card schemes — indeed, on the contrary, on the RBA’s own admission the ‘problem’ has flourished to the benefit of the banks and the detriment of the general community.
Even now the prospect is for even further delay, for further consultation before any practical step is taken. And, as noted, it cannot be ruled out that any attempt by the RBA to actually do something will not be frustrated by the banks using the avenues of judicial review open to them (as they did to frustrate the ACCC).
This situation is entirely inappropriate and unsatisfactory — it reflects shortcomings in the development of effective public policy to deal with price-fixing by banks against the public interest.
The onus is surely on Parliament to deliver effective trade practices legislation.
Banks seem to be special
One might wonder if public policy would tolerate collusive price-fixing arrangements, modelled on the kind banks are now engaged in, in a range of other industries. Other industries that might ‘benefit’ from uniformly pricing elements of ‘networked’ distribution arrangements include those with largely homogeneous products and services — for example, ready-mixed concrete; armoured-car cash distribution; courier services etc.
One can be fairly sure that such collusive price-fixing would not be tolerated — one fairly wonders why banks alone are permitted to do this.
To get there, one wouldn’t start from here
The proper pursuit of efficiency in retail payment systems would not start as the Reserve Bank did, from a presumption that credit card schemes have a durable place.
Ideally, one would like to think that the Reserve Bank and its Payments System Board would pursue its objective of efficiency in the retail payment system somewhat independently of established arrangements. One would not, for example, expect the Reserve Bank to be facilitating the growth of the cheque payment system, because cheques are patently inefficient; one worries that Reserve Bank’s easy access to profits on the currency note issue discourages it from fostering more efficient electronic-money substitutes. The potential worth of policy reviews is devalued if the review process ‘starts from here’ and supports the status quo.
In this vein, one would not expect the Reserve Bank to presume, as it seems to have done, that credit card product has a durable future. Rather one might have expected the Reserve Bank to assess credit card schemes in the broader context of transaction card arrangements generally, including debit cards.
A crucial question — ” why a line of credit is not attached to debit cards?” — does not seem to have been posed. The outcome of this credit card study would seem to have been prejudiced by constraining the context of the review and only asking questions about credit card schemes.
This artificially constrained ‘credit cards only’ focus not only offends commonsense, it ignores what appeared to be a fairly clear direction from the parliamentary committee to which the Reserve Bank is apparently accountable. (Equally important, will be the press reports of the way in which the Treasurer or his ‘agents’ may have been encouraged to lean on the Reserve Bank in a meeting with Visa representatives just prior to the election.)
No clear practical import of substance
The principal recommendations of the report were widely ‘leaked’ in advance of the formal publication of the report. They included ‘opening up’ participation in credit card schemes to ‘others’ and abolishing the requirement of the scheme promoters that retailers do not (sur)charge a different price for credit card transactions.
Notwithstanding the ‘weeping, wailing and gnashing of teeth’ that these recommendations are likely to engender in the weekend press, there is no reason to expect either recommendation to have any meaningful, substantial practical impact if indeed the proposals ever come to pass.
For one important thing, all those ‘non-bank’ institutions said to be knocking on the door to enter credit card schemes have had their chance for past two years or more and not taken it. Some two years ago APRA amended the ownership rules for banks so as to allow a non-bank to wholly own a banking institution subsidiary that would automatically have been an eligible issuer of Visa MasterCards. None of the non-banks nominated as potential members of credit card schemes have shown any inclination to do so. And none will — the barriers to entry to retail banking and credit card schemes have nothing much to do with the rules of the Visa MasterCard schemes. The Reserve Bank never talks about the unwritten barriers to entry into banking that are effectively administered by the Australian Tax Office.
For another thing, as reported in volume II (the commissioned report) the overseas experience is that where retailers are permitted to charge extra for credit card transactions they usually don’t. At best the ability to surcharge will protect retailers from exploitation by customers seeking to pay large bills by credit card — my expectation would be that the option of surcharging would only be taken up for bill payment transactions over $1000.
In short, the main ‘recommendations’ are unlikely to have any practical substance — but that will not stop extensive discussion in the media as if they might have practical substance. Stand by for pages of nonsense.
The more important “recommendation” about making transparent the setting of credit card transaction interchange fees has the appearances of a useful process but until this process, and the eligibility criteria, are more fully explained, I am reluctant to draw any comfort from them. In any event when, last year, the Reserve Bank assessed credit card schemes in the broader context of transaction card payments generally, it could reasonably have been inferred from that report that there was no place for uniformly fixed interchange fees for either credit card transactions or debit card transactions.
The fact that the Reserve Bank envisages a process for legitimising interchange fees for credit card transactions at all is, in the broader context, questionable.
But that is where you get to if you start from here and are determined to do ‘circle work’.
Times up for quick reactions.
Peter Mair can be reached at [email protected]