A member of the Crikey army in Singapore has filed this excellent piece on the outrageous credit card rip-off which are banks are clinging onto with all their might.

What I believe has now been borne out is the extreme lengths to which the banks have been prepared to go, to disguise the truth about credit cards and just how much they mean to them.

Whilst banks have always been eager to ply their customers with as many credit cards as possible, consumers have until recently known very little about just how banks make money out of the credit card racket. The banks have over many years fed credit card holders a rich diet of unsolicited offers (both pre-approved cards and limit increases), loyalty programs, and priority booking schemes, all at apparently no cost to the cardholder. However, the message that bodies such as the Australian Consumers Association have been highlighting now for some time, that consumers are paying for these benefits through higher costs at the check-out, is only just beginning to be heard. The banks have been wildly successful at skewing payment mechanisms toward credit cards, whilst at the same time keeping the obscene levels of revenue generated by the interchange fee out of the public view.

As for the role of regulators such as the Reserve Bank and the ACCC, the banks have been more than happy to engage the best legal minds that money can buy, to tie up the process long enough to simultaneously frustrate regulators and ensure that the interest of the general public in the credit card issue has waned. None of this of course excuses the lack of action on behalf of the regulators. For too long, too little has been done by these bodies to protect consumers from the monumental credit card rort. The result has been decades of the banks gouging money from the credit card schemes with the almost serendipitous coincidence of consumers being unaware of what was going on.

Credit cards, after charge cards are the most expensive means of paying for goods and services. Yet they are now used more often than debit cards, which are up to 5 times cheaper than credit cards. And what’s more, all consumers are bearing this higher cost, not just users of credit cards. The banks have been happy to exploit this lack of price transparency, and have in fact honed this rort into a fine art form by prohibiting merchants from reflecting the higher cost of credit card transactions in prices.

Although the Reserve Bank refrained from moving on interest rates at their most recent meeting, there is a clear consensus that the interest rate cycle has now turned. This does not augur well for Australian households who are now in more debt than ever before. The level of household debt now exceeds income in most cases, and consumers have added $62 billion in debt since the last time interest rates rose back in August 2000. With the average credit card rate around 16%, and the incidence of “revolvers” (those who roll over their outstanding amount) increasing, many Australians will find themselves in difficulty. What this is likely to mean will be more personal bankruptcies. The increasing tendency of people as young as twenty five declaring bankruptcy under the weight of massive credit card debts is set to rise further. The credit card debt cycle is inculcated early in life with 16 year olds gleefully given access to supplementary cards carrying thousands of dollars in available credit. The banks do have a case to answer in these sorry statistics, as they have played an integral role in plying consumers with multiple credit cards whilst at the same time unashamedly skewing payment systems toward the use of these cards. Ask yourself why you get as little as 5 free debit card transactions per month but unlimited credit card transactions? Despite the fact that almost every credit card offering comes with a loyalty program attached, there is just one debit card (Woolworths Ezy Banking) that offers similar benefits.

The Australian Consumers Association in its response to the RBA’s Consultation Document cited a recent unsolicited card offer targeting consumers earning $45,000 p.a for a card with a credit limit up to $25,000. When the Bankcard scheme was first introduced more than 25 years ago, unsolicited cards with pre-approved credit limits were mailed to bank customers at random. And the practice of bribing credit card holders with schemes such as loyalty programs continues to this day. In fact, the banks have become so emboldened over the years, that they now also slug cardholders with an annual fee arguing that increased competition has narrowed their margins to the extent that consumers would need to contribute toward the cost of running the schemes.

What competition is the logical question being asked. Let’s be honest here. The credit card schemes are a club in which membership is highly restricted, decisions are made in complete secrecy and to the benefit of club members (i.e. the banks) only. The banks have protested loudly in the media (without providing any substantive evidence) that the credit card market is already highly competitive. To rational observers who have followed the debate, this argument is more than just a little salacious. The banks have in effect created their own licence to print money and now that the interchange fee rort is being torn wide open, they are seeking to shift the focus to anyone but themselves. In the four party credit card schemes, that means shifting it to merchants, since consumers are off limits, being the sacred cow that generate the billion dollars annually in interchange fees alone for the club members.

The Interest Free Period

Many of the submissions arguing against the proposals (including the Commonwealth Bank’s) make the erroneous connection that merchants are the sole beneficiaries of the interest free period and that they should therefore bear the cost. The argument that merchants should bear this cost because credit card issuers provide, in effect, an outsourced store card is misleading at best. As the Australian Retailers Association quite rightly pointed out, when a customer takes out a mortgage to build a house, the builder is not expected to pay an “interchange fee” to the customers financial institution for the privilege of doing so. The interest free period is a commercial arrangement governed by the terms and conditions between the card issuer and cardholder. Furthermore retailers have acknowledged that accepting the banks credit card schemes is a basic requirement just to enter the consumers’ consciousness. In other words, accepting the major credit cards is necessary for retailers just to get a seat at the table. Saturation marketing by the banks of the interest free period has ensured that this this feature is now so entrenched that consumers have come to expect it. However, the absence of an explicit cost on the cardholder’s statement does not mean they have received something for nothing. The interest free period is in fact paid for by all of us, whether credit cardholder or not, through higher prices. The interchange fees are set (and received) by the “club members” themselves. They alone decide not only how the spoils are distributed, but also how much those spoils should be. As consumers, we have to understand that we are making a direct donation to the banks at the check-out, each time we accept the option to “charge it”.

The Interchange Fee

The banks have been happy to pedal the interest free period so heavily because up until now, they have been able to neatly slide the cost into the interchange fee and have it hidden from the view of consumers. Now that it seems the game is up for the banks, and the costs are to be forcibly broken down, they are seeking to attribute the interest free period as a benefit enjoyed by merchants.

In its response submission to the Consultation Document, the Australian Bankers Association quite neatly sets out the sums for us to show just how much is at stake for the banks if the proposed method of calculation was adopted. At half a billion dollars in annual lost interchange revenue alone, it is easy to see why the major bank CEO’s have been coming out with the sort of vitriol that we have heard in recent months. The interchange fee is a major gravy train for the banks and they are willing to go to almost any extent to protect it.

The banks have been at pains to argue for inclusion of capital costs in the calculation of the interchange fees, to develop and maintain the systems used in credit card administration. Prima facie, this argument has some merit. However, during the 1980’s and early 1990’s, at least two of the major banks spent hundreds of millions of dollars and several years trying to develop retail banking platforms that were eventually scrapped without ever being implemented. Westpac has itself recently scrapped the planned Algorithm credit assessment system it had planned to introduce. It is presumably these types of capital costs that the banks are now keen to have included in calculation of the interchange fee.

Let us hope that after a decade of false starts, the RBA will finally have the fortitude to say to the banks “ENOUGH”. The RBA’s Consultation Document is, in isolation a bold statement and an excellent starting point. It now must be acted upon. If that means consumers having to come to terms with the fact that there is no such thing as a free lunch when it comes to credit cards, then that in itself will not be a bad thing. The banks have been supremely successful in keeping the credit card rort under wraps. It is now time for consumers and the regulators alike to wake up and tell the banks that this is one more of their gravy trains that have come to the end of the line.