Australia’s leading campaigner for consumer banking reform, Peter Mair, has fired another shot through Crikey is his push for some long-awaited changes to the global credit card rort.

A Governor under pressure

Predictably, the Governor, and Chairman of the Payments System Board, is under pressure on payment system policy. The Reserve Bank, in December 2000, before this same Committee, undertook to take on the international credit card schemes single-handedly. In doing so the Reserve Bank effectively grounded the ACCC, then labouring without effective legislation in its prosecution, for ‘price-fixing’, of the Australian bank issuers of credit cards. In doing so the Reserve Bank did not then acknowledge its own vulnerability to a legal challenge, and it seems to be still in ‘denial’.

The Reserve Bank could have used its weight to press for effective trade practices legislation and bolster the ACCC – by choosing to go it alone, the Reserve Bank may now be seen as having spent another two years in a bureaucratic quagmire.

Australia still needs effective trade practices law. The current review of the trade practices law will hopefully drive effective legislative reform. Hopefully also the Reserve Bank will condescend to make an effective contribution to the case for this much-needed legislative action — to ensure the ACCC has effective authority over anti-competitive trade practices, including in the banking industry.

A Governor overconfident?

The superficial impression created by the Governor about the Reserve Bank’s authority over credit card schemes, was one of overwhelming, if not overweening, confidence.

In building the impression of an unassailable facade, the Governor remarked on the carefully developed policy work designed to bring the credit card schemes to heel — “Our next paper is actually going to be the outcome. It is not another discussion paper. It is going to say ‘As a result of these discussions, these are changes that are going to be made”.

A little further on in the proceedings the Chairman of the Parliamentary Committee observed that — (once the Reserve Bank decides) “There is no right to appeal at this stage” and went on to politely inquire whether “we” should be concerned about the lack of a right appeal.

On cue, the Governor said he was not really concerned about a right appeal — reiterating his view that “… we have done the most thorough and public examination of this subject that has ever been done anywhere in the world. If you were to have an appeal process, presumably you would have to be expecting someone to be doing an even more thorough and detailed examination than we have done, and I cannot conceive how it would be possible or how long it would take.”

This sense of a Solomon-like, adjudicating umpire operating beyond reproach in splendid bureaucratic isolation was nicely captured in the Governor’s opening remarks to the Committee. Having said about the credit card matter that “…. we will release our findings, some time after the end of June”, he went on to say that ” ….. we at the Reserve Bank have not engaged in public debate on this subject, even though others …. have been quite vocal”. What the Governor did not say was that the only group that had effectively said anything substantial by way of response to the Consultation Document was the banks that have been doing a good imitation of a rabbit in a trap. Nor did the Governor note some timely media editorialising with which he would have been in very grateful agreement.

A little later this sense of benign oversight gave way to a little chagrin — the Governor identified the Australian Bankers’ Association as the self-serving publisher of a letter highlighting the plight of the smaller banks likely to cease offering credit cards to their customers.

The numbers are about to go into the frame

Some big bets have been placed here — and the horses were already in the home straight. The announcement of the Reserve Bank’s decision (“the outcome”) is imminent. And so presumably is the reaction of the international credit card schemes, as represented in Australia by the 4 Pillars.

Even casual observers would be astounded if there were no appeal against decisions of the kind foreshadowed by the Reserve Bank. The Governor may well get the opportunity to appreciate how an appeal might be conceived and how long is the ‘forever’ it would take. Appeals are sometimes about buying time — and continued access to revenues much more than the lawyers charge.

In all the circumstances one would have liked to hear that the Governor has placed a ‘saver’ bet on the commonsense of strengthening the trade practices legislation.

The one platform from which an appeal could not be successfully mounted would be the platform on which the general community stands. In the Reserve Bank we now trust — fingers crossed.

Has there been a ‘ring in’?

While one would like to perish a particular thought, it has tended to recur. It is conceivable, however hardly, that the negotiation process between the banks and the Reserve Bank has entailed some plea bargaining designed to keep the matter out of the courts, but possibly at the expense of allowing some concessions against the broader public interest. Something like this appears to have happened in Europe a year ago when a previously clear intention to substantially outlaw interchange fees in credit card schemes there was abandoned for a draft agreement requiring only marginal and delayed reductions.

At a couple of points in the Governor’s recent testimony there were hints of recanting positions taken in the ‘Consultation Document’ issued by the Reserve Bank last December. There was one unsettling exchange. The Committee turned its attention to the credit card matter and the Chairman sought insights into the way that the Reserve Bank’s thinking may have changed since December. In response the Governor said some of the arguments being put forward now were ‘different’; that “there are some newer ideas which have come up in the second round…” and “…. the differences between the parties will be smaller than when we started”. This exchange begged a couple of other questions that were not asked. We are left on tenterhooks.

There was another cautionary exchange as well. Responding to a suggestion that the banks may have been engaged in price-fixing, the Governor semantically substituted “… the key price in the system is collectively set” and eschewed the term ‘price-fixing’ favoured by the ACCC and its competition authority counterparts abroad when assessing credit card schemes. The Reserve Bank is not into looking back for a number of good reasons.

Among the reasons may be a concern about the possible imposition of penalties designed to reclaim from banks any gains ill-gotten as a consequence of illegal ‘price-fixing’ in credit card schemes. Collectively any such ‘penalties’ for the banking industry would run to enough billions of dollars as to bring a blush to the cheek of any central-bank Governor. The USA courts recently legitimised a retailer class action against bank card schemes where the nominal stakes run to some $100 billion.

Our Reserve Bank would not do the European crawl-back — would it?

Not really comfortable at all

(i) why are credit card schemes profitable?

An underlying unease characterised the Governor’s ‘confident’ talking about payments matters — not least when responding to a question about credit card interest rates being ‘high’. The no doubt careful briefing about credit card transaction schemes being excessively profitable because of the uniform (if not ‘fixed’) interchange fees, tended to get forgotten under pressure of an indirect question. The Governor said “If everyone paid back during the interest-free period, clearly they (banks) would not be making much money out of the credit card system”. Incorrect response.

This response does not appreciate that a preferable alternative to the credit card is a debit card with a line of credit ‘overdraft’ attached. In that event, it is unlikely that the interest rate charged for such personal ‘overdrafts’ would be materially different to that now charged for credit card debt. Practically, the most obvious effect of fewer credit cards (apart from no interchange fees) would be an offsetting reduction in both bank deposits and bank loans, because customers would draw down their transaction account deposits before drawing credit from the overdraft facility. As things now stand with credit card schemes, the customers able to pay back during the interest-free period do so mainly using funds held in transaction accounts on which they are not being paid interest of any consequence. It is ‘tit for tat’. Any alleged revenue consequences for credit card schemes are mainly a consequence of contrived transfer pricing arrangements purely internal to banks artificial accounting systems — accounting systems that have been misused to take various public authorities for a few laps of the dance floor when trying to understand credit card profitability.

Make no mistake, the excessive profitability of credit card schemes reflects interchange fees primarily and other elements of merchant service fee agreements. Lending interest rates are a separate matter.

(ii) the BPay racket

Almost as an afterthought, the very last question on the day was about BPay: in particular — has there been any liaison between the RBA and ACCC with respect to BPay? (– aspects of which the ACCC was said to be looking at).

“It is a good question” said the Governor in an uncharacteristic display of understatement. The next useful remark — ” It (BPay) involves an interchange fee.” — was a formal admission for which we have waited a very long time.

And then it got interesting. The Governor opined that someone had made a complaint to the ACCC about BPay, and “They have to follow up any complaint that is made to them”. He then said, “I have not spoken to them (the ACCC) about it”. Left unsaid was that the Reserve Bank does not have to follow up complaints made to it.

One can only wonder why not. The BPay matter has been simmering for five years. The relevant public policy issues about BPay are almost identical to the features of credit card schemes now agreed to be objectionable. All this has been publicly suggested repeatedly, and in correspondence, for some years. One might reasonably wonder why it has only now become imperative that a complaint be followed up — and by the ACCC. One might equally wonder why some merchant beholden to the banks has had to complain before something is done to redress an objectionable situation long clearly understood to be so in both the Reserve Bank and the ACCC. Equally relevant, there have been repeated assurances about effective ongoing liaison between the RBA and ACCC, reflecting the ‘memorandum of understanding’ on the administration of overlapping responsibilities. What happened to that understanding?

The most sensible perspective on, and result for, the BPay matter is that it is resolved automatically along the same lines as the credit card matter. Nonetheless, for that resolution to be achieved promptly “some time after the end of June”, one might have expected the Reserve Bank to be making some preparation. Some authority obviously needs to make detailed inquiries and propose policies requiring the banks to reform the terms on which BPay is offered to billing companies and participating member banks. I am pleased the ACCC is doing this — at long last.

Surprisingly, none of this urbane commonsense was evident in the Governor’s response — and one regrets the Committee ran out of time to inquire why he “had not spoken to them about it” given that the story had been topical for some weeks.

Perhaps next time the Committee meets with the Governor there will be time for some lingering reflections on BPay. There sure should be. Stay tuned to this story.

End piece

The are a few answers about to be given to some long burning questions about credit card schemes and retail banking policy matters more generally.

Having banished the thought that the Reserve Bank would now back down, or water down, its proposed ‘effective abolition’ of interchange fees for credit card transactions, it is near time for a game of ‘who wants to be a millionaire?’ Among the contestants are many lawyers convinced that justice will not be done until enough lawyers have been paid. Worldwide there are some well known high rollers each with a lazy billion or more per annum at stake, and they want the wheel to spin for a few years yet before the game is up. Bet on an appeal being lodged — and savor the thought of the Reserve Bank Governor going through the process of actually conceiving it.

That said, the more productive game is now likely to be played out before the committee reviewing the trade practices legislation. Given that closing date for submissions is 21 June, one can only pray that the Reserve Bank Governor will make a ‘saver’ submission arguing for effective trade practices law, against the possibility of some misplaced confidence in “our next paper is actually going to be the outcome”.

Someone’s credibility is about to be dented — and may I generously hope that it is mine.

Peter Fray

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