The media was generally supportive the Reserve Bank’s credit card reform package this week but not everyone was happy as these three contributions to the debate from Peter Mair, Ian Interchange and Matt Bull suggest.

Australia’s leading consumer banking advocate

Crikey Sealed Section August 28

Asked to give the Reserve Bank a ‘tick’ or a ‘cross’ for today’s long-awaited decision on the regulation of bank credit card schemes, I would ‘tick’ the box marked ‘very cross’.

At the no-ticker heart of the Reserve Bank decision is an about face that has let Australians down. The Reserve Bank gave in to pressure from banks on the setting of credit card interchange fees. The Reserve Bank, a known ‘friend’ of the banks, is now managing the banks’ pricing agreements and the community can’t appeal against those agreements. Conversely the banks threatened to take the Reserve Bank to court if it did not give in. The banks would be laughing — they won the plea bargain. Take no notice of any crocodile-tear posturing over the next few days about a ‘tough regulatory regime’ unfairly forced on banks by the Reserve Bank — no such thing has happened.

Hold onto the thought that the Dawson Committee now reviewing the Trade Practices Act may propose stronger legislation against trade practices that will administered by the ACCC uniformly across Australian industry, including the banking industry. That is the way forward — not special deals for banks by a compliant regulator.

The heart of the matter

In December 2001, the Reserve Bank said: “In the Reserve Bank’s view, since the provision of the interest-free period is a matter exclusively between individual card issuers and their customers, passing the costs of the interest-free period to merchants through interchange fees would not meet the Reserve Bank’s principles for interchange fee setting”

A few months later, in August 2002, the Reverse Bank now says about interchange fees: “The Reserve Bank is prepared to include the cost of funding the interest-free period as an “eligible cost” ….. .”

Talk about an about turn. Given a chance to stand their ground and set a much-needed lead for the rest of the world, our Reserve Bank has caved in to pressure. The European competition authorities similarly ‘caved in’ a year ago. One can only wonder what was said to induce such a complete reversal. The UK’s ‘ACCC’ (the OFT) is yet to make a final decision — having also been inclined against allowing ‘funding costs of the interest-free period’ to be included in interchange fees, the pressure is now on for them to conform to the European and Australian precedent.

This is bad public policy — when the world is crying out for better. Global bad practice is best confronted by global regulatory co-operation. Emerging industrial countries do not need Visa and MasterCard banks pocketing 1% of tourist expenditures or being lumbered with a redundant high-cost addition to their domestic payment systems. Equally the developed world does not want specialist credit-card-only banks at risk of failure when the rug is eventually pulled from under the interchange fee rort.

What’s wrong?

The Reserve bank is about to let banks recover ‘costs’ that they do not incur — that what’s wrong.

For something to be a ‘cost’ to a bank there must be a compensating benefit on the other side. Customers borrowing their own money ‘tit for tat’ get no benefit and neither do banks incur a cost in ‘lending’ these customers their own money — apart from conducting one unnecessary account.

The only customers ‘getting’ interest-free credit are those who pay their credit card account on time in full. Free credit is smoke and mirrors nonsense. In the normal course customers pay their credit card accounts on time by drawing against deposits at banks on which effectively no interest is being paid. In the normal course for most customers there is no net cost to banks of funding their interest-free period — and yet the Reserve Bank proposes to allow a free-period funding cost for every credit card transaction as if the cost were only marginally below the 90-day bank bill rate.

The Reserve Bank offers no explanation for this about-face decision and apparently has no intention of measuring actual funding costs incurred. Rather it retreats to a contrived model that sees bank credit card schemes as some ‘outsourced store card’ — effectively compelling retailers to pay for banks ‘lending’ to bank customers who don’t need to borrow. This perspective suits the banks that now have the Reserve Bank on their side in forcing retailers to collect fees for banks that have no matching cost and of which the customers are unaware.

The credit card product is already an unnecessary and redundant contrivance against the public interest. [The superior modern transaction card is the debit card to which a line of credit could be attached for those needing credit.] The sense of contrivance is now compounded by deeming bank credit card schemes to be a compulsory ‘store card’ arrangement. Under this deeming provision retailers ‘accepting’ bank credit card transactions must pay fees as if retailers incurred costs of borrowing to lend free of charge to customers choosing not to pay by cash or debit card. The mind boggles at how a central banker’s mind will bend to allow banks access to fees to which they are not entitled.

This sense of the Reserve Bank being out of touch when deciding ‘eligible costs’ for inclusion in credit card interchange fees can be further illustrated. The ‘eligible costs’ will include those for ‘fraud’ and ‘ transaction authorisation’ — without any mention of the fact that it is the technologically redundant ‘signature authorisation’ of credit card transactions that gives rise to those costs. If credit cards, like debit cards, used PIN authorisation there would be no fraud and no overdrawing of available funds (or credit limits).

In conclusion

Much of the first-blush discussion of the Reserve Bank’s credit card policy decision may be diverted into pointless speculation about retailers ‘surcharging’ credit card transactions and competition from ‘new entrants’ in response to easier access to the status of credit card issuer. Don’t believe any of it.

Any expressions of interest by potential ‘new entrants’ will be simply ill conceived ambition — but nonetheless prima facie evidence of the Reserve Bank not having dealt properly with the excessive profitability of credit card schemes. Any speculation about retailers ‘surcharging’ and so driving credit card transactions from the market should be taken with a grain of salt for the time being. Only take ‘surcharging’ seriously when you read that someone of the caliber of Bernie Fraser will be coordinating the ‘united front’ development of payments policy matters at the Australian Retailers Association — and that is not likely.

ends

Now, let’s look at another take on the reforms that was sent to subscribers in a second sealed section on August 28.

The credit card wash-up

By Ian Interchange

Crikey’s Banking Expert

Peter Mair is a little bit of a lone voice in slapping down the RBA’s credit card reform package yesterday and banking expert Ian Interchange has put forward this interesting assessment of the proposals.

“The Reserve Bank earns half a pat on the back for its reform of the banking cartel’s credit card rip off. Some loosely connected thoughts about the reforms, and the lobbying behind them, follow.

Interchange

The banks got off lightly. In a critical about face, the Reserve Bank agreed to count the cost of the interest-free days of credit card products as an eligible cost to include in the interchange calculation. Previously, the Reserve Bank had said there were no grounds for doing this.

There are some grounds for taking free days into account, since merchants do obtain a benefit from being able to offer credit on someone else’s balance sheet rather than their own.

The good news for banks is that this means that interchange fees need fall only from 95 cents per $100 to 55 cents per $100, rather than to 35 cents per $100, as foreshadowed by the Reserve Bank last year.

This fall in the interchange fee means that issuing banks (the bank that provides you with your credit card), with lose only about $400 million in revenue rather than $600 million. Don’t worry they will recover a decent slab of this money by racheting up your annual fee, fastening the interest margin and cutting out frequent flyer points, which they regret anyway.

Surcharging

You already pay it in taxis, and you may soon have to pay it elsewhere. Brothers and sisters, processing credit card transactions ain’t free, and while cash ain’t free either, credit card transactions do cost the taxi, cafe51, utility, or whoever, more than they should. The prospect of a surcharge will just make everybody respond to these costs in a more effective manner. Utilities are likely to make you pay more, the local supermarket probably won’t.

Interest rates

The Reserve Bank confirmed what we already knew banks have been gouging you on credit card interest rates for years. When the cash rate rises, credit card rates rise quickly. When cash rates fall, credit card interest rates stay where they are. The only thing is, credit card interest rates will now need to stay higher to compensate for lower interchange fees.

The caveat to all this is that fat interest margins are really only required for cards that offer overly generous frequent flyer rewards. BankWest and St George get by happily today with interest rates of less than 10 per cent and interest free days of 55 days, and neither bank is likely to lift their rates.

Annual fees

Going up from the $200 million they already collect. Rationalise down to one card while you can folks.

Fees for loyalty programs

These might get buried in the annual fee, or charged separately. You don’t get something for nothing.

Loyalty programs

Frequent flyer points stink anyway, and the chase for points is becoming less of a driver in card programs, with card providers emphasising lower rates, lower fees, or everyday rewards as selling points. And since Qantas charges much higher rates than used to be the case, banks can’t afford to include free flights in schemes anyway.

In general, frequent flyer rewards will in future be confined to very expensive credit cards aimed at the rich.

Credit card profits

The market seems to think these are going down, and indeed they are. However, astoundingly, after three years of asking the banks seem not to have been able to tell the Reserve Bank exactly what their profits on their credit card businesses which seems to be tied to a lack of knowledge of what their profits are on any individual business. Nice to see that risk management practices at our banks are so advanced.

The lobbyists

Visa seems to have wasted its money on Michael Yabsley and Robin Harris nd company at Government Relations Australia. After assuring the major dailies that Peter Costello was against the reforms, it turns out Costello was in favour. As for the ABA

The ABA

The Australian Bankers Association is a national embarrassment. What was that David Bell said at the press conference again?

“At this stage we simply cannot make any assessment of what that [the changes] will mean to the credit card schemes, until the credit card schemes have a chance to look at what that means.”

Come on David for half a million a year, don’t you know what the changes mean? Or are you hazy on how the credit card system wortks?

Asked later about his response to some RBA observations (about how crook and corrupt banks are) Bell replies, ‘I haven’t read that part of the report.’

Oh dear. The rest of the world manages to speed read the substantive 47 pages of the Reserve Bank report in the two and a half hours after the report’s release, and the banker’s association chief can’t find time to read the report he’s giving a press conference about.

The whingers

Visa and MasterCard struggled with their lines. Visa tried to say it had nothing to say, then local chief Gordon Wheaton told the ABC what everybody knew already, which is that it would probably sue to stop the reforms.

MasterCard, in a fit of hysteria, said the reforms:

– ‘may destroy MasterCard,’

– ‘would make hundreds of thousands of pensioners and retirees worse off,’

– ‘lower consumer spending’

– ‘and increase unemployment.’

Truly. In the MasterCard press release. Whether MasterCard boss Leigh Clapham or Weber Shandwick are to blame for this nonsense is unclear. In any event, the threat to pull out is a furphy, with spokesman later saying they would stay in Australia.

The shame , and puzzle, is why banks and the card schemes resisted the regulators’ overtures to negotiate these reforms three years ago. The ACCC would have accepted a bank controlled review of interchange, at a higher level than imposed by the Reserve Bank, if only the banks had put in on the table in 2000.

ends

And finally, this is what Matthew Bull had to say out of Singpore in our August 29 sealed section:

RBA fails to go all the way

By Matthew Bull

Singapore-based banking expert

“Stephen,

I think both Peter Mair and your banking expert, Ian Interchange have made fair comments on the RBA’s final report on the Reform of Credit Card schemes. In my view, the final report went “half way” toward fixing the problems.

The trouble is, we had been led to believe by the rhetoric emanating from the RBA that they were prepared to go “all the way”. Indeed, the eye’s of the regulatory world were on Australia yesterday to see if we did have the intestinal fortitude to stand up to both the monolithic credit card Schemes and to the rorting Australian banks that make up these cosy clubs.

On this basis, we failed the test. Instead of leading the world in reigning in the credit card rorters, the RBA has renewed their licences to print money, albeit with slightly more restrictions than that which they currently enjoy. Near enough ain’t good enough though. The RBA had the opportunity to show the way and have largely let it pass.

The RBA has cleverly written the report in such a way that it would seem at first pass to have maintained the integrity of what they had set out to do, but on closer inspection it becomes apparent that back-flips abound. The devil is in the detail. The decision to allow the inclusion of interest free days in the calculation of interchange costs is the most breath-taking of the RBA’s back flips.

It would seem that the ranting and raving of certain major bank CEO’s has paid handsome dividends for them. I said in an earlier Crikey contribution that in my view the interest free period was a contractual matter between the card issuer and the customer, with the customer selecting the credit card features that they considered of most value to them. Sure the merchant may benefit from the existence of an interest free period, but this a coincidental benefit that arises as a result of the customer patronising that merchant and choosing to pay with their credit card. To this extent, the decision by the RBA to allow surcharging is defensible. The out-sourced store card argument was an artificial contrivance that just happened to fit neatly around the arguments of the banks.

I have to agree with Ian Interchange on the issue of loyalty points. You don’t get anything for nothing and the sooner we all come to realise that the cost of these programs is being “slipped in” through paying more than what you otherwise would have to, the better off we will all be. The complete lack of transparency in loyalty and reward programs is distorting the level of prices across the board. As far as I’m concerned, I’d rather be paying less for goods and services, than get a few lousy loyalty points that might one day get me an economy class ticket from Sydney to Melbourne at 11.00pm on a Sunday night – providing of course that the airline didn’t go bust in the meantime.

If it was the intention of the RBA to set an unrealistically “high water” mark and then to settle for a comfortable compromise with the banks, then the RBA can consider the final report a success. However, the past 18 months or more of “regulatory theatrics” could have been left out for the benefit of all. In any event, it seems the issue is far from dead. I’m looking forward to more outbursts from the “option charged” bank CEO’s as they calculate the potential downside to their share prices, even with the limited implementation that the RBA has now proposed. Who knows, perhaps David Bell will have finished reading the report by then as well.

Matt Bull

Peter Fray

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