Peter Mair comments on issues now on the front burner at the Reserve
Bank and with Australia’s major retailers following a “sleeper”
submission made by the Bank to the Australian Competition Tribunal in
the EFTPOS interchange fee matter.
The scene is now set for a substantial power play about the authority to regulate the Australian Payments System.

A submission, in the EFTPOS interchange fee case, which the Reserve
Bank made in April to the Australian Competition Tribunal (ACT) finally
surfaced this week: it was posted without notice in the payments policy
section of the RBA website.

Even though the Australian Competition Tribunal (ACT) recently set
aside a proposed agreement between banks, to set EFTPOS interchange
fees at zero for three years, the Reserve Bank may simply re-impose the
agreement on the community, deciding that it is in the public interest
to do so.

The assertion of the Reserve Bank’s right to do this was staked out at
the start of this sleeper submission – its ‘mandate’; its associated
‘power’ to directly regulate at its discretion and (at paragraph 10) an
inference that the RBA was already well down the track to designation
— a submission from a friend of the court perhaps, but not a humble
one.

Piqued interest?

The submission took a month to surface after it was requested. The
intervening exchanges, about why it was not readily available, piqued
my interest in what it may say.

One might also wonder why the submission was not voluntarily posted on
the RBA site somewhat earlier. The existence of the submission was
revealed (inadvertently or not) in the course of the RBA hearing on 4
June before the Parliamentary Economics Committee (EFPA). On reading
the hearing transcript, my interest was aroused because the ACT
decision was quite critical of the Reserve Bank’s (lack of) input –
and, in particular, did not refer to the RBA submission.

What does it say?

Interest groups will read the submission differently and the reactions of others will be enlightening.

Most of the submission seems designed to establish the authority of the
RBA and a sense of ‘work in progress’ under the auspices of the Bank on
a set of (separate) issues about retail payments systems.
There is a clear endorsement of the proposed agreement between banks to
substitute a uniform EFTPOS interchange fee for the present raft of
bilateral contracts.

Anyway, whatever it said, the Bank’s submission cut no ice with the
Tribunal: it rejected the Banks view of the agreement saying “any
public benefits are clearly outweighed by the detriments”.

Depending on the way others read this sleeper submission, there may be
issues in the preferences and supporting arguments of the Bank that
prompt new lines of argument. Some ‘late’ submissions may be fed into
the current round of consultations on the EFTPOS and ATM matters.

A particular point

The paragraph in the ‘sleeper’ that I highlight (47) reads:

Finally, to the extent that a fall in EFTPOS transaction fees to
cardholders encourages use of EFTPOS relative to more expensive payment
methods such as credit cards, merchants will be better off. Even though
the costs of accepting EFTPOS are likely to rise, the evidence suggests
that for many merchants it will still be cheaper to accept EFTPOS than
to accept credit cards. A movement by customers from using credit cards
to EFTPOS will therefore lower merchants’ costs overall.

True enough perhaps but, because it is the customer who decides which
card to use, the Tribunal rejected the prerequisite that customers
would use EFTPOS rather than credit cards. Even if more EFTPOS
transactions were ‘free of charge’, credit card transactions which are
also ‘free’ offer additional attractions to customers. It will be
difficult for the Reserve Bank to reassert the superiority of its view
over that of the Tribunal.

This dilemma points up problems in the uncoordinated separate regulation of things that are really co-dependent.

The mistake is not so much with a proposal to set EFTPOS interchange at
zero (forever). The key mistake is the earlier decision that let
credit-card issuer banks take substantial interchange fees for credit
card transactions without sound foundation.

A more correct decision about credit cards (and interest-free credit
costs) was promised in December 2001 but was reneged on in August 2002
(without explanation) when the RBA finalised its decision on credit
card schemes. If a more correct decision were now re-imposed on credit
card schemes the matter of efficiency in card use would be
substantially resolved.

It will underscore that earlier error if the RBA now intervenes to set
EFTPOS interchange fees at zero (for three years) and leaves this
superior payment instrument at a continuing disadvantage to the
inferior credit card product.

Any attempt to do this will create a risk that the eventual compromise
demanded by the banks will entail a further shabby deal (after three
years) to set an EFTPOS interchange fee (then payable to card issuers)
as the price of displacing credit cards. In any event, as the Tribunal
said, it will be ineffective in a major purpose.

Ask the merchants if they would like the illusory cost of ‘free credit’
to be removed from the setting of credit card interchange fees — and,
if it were, would they then agree to setting the EFTPOS interchange fee
at zero forever.

There are other issues canvassed in a separate submission posted on the RBA site.

End note

The reform of the retail payments system is in disarray. The prospect
of a High Court challenge to any attempt to overturn the decision of
the Australian Competition Tribunal is a glimmer of hope for the whole
payments system reform process being reviewed and, this time, being
done properly in the public interest.

Peter Fray

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