RBA is losing minds in credit card battle

Originally by Mark Westfield in The Australian, 19 March

No longer, on this issue at least, is it primarily concerned with system stability, but with making noises that it is acting for consumers. In a perverse way, its proposals will actually leave consumers worse off.

The RBA appears to be more concerned about retailers than consumers and this gives a clue as to the interests which sparked this inquiry into interchange fees, namely Coles Myer.

While the RBA's main target is the interchange fee the banks charge themselves to use each other's electronic funds transfer systems, the RBA appears to be running another agenda and that is to slow the use of credit cards.

Its December 2001 Consultation Document refers a number of times to "excessive card use" and the declining household savings ratio. If that is of concern to the RBA, then it should tackle the issue separately. It is of peripheral relevance to interchange fees.

The RBA is bracing itself for a fight with the banks and is going to extraordinary lengths to win public backing for its showdown by hiring the public relations firm Gavin Anderson and the firm's Canberra lobbyist Jonathon Gaul.

The banks are using their own lobbyist, the Australian Bankers Association, and one retail group, the Restaurant and Catering Association, is using the Sydney-Canberra firm of Jackson Wells Morris.

The danger is that the debate will be sidetracked by spin merchants and that people intended to be protected by this elaborate exercise, consumers, will end up being the big losers. If the RBA holds firm, then the obvious cost that consumers will pay will be the loss of the credit-free periods on cards and reward points systems.

Consumers have a choice of taking no-frills cards, such as Ezy Bank card offered by Woolworths and the Commonwealth Bank, which charge lower interest rates. Card holders who manage their credit using the interest-free period and like reward points will lose out, if the RBA holds its ground.

There is no guarantee either that retailers will reduce their prices as a result of a reduction in the interchange fee and a flow-through fall in the merchant fee. The RBA admits it would have the effect of "tempering increases that otherwise might have taken place".

Not surprisingly, the banks are resisting the RBA's new role as a price setter of card services and would-be consumer advocate. They claim that the central bank is acting outside its legislative power Continued - Page 20 From Page 19 and are signalling that they will challenge the RBA in court if it tries to impose the regime it is foreshadowing in its consultative document.

Banks and card groups - Bankcard, MasterCard and Visa - charge an interchange fee averaging 0.95 per cent. The RBA is hinting that, based on its estimates of costs of transactions, it would want the fee to be 0.3 per cent, or 78 per cent less.

In their least guarded moments, the banks would probably concede privately that there is room for negotiation here but nothing like the reduction hinted at by the RBA. They may, and should perhaps offer to, accept an average fee in line with the 0.8 per cent which the European Commission has imposed on electronic card transactions in Europe.

The RBA's consultation document dwells at length on the plight of retailers, claiming they derive no benefit from the card schemes, using the logic that some retailers who accept cards may benefit at the expense of those who do not. The benefits pass entirely to consumers, so the RBA says. What is wrong with that? The winners from the RBA's regime will be Coles Myer, Woolworths and David Jones who have in-house credit cards which charge higher interest than Bankcard, MasterCard and Visa and don't have to bear the cost of maintaining systems to transfer money to other institutions.

They get the cash directly.

The closed systems - Amex and Diners - charge double the merchant service fee rate of the open cards and for that reason many retailers won't take them. Yet they will be the winners from this review.

Of the closed Amex and Diners systems, the RBA says little. Perhaps they are a little too similar in operation to the in-house retail systems to be touched.