Friday, November 04, 2005

Card Cartels Feel Tremors (CFO | Magazine)

As other countries curb payments system abuses, our policy in this area looks more in need of an overhaul

By Peter Mair - CFO MAGAZINE. November, 2005

The way the credit card game is played is about to change globally. Various initiatives, internationally, are building a consensus that will disrupt the dominant card cartels and allow fairer, more efficient retail payment systems to flourish.

In Britain, the Office of Fair Trading (OFT) has decided that a collective agreement between banks on interchange fees for credit card transactions is contrary to competition policy. Specifically, the OFT said the agreement was being used to recover "extraneous costs" - for providing interest-free credit - not necessary to making credit card transactions.

Excluding any "cost" for interest-free credit from permissible interchange fees would be an important step: most likely, credit cards would then be displaced by debit cards (albeit with a fully priced line of credit attached).

This decision, the same as that initially proposed by our Reserve Bank of Australia (RBA) in December 2001, suggests the RBA was ill-advised a few months later when it changed its stance to let banks factor into credit card interchange fees an unnecessary cost for providing free credit. The consequences of that policy reversal reverberate still, including the present challenge by retailers in the federal court to the RBA plan to substantially cut interchange fees for Eftpos transactions.

In the United States, national retailer groups are taking anti-trust action against banks in credit card cartels: the provocative flavour of this initiative can be savoured at Not surprisingly, the subtext of this lawsuit mirrors references in the OFT decision to "unduly high interchange fees for credit card transactions acting as a tax on retail transactions".

It remains to be seen whether this initiative of US retailers is more political than practical: a successful anti-trust action in the US against the major credit card schemes would, however, be universally acclaimed.

Responsibility for the efficient and fair conduct of retail payment systems in the US has not yet been given to any regulatory agency. There are glimmers of hope in the current raft of Federal Reserve System conferences reviewing the role of credit card schemes and regulatory policy options. It can be an interesting portent when bureaucratic agencies involve international experts in debates that may translate to regulatory initiatives.

As suggested earlier*, the efficiency of retail payment systems globally will be enhanced once the US puts its arrangements in better order.

Beyond our usual reference group of countries, Norway is a leader in building understanding of the economics of retail payments systems and their regulation. In its recent report on payments, the Bank of Norway says a project group is considering whether there is too little competition between international card systems in Norway.

This report foreshadows regulating interchange fees, if competition for the business of acquiring card transactions does not improve, and allowing retailers to surcharge credit card transactions. Credit card usage in Norway is typically incidental to tourism, and the significance of all this may be more about ensuring that card usage remains "minimal". None the less, if a clear statement of the problems with card cartels is posted on the global village notice board by the Bank of Norway, it will be widely appreciated and respected.

Overlaying particular initiatives, the Committee on Payment Systems of the Bank for International Settlements (BIS) is now finalising a report offering general guidance for payment system development**. The BIS proposes a change from the typical situation in which national policy authorities accommodate the debilitating monopolisation that usually passes for the organisation of retail banking and payments, including in Australia. This BIS report begs tough questions of many advanced countries with much policy work to do if these BIS guidelines are taken to heart.

This report is forthright about payment industry structures. The "my way or no way" attitudes of credit-card scheme operators no longer wash. These organisations would be reformed, with open memberships conducive to operational transparency and effective competition and with customers more likely to be paying, explicitly, prices that reflect the cost of providing the payments services they use (but not extraneous costs).

The RBA, has foreshadowed "governance" reforms for Australia's retail payments system*** - laudable aims for a framework better suited to innovation and change, still with incentives to invest and co-operate, but presumably eschewing the typical, exploitative price-fixing.

This hopeful prospect does not, however, reflect in the newly released annual reports of either the Australian Payments Clearing Association, the industry body whose selfless co-operation would be required, or the RBA's own Payments System Board.

Converting good intentions to effective action seems likely to again elude the RBA - and "no one" is yet acknowledging possible implications for Australian policy of either the OFT decision or the proposed BIS guidelines. The situation is unstable.

[source: CFO Magazine]