Saturday, June 24, 2006

"World War on the Cards" (Peter Mair)

We should take our lead from Europe and move against excessive bank interchange fees on credit cards.

By Peter Mair with an Austrialian prospective

For the first time in a decade, the regulation of Australia's card payment system is being openly discussed by a parliamentary committee and further independent review is a possibility. As is usual in these matters, Australia is not alone. Among other reviews under way, the European Commission is looking for best-practice consistency between the different payment systems that will form the single euro payments area.

The scene is being set for reforms to card-payment systems that will eventually touch everyone, from the biggest businesses to the smallest households. One focus is the disruptive effects of excessive interchange fees taken by banks for credit-card transactions.

The European Commission, now seeking submissions to a formal inquiry, has posed questions in the interim with a rhetorical flourish that will be sobering to card-issuing banks and card scheme operators. The Commission's assessment is consistent with that of Britain's Office of Fair Trading, among others inclined this way internationally: in essence, card-scheme cartels are taking excessive profits.

This imposes unjustifiably high fees on retailers, unfairly increasing retail prices paid by consumers. On that foundation, the Commission is considering "cost-based pricing" to correct current distortions to efficiency in retail payment systems.

Looking ahead, the Commission foresees significant structural change in the card-payments industry, not the least of which is compatible infrastructure and technical standards to facilitate innovation and integration of domestic payment systems, about to be closely linked. Some "best practice" pacemakers in Europe see electronic-money cards as an efficient medium for small payments made face-to-face, and they will want an environment conducive to their acceptance.

In Australia, a tentative consensus about some contentious issues emerged in recent open discussion with the parliamentary economics committee. This was a timely contribution from Australia to the unfolding global debate: submissions from major industry players and transcripts of the hearings are available.

Take the proposition of reduced merchant service fees for retailers flowing through to consumers as lower retail prices, for example. The consensus achieved is likely to confront those credit-card operators who contend that consumers in Australia are "no better off" after interchange fees were reduced.

Similarly persuasive was a theme that the 45 per cent of adults without a credit card are disadvantaged when retailer's prices are loaded with costs for others paying with credit cards.
Not surprisingly the hearings revealed a pervasive sense of confusion about the costs and prices applying to retail payment transactions, especially card payments. Prices, whether explicit or hidden to varying degrees, are considered confusing to consumers, not least the purchase reward schemes and compulsory free-credit that are often of no practical benefit to cardholders.

Across retail payments systems generally, cost-price relationships are randomly distorted by cross-subsidisation arrangements, funded partly by bartering interest-free deposit balances for free transactions and otherwise by "all you can eat" schemes - allowing customers unlimited transactions free of additional charge, after paying fixed annual or monthly fees.

Against this background, a nominally plausible consensus for setting "cost-based" interchange fees wilted under ever more technical and fanciful arguments about which costs, including notional costs, might be deemed eligible for inclusion. There were also glimpses of relief. One was Britain's proposal to regulate against any allowance for interest-free credit, considered discretionary and thus "extraneous".

Similarly, the continuing discretionary exposure of credit card transactions to "signature fraud" disparages claims to include fraud costs. Ultimately if there were to be little in the way of eligible costs remaining to be recovered as "interchange fees", the sensible judgement may favour simply setting interchange fees to zero, at least for mature network payment schemes.

More generally some "red herrings" that typically colour credit-card policy discussions were more or less laid to rest. One contention, that retailers themselves should surcharge or discourage credit transactions, is now conceded to be an unlikely expectation. Similarly, lingering issues of regulatory equity schemes, such as American Express and Diners Club, operating without interchange fees may be better addressed by taxing as personal income flyer-point rewards left in the hands of employees that accrue from spending on business accounts.

The next steps for Australia to foster efficiency and competition in its retail payments systems will depend on conclusions the parliamentary committee may draw from its inquiries and related recommendations it may put to parliament in due course.

Hopefully, there will also be some cross-fertilisation of regulatory thinking across different countries, coming to grips with issues and sharing considerable common ground. There is also the sensible prospect of global linkages with Australia that are conducive to seamlessly efficient and unquestionably safe cross-border payments. In time those links will embrace Eftpos systems and the debit cards, with lines of credit and remote-payment capabilities, which will displace conventional credit cards.

[source: Peter Mair]