Is the RBA incompetent and trying to be too clever with interchange fee regulation?

[ermen]

Following my not so successful post on the Australian government (foreign affairs) for not negotiating better visa free access for its citizens, it is time to turn my guns to the "independent RBA" over the recent changes to interchange fees.

Here is the core argument:-

1. Logically, there was no need to impose a cap on interchange fees, given that merchants were free to pass on the cost of already processing credit card transactions to consumers. Obviously, there are people here, on this forum who value the extra points their cards gave them, and were willing to pay a surcharge in exchange for more points.

2. Some have argued that the RBA sees credit cards as a payment mechanism, and it should not have any bells and whistles attached. We cannot dispute that. But the counter argument is that if, RBA wants to develop the electronic payments systems, it already has debit cards which are already low fee, and work virtually the same as a credit card (except for the credit limit). A credit card is a separate (premium product), and consumers (and merchants) should be free to choose

3. Some have argued that making interchange fees lower, will lower costs for everyone. Is that true? Anecdotal evidence, suggests that the delta will simply be kept by the merchant. In any case, there already is a credit card surcharge mechanism in place. Is that not working? Even in this article below, there is no conclusive evidence that lowering interchange fees brings down cost for consumers

http://www.gao.gov/new.items/d1045.pdf

So, it does look like the RBA is trying to be too clever, and creating a situation which is a lose-lose for consumers.

But unlike the government and the Minister for Foreign Affairs, whom you can kick out at the next election, I do not believe it is possible to "drain the swamp" at the RBA.

I have sympathy for the argument from a consumer welfare economics perspective, in so far as credit card fees are a "non-trivial" transfer of welfare from low-income to high-income people (per wikipedia), but then again, I feel this can be eliminated via the credit card surcharging mechanism we have in place today

 

[ozdenis]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

Following my not so successful post on the Australian government (foreign affairs) for not negotiating better visa free access for its citizens, it is time to turn my guns to the "independent RBA" over the recent changes to interchange fees.

Here is the core argument:-

1. Logically, there was no need to impose a cap on interchange fees, given that merchants were free to pass on the cost of already processing credit card transactions to consumers. Obviously, there are people here, on this forum who value the extra points their cards gave them, and were willing to pay a surcharge in exchange for more points.

2. Some have argued that the RBA sees credit cards as a payment mechanism, and it should not have any bells and whistles attached. We cannot dispute that. But the counter argument is that if, RBA wants to develop the electronic payments systems, it already has debit cards which are already low fee, and work virtually the same as a credit card (except for the credit limit). A credit card is a separate (premium product), and consumers (and merchants) should be free to choose

3. Some have argued that making interchange fees lower, will lower costs for everyone. Is that true? Anecdotal evidence, suggests that the delta will simply be kept by the merchant. In any case, there already is a credit card surcharge mechanism in place. Is that not working? Even in this article below, there is no conclusive evidence that lowering interchange fees brings down cost for consumers

http://www.gao.gov/new.items/d1045.pdf

So, it does look like the RBA is trying to be too clever, and creating a situation which is a lose-lose for consumers.

But unlike the government and the Minister for Foreign Affairs, whom you can kick out at the next election, I do not believe it is possible to "drain the swamp" at the RBA.

I have sympathy for the argument from a consumer welfare economics perspective, in so far as credit card fees are a "non-trivial" transfer of welfare from low-income to high-income people (per wikipedia), but then again, I feel this can be eliminated via the credit card surcharging mechanism we have in place today

I totally agree - the RBA has caused huge damage, increased costs & inconvenience to all users of credit cards - for reasons I am afraid I do not understand. I & my wife usually use Amex cards. They have always had higher fees with a lot of merchants but we have been able to pay for supermarket & travel purchases through our travel agent, with NO Amex fees (I admit these have been the main sources of our points accumulation as we are retired & only do personal travel). No longer in the case of our travel agent. Now fees are imposed, not just on Amex, but on ALL brand cards. With some merchants we were able to us a Qantas Debit Card with no fees. No longer. Even Visa/Mastercard debit cards as well as well as credit cards, now have fees imposed by many merchants. What the hell has the RBA achieved by its actions. Also we now find credit card annual fees being increased & less points earned on most cards after the RBA action, Visa, MasterCard included. All for what???

Not the first time the RBA or other bodies like the Competition watchdog etc have introduced some policy that is supposed to be of benefit turns out to impact adversely on the population.

Can someone please explain to me how I & other card users are supposed to supposed to benefit from these actions. I certainly can't see how my costs are being reduced. From no fee to any fee is not a saving, it is a cost increase.

 

[opusman]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

My assumption is that this has been driven by someone at the RBA with a personal vendetta against credit cards. Perhaps he got turned down for a credit card once and has never gotten over it.

It does bugger all for consumers, that's for sure.

 

[ozdenis]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

My assumption is that this has been driven by someone at the RBA with a personal vendetta against credit cards. Perhaps he got turned down for a credit card once and has never gotten over it.

It does bugger all for consumers, that's for sure.

Thank you opusman - I have found someone who agrees with me. I was worried I was not very intelligent because I could not see any "benefit".

 

[woodyren]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

Thanks for backing up my assumptions. I have been thinking since the interchange rate regulations were first floated on what benefits they would have. I cannot think of any for the consumer.

 

[muppet]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

I totally agree - the RBA has caused huge damage, increased costs & inconvenience to all users of credit cards - for reasons I am afraid I do not understand. I & my wife usually use Amex cards. They have always had higher fees with a lot of merchants but we have been able to pay for supermarket & travel purchases through our travel agent, with NO Amex fees (I admit these have been the main sources of our points accumulation as we are retired & only do personal travel). No longer in the case of our travel agent. Now fees are imposed, not just on Amex, but on ALL brand cards. With some merchants we were able to us a Qantas Debit Card with no fees. No longer. Even Visa/Mastercard debit cards as well as well as credit cards, now have fees imposed by many merchants. What the hell has the RBA achieved by its actions. Also we now find credit card annual fees being increased & less points earned on most cards after the RBA action, Visa, MasterCard included. All for what???

Not the first time the RBA or other bodies like the Competition watchdog etc have introduced some policy that is supposed to be of benefit turns out to impact adversely on the population.

Can someone please explain to me how I & other card users are supposed to supposed to benefit from these actions. I certainly can't see how my costs are being reduced. From no fee to any fee is not a saving, it is a cost increase.

Just because you didn't see a line item on your invoice saying "interchange fee" doesn't mean you weren't paying it.

In fact everyone was paying more for every item whether they used a credit card or not. Now only those wasting money on low-value add financial services are the ones who have to pay for it.

Overall you'll probably save money just buying AA miles rather than having every purchase cost an extra 1.5% to claim points.

 

[Moopere]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

Here is the core argument:-

1. Logically, there was no need to impose a cap on interchange fees, given that merchants were free to pass on the cost of already processing credit card transactions to consumers. Obviously, there are people here, on this forum who value the extra points their cards gave them, and were willing to pay a surcharge in exchange for more points.

Yes and no in my opinion. Certainly insofar as a lot of AFFers would be concerned they have their eye on the main game which is the obtaining of points by whatever means so long as its financially viable to do so - ie, surcharge becomes too high and the 'game' is no longer viable.

Friends and colleagues who are not 'game' players like many at AFF (me included) see the CC surcharge as a cost of doing business, to them. They pay it, and are seemingly happy to pay it, for the convenience of using a CC - this is from folks who either don't care about points but get some anyway or even from those who have cards which don't earn at all.

If I didn't 'win', at least in my own perception, by using cards to gain points then I'd stop using them and go back to cash - more on this in a moment.

2. Some have argued that the RBA sees credit cards as a payment mechanism, and it should not have any bells and whistles attached. We cannot dispute that. But the counter argument is that if, RBA wants to develop the electronic payments systems, it already has debit cards which are already low fee, and work virtually the same as a credit card (except for the credit limit). A credit card is a separate (premium product), and consumers (and merchants) should be free to choose.

Indeed. Freedom is good.

But remember back to when CC's started to really appear on the market in a big way, at least in Australia. Their differential from the then prevalent 'bank card' was perks of one type or another. Once frequent flyer miles entered the game they gradually took over as the main perk. The whole thing was meant to be a marketing ploy, come to my retail shop, use your whizz bang new CC and you'll get something back, the something has changed a fair bit over the years, but its now fully in the realm of loyalty points earning. So, it was a form of incentive to buy your goods at certain retailers rather than others. At this time surcharges were illegal (from memory) or at least certainly not prevalent.

These days aside from the 'convenience' of having an unsecured line of credit, theres almost no point to the commonly available CC's without loyalty miles - at least when you compare them to regular bank cards, debit cards as we call them now.

3. Some have argued that making interchange fees lower, will lower costs for everyone. Is that true? Anecdotal evidence, suggests that the delta will simply be kept by the merchant. In any case, there already is a credit card surcharge mechanism in place. Is that not working? Even in this article below, there is no conclusive evidence that lowering interchange fees brings down cost for consumers

no, indeed, and again, we've all collectively forgotten the whole point of the premium credit card. Its meant to be a marketing point of difference for merchants. Consumers shouldn't even care less and there certainly shouldn't be a surcharge of any sort, that the consumer sees. Costs associated with cards should be 'cost-of-business', along marketing lines, for businesses that accept them. You are saying to consumers, come here, buy your stuff from me with the easy convenience and 'perks' of using your credit card. The consumers come, buy your stuff and you (the merchant) pay the card company a percentage for assisting you to make that sale. If companies/businesses don't believe that they are getting value out of this marketing 'tool' then they are certainly free to accept only cash. Just as any business is free to advertise or not ... its entirely up to them.

I have a point though.

What I think we're seeing here is tactical action against loyalty points. I don't think this is all about making things cheaper for consumers. The ATO has been 'hands off' loyalty points since a couple of test cases back in the nineties (I think ... memory fading). They see this whole game as a black economy, one that "should" be taxed. Now of course at face value the RBA and the ATO are not linked, but I also don't think there is a chinese wall between them either .. heh.

The introduction of allowing surcharges on card based payments was probably meant to slow down the free exchange of loyalty points. I'm sure it had some effect, but not the one they were after. So, a different approach would be to make the model nonviable. True enough, the response from society as a whole might be to essentially go back to the original model, that points, and their cost to those giving them out, becomes, again, a cost-of-doing-business, coming directly out of marketing budgets, its hard to say. We might also see consumers 'wake up' and largely stop using cards altogether - there is already a substantial swing back to the cash economy - the RBA has had to print more money than expected for the last two years I believe, possibly longer, bucking the trend as cash transactions were on a long and slow decline.

Its worrying the ATO enormously. Cards and electronic money transfers are lovely - easily tracked and to a large degree, easily taxed as a by product. We'll have to see how it pans out over 5-10 years or so.

For mine, decisions like this are easy and purely financial. If it becomes more expensive for me to gain points than my perception of their worth then I'll stop doing that and go back to cash. Cash in and cash out served me perfectly well for decades before the prevalence of CC's and points I will miss the game though heh.

 

[albyd]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

The way I see it, with the proliferation of cashless payments, the RBA doesn't distinguish between the brand on your card as technically, payments are processed using the same 'pipe' and the 'payment' function is pretty generic.

The RBA is trying to change the price signals to consumers that have led to the dominance of the card schemes at the expense of 'cheaper' systems like eftpos being non-competitive as reward points have changed consumer behaviours (and likely sped up the change to a cashless society).

While the RBA's thinking is 'logical', I think they have overreached with the latest round of changes.

Outside of the 'payment' function, CCs (as the original form of cashless payment) are a fundamentally different product to straight payment cards like eftpos or scheme debit cards. They have more features like a credit line and insurances, etc. They cost more to service and there is a heightened possibility of credit losses (debit cards can't lead to bad debts - can't spend what you don't have on deposit). The rewards points are just an added cost of doing business for the issuers just like merchant fees are a cost of doing business (I get the impression these won't be falling for retailers as a result of the latest changes and therefore the surcharges will continue to stand) for retailers who see the benefit of accepting payment cards.

I think we should let competition do its thing (anyone remember Bankcard?) and choose the winners. If eftpos cards were so great, then they'd be able to do online and contactless payments. They don't have the funding to develop this - as much as they've kept promising it. There are eftpos equivalents offshore and they can't do international online payments. The main card schemes have been at it for a long time and it is incorrect to ignore the investment in innovation they have made over time which has brought us some of the features we now depend on like online and contactless payments. These things aren't free to develop. Yes, they've had interchange to fund it but it has to come from somewhere. They still need to be mindful of competition - that's why cab payments now cost 5% not 10% and are likely to fall further as a mobile eftpos terminal isn't a unique offering when everyone has one.

I think the system we had until recently where merchants who thought they could try it on and surcharge was a fair medium where price signals to favour non scheme cards were fairly prevalent. The new changes go too far - I think consumers should be able to decide whether they want to 'pay' for their rewards points rather than still be surcharged and get bugger all going forward.
For those who are looking for a balanced view of this matter, I think this is as balanced as I can be - after all we're members of a travel forum and Credit Card rewards are a central part of this.

Yes, we're having our toys taken away from us, but we don't have to like it.

 

[ermen]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

Someone mentioned that to the RBA, the cost of a transaction going down the "Credit Card Pipe" is the same, and there shouldn't be a difference between cheap and expensive cards (i.e. what happens now). My argument against that is look at the phamaceutical industry (OK not under the RBA's purview, but who knows whether they want to get their tentacles into the system ). A box of Coles Paracetemol costs what $0.70, a box of branded Panadol - is what $3.00? Don't see anybody complaining there. Again, goes back down the branding perception.

If RBA is more concerned about transfer of wealth from lower income to higher income households, a more elegant method, and as these economists will say "a Pareto-efficient method" would be to call for mandatory surcharging on credit card payments. then, those who truly value the benefit of the points (and other perks), will be paying for them, without a cross subsidy from cash / debt card users.

Of course, there is still the issue of non-premium card issuers, subsidising premium card issuers. But, if a non premium card holder doesn't see any value out of the increased, they are free to use a cheaper form of payment.

 

[dajop]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

Someone mentioned that to the RBA, the cost of a transaction going down the "Credit Card Pipe" is the same, and there shouldn't be a difference between cheap and expensive cards (i.e. what happens now). My argument against that is look at the phamaceutical industry (OK not under the RBA's purview, but who knows whether they want to get their tentacles into the system ). A box of Coles Paracetemol costs what $0.70, a box of branded Panadol - is what $3.00? Don't see anybody complaining there. Again, goes back down the branding perception.

Not wanting to weigh in generally on the merits or otherwise of the RBA approach, but specifically for this analogy , for the analogy to be relevant, then the technology needs to be efficient and transparent and allow merchant to recognise and surcharge the premium card accordingly. If they are indeed getting charged more for premium cards, then they should pass that cost onto the consumer rather than slugging all credit card holders equally (if surcharging) or wearing cost of premium cards (if indeed they are being charged more for them) - if not surcharging. The way it would seem to happen at the moment, is that some people are paying $1.50 for their $0.70 generic box of Paracetomol tablets, whist others are paying $1.50 for their $3 box of Panadol. [OK not a strict analogy either, as most people would then probably switch to Panadol, and therefore price would go up].

 

[Nutcase]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

My only question to all of you is;

"What benefit does interchange bring to anyone besides you, the premium card holder?"

When you can answer this honestly, you will see the RBA's position very clearly. You will also understand why other central Banks are looking at interchange closely as well.

 

[opusman]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

Answer the question about the benefit to consumers that you keep avoiding, and then maybe I'll try to think up a witty reply for you.

 

[trippin_the_rift]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

My only question to all of you is;

"What benefit does interchange bring to anyone besides you, the premium card holder?"

When you can answer this honestly, you will see the RBA's position very clearly. You will also understand why other central Banks are looking at interchange closely as well.

Considering all the points changes for consumers have so far have more than halved in value (ie the consumers 'cut' of the transaction as points) has been lowered by more than the difference in interchange fees.

Therefore, so long as all banks follow suit (which they will) it means banks will profit more than ever before from a transaction while consumers get ****ed.

Citibank even had the audacity to lower points on international spend by 40% and these rates are not affected by interchange mandates.

Mate you're smart enough to put on a logical business hat and realise there are zero benefits to any consumers in this scenario.

 

[ermen]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

My only question to all of you is;

"What benefit does interchange bring to anyone besides you, the premium card holder?"

When you can answer this honestly, you will see the RBA's position very clearly. You will also understand why other central Banks are looking at interchange closely as well.

That is an unusual question to ask.

It is like slapping a rental control on residential rentals in the CBD and asking "what benefit does a high rents in the CBD bring to anyone, aside those who can afford it?"
Or since this is AFF, capping the amount able to charged for business class, "what benefit does business class bring to anyone aside those who can afford it" (as an aside, are economy pax subsidising J pax or the other way around?)

Well I will answer the question though - it provides the fee pool to fund the perks of a premium card holder.

Now, what the RBA has effectively done is imposed a sort of rental control.

If they were concerned about cross-subsidy, they could have have mandated that all credit card transaction must incur a surcharge equivalent to the amount of interchange / merchant fee paid. That will actually solve everything - those who value the card perks will pay the fee, those who don't, won't.

 

[Nutcase]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

That is an unusual question to ask.

It is like slapping a rental control on residential rentals in the CBD and asking "what benefit does a high rents in the CBD bring to anyone, aside those who can afford it?"
Or since this is AFF, capping the amount able to charged for business class, "what benefit does business class bring to anyone aside those who can afford it" (as an aside, are economy pax subsidising J pax or the other way around?)

Well I will answer the question though - it provides the fee pool to fund the perks of a premium card holder.

Now, what the RBA has effectively done is imposed a sort of rental control.

If they were concerned about cross-subsidy, they could have have mandated that all credit card transaction must incur a surcharge equivalent to the amount of interchange / merchant fee paid. That will actually solve everything - those who value the card perks will pay the fee, those who don't, won't.

Its a hard question to answer isn't it? At least you were honest about it.

Business class as an example really shows that interchange benefits no one but the premium card holder.

With Business class, the benefit is obvious and is willingly paid for. With a commodity like a payment - thats just not the case.

 

[dajop]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

Therefore, so long as all banks follow suit (which they will) it means banks will profit more than ever before from a transaction while consumers get ****ed. .

And will Hilton etc who have their current 1.5% credit card surcharge currently reduce or profit take as well?

 

[Nutcase]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

That is an unusual question to ask.

It is like slapping a rental control on residential rentals in the CBD and asking "what benefit does a high rents in the CBD bring to anyone, aside those who can afford it?"
Or since this is AFF, capping the amount able to charged for business class, "what benefit does business class bring to anyone aside those who can afford it" (as an aside, are economy pax subsidising J pax or the other way around?)

Well I will answer the question though - it provides the fee pool to fund the perks of a premium card holder.

Now, what the RBA has effectively done is imposed a sort of rental control.

If they were concerned about cross-subsidy, they could have have mandated that all credit card transaction must incur a surcharge equivalent to the amount of interchange / merchant fee paid. That will actually solve everything - those who value the card perks will pay the fee, those who don't, won't.

Rent control doesn't work the way that you are proposing so thats probably not a good example. Its also not opaque like interchange.

Surcharging has been left to individual merchants based on their costs and some have gouged. If you choose to be gouged then thats up to you. Surcharging was eliminated because the schemes forbade it and this was seen as a burden on merchants along with the "accept all cards" rule. They both had to go. Accept all cards meant that a merchant has to accept all scheme issued cards regardless of type (Debit, Platinum etc) for obvious reasons.

The other problem is the billing systems of the banks for merchants. Put simply, they are not that sophisticated. The fairest is "interchange plus" which NAB offered and still does to some extent. Most banks charge a "blended rate". This is where the cross subsidy happens.

The other thing going on is the "BIN flip". This is where your gold card is actually "Super premium" even though it says gold on the card. The Bank can change your card type without your knowledge or your approval. The BIN is the first digits on your card which identity the Bank, scheme and card type.

https://www.bindb.com/bin-list.html

Ever wondered why NAB doesn't have a "black"card? They do, its called Platinum. It just attracts super premium interchange because they cut a deal at the back end with the scheme. This is why the RBA does what it does.

Remember 2000 Olympics in Sydney? You couldn't use Visa but could use Mastercard (and the others) because they allowed surcharging. Ironically, Visa was a major sponsor. Thats how hard the schemes play when they are threatened.

 

[Nutcase]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

And will Hilton etc who have their current 1.5% credit card surcharge currently reduce or profit take as well?

Thats 70bps above the upcoming interchange cap. Keep in mind that there are also 10bps in scheme fees on top so there is a 60bps "please explain"

Lets say that the Bank gets around 30-40bps this leaves up with 20bps to discuss.

Not that much really.

 

[dajop]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

Thats 70bps above the upcoming interchange cap. Keep in mind that there are also 10bps in scheme fees on top so there is a 60bps "please explain"

Lets say that the Bank gets around 30-40bps this leaves up with 20bps to discuss.

Not that much really.

But of course, cash transactions come at no cost to a big hotel

 

[Nutcase]

Re: Is the RBA incompetent and trying to be too clever with interchange fee regulatio

But of course, cash transactions come at no cost to a big hotel

Businesses simply do not see cash handling as an expense or a risk. They seem to like it for some reason - especially small businesses.

The Banks are partially to blame for this as they don't charge for cash handling at a branch level. Its seen as "free". Ridiculous.

A merchant service fee of 1-1.5% is a small and reasonable fee to pay for the benefits that it brings to the merchant. Unfortunately merchants don't always view it like that and its seen as another "bank fee" which are always bad.