Central Bank Reform Boost For Equality
Newcastle Herald
Wednesday August 28, 2002
BY cracking open the credit card payments oligopoly, the Reserve Bank has struck a blow for equality and introduced significant economic reform.
Banks have promoted credit card use, by offering inducements such as reward programs, because it is the payment method that gives them the greatest return.
A key reason for these fat profits is the hidden interchange fees and merchant service fees banks can levy on each credit card transaction.
Last year, interchange fees reaped banks $900million and merchant service fees, $800million.
Consumers pay these fees indirectly but never see them.
Some major anomalies have developed as a result of the banks' promotion of credit cards.
High-volume credit card users who pay off their card balances promptly are being subsidised by those who favour cash or debit cards and those who maintain a high monthly credit card balance.
The reforms aim to break down this inequality.
Chris Connolly is from the Financial Services Consumer Policy Centre at the University of NSW Faculty of Law.
He points out that the subsidised users tend to be high-income earners able to pay off their card bills quickly.
`(The reforms are) a rare win for low-income consumers who have borne the brunt of these hidden fees,' Professor Connolly said.
The distortions credit cards cause mean the retail payments system in Australia is not working as efficiently as it can and the community as a whole is paying more than necessary.
Though cutting the hidden fees is an important reform, the Reserve Bank's action to make it easier for new competitors to enter the credit card market is the biggest potential win for consumers.
Increased competition in the home mortgage lending market has seen loan margins plunge.
If the credit card market is subject to the same competitive forces, notoriously high credit card interest rates will fall, delivering considerable savings to card users.
The technical details of the reforms have changed during the long consultation process but the central bank has not wavered in its determination to allow greater competition and transparency in the credit card payment system.
QUESTIONS AND ANSWERS
n What are the changes?
Three key changes are due next year.
First, a more open formula to calculate the fee banks charge each other. This fee, built into the price whether cash, credit or EFTPOS, is about 80 for every $100 purchase for electronic transactions and $1.20 for manual sales and all Bankcard purchases. This will fall to 55-60 under the new formula, saving up to $400million a year.
Second, non-financial institutions such as Woolworths and Telstra will be allowed to issue their own credit cards rather than 'co-branding' with banks.
Third, retailers will be able to charge customers extra if they pay by credit, saving them a substantial amount.
n Which cards are affected?
Changes apply to MasterCard, Visa and Bankcard credit cards only. American Express and Diners Club cards are outside the Reserve Bank's direct control and EFTPOS cards are not affected.
n Will I pay more to use a credit card next year?
The UK experience suggests competition will prevent most retailers from charging credit card customers extra but lower prices for cash could become more common.
n What will happen to credit card interest rates?
New players should increase competition and bring down interest rates, just as new players did in the home loan market.
n When do the changes begin?
Retailers will be allowed to charge extra for credit card purchases from January 1. Interchange fees will fall from July 1 but Treasurer Peter Costello says he wants both changes to begin on July 1.
n Will an interest-free period still apply?
Yes. The Reserve Bank says it will allow the cost of an interest-free period to be included in calculating the new interchange fee.
n Will rewards programs be affected?
It remains to be seen. The central bank says it does not see why the costs of loyalty programs should be included in the new calculation.
© 2002 Newcastle Herald
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