You have been warned: Reserve Bank to side with banks on credit cards

Australia's leading consumer banking advocate, former Reserve Banker Peter Mair, has seen danger signs that our central bank is about to cave in to the banking cartel on credit cards. You have been warned that this is on the cards before Christmas. Now we have been led to believe that we will be getting something this Christmas -- but the prospect may evaporate again if the 'something' we do get is another useless bureaucratic fumble of the ball. And that is on the cards. This bumbling has been going on for almost a decade. 

I may be jumping at shadows but two developments in the past week checked my optimism that, this Christmas, everyone will get what they deserve. That the banks would finally get the 'lumps of coal' they so richly deserve -- while the community will get the relief it deserves, from a racket now 'knocking off' from them at least a billion dollars per annum. 

What happened?

First, on the Business Sunday for 11 November, there was an exchange between Michael Pascoe and the chief executive of the NAB Mr Cicutto. The exchange related to a hypothetical question -- "what if Ansett issued Visa credit cards?". Mr Not-so-cuto said the consequences for the community would have been a terrible blow to confidence in the payments system' -- because Ansett could not have refunded money paid for not-delivered purchases made with the credit cards it issued. A well-briefed Mr Pascoe quickly put Mr Cicutto back in his 'dunces' box -- twice. 

The same thought -- non-banks issuing credit cards as 'members' of the MasterVisa Card schemes -- got a run in the Financial Review later in the week. The principal story line was the more superficially credible proposal that Coles Myer would be a player if the systems were opened up by the Reserve Bank. The AFR story also reported that "the Visa boss, Mr Gordon Wheaton wrote to Howard asking him to consider, in the light of the Ansett collapse, just what damage would have been caused if "non-prudential entities could issue and acquire credit cards". 

Second, the AFR story also said in relation to the very long-overdue RBA report that "While only relating to credit cards....". 

So what?

On the first matter, the focus is the inference that the Reserve Bank is to propose that membership of the international credit card schemes be opened up to new players, including non-banks such as "Ansett" and Coles Myer. 

This would be a real 'furphy' -- see "opening up" below. 

More generally, one would like to see the letter Visa sent to the Prime Minister -- and perhaps a diary note of any remarks expressed when the letter was handed over. When $A50 billion per annum is at stake worldwide for MasterVisaCard, it would be exquisite to see them mixing being overly polite and overly aggressive in asking for the RBA be 'called off'. The only sure thing is that the 'spin' on Visa's story would have been sickening. 

The second matter -- that the RBA report will relate only to credit cards -- opens the possibility that the Reserve Bank has disregarded both commonsense and a public request by the Parliamentary 'Banking' Committee (EFPA). Last June, the EFPA asked that the RBA bring down a report that concurrently embraces both 'credit cards' and 'debit cards' and resolves the inseparably intertwined policy issues about 'cards' that need to be dealt with in a single coordinated consolidated package. See "credit cards only" below. 

The Reserve Bank should never have had to be asked to do this -- doing it is axiomatic, at least it should be. 

"Opening up"

The stories about 'opening up' membership of the international credit card schemes to issuers other than approved deposit taking (banking) institutions are unlikely to have appeared as 'fillers' on days with no news. On the contrary, these 'leaks' would be consistent with the usual 'kite-flying' and preparatory ploughing of the community field, softening up the community to be receptive to a Reserve Bank report consistent with 'what they heard last week'. 

If this were to be the case, it would be nothing short of a scandalous deception of the community. There will be no non-bank entry into the business of issuing MasterVisa cards -- repeat, none. And no one in their right mind would believe there would be. 

The reason why there will be no non-bank entry has nothing to do with the rules of the MasterVisa schemes. The reason has everything to do with the distortion of the market for retail banking services by allowing banks -- effectively, the 4 pillars -- to barter 'free' transaction services for 'interest-free' transaction account deposit balances'. Put simply, non-banks, not having access to such interest-free loanable funds, could not afford to match the banks offer of '55 days free credit'. Those (ie: most) credit card customers able to pay their monthly accounts in full by the due date use funds held in no-interest bank transaction accounts -- non-banks do not get 'free' loanable funds. 

Repeatedly over the past two decades policy makers have promised the community to make the retail banking industry more competitive. The actual results are there for all to see. After two decades, the retail banking industry is ever more concentrated and the 'pillars' are still manoeuvring for mergers between themselves. Any announcement of a so-called 'opening-up' of the credit card market will no doubt be accompanied by much pointless media speculation about 'who' might enter, and 'what' they would do, and 'how' the banks would be pulled into line and so on ad nauseum. 

Don't believe a word of it. Not even for a moment. 

Simply ask, again and again, if the Reserve Bank would explain why it would not be far preferable for a 'line-of-credit' to be attached to debit card accounts -- and 'interchange fees' outlawed. 

"Credit cards only"

Any report issued from the Reserve Bank that purports to deal separately with "credit cards only" should be marked returned to sender -- and sent back unread. 

Any attempt to deal with 'credit cards only' will have been a pointless waste of time and effort -- if not an intellectually indictable offence. 

I won't labour the point again here, but credit card schemes are best regarded these days as a contrivance against the public interest, marketed as they are with the support of collusive price-fixing agreements between member banks -- especially the so-called transaction 'interchange fees' paid to card issuers. 

If a further attempt is made by the Reserve Bank to legitimise 'credit cards only' it will again avoid an explanation by the Reserve Bank as to why it would not be preferable for banks to attach a line of credit to customer's debit card accounts. Debit card accounts to which a line of credit were attached would be superior to the credit card product -- they would avoid false arguments about the cost of "free" credit and about the cost of 'payment guarantees' to merchants for card purchases. 

More generally a "credit cards only" approach would allow the Reserve Bank to avoid explaining: 

* why is not possible to have 'clawback' provisions for debit card purchases made 'over the phone'; and 

*why it is not possible to attach performance guarantees to debit card transactions where payment is made in advance of the delivery of goods and services. 

Any attempt by the Reserve Bank to deal with 'credit cards only' and separately from the identical issues associated with debit cards would be a mark of disrespect for the community generally -- and mock the process of the Reserve Bank being accountable to the Parliamentary 'Banking' Committee. 

End piece

I have long had misgivings about allowing the Reserve Bank to assume 'lead regulator' responsibility for dealing with bank credit card schemes -- and in particular stopping the inappropriate price-fixing associated with credit card transactions, especially transaction interchange fees. 

The portents have never been good -- and they got worse last week. 

One would like to think that this is absolutely the last chance for the Reserve Bank to do this job properly. The handicaps on the Reserve Bank include a predisposition to protecting banks access to the 'soft profits' in the tax-avoiding bartering of "free" services for "interest-free" deposits and the collusive pricing agreements for their credit card, debit card, and BPay schemes. In respect of card transaction schemes, the Reserve Bank is further compromised by its previous ineffective efforts to 'resolve' these issues. The Reserve Bank is in an intellectual tangle. 

Let us hope I am jumping at shadows. If I am not, you have been forewarned. 


(Note: Copies of previous papers arguing these points in more detail are available on request) 

Peter Mair can be reached at pmair@ezy.net.au .