User Pays Principle

Below is an extract from A POCKET FULL OF CHANGE - The House of Representatives Standing Committee on Finance and Public Administration - Banking and Deregulation - Nov 1991:

"2.59 The last move to reinforce the regulatory system was the passing of the Financial Corporations Act, 1974. It was becoming increasingly apparent that a system of implementing monetary policy through tightly regulated banks while there were relatively free non-bank financial intermediaries was leading to the banks losing business to their competitors. This was not only viewed as unfair to the banks but was weakening monetary policy. Many economists saw the solution in deregulating the banks and moving to a more market-based monetary policy. The logical alternative was to attempt to bring the non-banks within the regulatory net.

This the Act could have done. However, it was decided to limit its operation to the collection of statistics and the sections covering the regulation of non-banks bas never been proclaimed."

Below is a brief extract from description of the Reserve Bank of Australia (RBA) by Clayton Utz:

"The RBA’s monetary policy is primarily directed at maintaining inflation rates at the level most conducive to sustainable growth. The RBA’s financial stability policy aims to prevent excessive risks in the financial system and to limit the effects of financial disturbances when they occur. Within this role, the RBA has a particular responsibility for maintaining the efficiency of the payments system. The RBA is governed by the Reserve Bank Board and the Payments System Board."

Less than two years ago the spread between the Overnight Cash Rate of 0.10% and the highest Cash Advance interest rate (Latitude Financial's Go MasterCard) approached 30%. Latitude Financial's Go MasterCard had a Cash Advance interest rate of 29.49% until March 2019.

Presently it is 25.9%, but now incorporates a Cash Advance Fee of $3 or 3% of the cash advance, whichever is greater = 28.9%. It also charges an explicit 'Late fee' of $35 and $8.95 monthly account service fee when outstanding balance is greater than $10.

Little wonder that Credit Cardholders with low Financial Literacy Capacity (independently classified by the Productivity Commission, ABS and ASIC) get lured into applying for a Latitude Financial GO Mastercard because of deceptively offering 'Enjoy now. Pay later. Interest Free'.

Reserve Bank of Australia - Our Role includes the following obligations of the Payments System Board which seemingly does not include the "efficiency" and "competition" flowing from Credit Card Issuers if they observed the fundamentals of the User Pays Principle on the cost of delivering Credit Card Products because -

* 67% circa Transactors enjoy a Free Ride with their Revolving Lines of Credit; and

* 33% circa Revolvers pay all Interest and Late Payment Fees, with the 12.58% circa of Credit Cards held by Persistent Revolvers:

"The Payments System Board’s responsibilities stem from the Financial System Inquiry (1997), Final Report, March. The Inquiry found that, while earlier deregulation had improved competition and efficiency in Australia’s payments system, further gains were possible. To that end, it recommended the establishment of the Payments System Board at the Reserve Bank with the responsibility and powers to promote greater competition, efficiency and stability in the payments system. The Government accepted those recommendations and established the Payments System Board in 1998. The Board’s responsibilities are set out in the Reserve Bank Act 1959. The Act requires the Board to determine the Bank’s payments system policy so as to best contribute to: controlling risk in the financial system; promoting the efficiency of the payments system; and promoting competition in the market for payment services, consistent with the overall stability of the financial system.

At the time the Board was established, the Government also provided the Reserve Bank with specific powers to regulate payment systems in order to implement the Board’s policies. The most relevant powers in the context of the reforms to the debit card systems are those set out in the Payment Systems (Regulation) Act 1998. Under this Act, the Bank has the power to designate payment systems and to set standards and access regimes in designated systems. The Act also sets out the matters that the Bank must take into account when using these powers, including the desirability of payment systems: being financially safe for use by participants, efficient and competitive; and not materially causing or contributing to increased risk to the financial system."

RBA publications sine the 1990s have been full of hypocrisies. Below is an extract from Glenn Stevens: Innovation, stability and the role of the Payments System Board address by Glenn Stevens, Governor of the RBA to Australian Payments Clearing Association (APCA) 20th Anniversary Symposium, Sydney, 28 May 2012:

"This is most evident in the credit card market, where consumers typically face a low or negative price while merchants face a relatively high price. The flow of interbank fees to support this has traditionally made issuing cards profitable for financial institutions. Because payment systems often do not simply operate on a user-pays model, establishing a business case can be more difficult than in other industries, even where there is a clear demand from end-users. This means there is a case for some kind of mechanism to overcome coordination problems and to ensure that any disconnect between the public interest and the business case is properly managed. But any intervention by a regulator like the Payments System Board of the Reserve Bank must of course be carefully considered. The Payments System Board will be addressing the issue from two different perspectives. First, it will be expressing some views about the governance arrangements within the industry, with the aim of giving those the best possible prospects of successful collective decision-making and appropriate consideration of the public interest. More details on that will be included in the conclusions of the Review."

As at Dec 2021 there were 700 financial counsellors across Australia operating in 192 agencies across 674 sites. Assisting personal Credit Card indebtedness is without doubt the most common type of financial counselling. Financial Counselling includes a section titled Credit Card Distress that evidences the emotional and financial trauma suffered by many Australians with low Financial Literacy.

The Reserve Bank released "RBA's Reform of Credit Card Schemes in Aust: "A Consultation Document" – Dec 2001. Below are extracts where the Reserve Bank had lofty goals to better "....meet the public interest test ...." and that of Merchants:

Section 21 'Reform of the credit card schemes' of EXECUTIVE SUMMARY - page iv

Having weighed a range of arguments from interested parties, the Reserve Bank is of the opinion that the main regulations established by the credit card schemes in Australia do not meet the public interest test. The regulations suppress or distort the normal market mechanisms in ways that work against, rather than contribute to, the community’s welfare.

23. The Reserve Bank's reform measures deal only with the regulations of the credit card schemes governing the collective setting of wholesale fees, entry to the schemes and restrictions on merchant pricing. The measures do not deal with the relationships between individual scheme members and their customers which are not covered by scheme regulations. Hence, they do not cover the setting of credit card fees and charges to cardholders and merchants, or interest rates on credit card borrowings.

Section 25 'A standard for interchange fees' of EXECUTIVE SUMMARY - page viii

25. The draft standard requires that credit card schemes publish their interchange fees and the aggregate costs that have been included. This will ensure that the calculation of interchange fees is entirely transparent and can be readily understood by card scheme members, the merchants to which the interchange fees are passed, and the community. Identifying the specific costs involved will also give card scheme members and merchants an incentive to address these costs."

Section 27 and 28 'An access regime for credit card schemes' of EXECUTIVE SUMMARY- page viii

Though some minimum entry standards are appropriate, the Reserve Bank believes that the current barriers to entry to the credit card schemes unduly restrict competition. The Reserve Bank's draft access regime liberalises access to the credit card schemes by allowing non-financial institutions of substance to enter the credit card market in their own right. Such institutions will need to be authorised and supervised by APRA. They will need to demonstrate to APRA that they have the skills, staffing and operational capacity for the scale of credit card activity proposed, and will have to meet ongoing prudential standards no less strict than those currently imposed by APRA for given types of risks. The draft access regime will make credit card issuing and acquiring open to greater competition, without undermining the comfort from having credit card scheme members prudentially supervised or the benefits to the credit card schemes of ‘outsourcing’ membership eligibility to APRA.

The draft access regime specifically prohibits any card scheme restrictions or financial penalties on members that wish to specialise in credit card acquiring. These restrictions have no basis in risk management and, whatever their original rationale, have the effect of handicapping potential competitors.

Section 1.5 'The public interest test' - page 11

This regulatory framework is unique: in no other market in Australia are competitors permitted, without authorisation under the Trade Practices Act 1974, to act collectively to set wholesale prices, prohibit merchants from passing on these prices and restrict entry to the market in a way that substantially lessens competition. The regulatory framework of the credit card schemes benefits the schemes and their members, as well as credit cardholders; however, the Joint Study raised serious doubts about whether the community as a whole also benefits. For this reason, the Reserve Bank's starting point has been to assess whether the regulations of the credit card schemes themselves can meet the public interest test.

The Payment Systems (Regulation) Act 1998 provides the relevant definition of the public interest. The Reserve Bank is to have regard to the desirability of payment systems:

‘being (in its opinion):

financially safe for use by participants; and

efficient; and

competitive; and

not (in its opinion) materially causing or contributing to increased risk to the financial system.

The Reserve Bank may have regard to other matters that it considers are relevant, but is not required to do so.’

In applying this public interest test, the Reserve Bank's approach is consistent with the broad objectives of competition policy in Australia. The blueprint for this policy was set out in the report of the National Competition Policy Review (the Hilmer Report) in 1993 and endorsed by Federal and State Governments at Council of Australian Governments (COAG) meetings in 1994. Broadly speaking, competition policy seeks to promote efficiency and enhance community welfare through the encouragement of effective competition and the protection of the competitive process. The Hilmer Report identified three dimensions of economic efficiency, which are as relevant to markets for payment services as they are to other markets for goods and services:[⁴]

allocative efficiency, which is achieved where resources are allocated to their highest valued uses (ie those that produce the greatest benefit relative to costs);

productive efficiency, which is achieved where firms produce goods and services at minimum costs; and

dynamic efficiency, which reflects the need for industries to make timely changes to technology and products in response to changes in consumer tastes and in productive opportunities.

If it is to meet the broad objectives of competition policy, the payments system in Australia needs to give maximum rein to the workings of the price mechanism and the free movement of resources, provided the safety of the system is not compromised. For this reason, the Reserve Bank sees the following competition ‘benchmarks’ as underpinning the public interest test in the payments system:

relative prices charged by financial institutions to consumers who use payment instruments should reflect the relative costs of providing these instruments as well as demand conditions;

merchants should be free to set prices for customers that promote the competitiveness of their business;

prices of payment instruments should be transparent;

any restrictions on the entry of institutions to a payment system should be the minimum necessary for the safe operation of that system; and

competition within the market for a payment instrument, and between different payment instruments, should be open and effective.

If markets for payment services meet these benchmarks, the community can be confident that the price mechanism will allocate resources efficiently to meet the demand for different payment instruments, while the ‘contestability’ of the markets – that is, the threat of entry by new competitors – would ensure that payment service providers earned no more than a competitive return on their investments over time.

Even within a competitive environment, there is likely to be a role for private-sector regulations to ensure the safe and orderly operation of a payment system. However, if such regulations suppress or distort the normal market mechanisms, the onus must be on those institutions imposing the regulations to demonstrate that community welfare is not harmed.

Section 5:2 merited application of the User Pays Principle: - page 117

"Reform of credit card schemes will also have a direct impact on credit cardholders and is likely to result in some re-pricing of credit card payment services. However, this is the means by which the price mechanism is to be given greater rein in the credit card market. A movement towards a “user pays” approach to credit card payment services would be consistent with the approach adopted by Australian financial institutions in pricing other payment instruments under their control. As the ABA itself has confirmed: “Pricing services efficiently provides consumers with choice to use lower cost distribution channels and, therefore, facilitates a more efficient financial system. It is also fairer and efficient, because consumers only pay for what they use.”198

The principles that consumers should face prices that take into account the relative costs of producing goods and services, as well as demand conditions, and that resources should be free to enter a market in response to above-normal profit opportunities, have been the guiding principles for tariff reform and market deregulation in Australia. Such market reforms may impact unevenly on different groups – some gaining, some losing – but they are now the well-established route to more efficient use of resources in the Australian economy."

The above three extracts from "RBA's Reform of Credit Card Schemes in Aust: – Dec 2001 predicated upon the User Pays Principle, "the community’s welfare" and "the public interest test" were drowned out and soon forgotten due to the welter of powerful lobby groups amongst Responses to Consultation Document, in particular the ABA's 'Banking Industry Response to RBA Consultation Document' - March 2002. Below are ABA extracts:

Chapter 6:

"If the RBA proceeds to determine the Standards and impose the Access Regime as proposed in the CD it will have acted beyond its powers, in disregard of the considerations and process directed by the Payment Systems (Regulation) Act 1998 and upon the basis of erroneous and unreasonable assumptions."

6.1   Beyond Power

6.2   Disregard of Relevant Considerations

6.3   Mandated Process

6.4   Erroneous and Unreasonable Assumptions

ACCC recommends Reserve Bank consider using powers to reform credit card schemes - 2001.

Separately, the below extract from the afore-mentioned RBA's Consultation Document titled Executive Summary - Reform of Credit Card Schemes in Australia: RBA's "A Consultation Document" – Dec 2001 notes under point 6 of 'Introduction' that some Credit Cardholders are enjoying the convenience of using Credit Cards without contributing to Credit Card Issuers' operating costs:

"Within the latter group, there is a third group which directly contributes very little to the costs of credit card schemes – these are the cardholders (known as Transactors) who settle their credit card account in full each month. Although they normally pay an annual fee, they pay no transactions fees, enjoy the benefit of an interest-free period and in many cases earn loyalty points for each transaction."

Below RBA Graph No 8 (as at March 2015) evidences the substantial range of Interchange Fees Categories:

* MasterCard - 18 Categories

* Visa - 23 Categories

Below RBA Graph No 6 (as at March 2015) evidences the substantial range of Interchange Fees from Nov 2015:

* MasterCard - from as low as a quarter of one percent up to 1.75 percent fee

* Visa - from as low as a fifth of one percent up to 2 percent fee

Re the above noted Reserve Bank of Australia - Our Role, has the Payments System Board promoted "... greater competition, efficiency and stability in the payments system with Credit Card Products since the PSB was granted 'extensive powers' for specific reasons in 1998?
How significant are the impacts of Credit Card Products on Australian way of life?

ASIC's MoneySmart webpage lists that there were 7,515,000 Credit Cardholders in Australia (Source: Roy Morgan Research, 12 month average at June 2016).
Australian Credit Card and Debit Card Statistics 2017 - Finder shows 16,735,686 Credit Cards on issue as at 31 Oct 2016
RBA's Submission to the Senate Inquiry into Matters Relating to Credit Card Interest Rates - Aug 2015 noted:

"In the June quarter of 2015, new credit card transactions averaged around $24 billion per month. At the end of June, the total level of credit card debt was $51.5 billion (Graph 11). Of this amount, $33.1 billion, or around 65 per cent was bearing interest. A simple calculation would suggest that around 75-80 per cent [(51.5–33.1) ÷ 24 ≈ 0.77%] of transactions on credit cards do not accrue interest. That is, interest-paying ‘Revolvers’ account for about 30-40 per cent of accounts, about 20-25 per cent [1.00 - 0.77 ≈ 0.23%] of transactions, but close to two-thirds of the outstanding stock of debt.9"

ASIC MoneySmart 'Credit card debt clock' quantifies per second movements in various aspects of Credit Card Debt that is accruing Interest. As at a moment in time on Wed. 1-Mar-17, it showed that 'Outstanding Indebtedness' that was being charged interest (either because the Interest Free Period had expired, or the Credit Cardholder had forfeited its Interest Free Period) at an ave rate of 17.2% was $32.287,165,661.06 ($32.287 billion) and aggregate interest payable over 12 months was $5,559,849,926.83 ($5.559 billion).

The nomenclature, Persistent Revolvers, was first applied by the Reserve Bank in its Submission to the Senate Inquiry into Matters Relating to Credit Card Interest Rates - Aug 2015 when it published Graph 7 "Cardholder Payment Behaviour" (RHS). The definition of Persistent Revolvers explains that 33% circa of Credit Cardholders transactions are made by Revolvers and 38% circa of Revolvers are Persistent Revolvers. Persistent Revolvers hold 12.50% circa of the 16.1 million Credit Cards on issue in Australia (i.e. 2,057,234 Credit Cards). Yet those two odd million Credit Cards owned by Persistent Revolvers that have very low Financial Literacy Capacity (as measured by the Productivity Commission, ABS and ASIC reports) contribute 80% circa of all Interest and Penalty Fees Revenue generated from Credit Card Products. The average Persistent Revolver hold approx. four times the number of Credit Cards that each Transactor holds.

The ASIC MoneySmart 'Credit card debt clock' does not estimate Late Payment Fees or any Over The Limit Fees also charged, that would probably account for another 5% of $5.559 billion dollars, namely $277 million dollars annually, paid by the 33% of Credit Cardholders that are classified in a welter of Reserve Bank submission, enquiries etc as Revolvers.

When we add aggregate interest payable over 12 months of $5,559,849,926.83 to $277 million dollars annually in Late Payment Fees and any Over The Limit Fees, the agg. annual cost upon Revolvers is $5.837 billion.

What is more disturbing is that the 12.5% of Credit Cardholders that are Persistent Revolvers are paying 80% of that $5.837 billion paid annually by Revolvers. Persistent Revolvers 80% portion is $4.679 billion incurred annually. Not unsurprisingly Persistent Revolvers with low Financial Literacy Capacity suffer Extreme Financial And Emotional Distress with many relying on Financial Counsellors provided by 44 charities/community organisations that receive $43 million annually from the Commonwealth Govt. ($20m) and State Govts. ($23m) to fund 500 circa Financial Counsellors.

The average Interest and Penalty Fees Revenue for each of the 2,057,234 Credit Cards owned by Persistent Revolver is $2,747.67 ($4.679 billion annual interest share / 2.057 million Credit Cards owned by Persistent Revolver). The average Persistent Revolver owns five Credit Cards and incurs $11,373 Interest and Penalty Fees annually. Meanwhile the 67% of Credit Cardholders that were Lucky to be Financially Educated enjoy a Free Ride.

To compound the injustice of 12.5% of Credit Cardholders, Persistent Revolvers, continuing to pay 80% circa ($4.679 billion annually) of all Interest and Penalty Fees Revenue [12.5% is calculated from Graph 7 "Cardholder Payment Behaviour" and table below and interpreting anecdotal evidence from Credit Card Distress Authorities], now 11 years after the ABS reported that "...7.9 million (53%) of Australians aged 15 to 74) had proficiency less than the minimum required for individuals to meet the complex demands of everyday life and work emerging in the knowledge-based economy‘ for document literacy and numeracy respectively" (in Chapter 1), the Reserve Bank did not respond to the Writer's detailed submission (on 3 x CDs) that the Writer posted in triplicate to the Reserve Bank on 8 Dec 2011 that implored the Reserve Bank to adopt the User Pays Principle as specified in Section 8 of the Writer's letter on CDs.

	Occasional Revolvers		Persistent Revolvers
1st (lowest) Household income quartile	45%		55%
2nd (second lowest) Household income quartile	55%		45%
3rd (second highest) Household income quartile	66%		34%
4th (highest) Household income quartile	82%		18%
	248%		152%

	248%	62%	Occasional Revolvers
	152%	38%	Persistent Revolvers
	400%	100%

Interchange Fees notes that the Australian Retailers Association - Submission to RBA dated 2001 - Credit Card Schemes in Australia - sourced on the RBA website (marked Confidential) was highly critical of the RBA's inept and complicit role in Credit Card Issuers imposing an Interchange Fee upon Merchants when the contract is between the Card Issuer and the Cardholder. The Australian Retailers Association supported the User Pays Principle for all enjoying a Credit Card/s Line Of Credit by recommending that the 'ad valorem' Merchant Service Fees "should be completely abolished and replaced with market negotiated activity based fees".

Below are pertinent extracts from Australian Retailers Association - Submission to RBA dated 2001:

"1.1 Confidentiality

The contents of this report are confidential. Data relating to the business of the Australian Retailers Association (ARA) or its members and contained within this submission is confidential and is not to be released into the public domain."

"Executive Summary

The thrust of this paper by the Australian Retailers Association (ARA) can be summarised by a quotation from the RBA / ACCC paper ‘Debit And Credit Card Schemes in Australia – A Study of Interchange Fees And Access’; Page 52 states:

“ Simple economics shows that when a service is under priced, it tends to be over-used”.

This statement in our view distills the essence of credit card pricing and use both here and internationally. From inception, the Merchant community has been paying a disproportionate share of the cost of credit cards. Consumers have been paying less than the true cost of services provided to them by Credit Card Issuers. This we believe was the result of credit cards at inception not having a viable economic rationale for the consumer and Credit Card Issuers and Acquirers structuring the product economics in order to enhance take up. Had credit cards been priced in a competitive environment, then it is highly likely that they would not have gained such a major global presence.

The global Merchant community has, made a major contribution to the revenues and profits of Credit Card Issuers and Acquirers. Credit card services have been overpriced to Merchants and under priced to Cardholders.

Our paper will argue that:

1. interchange between Card Issuers and Card Acquirers should be completely abolished and replaced with activity bases fees or fees for service;

2. credit card interchange is passed on to Merchants via the Merchant Service Fee. Our own experiences have seen interchange put to us as a ‘floor’ to the Merchant service fee rate advanced by Acquirers;

3. Merchant Service Fees should be completely abolished and replaced with market negotiated activity based fees;

4. the current credit card scheme no surcharging or non-discrimination rule be abolished across all card types, and that Merchants and the market not be restricted (subject to competition law) from setting their own pricing policies.

We would encourage the RBA to take this opportunity to address a major inequity in the Australian payments environment."

Below are pertinent arguments:

Argument 1 - The risk of extending credit to cardholders:
"The magnitude of credit card annual percentage rates (APR) is well above other unsecured lending rates."

Argument 2 - The cost of the Issuer processing the transaction

"It is therefore reasonable for the Issuer to seek cost recovery and a competitive margin for this service – from the cardholder with whom a relationship exists and for whom a service is being performed. Such a fee for service should reflect the exact nature of the services offered by the Issuer to the cardholder.

The fee should be ‘internal’ to that relationship.

We would therefore argue that the cost of the Issuer processing a credit card transaction does not warrant an Interchange Fee being levied to the Card Acquirer and ultimately passed on to the Merchant via Merchant Service Fee. We would cite a number of reasons in support of this:

The Issuer is acting on behalf of their Cardholder in processing a credit card transaction. The Cardholder is instructing the Issuer to perform the transaction;

It is the Cardholder who is seeking to effect payment to the Merchant via a credit card. It is at the Cardholder's discretion to select a payment method. The Cardholder initiates the entire credit card processing cycle and should bear the costs of the party (the Issuer) acting directly on their behalf;"

Argument 3 - Costs associated with the interest free period attached to credit cards

"We agree that the interest free period encourages potential Cardholders to take up card products and existing cardholders to utilise their cards. It is very useful and beneficial for consumers to delay payment for goods and services for some 55 days. We would point out that certain credit cards have zero interest free days, yet still attract identical interchange and Merchant Service Fee levels.

The interest free period is again, a Card Issuer / card holder relationship cost.

The introduction and length of interest free periods was determined by credit Card Issuers to facilitate credit card take up and usage – both revenue generating activities for themselves. We find it implausible that Issuers sought to introduce interest free periods for any reason other than to increase their own income levels."

Argument 4 - The cost associated with providing a payment guarantee to merchants

"We would expressly reject that any credit losses resulting to the Issuer from this process (card holders lodging bogus charge backs and then not paying when proof of purchase is provided), should be passed back to the Merchant via Merchant Service Fee that has interchange as a major cost component. This is an Issuer / Cardholder credit matter."

Hence, the Australian Retailers Association supported the User Pays Principle for all Credit Cardholders.