Peter Mair

 

The Reserve Bank of Australia and Credit Cards

I want to talk about credit cards - about Tuesday's decision by the Reserve Bank to regulate credit cards.

If I were asked to give the Reserve Bank a 'tick' or a 'cross' for their recent decision, I would 'tick' the box marked 'very cross'. I am really annoyed with the Reserve Bank and so should you be.

The Reserve Bank -- a known 'protector' of the banks -- has let us down. It gave in to threats from banks and reversed a crucial decision on 'eligible costs' for setting credit-card interchange fees.

The banks would be laughing -- they plea-bargained and they won. The community has no similar scope to threaten the Reserve Bank.

Take no notice of any bank posturing over recent days about a 'tough regulatory regime' forced on them by the Reserve Bank. No such thing has happened. The banks got off light -- unfairly so.

Putting the ACCC back in charge of pricing agreements in the banking industry is the way forward -- no more special deals for banks from a compliant Reserve Bank regulator.

The heart of the matter is the cost of funding the so-called 'free credit' period for credit card purchases.

The money at stake is substantial, about $250 million, which is 40 cents for each of the 60 million credit card transactions paid in full each year before the due date.

The Reserve Bank should have kept its promise to give that money back to the customers.

Last December, the Reserve Bank said,

passing the costs of the interest-free period to retailers through interchange fees would not meet the Reserve Bank's principles for interchange fee setting

Now, in August 2002, the Reverse Bank says,

The Reserve Bank is prepared to include the cost of funding the interest-free period as an "eligible cost"

Talk about an about turn. Talk about principles. Talk about gutless.

Given a chance to stand their ground and set a much-needed lead for the rest of the world, our Reserve Bank caved in to pressure.

This is bad public policy -- when the world is crying out for better.

What is wrong you might ask?

For something to be a 'cost' there must be a benefit on the other side.

The only customers 'getting' free credit are those who pay their credit card account on time and in full.

Free credit is smoke and mirrors nonsense.

In the normal course customers pay their credit card accounts on time by drawing against deposits at banks on which effectively no interest is being paid.

In the normal course there is no net cost to banks of funding any interest-free period. Yet the Reserve Bank will allow banks to take a 40cent funding cost for every credit card transaction paid off on time.

There is no appeal against this about-face for which the Reserve Bank offers no persuasive explanation -- and it has no intention of measuring any actual funding costs incurred.

The Reserve Bank now says bank credit card schemes are some 'outsourced store card' -- like a Coles-Myer card.

There is no regard for the reality that every retailer must accept bank cards these days -- they are as common as cash. One boggles at how a central banker's mind will bend to allow banks access to fees to which they are not entitled, to recover costs that do not exist.

Much of the media discussion of the Reserve Bank's credit card decision has initially been pointless speculation about retailers 'surcharging' credit card transactions and competition from possible 'new entrants'.

Don't believe any of it. It just will not happen in any meaningful way.

The key point about credit card reform is that the Reserve Bank made a move in the right direction but it broke an undertaking to look after the people and chose instead to look after the banks.

It is bad form and bad example.

There may be no right of appeal but I will be asking the Treasurer to review this decision.