Chapter 18.        The Australian Retailers Association -

                            *           wanted Interchange Fees and Acquirer Bank Fees scrapped because the contract is between the Card Issuer and the Credit Cardholder

                            *           supported the User Pays Principle for all Credit Cardholders

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 Reserve Bank'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.

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