Peter Mair spent decades at the Reserve Bank and now lifts the skirt on the latest dodgy tactics by the banking cartel and their compliant regulators. The Reserve Bank meets the Parliamentary "Banking" Committee (EFPA) on 31 May. The discussion will probably touch only briefly on payments system policy issues, a full year since the previous skimped discussion. Key elements of credit-card policy are yet to be 'finally' decided by the Reserve Bank, and then the debate will move to the courts. Rest assured nothing is likely to be done about matters 'subjudice'. De ja vu.

An inquiry into the trade practices law is getting underway and offers hope of stronger laws against price fixing, including by banks in respect of their credit card and BPay schemes.

All up, the Australian community could be fairly dissatisfied with the performance and lack of accountability of those responsible for reforming retail banking and payment systems. In the five years since the 'Wallis' banking inquiry, the problems in the retail payments system have generally got worse. Insincere rhetoric has been the constant backdrop to an interminable process of 'studies', 'consultation reports' and further 'ongoing consultations' mainly with industry executives affronted by the intention, finally, to assert the public interest. A quite separate policy authority could usefully specialise in retail banking issues for a few years.

The underlying tragicomedy with credit cards is unerringly moving to the frustration of promised reforms in the courts. At some point the Australian community might ask that the law on trade practices be strengthened to preclude the continued abuse of its best interests. It would be a fair question. Hopefully that question will be put repeatedly to the ACCC Inquiry.

One of the quaint characteristics of parliamentary committee processes is the opening exhortation to witnesses to not mislead the Parliament. It may be instructive for some researcher to consider answers to similar questions in a related sequence of parliamentary committee hearings. Some clues are given in the 'appendix'.

1. CREDIT CARDS -- A TOPICAL ISSUE

Pending a legal challenge to any decision that the Reserve Bank may make about setting interchange fees for credit card transactions, the Reserve Bank is momentarily sitting pretty on a document proposing effective action. The Reserve Bank would be surprised to find itself on the front line against the global credit card industry. The competition authorities in the UK and Europe have left it to Australia to make the 'card' yards.

Make no mistake, the Reserve Bank consultation document, if implemented, would rip the black heart out of credit card schemes globally -- other countries could not ignore, and would sensibly welcome, the Australian action. Moreover the Reserve Bank's related intention to rule out interchange fees for debit card transactions conceptually destroys the preferred fallback position of the retail banking industry, to abandon credit cards once comparable interchange fees are attached to debit card transactions.

Ignoring bygones, the Parliamentary "Banking" Committee would appropriately congratulate the Reserve Bank on the way its consultation document proposes dealing with interchange fees in credit card schemes -- but then quickly move to the real issues.

(Under no circumstances should the Parliamentary Committee dwell on the dummy passes masquerading as 'surcharging' or 'new entrants' in the RBA consultation document. Nor should any credence be given to the tantrums put on over recent months by either our banking industry 'leaders' and the visiting hit men, from Visa and MasterCard acting for the global banks milking the global community with these schemes.)

The legal challenge

Good intentions are never enough, good works are also necessary.

By now the Reserve Bank should have a view about the legal footing on which it stands, of its chances of making stick a decision about regulating interchange fees for credit card transactions. What does it think about the adequacy of its enabling legislation? Views about the legal foundations for payments system policy are about to be made clear anyway and, if they are shaky, this opportunity for the RBA to ask the Parliament for effective legislation should not be missed. The public will be listening for the question and the answer. A following question might inquire, as appropriate, why the 'alarm' was not raised previously.

The inquiry into the trade practices law will bring this issue about ineffective trade practices law into the open. Ideally the prospective 'use' of legal processes to defer the implementation of reforms to interchange fees would have been headed off earlier. If the credit card matter languishes in the courts, those effectively on trial will include the Parliament, and its advisers that failed to put effective trade practices law in place.

At a minimum, arrangements that fix prices should be proscribed unless they have the prior approval of the competition policy authorities and then only to the extent necessary to maximise the community benefit of the arrangement.

Having made a grandstanding display of bureaucratic bravado in December 2000 to takeover the prosecution of credit card schemes, it will now be an acute embarrassment if the RBA's payment system law is similarly exposed as ineffective and they did not know. The irony will not be lost on Alan Fels and the ACCC, now making a comeback after being 'benched' from the prosecuting team.

2. BPay STINKS TOO

The re-entry of the ACCC to the debate on bank 'price-fixing' not surprisingly concerns the banks' BPay bill payment scheme. The timing of the re-entry suggests the ACCC is thinking the RBA is about to 'get bogged down in the courts' with the credit card matter and exposure of BPay may usefully underwrite a call for more effective trade practices law. It should.

BPay is more offensive than credit cards if only because it involved banks quite recently in a plan to put in place a uniform pricing arrangement already regarded as inappropriate. Moreover the banks developed the BPay scheme outside the policy framework, APCA, that was put in place to protect the community against such objectionable initiatives. The development of BPay in 1997 confronted the authority of the Reserve Bank -- and the banks got away with it. Wish the ACCC well.

BPay is based on the credit card network model. BPay, like credit cards, is basically a good product except that, like credit cards, it has an objectionable interchange fee built into the pricing contracts. It was objectionable also that the banks developed the BPay facility to substitute for an established service (direct debits) that was inherently better and cheaper but not marketed effectively because it was less profitable.

Calls for the authorities to bring banks to account for their BPay scheme repeatedly fell on deaf ears. No statistics are collected and published for BPay transactions. It is never really mentioned. Details of the scheme are 'secret' rather than transparent. BPay has been allowed to stay and prosper when it should have been reoriented in the public interest. As should credit card schemes.

It would be useful for the Parliament to ask the Reserve Bank to share what it knows about BPay and its pricing arrangements -- and then ask why nothing has previously been said.

3. OTHER ISSUES

The 'other issues' are of course the same issue -- the ineffectiveness of policy processes for dealing appropriately with the retail banking industry.

There is a litany of well-intentioned pontificating about what should happen that stands in sharp contrast to the nothing-really-doing reality of not reforming the retail banking industry -- about the inefficient, overpriced transaction services that underwrite banks' excessive profitability (and a quiet life at the RBA and APRA).

With the meter running at some $1 billion p.a. for the credit card rort alone, it is far better being a banker-owner of the 'cab' than the paying-passengers stuck at the regulatory traffic lights for the past 5 years already.

The latest recitation of this litany was in the third annual report of the Reserve Bank Payments System Board -- released on Easter eve, some six-months late.

On with the game

Moving beyond credit card schemes, an appropriate agenda for the 31 May hearing would include both the contents of the third (2001) annual report of the Reserve Bank's, Payments System Board and some policy issues not mentioned in that report.

The general tone of this six-months-late report is laboured and tedious: it is repetitive of issues still outstanding that should have been resolved years ago.

Among other surprising things, there is no mention of the pre-election posturing of the banks to 'restore free-of-charge banking transactions' to those without the minimum deposit balances (or loans) required to be given exemptions from paying transaction fees. No comment on how this 'free for all' does not fit sensibly with the 'lecture' on the importance of explicitly linking prices to costs -- and the preference for the 'needy' to be subsidised directly by government.

The best way for the general public to be appraised of the significance of this Payments System Board report would imagine an audience of bankers and policy makers listening to extracts read aloud from the report. People laughing to death (many deservedly) would be wonderfully illustrative.

The direct debit system still languishes notwithstanding that Reserve Bank has long declared it to be the most highly efficient payment instrument. Blissfully unknowing that the banks have no intention of making this system work as it should, the Payments System Board wistfully "looks to financial institutions to play their part in promoting the use of this highly efficient payment instrument". The Board, apparently unthinkingly, "remains committed to improving customer safeguards" as embodied in its Charter for Direct Debit Customers that is apparently largely ignored. Spare my days.

The Payments System Board seems not to appreciate that banks developed the BPay system to displace 'direct debits'. The apparent clarity with which the Reserve Bank now sees how credit cards displace debit card transactions, belies its inability to 'see' the displacment of direct debits by the much more profitable BPay scheme. The BPay scheme also has a uniform interchange fee underwriting its excessive profitability. There is not even the stated intention at the Reserve Bank to 'study' the banks BPay scheme -- the mind boggles at this intellectual inconsistency. Thankfully the ACCC now has the BPay scheme on its 'investigative' agenda.

A little later in the report, following a '101' style lecture on the importance of prices reflecting relative costs, it is noted that " successive Australian governments have made a strong commitment to promoting competition and this is echoed in the Board's mandate in the payments area". It was once proposed that towards the mid-1980s, a room '101' might be made available for those peddling such patently insincere dogma. The actual results of this 'strong commitment' are there for all to see -- and the clamour is swelling for 'two good' and 'four bad'. (Pillars, that is)

At some point the considerable distance between good intentions and the blinding reality of inefficiency in an uncompetitive retail banking system becomes difficult to reconcile with a supposedly sincere effort to properly inform either Parliament or the wider community.

Further on the report repeats a conclusion of the October 2000 card transaction study -- that "there was no convincing case for an interchange fee in Australia's debit card payment system". Eighteen months on, one wonders why there still is an interchange fee in Australia's debit card payment system. The answer beggars belief. The Board wanted to "emphasise that the initiative for reform in the debit card market is... in the hands of industry participants": that is in the hands of those behind the current scheme that endures against the public interest. There is little comfort in the observation that "the Bank has now begun to work with industry participants to consider options for change".

Having seen, with the credit card matter, the gap between the Bank 'beguning' something and even approaching effective action, the community might reasonably despair. The RBA inaction on BPay is similarly cautionary. Not surprisingly, the always-objectionable VisaDebit card continues to be widely used notwithstanding that it was eventually assessed by the Reserve Bank to have "no place in the Australian payments system".

What is going on here?

And there are omissions. One of the more exciting current developments in retail payments systems is the development of internet funds transfer schemes that literally allow everyone to pay anyone, anywhere, anytime -- provided only that the payer knows the account numbers of the payee. This system, capable of replacing the cheque, needs the well-informed coordinating influence of industry standards and the considered official endorsement of the monetary authorities -- I could see no mention of it. Much the same goes for 'electronic currency' capable of substituting cheaply and effectively for conventional currency. A commercially viable, electronic cash scheme continues to be elusive with pilot schemes disappointing expectations. Little wonder there was a 'tech wreck' when a 'new economy' capacity to deliver goods and services was not matched by the capacity for customers to pay for them using 'old economy' technology. Apparently, nothing much is going on here either -- and this is the supposed future.

End piece

The latest 'annual' report of the Reserve Bank's Payments System Board should be acknowledged as a final straw.

At some point the community can fairly say, enough is enough. It can reasonably demand acceptance that the regulatory framework in place simply is not delivering acceptable outcomes for retail payment systems. It is time for a new start, a different approach -- more effective legislation and more effective policy developed by a policy agency not confused by an 'obligation' to protect the banks.

Ideally a redistribution of responsibility for payments system policy would be accompanied by tax policy reforms. The payment system should be cut off from its dependence on the tax-avoiding bartering of 'free' transactions for 'free' deposits. The attendant cross-subsidisation of payment system costs from the deposit and lending, intermediation operations of banks is a major reason why the market does not work as it should. Simply stopping this bartering would work wonders with banks' attitudes and payment system efficiency.

Take that prop away from the banking system and Australia would have progressively cheaper and better payment facilities.

This is widely known but 'never' said -- on the contrary the community is continually misled. A new policy agency would soon 'know it' and soon promote needed reforms.

The Parliamentary Committee hearing on Friday 31 May could gently expose the nonsense inherent in current arrangements.

Peter Mair
20 May 2002

Feedback to Peter Mair at pmair@ezy.net.au

APPENDIX: HOW THE CREDIT CARD STORY DEVELOPED

One useful approach to appreciating the studied ineffectiveness of public policy approaches to the retail banking industry is of course an analysis of the transcripts of previous 'hearings' of Reserve Bank views put to the Parliamentary "Banking" Committee.

Commencing in December 1998, the Committee has had two opportunities each year to 'hear' the Reserve Bank address payment system policy issues (except for this current financial year when there will be only this one hearing on 31 May). Credit card schemes are a topical focal point among a range of possibilities.

Pre-Cruickshank

Prior to the release of the UK 'Cruickshank report' in March 2000, the Reserve Bank was largely dismissive of concerns about credit card schemes. In December 1998, responding to a question about a lack of competition in credit card schemes, the answer was, "No. We do not have any responsibility for the banking sector per se". The clear impression given to the Committee was that credit card schemes were not in the Reserve Bank's range, but may have been the business of some other policy agency.

Mid-1999, just before the 'cash for comment' scandal broke, was the high point of RBA hubris. The timing was impeccable. In June 1999, the Reserve Bank played a 'trump card' releasing a major policy statement and supporting documentation, one day before a scheduled meeting with the Committee that was overwhelmed. This pre-emptory strike triumphed the tritely true but largely irrelevant observation that 'bank margins had fallen by more than bank fees had increased". A qualification was 'accepted', that some -- the non-borrowing poor -- may have been net losers now a once 'free service' had its subsidy withdrawn. However, a prospective role for the regulation of bank fees and charges was dismissed (using the 'margins' evidence) prior to an acknowledgment that "if there was gouging going on .... the situation would be different". (The regulatory tide turned the following month when the banks were revealed to be having a lend of the community -- 'cash for comment' -- 'cash for comment').

Implicitly, apparently, it was not then known that 'gouging' was going on but the dawning was getting close. In September 1999 the ACCC launched an action against the banks for 'price fixing' and was 'joined' in a process of 'studying' credit card schemes with the RBA.

By November 1999 the tide had turned -- not least because the Committee was then briefed better on payments policy issues, including the mechanics of the bank credit card rort. The previously lauded triumph of 'margins over fees' was put in a sensibly broader context and the reduction in margins correctly attributed to "massive cuts in costs" (largely shifted to Australia Post and customers denied 'branch' services). More importantly the RBA noted "a huge increase in transactions using credit cards" and went on to say "we are sufficiently interested in this subject that we have started a study of it through the Payments System Board ... ". One can only wonder what the RBA previously saw when they read the credit card statistics they had been collecting for some years.

Post Cruickshank

The 'Cruickshank Report' of a UK banking inquiry in March 2000, was reasonably insightful and forthright in its analysis of banking policy issues -- especially credit card interchange fees. However, it was also notable for clearly articulating the consequences of what it called the 'old contract' between the Bank of England and the UK banks. Under the 'old contract' the broader public interest was subordinated and banks were given the feather-bedded luxury of a non-competitive regulatory regime protecting their profitability, in exchange for doing what they were told and keeping banking politics relatively cool. Not unlike the situation in Australia, so to speak.

The upshot was that the Bank of England lost responsibility for banking industry policy to a reconstituted Office of Fair Trading (the UK's ACCC). Australia's Reserve Bank could see this writing clearly on the wall and faced the embarrassment of losing a policy responsibility (for payment system competition and efficiency) it had only just been given. Its attitude changed quickly. Ironically, in the event, the UK's OFT is yet to strike a blow against credit card schemes. As of now, the main impact of the Cruickshank recommendations has probably been on the Reserve Bank of Australia. Fairly ironic.

When the Parliamentary "Banking" Committee again 'heard' from the Reserve Bank in May 2000, the first question on payments policy issues was not surprisingly about the implications of the Cruickshank report for Australia. Suddenly, credit card schemes had become "a very interesting subject" to the RBA and it was "simply trying to find out what is going on and what the flows of fees are" -- although the community should have contained their expectations because it was concurrently said to be "intensely complicated". These encouraging signs were nonetheless qualified later in the hearing when it was commented that: "We are not a consumer protection agency at the Reserve Bank".

Left unsaid was that enough detail of the excesses of banks' credit card schemes had been sufficiently well known for some years to warrant strong regulatory action that was never taken. The study was touted as 'new'.

Things about credit cards were clearly moving quickly and when the 'hearing' of the RBA was rejoined in December 2000, it was against the backdrop of the then recently published report on transaction-card schemes prepared in the Reserve Bank but published jointly with the ACCC. Among other things, which agency was responsible for competition policy issues about credit cards was said to be 'fuzzy'. By then of course the Reserve Bank had more or less decided to take over the prosecution of credit card policy issues with the banks, ostensibly because the prosecution launched by ACCC was about to "get bogged down legally". All this came to pass at Easter 2001 when the RBA 'designated' credit card schemes and the ACCC conceded the transfer of this responsibility. Remarkably, the RBA never mentioned to the Banking Committee that is own powers were untested and likely to be challenged, as the banks had always promised. (As noted, the ACCC is about to re-enter this debate through its 'investigation' of the banks' BPay scheme modeled on the credit card arrangement, complete with an interchange fee)

One question at a time

By May 2001 the game was on in earnest. Among other bon mots -- "credit cards are the biggest issue at the moment" -- was tendered as an explanation of why needed action was not being taken to follow up previous assessments that the customers were also being creamed by excessive fees for ATM and debit card transactions.

The "Banking" Committee was not impressed, very sensibly asking then for "a total policy approach" and subsequently issuing a press statement headed "Reserve Bank told to get its act together" -- and requesting that interchange fees on ATM and EFTPOS transactions be fixed 'as soon as possible". The Reserve Bank was not accommodating on the day, or subsequently. That apparent disregard of Parliament is reasonably a matter of some concern -- especially when the previous history of mishandling this 'total policy' matter reveals so much to be desired. A concern likely to be reinforced shortly by the probable exposure of the Payments System legislation as inadequate to the task of promptly delivering what the Reserve Bank regards as good public policy. Alan Fels would be wryly amused.

The Parliamentary Committee is about to realise that it has been 'yes ministered' -- a costly, pointless legal stoush will further delay a properly coordinated and effective approach to regulating the retail payments system. Time slips away -- and the money keeps rolling in, for the banks.

One could say that it is appropriate for the Reserve Bank to make decisions independently about its payments policy responsibilities, as with its monetary policy decisions. Against that stands a long history of inaction on issues about competition and efficiency in retail banking. The Parliament had every right to ask for a 'total policy approach'. And beyond that there can be a fine line between independence and insolence.

The debate rejoined

It is a long time between drinks in this policy wasteland -- and the public thirst is apparently never to be satisfied. Dawdling ineffectiveness begs the question of any resolute intention to bring the retail payments system to order about its efficiency and competitiveness.

A couple of questions should have been asked and answered some years ago,
*     first, should the trade practices law proscribe uniform pricing agreements that have not been cleared by the competition policy authority?; and
*     second, why is a line of credit not offered on debit card accounts?

We live in hope.

Peter Mair