Defined Terms and Documents       

RBA periodically releases detailed financial reports, known as Staff Working Papers, written by a small cohort of RBA employees, on developments in the credit card market which -

(i)        overplay the share of revenue sourced from Merchant Service Fees on the Wholesale Supply Side of Credit Cards; and

(ii)       downplay Credit Card Issuers' reliance by upon Interest And Fees Revenue on the Retail Supply Side of Credit Cards

 

On 8 Dec 2011, the Writer posted 3 CDs to the Ms. Sharon van Etten, Media & Public Relations Office, Reserve Bank of Australia titled:

*           Request to the Reserve Bank of Australia to implement the same "competitiveness and efficiency" that it has overseen in the 'wholesale supply side' of the debit and credit cards products to the 'retail supply side' of credit cards, because banks profits from credit cards are not derived from the "User Pays Principle"

*           All users should pay the cost of their credit card transactions, and not some "unlucky" users paying a disproportionate burden which has further gapped the "Haves" from the "Have Nots" 

Below is an extract from the afore-mentioned Writer CDs to the Ms. Sharon van Etten at the RBA dated 8 Dec 2011 which 'inter alia' -

(a)        contended that powerful lobby groups on the Wholesale Supply Side of the debit and Credit Card Products argy bargied to achieve equitable pricing amongst the participants in the Four-Party Schemes and Three-Party Schemes whereupon the RBA merely 'rubber-stamped' the outcomes;

(b)        challenged that "The Payments System Board of the Reserve Bank has no regulatory power over these aspects of credit cards." - RBA brought credit card schemes in Australia under its regulatory oversight - Media Release 12 April 2001; and

(c)        implored the RBA to draw upon its "...extensive powers..." to  "......encompass the retail and commercial systems where large transaction volumes provide scope for efficiency gains.....to gather information from a payment system or from individual participants" in order to ascertain  -

            A).    which Credit Cardholders are paying the bulk of Interest And Fees Revenue to Credit Card Issuers; and

            B).    which Credit Cardholders are enjoying Credit Card Products at virtually no cost: 

"Section 2. titled Comments on your email sent Thurs, 10 Nov '11 2:27pm

 

 

 

 

 

 

 

 

 

Attachment 'B' and (I.), (II.) and (III.) below highlight that the RBA "has has taken a number of steps to improve the competitiveness and efficiency" of the 'wholesale supply side' of the debit and credit card products which look to be priced reasonably for "the economic prosperity and welfare of the people of Australia": 

 

(I.)       In 2006 the Payments Systems Board prescribed the interchange fee standard (paid by transaction acquiring institutions, hereinafter Merchants to Credit Card Issuers to be no higher, on a weighted average basis, than a cost-based benchmark.  Interchange fees in the Visa and MasterCard systems are paid by the Merchants to Credit Card Issuers and are subject to regulatory caps - a weighted average of -
*        50 basis points for credit card transactions, and
*        12 cents for debit card transactions. 

(II.)      Around 2006, PSB removed restrictions on Merchants charging surcharge fees (which may differ in percentage) to customers for use of credit cards according to the fee charged to the Merchant by the Credit Card Issuers. 

(III.)     The RBA undertook reforms to the EFTPOS system for proprietary debit cards and the debit card system operated by Visa in Sept 2006. MasterCard provided a voluntary undertaking to comply with the Visa Debit Standards.
These reforms -
 i)         capped the level of scheme debit interchange fees;

             ii)         set a cap and floor to bilateral EFTPOS system interchange fees;

             iii)        removed the requirement that Merchants accepting scheme credit cards also accept scheme debit cards;

             iv)        allowed Merchants to surcharge customers using scheme debit cards for payment; and

             v)         liberalised access arrangements for the EFTPOS system,
in conjunction with an EFTPOS Access Code developed by APCA. 

            From January 2010, the RBA established a separate cap for multilateral EFTPOS interchange fees.
The BPAY biller's financial institution pays a wholesale cost-based benchmark fee to the BPAY payer's institution of -

             *           45.1 cents for a BPAY payment from a deposit account, or

             *           40.7 cents (plus 0.297% of the transaction value) for each BPAY payment from a credit card account.

 

The above interchange fee standard, allowance of Merchant fee surcharges and BPAY fee structure are testaments to the application of "cost-based benchmarks" on the 'wholesale supply side'.

 

   

Perhaps a lot of Argy Bargy amongst the following lobby groups over supply/demand impacts and cost-based benchmarking of services/funding costs have contributed to the "competitiveness and efficiency" on the 'wholesale supply side' of the debit and credit card systems in Australia:

  1. Visa, MasterCard, Amex, Diners Club
    ePal - part-owned by the four pillar banks and also Coles and Woolworths
     Credit Card Issuers

  2. Australian Payments Clearing Association

  3. AMA
     The Pharmacy Guild
    Retail Traders Association

  4. Australian Newsagents Federation

  5. other Merchant special interest groups
     TYRO (Terminal Via Internet Protocol)

Based on my dealings with the RBA in the late '70s, and my understanding why Commonwealth Bank of Australia was divested of it central bank functions in 1959 (refer Section 3 below), and having considered Attachment 'C' and Attachment 'D', I am unable to comprehend your contention that "The Payments System Board of the Reserve Bank has no regulatory power over these aspects of credit cards."  I understand that the RBA has "...extensive powers..." to  "......encompass the retail and commercial systems where large transaction volumes provide scope for efficiency gains.....to gather information from a payment system or from individual participants" and is therefore authorised to request:

"All the banks to provide monthly (or quarterly) data on:

1.       Number of cards that repaid total indebtedness and aggregate dollar amount of those repayments.

2.       Number of cards that repaid > or =50% of total indebtedness and aggregate dollar amount of those > or = 50% repayments.

3.       Number of cards that repaid<50% but >5% of total indebtedness and aggregate dollar amount of those <50% but >5% repayments.

4.       Number of cards that repaid <=5% of total indebtedness and aggregate dollar amount of those <=5% repayments."

If the RBA has to create a new regulation(s), then it has the authority and charter to do so."

The RBA has released 'Bulletins' each quarter on a plethora of topics since 1985.

The 'Bulletin' – March Quarter 2012 included The Personal Credit Card Market in Australia: Pricing over the Past Decade written by Iris Chan, Sophia Chong and Stephen Mitchell from the 'Payments Policy Department'.  Alas, this 11 pages Bulletin focused exclusively on the Wholesale Supply Side of Credit Cards as evident in the below 'Conclusion' with no analysis of the Retail Supply Side, in particular no explanation as to why the RBA has done naught to require Credit Card Issuers to lower interest rates in line with the fall in the Cash Rate particularly when the Margin Between Average Business Card Purchase Interest Rate And Official Cash Rate Has Increased:

"Conclusion

 

The personal credit card market has evolved substantially since the early 2000s, reflecting, in part, the Reserve Bank’s reforms to improve competition and efficiency in the payments system. In particular, over the past decade it has become increasingly expensive for cardholders to earn reward points and other benefits by using their cards, while merchant service fees have fallen.

More recently, card schemes have provided card issuers with incentives to promote cards associated with higher costs (whether interchange or merchant service fees), albeit within the bounds of the rules set by the Reserve Bank. For instance, all four major banks now offer companion American Express cards – which typically attract a higher merchant service fee and offer higher rewards per dollar spent than the MasterCard or Visa cards with which they are paired – as a standard feature. There has also been a substantial increase in the number of platinum card products on offer to cardholders, with some banks replacing their existing gold cards with platinum cards and a number of merchant-branded platinum cards also introduced.

In addition, now that the distinction between gold and platinum cards is diminishing, some banks have introduced new super-premium cards that offer more  generous rewards.

These recent developments have increased the interchange and other revenue received by credit card issuers, which they may use to fund more generous rewards programs for cardholders without a need to increase annual fees. That is, some cards have become more attractive to use since recent changes have lowered, albeit slightly, the effective price paid by some credit Cardholders relative to other payment instruments. At the same time, these trends add to costs on the acquiring side of the market and, if sustained, could put upward pressure on some merchant service fees over time.

Notwithstanding these developments, average merchant service fees have been relatively stable in recent years and they remain well below levels which prevailed prior to the reforms."

Below is an extract from afore-mentioned The Personal Credit Card Market in Australia: Pricing over the Past Decade which highlights the RBA's concern over aspects of the Wholesale Supply Side where each of the below three parties have powerful lobby groups to protect their commercial interests:

*        Credit Card Issuer;
*        Card Acquirer; and
*        Merchant.  

"The Reserve Bank became concerned in the early 2000s about the competitive forces acting on Interchange Fees in the Four-Party Schemes, as well as the fact that surcharging restrictions imposed by both the Three-Party and Four-Party Schemes were masking price signals to Cardholders about relative costs of different payment methods.  It has therefore progressively introduced a number of reforms to the credit card system, with the aim of improving efficiency and competition in the Australian payments system.

Specifically, the Reserve Bank imposed interchange fee Standards (which came into effect in 2003) that placed a cap on weighted-average Interchange Fees for the MasterCard and Visa credit card schemes.  The effect of this cap, currently set at 0.5 per cent of transaction value, has been to lower the weighted average Interchange Fees in these Schemes by around 45 basis points. Each Scheme must formally comply with the cap on specified dates every three years, or whenever the scheme makes a change to its interchange fee schedule.

Around the same time, the Bank also removed prohibitions on surcharging that had been placed on merchants by Card Schemes. The effect has been to allow Merchants to pass their cost of accepting credit cards directly on to consumers and to use the threat of surcharging to negotiate lower Merchant Service Fees from their Acquirer."

Alas, the RBA shows no such interest in protecting the financial interests of the on the Retail Supply Side.  Unlike the Wholesale Supply Side where all the parties (Credit Card Issuers, Card Acquirers and Merchants) have powerful lobby groups to protect their commercial interests, the Retail Supply Side contains exceedingly powerful and occasionally unconscionable Credit Card Issuers that deploy a Labyrinth of ‘Concealed Spiders’ and charge Usurious Unsecured Personal Loan Interest Rates Charged On Many Credit Cards, whereas almost 8 million Australian Credit Cardholders have no lobby group to protect their commercial interests because Australia's Principal Regulator of the Payments System, namely the RBA considers that "The Payments System Board of the Reserve Bank has no regulatory power over these aspects of credit cards."