Professor Steve Worthington, Swinburne University of Technology

Last week, Professor Steve Worthington of the Department of Marketing, Tourism and Social Impact at Swinburne Business School, Swinburne University of Technology presented at RFi’s Australian Consumer Finance Forum during the session ‘Regulation and other Risky Business’, and more specifically on his area of expertise ‘Regulatory interventions and their consequences for customers in the Australian payment system’. We thought it would be useful to include this regulatory perspective in our Specialty Payments Focus ARB, on the eve of RFi’s inaugural Australian Payments Innovation Forum.

 

Professor Worthington, taking the customers point of view, began by outlining his perceptions of the Forum so far that day. “Payments have been described as the life-blood of the Australian finance services industry and I would wholeheartedly agree. It’s estimated that somewhere between a third and a half of revenue in banking comes from the payments operations that banks provide, as well as payments, of course, providing a great source of customer data and a platform for cross-selling.”

 

In his presentation, Professor Worthington covered a decade of regulation and its changes over that time, which he has studied and analysed as, and when, its happened. He covered those regulations that are impacting payments in Australia, the consequences of these interventions, (intended and unintended he quickly pointed out), how consumers access their cash and how these interventions might impact those methods going forward.

 

It is no secret that in their pockets today, consumers (including you and I) hold a variety of cards, and as such, a variety of ways in which to make a payment. At any moment they can choose an eftpos debit card, MasterCard or Visa debit card - which will in turn often be a MasterCard or Visa credit card - an American Express charge or credit card and for some, a Diners Club charge card.

 

In 2003, Professor Worthington was commissioned by the Australian Centre for Financial Studies to write a paper, which his speech at the ACFF covered in a comparative and updated variety. As a quick re-cap on regulation over the past decade, he cited a few interventions and the consequences he sees as affecting the RBA’s intervention of the change to merchant service fees (following merchant pressure to reduce them) allowing a more transparent way of paying for customers.

 

However, as with all interventions, there were some unintended consequences and of this particular intervention, that included the ‘gaming of the system’ (by a variety of parties) to the interchange fees by all of issuers. “The Payments System Board in their 2013 Annual Report commented that in regards to MasterCard and Visa, there were originally 8 interchange categories, now, there are 42”.

 

Professor Worthington described a proliferation of categories depending on the cards that consumers hold and the merchants that they’re dealing with. The Payments Systems Board cited charities as having no interchange fees, supermarkets and the RBA with lower fees, with SMEs being the group that experiences higher fees, causing another challenge for an already challenged segment of the industry.

 

He described the relationship between loyalty points and rewards, with up to a third of consumers being ‘upgraded’ to ‘premium’ cards so although they appreciate greater rewards, consumers are however inadvertently paying a higher interchange fee.

 

He mentioned a recent Mozo survey where there has been a comparison of all rewards points offered, which in many cases doesn’t even equal the annual fee for the credit card. Professor Worthington feels it’s all about being transparent. He went on to outline a plateauing of issues in the industry. The number of credit and charge cards has plateaued, with Australians no longer “feeding our habit” of taking out numerous credit cards. It’s a similar story with the amount of interest accruing balances – which have also plateaued.

 

Credit and charge card purchase values also seems to have plateaued, whereas there is an ever increasing appetite for debit cards. In terms of volume, the debit card has leapt ahead and although traditionally debit cards pay for purchases of lesser value, debit has overtaken credit and been doing so for a long time. Professor Worthington pointed out international experience would indicate (particularly if we are looking at the UK) that debit will quickly be over-taking credit in the value of purchases also.

 

Following his presentation, I asked Professor Worthington, whose study in this space is second to none, his impressions of the three major elements of regulation which will prove a struggle for banks over the coming 12 months and how can they best prepare, and then, succeed through them.

 

Here are his top tips:

 

1) Surcharging - a very topical topic. He used the JetStar $8.50 'fee' per person, per flight example. Professor Worthington feels if the FSI recommends (as they have alluded they will do) that the RBA appoint a regulator (the ACCC?) to monitor surcharging, then it may be up to the banks to implement this as card acquirers, with their merchant clients – definitely a challenge!

 

2) Interchange - if the RBA recommends a limit on the spread of interchange rates (it is currently 180 BP's between the lowest and highest rates and SME's are by enlarge, paying at the higher rates), then the banks will have less income from their merchant acquiring activities.

 

3) If the FSI recommends that the RBA be 'competition neutral' in their interventions into the payment market, then American Express with their issuance of credit cards (as well as their traditional charge cards) may come under regulation, as there is some element of interchange in their relationship with their issuers of American Express Credit cards.

 

Professor Worthington gave a great presentation and we valued his thoughts and insight greatly. It is a rapidly evolving segment of the industry, clearly effected by regulation, which we hope will spur competition and of course, protect the consumer.

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