Credit
cards: how the poor pay for the rich - SMH
By Annette Sampson
April 1 2002
I am a bad person.
I used to think I was responsible because I budgeted carefully, used my credit
card to make the most of my purchases, and paid it off at the end of each month.
But thanks to wrangling over credit card reform, I now know that I am flying
around Australia on loyalty points (when you can redeem the damned things) at
the expense of the poor.
As the
process to reform Australia's credit card system approaches farce, the banks and
credit card companies are claiming this is about to come to a screaming halt.
If the Reserve Bank has its way, the
scaremongers warn, I'll be paying extra for every purchase I make on credit
cards, and benefits like loyalty programs, interest-free periods, and
chargebacks will be wound back.
The 50
per cent of Australians who don't have credit cards will be paying less for
their goods and services instead of subsidising people like me.
It will be a classic case of user pays.
But here's the catch. While the banks
have embraced user pays like a long-lost rich uncle in other parts of their
business, they're having none of it when it comes to credit cards.
The
underlying fear is that if the Reserve Bank insists on user pays, what happens
if the user decides not to pay?
The Reserve Bank issued a consultative
document on credit card reform on 14 December 2001 and is receiving feedback.
What got up its nose is the "interchange" fee charged by credit card issuers
(mainly the big four banks, Visa and MasterCard) to the middle men - the
institutions that process credit card payments for merchants.
In
Australia, the average interchange fee is 0.95 per cent - which reaps about $775
million a year for the issuers. Worse, says the Reserve, it seems to be set by a
cosy collective arrangement rather than reflecting the costs involved.
The
issuers can do this because the middle men then slug your local shop or
restaurant with a merchant service fee. This averages 1.78 per cent, though
smaller retailers pay as much as 4 per cent.
It's a
profitable business. The retailers end up paying the costs, and the Reserve Bank
has estimated credit card issuers generate a mark-up of 39 per cent over their
costs while the middle men generate about 67 per cent.
Another way of understanding where the Reserve Bank is coming from is to look at
where the issuers' revenue comes from. Interchange fees account for a third it.
A whopping 60 per cent comes from the "revolvers" - the 75 per cent of
cardholders who incur interest on their credit card balances - and less than 4
per cent comes from "transactors" like me.
The
Reserve Bank wants to change that imbalance. It wants interchange fees cut so
that retailers end up paying for card features that benefit them, but not for
consumer benefits like loyalty programs and interest-free periods. It also wants
to allow merchants to levy a surcharge on credit card customers.
The
premise is that because your local shop is no longer paying for your credit card
benefits, it could reduce prices for everyone else. The poor would stop
subsidising the rich.
While
there's no guarantee retailers would come to the party, consumer groups at least
are prepared to take their chances. As one group tartly remarked: "We are more
optimistic that the true costs will be passed on to consumers in nearly any
business sector other than banking."
Just
as importantly, credit card holders would no longer be rewarded for using the
most expensive form of payment while consumers who use more efficient methods -
like EFTPOS or debit cards - are charged a fee. (If you're wondering why credit
cards are more costly, one reason is that fees for each transaction are charged
on a percentage basis, rather than a flat fee.)
In
central banker speak, consumers would get a clearer "price signal" as to which
form of payment was more efficient and make their decisions accordingly.
No
wonder the issuers are worried. They have encouraged their customers to increase
credit card usage by an unprecedented 26 per cent a year for the past three
years - mainly through extolling benefits like loyalty programs and
interest-free periods. They have actively encouraged selfish behaviour like mine
because those percentage fees have made it good business.
If
I've got a lot to lose from credit card reform, they've got more.
|