MasterCard says card rates will rise if RBA cuts fees  August 9, 2015 - 3:12PM   Shaun Drummond

MasterCard says if the Senate inquiry leads to lower merchant fees there is no doubt consumers will be adversely affected. Photo: Michel OSullivan MAO

MasterCard says any move by the Reserve Bank to cut fees merchants pay to banks for accepting credit cards runs the risk banks will recoup the income by raising card interest rates.

In a submission to the Senate inquiry into credit cards, started by a very busy Senator Sam Dastyari, the global card giant said the institutions most likely to raise rates were smaller banks and credit unions because they would suffer a greater loss.

The RBA is expected to decide what reforms to make to payments at a meeting of the Payment Systems Board on August 21. It will then conduct a public consultation on its plans, which will coincide with the Senate's inquiry on card interest rates.

The Reserve Bank is expected to decide what reforms to make to credit card payments at a meeting of the Payment Systems Board on August 21. Photo: Andrew Quilty

One option it is widely believed to be considering is capping interchange fees paid by businesses to banks issuing Visa and MasterCard cards to 0.3 per cent per transaction, more than halving the present average of about 0.83 per cent. This would cut about $2 billion in fees going to banks every year.

"If the RBA lowers interchange then there is no doubt consumers would be adversely impacted," Brent Thomas, MasterCard's vice-president public policy and corporate affairs, said. "Those impacts could be in a range of ways, including higher interest rates.

"Additionally, some banks and credit unions have confirmed they would find it difficult to continue offering low-interest-rate credit cards."

This was because the big banks were both issuers and and "acquirers" of cards – meaning they accepted cards on behalf of their business customers – while small lenders were generally just issuers, Mr Thomas said.

"That is one of the central planks to ensuring Australians have access to affordable credit."

More likely

However, sector experts disagree. Professor Steve Worthington, an expert on credit cards from Swinburne University, said it was more likely banks would raise fees and reduce the rewards they offered to customers before they raised interest rates.

"There is an increasing number of transactors (those who pay off card balances within interest-free periods), so I don't see banks changing interest rates because that's too sensitive," he said.

"But I do see an increase in fees and I do think there will be a reduction in the value of rewards schemes. To raise interest rates would be counter-productive, especially given the political pressure now to reduce interest rates."

Another industry observer, the former head of Diners Club Grant Halverson, believes other fees and charges, including other levies on business, will be hiked by banks to pay for any loss of income from interchange. 

Interchange fees have gone down but the charges to merchants have quadrupled, including commission rates and monthly terminal fees. Because banks in Australia are the biggest owners and distributors of the payment terminals, they have many more opportunities to earn margin than banks in other countries.

The inquiry is looking into why interest rates on credit cards have not reduced in line with a fall in the cash rate since October 2011. They have averaged 13 per cent for low-rate cards and 20 per cent for "premium" cards, which are usually the ones that have the highest fees and rewards.

A spokesman for Senator Dastyari said the inquiry would look at interchange fees and their influence on other fees and interest rates paid by consumers. 

"We have made it quite clear while there has been a lot of interest in the interest rates, the interchange rate is something we will be looking at as well," he said.

"It is a piece of quite historic red tape and legislation was introduced to stop gouging of [merchants] with this fee."

But he said interchange fees might no longer be relevant, as the world moves to use new forms of digital currency.