The Productivity Commission (PC)’s final report into competition in the financial system was released in the first week of July. The report has major implications for payments in Australia, writes Grant Halverson
The Productivity Commission report reviews whether there has been an appropriate balance between competition and stability in banking, which has entrenched the market dominance of the four banks in Australia. The PC report strongly supports greater competition, transparency and better choices to empower consumers.
For the payments system, the Productivity Commission observes that the system “is at a critical turning point” and has major recommendations:
• The regulator (RBA/Payments System Board) should ban interchange fees by the end of 2019. All other fees should be made transparent and published;
• The competition regulator, the ACCC, should investigate whether interchange fee regulation favours three-party card schemes and, if distortion exists, provide further regulatory intervention;
• Merchants should be given the capacity to select the default route to be used for payments by dual-network cards;
•By the end of 2019, the ACCC should investigate what additional disclosure methods could be used to improve consumer understanding of fees for foreign transactions;
• There needs to be a review of the regulation of purchased payment facilities, such as Paypal, and a simplification of the regime;
• The government should make the ePayments Code mandatory. The code sets out basic rules for who pays for unauthorised transactions, and establishes a regime for recovering unauthorised payments;
• The New Payments Platform (NPP) should be subject to an access regime to ensure there continues to be competition for new entrants to join in, and
• Ways should be investigated for the NPP to promote competition, such as additional functionality for PayID to give customers the ability to send or receive bank transfers and other payments.
The final report
The government will await the Royal Commission’s final report before it definitively responds to the Productivity Commission, expected in March 2019. It is also significant that the UK’s Payment System Regulator announced a comprehensive review of acquiring on 3 August.
To give some scope of the impact of total reduction on domestic interchange – RBA cannot change overseas prices – the key numbers need to be examined. The total credit card spend for the 12 months to May 2018, according to RBA, was A$330bn ($245bn). To get to domestic interchange, you need to take out a number of transaction types, such as overseas spending, Amex and Diners Club, and commercial cards and cash withdrawals, both of which are at different rates.
The domestic spend by Visa and Mastercard credit cards in Australia is therefore A$172.8bn. The average merchant fee for Australian business is estimated at 1.65% for Visa and Mastercard, 1.42% for Amex, 1.80% for Diners Club, 4-6% for AfterPay and 4% for ZipMoney.
There are also other fees and charges from all card and instalment providers. The average merchant revenue for Visa or Mastercard acquirers is A$2.851bn. Interchange for Visa and Mastercard credit cards is 0.75% or A$1.296bn. Interchange on Commercial Cards is 1.10% average, multiplied by A$62bn, giving A$682m.
Therefore, the total interchange that PC is recommending illuminating is A$1.978bn – less than 10% of card issuers’ total revenues. The card companies have been experts at introducing new fees or increasing fees to recoup any loses they suffer.
This happened in 2002/3 when the RBA reduced interchange, and has continued since. The key questions are: will the 0.75% be passed on the retailers? And will retailers pass the 0.75% on to consumers in price reductions?
Previous experience in Australia is mixed, and generally, if reductions are passed to retailers, they are not passed on to consumers, who have suffered increased fees and charges while not receiving any benefits. The Productivity Commission is largely silent on this key issue.
There was no mention of the very high merchant rates charges to e-commerce sites, or the much higher fees charged by AfterPay and ZipMoney for instalment products – both AfterPay and ZipMoney exploit a perceived legal loophole by claiming they do not provide credit, and therefore do not need to comply with credit regulations.
The elimination of interchange also throws a huge curve ball at cards’ frequent flyer programs. Most issuers use interchange as the source of revenue to pay airlines for the points they purchase on behalf of consumers.
Now banks will need to justify this revenue as either a marketing expense, or generate new fees to pay for airline points – most bank programs already have annual fees for frequent flyer use; expect these to increase by 25-35% per year. How have the card issuers recovered monies from consumers since 2003?
• Annual fees increased by 390% from A$24 average in 2002 to A$94 in 2017, despite the 2.6 million zero-fee cards in Australia;
• A new 3% FX fee on all foreign charges generates A$1.2bn per year by credit and charge cards, which includes e-commerce – plus inflated exchange rates;
• Frequent flyer fee increases average A$35 per year;
• Other fees that did not exist before 2003 include late fees, over-limit fees, and increases in cash advance fees, such as lotteries or gambling fees;
• This does not include debit card revenues increasing by A$700m.