Regulate for the future and cut interchange fees
The Reserve Bank’s regulatory approach to the card payment system does not cater for technology advances such as contactless payments and mobile wallets. It needs to move on from yesterday’s battle to today’s reality.
As outlined in our recent submission to the RBA (PDF), current regulation has become trapped in a circle of industry gaming, countered by new regulatory standards of increasing complexity and resulting in enforcement nightmares and new gaming.
Technology advances such as contactless payments, mobile wallets and account-level processing have invalidated the RBA’s fundamental assumption that regulation could assure that price signals and merchant and consumer choices would enable a sufficiently competitive and effective market.
Today’s reality of the payment space is characterised by:
- The fight for the digital-savvy consumer who requires simple, easy, real-time payment solutions such as contactless, account-level processing, and mobile wallets. This is the way it is. It is all about user experience.
- The fact that the technology provider and issuer of the payment product (card schemes and issuing banks) make all the choices and the retailer and their bank are disempowered. There is no more cost information, no product or network choice, and no opportunity for the cardholder or merchant to make any choice at the time of payment.
- The Bank’s concept of transporting price signals to the point of payment which puts competitive tension into the payment selection (by giving the cardholder and merchant a choice) has become obsolete. It just does not work. There is no transparency or choice. It is tap and go.
- The retailer and cardholder cannot avoid high, and at the time unknown, costs imposed on them directly or indirectly. The merchant is taxed.
Given these new realities of payment technology, as an absolute minimum, the Bank should convert the current weighted-average benchmark of 0.50 percent for credit cards and 8 cents for debit cards to a hard cap.
As the interchange fee becomes more reasonable (lower), the pressure to surcharge and the subsequent unsocial cross-subsidies will wane and Australia’s migration into the cashless society will accelerate. Consumers would also enjoy relief from rising cost-of-living pressures, while retailers struggling in a difficult market would become more profitable and competitive.
Current major incumbent banks in the industry might say that a lower level of a hard cap would stop innovation in issuing businesses. The fact that European interchange rates are hard capped at a much lower 0.3 percent, coupled with the current strong profits of the incumbents, strongly suggest that the commercial banks’ argument is nothing more than a desire to preserve profits and market position.
This will, in fact, directly deprive SME businesses, which create the majority of jobs in Australia, of profits and thus capital to help Australia grow.