Taking the lead in the digital economy
Tyro asserts in its submission to the Reserve Bank of Australia’s Review of Card Payment Regulation that now is the time to eliminate the interchange fee costs, so as to facilitate the introduction of innovative, efficient and financially safe new real-time payment solutions, reverse the current decline and risk of disappearance of cheaper domestic card scheme (eftpos Payment Australia Limited) and in general to accelerate electronic payment adoption substituting paper-based methods such as cash and cheques.
There is a significant productivity potential for Australia, if it were to take a lead in the digital economy. But today, we rather observe that instead of card payments becoming an ever more cost efficient payment facility, the industry introduces costs and complexities slowing down the migration. The root cause is interchange fees and their perverse effects.
Interchange fee proliferation drives excess and unfairness
By their nature, interchange fees are not transparent and sheltered against competitive pressures. No consumer or merchant can negotiate interchange fees except for the two dominant retailers. The credit card schemes compete to entice issuer banks to issue and promote their card products. The issuer banks’ incentive is to maximise interchange fee revenue. Thus the schemes and the banks game the regulatory framework through proliferation and backward-looking three-year compliance reviews.
The vicious circle for the economy and the community has been driven by the schemes and banks proliferating the number of payment card products offering an ever-increasing range of low and high interchange fee and reward variations. This way the schemes and banks can maximise the excess over the regulated average interchange fee cap and they can offer discounted card services to the powerful dominant retailers and expensive card services with attractive rewards to wealthier customers.
The unfair result is that these discounts and rewards in the hundreds of millions of dollars per year are funded by Australia’s small and medium business merchants and the least affluent consumers. This is a huge transfer of wealth.
It is time to recognise that the current dominant card payment systems have become mature systems. While the interchange subsidy may have been appropriate during the establishment phase of the card payment system, it is now counterproductive in a phase where the acceptance of card payments has become an ubiquitous alternative to cash and cheques.
Interchange fees for debit cards should be eliminated, since the consumer is using his own money and resource costs are minimal. Interchange fees for credit cards should also be eliminated or at least reduced to a maximum of 30 basis points on all types of card transactions. For credit cards one could consider a reasonable interchange fee given that merchants do benefit from a credit facility and resource costs are somewhat higher.
As a consequence of zero or reasonably low interchange fees, the incentive to proliferate cards to game average interchange caps, the resulting cross subsidies at the detriment of SMEs and less affluent consumers and the need to surcharge costs to consumers is eliminated or at least reduced. The substitution of cash and cheques would accelerate.