SUMMISSION :  RESERVE BANK PAYMENTS POLICY DEPARTMENT:  CARD PAYMENTS REGULATION

THE FUTURE FOR CREDIT CARDS

MYSTERIES OF RETAIL PAYMENTS REGULATION

The portents of the RBA’s current ‘issues paper’, and yet another protracted review, are not all that good when the regulatory noose needs to be tightened more quickly around credit card schemes.
It is disappointing, for example, that, apparently, the cap on interchange fees, for local credit card transactions will, at the very least, not be lowered to 0.3% in line with the now established European standard.
Ideally, all ad-valorem fees in retail payment schemes would be proscribed – and doing so would soon cool the debate about retailer surcharges. 
The confusion about planned inaction is only greater when the RBA says:
 The current review has not altered the Board’s long-held view that there appears to be little justification for significant interchange fee payments in mature card systems.
The concerns are further stimulated when the RBA makes a plea for decency, well knowing banks’ long determined inclination to circumvent regulation.
........., the Board expects payment systems participants to observe and comply with the Bank’s regulatory framework in good faith and not attempt to circumvent the policy.
Beyond that, the little-ado-about-much theme of the RBA’s inclinations is further illustrated:
............. while there may be a role for interchange fees in emerging payment systems in encouraging the use of a system by one side of the market or the other, the case for such fees is much weaker as the system becomes well established. The latter conditions clearly apply in Australia; payment cards are now the dominant means of making retail payments, .............. Visa and MasterCard are the two largest schemes and jointly account for around 65 per cent of all card payments (debit, credit and charge). This market share has grown over the past few years, but there has been no tendency for interchange rates in these systems to fall as system volumes have risen and as average costs have fallen.
Why does the RBA not act on its own repeated assessment: no need for interchange fees?
There are also relevant points that the RBA does not seem to mention. In particular the customers’ inducement to use credit cards is only increased when, beyond a few free debits to deposit accounts, additional debits attract fees of some 50 cents – fees that can be avoided by using the credit card account instead of a debit card.
It is no wonder that the question, left hanging in the air, is why such a long and tortuous debate is still unfolding some 20 years after the RBA was empowered to take credit cards out of the retail payments game because they were, even then, known to be a redundant, profiteering and disruptive contrivance against the public interest. 
When something is not done it is presumably something not intended to be done. Why?

Starting at the end

Many, like me, have long been troubled by the apparent ineffectiveness of the regulation of retail payments arrangements, and related transaction account banking facilities, to promote – and presumably deliver – an efficient and competitive retail payments system.
Those, so troubled, do not include the four major banks. 
Indeed a former major-bank CEO headed a recent review of the financial system and, early in the course of that review declared the system was both efficient and competitive – and that was the end of that line of inquiry. This declaration was then, and remains now, contrary to the understanding in the community generally that the retail banking system operates like a cartel – and un-competitively and inefficiently as well -- to benefit the banks at the expense of the community. 
Credit card schemes – now, essentially a redundant contrivance -- are a prime example.  
Recurrent scandals, about malpractices and gouging of fees among the major banks, reported in the media and abhorred in the course of parliamentary inquiries only add to the sense of incredulity in the community with ‘AOK’ announcements from the regulators that ‘there is nothing to see here’.
There is plenty to see here.

Before illustrating that further, however, it may be instructive to consider a possible sleight of sight in reading the riding instructions given to the RBA about its regulation of the payments system – they say:
The Board is required to exercise its responsibilities in a way that best contributes to controlling risk in the financial system, promoting the efficiency of the payments system and promoting competition in the market for payment services, consistent with the overall stability of the financial system.

Those, like me, seeing words they like – about promoting competition and efficiency – are not seeing the words the RBA and the major banks like, the apparently overriding top-and-tail to these instructions about ‘controlling risk’ and ‘consistent with the overall stability of the financial system’.
Once the focus of attention is riveted on ‘risk’ and ‘stability’ it is no wonder the RBA has been and remains a self-declared ‘reluctant regulator’ of retail payments systems – and why problems with no-competition and inefficiency in retail payments remain entrenched.

The community is the guilty party (if the RBA is not)
Community angst about a monopolistically profiteering banking system sits uneasily with the same community concurrently retaining an unhealthy attachment to inefficient payment products.
Imagine the outcry if, some two decades ago, the RBA had actively promoted the demise of the cheque as a popular payment instrument. Recall some history about reforms of bank fees – like the open revolt in 1963 when the banks started charging 3 cents for each cheque deposited; bring to mind any of the myriad letters-to-the-editor decrying the banks charging customers to either put money in or take (‘their’) money out of their account.
Have some empathetic respect for the politicians and the regulators deftly letting sleeping dogs lie. Bank regulators take refuge in allowing banks to get retail-banking revenue however they can – the only proviso being that bank customers be never told about the sleight of hand entailed in the customers swapping free banking transactions for not getting interest on deposits in transaction accounts -- and more, banks overcharging retailers for credit card transactions which are provided not only ‘free of charge’ to card users but often encouraged with flyer-point rewards as well (costs all recovered in higher retail prices for purchases).
It is an indictment of the community that the RBA could, apparently, never ever be permitted to share with the community these insights into how the banking game is played: the customers are left with an illusion -- the sheer enjoyment of being underpaid and overcharged.
It is notable, however, that the same community has been played off a break by the increased price of electricity, gas and water among many other utility things – areas where community complaints about excessive charges are met with an official bon-mot akin to advice recently made popular by a Cup winning jockey. 
Even so, the question has to be asked ‘why did the RBA not take the community into its confidence and, with the help of a Ross Gittins, explain why it was sensible to encourage banks to levy explicit fees and charges directly on customers for banking services?
Now, the answer to that question is presumably that the RBA did not want to – it did not want to change a game that delivered excessive profits to banks and, thus, salvation also into the RBA’s hands in terms of ‘controlling risk and avoiding instability’ as the solvency of banks was, and is, so softly featherbedded. 
Overall, the display of such reluctance by the RBA has been and remains problematic – properly explained, the community could have and would have understood the need for better outcomes.
There is still no indication of the RBA intending to show more respect for the community --explaining how the banking game works now and could be played better in future.
A never ending story
                                        .............. of a regulatory mystery.
Twenty years on, it is remarkable that the RBA is embarked on, and embroiled in, yet another round of protracted review and consultation to address ‘problems’ with credit card schemes. Basic problems, of longstanding, have not yet been properly addressed -- some problems reflect misguided regulation, by the RBA itself, in its previous displays of circle-work that could collectively be seen as more intended to foster, than to stop, profiteering inherent in credit card schemes.
The RBA could have, should have, wrapped these problems up years ago – why did it chose to not do so? 
The recognition of credit card schemes clearly confronting the wider Australian community dates back to the early 1990s. At that time, it was expected that the acceptance of EFTPOS debit-card schemes meant that – except for international travellers -- the future for credit cards was bleak – especially if debit cards were linked to a line of credit.
What happened next was an astonishing illustration of attack-being-the-best-defence by the banks issuing the dominant Visa and MasterCard (VMC) credit-cards. Instead of languishing as they should have, these credit card schemes were soon prospering mightily. None of this could have happened without the tacit cooperation of the RBA, to say nothing of other consumer-protection regulators deferring to the RBA.
By way of an illustrative anecdote, the demise of credit cards was expected to be documented in a reformed collection of card transaction statistics in the RBA Bulletin showing separately debit and credit card activity.  The development of this collection, first published in mid 1995, intended to embrace details of revenue collected by way of interchange and other fees paid by merchants and customers – separately for both card classes. At the last moment the RBA deleted the revenue items – this notwithstanding that all banks, including the major banks, had agreed to report these figures for publication. There is a wry rule in the bureaucracy – do not ask questions to which the likely answers would demand action we do not want to take. Many years later, when this shortcoming was corrected, credit-card interchange fees had already been capped at about half of previous levels.
The question, then left hanging, is why the RBA did not want to see the cheaper and more efficient technology of EFTPOS displace the profiteering and inefficiency inherent in the VMC credit card schemes?
There should be growing respect for the idea that the RBA still likes banks to have very lucrative, soft-income streams to bolster their solvency. Indeed, the recent flurry of activity about higher capital requirements for banks needs to be weighed against the loss of soft income from deposit accounts as interest rates fell to historic lows.
The take-over value (sale price) of a bank holding substantial transaction account deposits is a lot lower when interest rates are 2% p.a rather than 5% p.a.  Consider that banks are now holding some $1,000 billion – that’s one trillion – in transaction account deposits on which ‘no’ interest is paid and, at 2% v.5%, earning some 30 billion less each year to cover costs and any losses – the present capital value of that ‘less’ is ..............best left unsaid lest it frighten the horses.
 A regulatory wasteland
Some things are still not well understood.
Globally, central banks, and associated financial system regulators, are routinely accorded a sanctified status that, frankly, almost always stands in sharp contrast to repeated, practical displays of ineptitude.
A foremost illustration of such misplaced faith is the Basel based BIS – a central bankers’ bank established in the wake of the great depression, to ensure such a thing never happened again. It did in 2008. The viability of national and global financial institutions and markets was sapped in a two-decade campaign of misguided and deceptive regulatory reform. Promoting global observance of a regulatory scheme promising ‘bank capital adequacy’, actually, predictably, ensured the complete contradiction of the promise and delivered bankrupt banks and a global financial crisis. 
Why the BIS still exists is an open question.
A renewed framework for such campaigns, to supervise bank stability, nationally and globally, subsequently reached such a babel-like level of confused complexity as to leave local banking regulators perplexed – well advised to just do what they think best.
Locally, in Australia, a dramatic contribution of the banking regulators to financial instability was made early. In the 1980s, the local banking system was deregulated without understanding the consequences -- that what was being done would precipitate a substantial failure of the local banking system. In the wake, all state banks and almost every newly licensed foreign bank failed and two of the four major banks were on the ropes. 
The repercussions included a level of political and regulatory fear that has apparently translated to a no-risk regulatory culture and ‘can’t-fail’ industry structure.
That context is essential to understanding the history of payments system regulation – the self-described title of ‘reluctant regulator’ grossly understates the apparent inclination of the RBA to do nothing much in the way of reforming an uncompetitive and inefficient retail payments system. As planned, credit card schemes will remain a problem – for customers!
End note
Some 75 years ago a debate about nationalising the banks, or not, eventually decided ‘not’. The situation now prevailing is close to the ‘not’ being replaced by ‘now done’. In broad terms, bank customers own the banks and get the profits in a circular interaction assisted by super funds – and the community purse is always open to cover any unforeseen events. 
The four major national banks that have long run the game akin to a cartel are so ‘too big to fail’ that questions about the system being inherently competitive and efficient have long ceased to be relevant. A new national payments platform, akin to a public utility, will make a useful contribution to efficiency but competition will remain a mythical aspiration.
Australia could do better: taking credit cards out of the game would help but not yet it seems.
Peter Mair 28 January 2016.