Credit card surcharges

The RBAs Malcolm Edey gave a speech yesterday on the payments system.

When we think about innovation in a network setting like this one, it’s useful to distinguish between two types: proprietary innovations, where the benefits are localised to the business that’s doing the innovating (and to the customers of that business); and system-wide innovations, where the benefit accrues to users of the system as a whole.
It’s reasonable to expect that service providers will do a good job with the first kind of innovation. In fact we see examples of that kind of development all the time. For example, we are currently seeing financial institutions exploring new ways to use mobile devices for payment purposes, including for making person-to-person payments using the existing infrastructure. Similarly a major bank is promoting the ability of its systems to update customer account information in real time.
But it’s in the second type of innovation that there is the more serious potential for inefficiency, or for under-investment. That might happen through a lack of co-ordination among industry participants, or through a lack of incentive for individual providers to participate in system-wide improvements. We’re not starting with the presumption that that’s the case – only that it could be.
As a regulator, we recognise that our approach to these questions has to be quite different from the way we approach other cases for regulatory involvement. The RBA has significant powers, as you know, to designate payments systems and to set standards. But we’re well aware that you can’t regulate innovation into being. That’s not the intention. As far as possible we’ll be aiming to work with industry, looking at whether there are areas where more co-ordination is needed, and assisting with that where we usefully can.

That actually sounds quite sensible, but it is not clear that this is what the RBA has been up to in regulating credit card interchange fees. The ACCC and RBA promoted this ‘reform’ in 2000.

Australia has well-established ATM, credit card and debit card networks. Each of these
networks operates to a high standard of technical efficiency, and has widespread customer acceptance. Interchange fees may have played an important part in the development of these networks, but by their nature they have done so by reducing the potency of the normal market mechanisms which determine consumer choice and resource allocation. While a pricing system based on interchange fees still seems to be the most practical arrangement for the credit card network, the levels of interchange fees are high relative to costs and fees of this magnitude are not essential to the continued viability of this network. For the other networks – ATMs and debit cards – alternative pricing arrangements exist under which providers of card services could recoup their costs directly from users, as they do with other payment instruments.

At the time the ACCC and RBA mounted a theoretical argument that interchange fees somehow stifled competition. Yesterday Malcolm Edey must have expanded on his scripted speech because the AFR reports (subscription required)

The days of airlines, taxis and hotels hitting consumers with credit card processing surcharges as high as 10 per cent of a purchase price could soon be numbered.
The Reserve Bank of Australia, which regulates the payments system, gave its strongest hint yet yesterday that it could give card networks including MasterCard and Visa the power to cut off merchants who dress up price gouging as processing fees.

None of the other media are reporting that, but if accurate it must suggest that the RBA has its doubts about the efficacy of its previous reforms.

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3 Responses to Credit card surcharges

  1. conrad

    I don’t really see what the problem is for some of these groups (e.g., hotels), as long as it’s all up front and you know you will be hit by it before you buy the stuff or take the service (perhaps excluding taxis) — it’s not like you are obliged to pay with credit cards and it’s not like you don’t have other options in terms of how you can pay (or just buy something from someone else who is willing to take your credit card).

    I think the problem is worse in reverse — where the credit card companies try and stop retailers offering discounts when you pay by a method that doesn’t cost the retailer 2%, although I seem to remember that laws were created against this.

  2. Patrick

    Merchant fees are generally less than 1% for Visa & Mastercard and anywhere from 1-3% for Amex depending on industry. It is interesting to note that retailers are happy to cry poor at the additional hit to their bottom line of accepting credit cards but often fail to understand the benefit of demand brought forward that credit card acceptance creates. i.e. I am much more likley to buy the latest desirable gizmo I can’t afford if the retiler takes my preferred credit card. If I am forced to pay ca$h I may hold off on the purchase. Frankly, merchant fees are a cost of doing business and should not be a separate line item for a consumer. If a merchant wants to build the cost into their price like all the other costs of doing business then fair enough.

    Cabcharge charge 10% because they can.

  3. Pingback: Credit card surcharging : Core Economics

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