Top Australian Bank Regulator Defends Interchange Regulation

In testimony today before a committee of the Australian house of representatives, the governor of the Reserve Bank of Australia stoutly defended the RBA's action last year to regulate credit card interchange rates in that country, claiming it has saved merchants some $447 million (US) in the past year and handed them new bargaining power in their negotiations with the card systems. The testimony comes at a time when concerns about interchange are reaching a peak in the U.S., with at least three new lawsuits having been filed by merchants over the issue in the past 60 days, and calls by some merchant representatives for regulation of the interchange-pricing mechanism. Speaking before the Australian house's standing committee on economics, finance, and public administration, RBA governor Ian MacFarlane said his agency's reforms have benefited consumers and merchants by cutting transaction costs, reduced incentives to cardholders to use cards only to obtain frequent-flyer points and other transaction-driven rewards, and given merchants the power to pass card costs on to consumers. “The biggest single reform was to hand back to the merchants the power to adopt the user-pays principle which they had had denied to them for 30 years,” MacFarlane told the committee. “It has been handed back to them. We are trying to empower them. I am saying publicly, 'You are doing a public good if you are a merchant and you charge someone for using an expensive payment mechanism. You are helping the community. You should be congratulated.'” He contended the RBA reforms–which forced Visa and MasterCard credit card interchange down from 80 basis points on average to 35 basis points and swept away card-network rules prohibiting merchants from surcharging for card transactions?have cut transaction costs overall in Australia. He also credited the reforms for reducing what he referred to as a “cross-subsidy” by which consumers using credit cards as transaction devices to gain rewards points were benefiting at the expense of borrowers. He and other RBA officials presented statistics indicating rewards programs are now paying 0.6% of dollars spent on average compared to 0.8% before the reforms took effect. “The ordinary consumers were paying for rewards points for the subset of consumers who had these [rewards] credit cards,” he said. “All we are doing is reducing that cross-subsidy.” In response to criticism from one committee member, who feared regulation has distorted the market in a way that leads consumers to move to American Express and Diners Club cards because they offer higher incentives, MacFarlane said that overall regulation has benefited society. “It is going to have the effect of reducing the average cost of the transaction in Australia,” he retorted. “If that is a distortion, we will plead guilty to that.” He buttressed his point by saying AmEx and Diners Club collectively have increased their share of market from 10.5% to 12%, counting activity on cards cobranded with banks, an increase he dismissed as small. The RBA has pressured all the card companies to release market share numbers, and MacFarlane said the agency will publish the first release next month. Along with the regulation of bank card rates, the RBA has also won agreements with AmEx and Diners Club under which the T&E card companies will publish their discount rates, allow merchants to pass on these fees to cardholders, and allow merchants to steer cardholders to less expensive payment alternatives. The RBA's action on interchange has sparked controversy in part because it prompted banks to raise annual cardholder fees and trim grace periods. Indeed, today's testimony revealed households have paid an additional $139 million in card fees since the regulation took effect last year. But MacFarlane insisted regulation was the only alternative, given the circumstances?and made a reference to a similar set of circumstances in the U.S. “This is a very peculiar market,” he told the committee. “All the research has demonstrated that in these markets, particularly the U.S. market, competition leads to increasing merchant service fees [because of rewards programs]. That is why this is a market that needs some form of regulation. We know?the research has been done?that the hands-off approach means year by year the cost of making payments goes up.” The RBA's regulatory work may not be done. It has PIN debit fees under review and is proposing lower interchange and the elimination of no-surcharge and honor-all-cards rules related to the Visa signature debit card.