Rapacious gouging of consumers through excessive credit card surcharging needs to be quickly and firmly checked by regulators if new Reserve Bank of Australia (RBA) rules governing the payments industry are to be successful in stamping out the practice, MasterCard’s Australian chief, Andrew Cartwright, has said.
The RBA on Thursday revealed its highly anticipated formal response to the hot button consumer issue, mandating that merchants can only pass-on actual costs of accepting card transactions when imposing surcharges, with the Australian Competition and Consumer Commission put in charge of sniffing out inflated fees and policing sneaky profiteers.
“This affects all Australians and MasterCard is pleased this is being addressed. It’s long overdue,” Mr Cartwright said.
However he cautioned that for the new excess surcharging bans to have a real effect, visible action against rule breakers and effective monitoring needs to be in place fast.
[quote]“As well-meaning as the new rules around surcharging are, if there is not effective review and compliance it will come to nothing, Mr Cartwright said.[/quote]
Consumer advocates and card schemes have been on the RBA and the federal government’s case for years over businesses using overblown surcharges as a way to make money on the side, with airlines, hotels taxis and utilities among the biggest abusers.
Industry estimates put the annual cost of card surcharge gouging in Australia at around $1.6 billion a year, while consumer advocate Choice says it’s seen “mark-ups of up to 2670 per cent on the actual cost to merchants of processing a card transaction” which the group has branded as “both unjustifiable and unacceptable.”
While schemes like MasterCard want a return to the practice of surcharging being stopped altogether under their own rules for merchants, payments regulators have insisted businesses should be allowed to recover the cost of accepting card payments by passing it on in the form of a fee.
For many consumers and policymakers, the RBA’s nuanced cost recovery argument has largely been rendered academic after sectors like airlines started adding hefty flat fees between $8 and $12.50 per seat for each booking secured, with card payments rules accidently creating a lucrative “ancillary revenue” loophole that would otherwise be knocked out by drip-pricing rules.
Without naming names, MasterCard and Mr Cartwright are now clearly hopeful that [quote]some of the biggest and worst offenders will either change their ways swiftly or feel some regulatory sting[/quote].
“I think the ACCC will actively watch the major players and if there is someone who is really out of line they will make an example out of whoever that merchant or retailer is. That’s what I’d like to think,” Mr Cartwright said.
According to the RBA’s latest paper, the surcharging new framework takes effect for large merchants on from 1st September 2016 and for other merchants from 1st September 2017, with the ACCC given enforcement powers under the new regime.
But some consumer advocates remain clearly unconvinced.
“While today’s announcement following the RBA’s review of Card Payments Regulation addresses excessive surcharges in many large industries, uncertainties remain around surcharging card payments for smaller everyday consumer purchases,” said Christopher Zinn, the campaign spokesperson for the merchant-led Surcharge Free group.
“The RBA guidelines do not engage with consumers’ negative feelings toward surcharging or the detrimental impact the practice can have on customer loyalty and advocacy for businesses of all sizes,” Mr Zinn said.
Interchange and competition still a sticking point
As expected fee regulation – especially the consistency of it – has remained a key area of friction in RBA’s big regulatory update for payments between card schemes, with the topic if interchange fees – that’s fees that flow to a bank that issues a card from the bank that accepts a card – still a sticking point.
While the RBA decided to keep what’s known as the “weighted-average benchmark” for credit cards at 0.50 per cent, it’s dropped the benchmark for debit cards from 12 cents to 8 cents.
But there are now also extra caps built-in for different kinds of credit cards, particularly in the area of what’s dubbed “premium” or “platinum plus” – bank issued credit cards that are marketed to higher spending customers and typically have rewards points and loyalty schemes attached to them.
“The weighted-average benchmarks will be supplemented by ceilings on individual interchange rates which will reduce payment costs for smaller merchants,” the RBA said in its statement, adding that “commercial cards will continue to be included in the benchmarks.”
Mr Cartwright argues that the downward pressure on interchange rates through the widening of where the caps apply could prompt issuing banks to try and find the revenue they will likely lose from elsewhere – potentially more directly from consumers and businesses.
Like the opportunistic rash of excessive surcharging, the intent of interchange regulation could produce unintended consequences and arguably perverse incentives.
“The consequence of [further interchange regulation] could be negative to consumers. What happened in 2003, when regulation first came in, was the banks needed to replace this revenue from other sources – be it through increased annual card fees, higher interest rate or reducing the value of rewards programs,” Mr Cartwright told Government News.
“Given that millions of Australians have a platinum or above platinum card in their wallet this [could in reality] negatively impact millions of Australians.
In the commercial card market – credit cards issued by banks to employees of government and businesses to cover and control expenses and smaller supplier payments – there’s also a rub in terms of competitive equality.
Mr Cartwright notes that while European regulators have excluded commercial cards from broader interchange regulation directed at consumer products in recognition of the different economics at play, the RBA has moved in a different direction.
“The risk is that it will be less attractive for financial institutions to issue [commercial card products], and therefore there will be less competition in the commercial card space” Mr Cartwright says.
Notably, competitors to MasterCard and Visa like American Express, whose ‘proprietary’ cards (those issued by Amex itself rather than by a bank) still fall outside the RBA’s interchange regulation regime.
That’s significant because Amex, whose corporate card is well established, is believed to hold around a third of the commercial card market in Australia. And although merchants have the option of passing on acceptance charges, in reality any intended pricing signal is neutralised because corporate cardholders don’t personally cop the extra fees because they are using a work card and don’t realistically have a choice of payment method.
“The corporate Amex card [remains] outside [RBA] regulation, so we still do not have a true level playing field,” Mr Cartwright says.
Amex’s other bank issued ‘companion’ cards have however been brought under the regulatory umbrella for interchange, a move that MasterCard has predictably welcomed.
As the market for digital payments space heats-up, it’s an area that’s become more important daily for customers, market participants, policymakers and regulators alike.
Watch this space . . .
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