Next Friday, 18 February, the Reserve Bank Governor will meet the reconstituted Economics (and Banking) Committee of the House of Representatives.

The focus of this discussion opener is policy issues about ‘retail payments’, ahead of the Federal Court hearing the retailers’ challenge to the proposed regulation of the EFTPOS system by the Bank. The mainstream media will continue to step lively on the implications of rising interest rates for household debt burdens and related ‘economics’ issues.

– the ‘new’ committee

How will this ‘new’ Economics Committee shape up under Bruce Baird, as chairman, and with a couple of icon members, Lindsay Tanner and Malcolm Turnbull?

Asking a committee of backbenchers to ‘mark’ major policy agencies, like the Reserve Bank, is inherently frustrating. The Government would hardly want the committee to be too assiduous in chasing sensitive issues in public: opposition members are more likely to gather ammunition than fire shots. However, if the prospects for holding Senate Inquiries are bleak, the tone of committee hearings like this one could sharpen if they offer a chance to draw attention to some issues.

A. Payments Policy: Picking Up the Pieces

Discontinuity in the membership (and secretariat) of this committee means a new team picking up the pieces of a policy debate that has gone around in circles for years, much to the grateful amusement of the banks who run the retail payments system as a de facto cartel.

The nonsense that characterizes this debate in Australia has parallels in some other countries, not least the US and UK. Conversely this nonsense has no place in most of Asia or continental Europe where retail payments systems set the benchmarks for world best practice. One can only wonder what the alliance of the willing has in mind in this regard for developing countries.

The new Committee will be briefed, by its secretariat, based on the latest report of the Reserve Bank’s Payments System Board (PSB) to understand faults in Australia’s retail payment arrangements and the Bank’s approach to reforming them.

It would probably matter little which of the six annual reports of the PSB that was used for the briefing: the six reports have a formula feel about them, summarized as “give ‘em the old one, two, three”.

– the ‘one’

The 2004 Report opens with the usual lamentation about the ‘paucity of data’ that confronted the Board when it was established in 1998. Not only does this ignore the formal responsibility the Reserve Bank had, from 1984 to 1998, to oversee the development of the Australian payments system, it also ignores the longstanding clarity of the mountains and valleys in the big picture.

It has been clear for many years that Australia is overly dependent on ‘free’ cheques (financed by not paying interest on deposits in transaction accounts) and overpriced credit card transactions (and like schemes, VisaDebit and BPay) which incorporate price fixing agreements contrary to the public interest.

An apparent function of lamenting the ‘paucity’ is to excuse the subsequent lengthy studies which, eventually and inevitably, express what was already well known, but with accuracy, to two decimal cents, that is totally unnecessary.

– and the ‘two’

PSB reports then build a (false) sense of confidence about the Bank‘s grasp of the issues: textbook lectures explain how the price system protects ‘efficient resource allocation’ when prices explicitly paid by consumers for payments services fully reflect the costs of providing each service.

Remarkably this ‘theory’ is repeated each year without any genuine acknowledgement that, as things stand, prices paid (and ‘not paid’) by consumers for payments services have not, do not and will not ever bear any sensible relationship to the relative costs of providing the different services.

Nor does the PSB acknowledge that politicians of all colors, who go weak at the knees at any suggestion of customers actually paying fees for transaction services, will condone the most blatant rorting of the system, provided only that high fees are hidden from customers, ‘buried’ in higher retail prices and collected by retailers for the banks.

A few moments practical reflection will show that a major role of the many explicit ‘bank fees and charges’ now in place is actually about driving customers to use services that are very profitable to banks. Banks want customers to use services which are apparently free – credit cards, VisaDebit cards and BPay – but actually entail the very high hidden prices and (high profits) arising in price-fixing agreements and collected by retailers.

The Reserve Bank is a silent partner in the rorting that goes on. The linked power of the banks and the Reserve Bank spins a story to the community which declares acceptable that which most would say definitely is not.

– and the ‘three’

PSB reports go on read like an adult version of “Little Jack Horner” with lengthy self-congratulatory references to reforms achieved and planned by the PSB. At no point does the PSB actually own up to the considerable distance that Australia remains from benchmarks for world best practice and nor does it set a credible practical plan to bridge the gap in the foreseeable future.

This ‘circle work’ has gone on for over 20 years.

– a question

On its very first page the current PSB report perhaps gives cause to ask for a ‘please explain’ from the Bank. Referring to “the considerable aggregate cost to the community of making payments” the report says “….. a conservative estimate (of these costs) would be ½ per cent of GDP, or $4 billion annually.

Tell that to the fairies.

Contrast this with the reporting of ‘costs’ in the PSB’s very first report in 1999. The ‘99 report, at page 6, says: “the costs to financial institutions of providing payments services could be around half to one per cent of GDP” and “if the costs to consumers and firms are included … as much as three per cent of GDP might be absorbed in making non-cash payments”. The relevance of ever mentioning only banks’ costs when referring to the ‘costs’ of the payments system escapes me.

In short, when talking about payments system costs five years apart, there is an incredible factor-of-6 difference in the ‘headline’ range used by the PSB to log the importance of payment system costs into the public mind – and that is just for non-cash payments.

Moreover, there is no adjacent mention of the 20 billion cash payments made in Australia each year.

For conventional cash payments ‘costs’ (actual and implied) run to some 7 cents for both buyers and sellers and, in total, some $3 billion nationally each year– and still there is no sight of an electronic cash system (an all-purpose ‘phone card) that would both revolutionize the efficiency of the ‘cash’ payments system and bring an effective medium for micro-payments to the internet.

The main point for this Committee is that the (inefficient) operation of our retail payments system is costing Australia ‘heaps’ and little effective is being done to put the system on track to world best practice.

This is widely known in the Reserve Bank, by the Payments System Board and by the banks and affiliated beneficiaries of the nonsense – the only group that has never been properly informed is the general public which pays the consequences.

At stake for the community, in prospective reforms of the retail payments system, is much more than part of ‘a ½ per cent of GDP’ and I would be astounded if the RBA did not agree if it were asked for a candid answer, based on ‘full costs’ to the community.

Put the question.

B. The Biggest Card Game in Town

A card game being played globally, for enormous stakes, is also being played in Australia. However, because of a pending ‘legal challenge’ the prospects are dim for any useful discussion with the RBA next Friday about policy issues with the EFTPOS card payment scheme.

The issues about network payment schemes have been widely canvassed in Australia, not least in the past year as the Reserve Bank had its first setback in the courts, and as the battle lines are drawn for the next round in the same Federal Court framework.

It is not cheap to get a seat at the table to play a hand in this game – the disclosed cost of the so-called ‘appeal’ by Visa and MasterCard in 2003 ran to ‘tens of millions’. One consequence is that the community generally, which stands to gain most from properly regulating banks’ card schemes, is denied a voice in appeals against Reserve Bank decisions. One interesting aspect of the coming ‘merchant’ challenge to the RBA proposals on EFTPOS charges is that the merchants are de facto footing the bill for bringing a community perspective to the table. The community should applaud the merchants.

C. VisaDebit (- and the Greedy Pigs)

Over the past decade a truly offensive affront to the sensibilities of the Australian community has been a transaction card product known as VisaDebit.

When used as ‘recommended’ by its issuers (mainly small ‘building society’ banks and credit unions) these cards, which allow no credit, require merchants to pay charges the same as those levied for credit card transactions (which can entail ‘free credit’ and for which costs the banks are presently permitted to load the merchant fee).

For many years nothing was done by the Reserve Bank to deal with the clear breach of good faith entailed in the VisaDebit product. Eventually, however, the Bank acted because the marketing of VisaDebit as ‘free of charge to customers’ was getting leverage off the charges banks explicitly levy for EFTPOS transactions.

And this is where weaknesses in Reserve Bank policy making processes became evident.

  • First, having turned a blind eye for so long, the RBA was at a disadvantage when now saying ‘this is not on’ because it does not suit the Bank (it never ever suited the community which the RBA was there to protect).
  • Second, having decided it was not on, the PSB report says banks were asked to voluntarily ‘address it’s concerns’, and goes on to say “while some progress was made” (read: circle work by the banks bought more time) the banks eventually said they “could not effectively discuss what would amount to the collective setting of interchange fees.”[Ponder that: the very banks which, semantics aside, are party to arrangements effectively fixing prices for card transactions, said they could not discuss a variation of a fee for VisaDebit apparently fixed under arrangements to which they are a party. It is a mystery to me.]
  • Third, confronted with an RBA decision to ‘designate’ (and regulate) the VisaDebit scheme the Visa organization, deciding that attack was the best form of defence, renewed its marketing campaign. [and concurrently the MasterCard organization announced plans to issue a similar ‘off line debit’ card in Australia.]

The new VisaDebit marketing campaign is an apparent play on the theme of the ‘Babe in the City’ movie. The video features a couple of pigs delivering a message disparaging conventional EFTPOS cards on the basis that VisaDebit cards can be used at ATMs overseas and at 22 million merchants ‘accepting’ Visa internationally.

No mention is made of the high costs unfairly imposed on Australian merchants and recovered in higher retail prices paid by the Australian community. If Visa was truly proud of its VisaDebit product it would own up that using it is only ‘free’ because merchants are heavily charged for customer purchases made with it. The Visa campaign is all spin.

The ‘pigs video’ is accessible on Visa’s website along with a brochure headed ‘Get a Visa(Debit) Card’ because, among other things, it can be used by its 4 million Australian holders to make purchases on the internet and over the phone. Again there is no mention of the very high costs imposed on merchants (and customers, indirectly) for the privilege — nor is there any recognition that it is a discretionary decision of the banks to withhold similar flexibility in purchase functionality when using conventional EFTPOS debit cards

The pigs in the video apparently know no bounds – and, as is now clear ten years on, the fencing team at the RBA seem unable to get a needed job done properly either.

Visa should be ashamed – and so should the Reserve Bank.

While EFTPOS, sub judice, may be out of bounds next Friday, the RBA would seem to have latitude to frankly answer questions about the disrespect Visa is openly showing to the Reserve Bank and for local sensitivities: Visa is effectively saying ‘we will do whatever we can get away with” and, sotto voce so far, we may again pursue the matter in the courts to delay any enforcement. Visa indicts itself.

It would also be useful to get on the public record a formal denial from the Bank in answer to the question: has it delayed action on VisaDebit in part to protect the interchange fee revenue of the ‘small bank’ issuers of VisaDebit cards? [….because the small banks are still waiting for the promised offsetting relief from paying substantial interchange fees to the major banks for EFTPOS transactions made by their customers.]

It is similarly lamentable that these ‘small institutions’ which have exploited the scope to issue VisaDebit cards (and trousered lucrative interchange fees) have not substituted principle for mammon and asked for all interchange fees to be abolished from network payment schemes. These current and former mutual organisations sold their souls when they ‘privatised’ their businesses or otherwise abandoned a low-cost ethos which served their members best. Community trust was betrayed: beware of the words ‘not for profit organisation’.

C. The Five-Year Review

In August 2002 when the Reserve Bank delivered its (objectionable) decision on interchange fees for bank credit card schemes, it proposed to review the decision after five years.

Since then the folly of the RBA making piecemeal decisions on ‘interchange fees’ for network payment schemes has become patently obvious.

One might say ‘why wait’: it is now clear that the decision on credit card fees was ‘in error’ sufficient to prejudice the proper regulation of interchange fees for the EFTPOS, VisaDebit and BPay schemes (and prospectively for the network schemes we need to make electronic money a practical reality.)

Hopefully the Federal Court will, later this year, expose this breach of good public policy making in a ruling consistent with the 2004 decision of the Australian Competition Tribunal rejecting a proposal to set at zero the interchange fee for EFTPOS purchases, because it was contrary to the public interest.

A useful rule of thumb encourages those realizing that a mistake was made to change the decision and correct the mistake, reasonably promptly. One would like to believe that the Reserve Bank respects this maxim.

For the record, it would be useful next Friday if the Committee were to interpose the question — ‘Are you still happy with the 2002 decision on credit card interchange fees?: preferably this would be done while the Bank is recounting at length the ‘success’ of the credit card ‘reforms’ it engineered.

In this context it is useful to note that the Reserve Bank is inclined to garner support for its EFTPOS proposals by saying it will remove hidden fees of some $170 million annually, mainly paid to merchants. While saying this the Reserve Bank conveniently overlooks that remaining credit-card interchange fees still entail ‘hidden fees’ of some $500 million annually that is paid to banks.

Concluding Comment

I suspect next Friday’s hearing of the Reserve Bank by the ‘Economics/Banking’ Committee will be somewhat ineffectual, especially on payments policy matters.

The hearing will essentially be a ‘free kick’ for the Reserve Bank

For the first round when a new committee is up against experienced team of big hitters from the Reserve Bank, one could perhaps say ‘fair enough’.

The game will be on in earnest in the next round, presumably scheduled for later in 2005 and hopefully after the Federal Court has decided the merchants’ challenge to the Reserve Bank’s plans for EFTPOS interchange fees.