Banks are already complaining – hardly surprising given they stand to lose an estimated $900 million in revenue as a result of the plan. Banks warn that the Reserve Bank is moving more aggressively than other countries in cutting interchange fees, while claiming it is underestimating the cost of providing a reliable payment network. If they are to lose $900 million in revenue, banks say they may need to respond by raising credit interest rates and fees, or devaluing reward points.
There is a precedent for this: banks hacked back the value of credit card loyalty schemes last decade as card revenue came under pressure.
The annual fees for credit cards could rise as a result of an interchange fee ban.Credit: iStock
Payment giant Mastercard has also come out swinging against the Reserve Bank plan, arguing it will lead to higher costs for shoppers. Australasia division president Richard Wormald says that when interchange fees were cut in Europe, it sparked a jump in credit card interest rates, and a similar thing will happen here.
“There’s no free lunch. By cutting $900 million out of interchange … consumers are going to pay more for their credit card annual fees. There are probably new account-keeping fees on debit cards … the interest rate on credit cards will go up materially, and of course, those customers that like rewards points – and many do – will see they disappear,” he says.
Smaller businesses that depend on debit and credit cards to get paid, on the other hand, have a very different view.
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They want the Reserve Bank to take a stronger line and cut bank fees for debit cards – a potential cash replacement – to close to zero.
The Independent Payments Forum, which represents small and medium businesses, says the central bank’s proposals don’t go far enough to reduce the pain for small business. It worries that its members won’t see much reduction at all in their payment costs, but with surcharging to be banned, they’ll have to absorb these payment costs or raise their prices. The forum is also pushing for the Reserve Bank to cut scheme fees – the fees charged by Visa and Mastercard to do transactions.
Clearly, there is no way to please everyone in this debate.
As digital payments continue growing, there is naturally tension between banks, card companies, businesses and consumers over who should wear the cost of providing reliable and innovative payment infrastructure, and how to keep the system efficient.
In the Reserve Bank’s view, too much of the cost is falling on the smaller merchants, which pay higher fees than the retail giants to accept card payments.
The Reserve Bank acknowledges that its plan to lower this cost may result in consumers paying higher fees or a watering down of credit card reward schemes – but that probably wouldn’t trouble the central bank much. While some cardholders love accruing frequent flyer miles, it is hard to see why small merchants should help to subsidise them in racking up these points.
Despite the complaints from banks, they will probably find ways to offset the hit from the planned changes.
J.P. Morgan analyst Andrew Triggs, for example, says the Reserve Bank’s estimate that its change will remove almost $900 million in fees paid to banks is “overly simplistic”. This is because banks will respond by raising credit card fees, cutting reward schemes, and potentially cutting the fees paid to Mastercard and Visa. “Net of these second-order actions, we would expect the changes to be largely immaterial headwinds to the major banks,” Triggs says.
In short, it looks like changes aimed at making the payment system more efficient could result in credit cards becoming a less appealing product for customers. But it wouldn’t be the first time that’s happened, and the credit card has survived other major regulatory changes in the past.
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