Banks and possibly airlines and some retailers are heading for a fair whack to their revenues in the next year or so from the crack down on credit card surcharges by the Federal government and the Reserve Bank.
The move against overcharging for credit card use and for the way loyalty cards are run by banks and others follows the Murray inquiry into the Financial System and the Turnbull Government’s commitment to pass legislation cutting surcharges and making it hard for many big businesses to use these extra charges as a revenue source rather than just covering costs.
The RBA has been pushing for reforms in this area now for the past two years through the Australian payments Council and the change to cut surcharges was a big part of the central bank’s submissions to the Murray Inquiry. In fact draft legislation from the Federal government was introduced into Federal Parliament yesterday, and the RBA and Payments Council released its long awaited discussion paper on the issue.
“It is important, however that merchants do not impose surcharges in excess of their actual payment costs. The Bank has had concerns about excessive surcharging in some sectors for some time. Accordingly, and consistent with the Government’s draft legislation, the Board is proposing to change the Bank’s surcharging standard with the aim of ensuring that customers cannot be surcharged any more than the cost of accepting cards,” the RBA said yesterday.
“The proposed standard preserves the right of merchants to surcharge for more expensive payment methods but includes changes to enhance transparency and improve enforcement in cases where merchants are surcharging excessively."
Some banks (the big four) and credit card groups such as Amex Mastercard and Visa could be big losers, while many small businesses will find their card providers and banks are forced to cut the fees they charge.
Some media reports yesterday highlighted the fact that some credit card holders face having to spend more to get their frequent flyer points thanks to the proposals, but they will be a small group who will be ‘hurt’ by the changes. The overwhelming majority of consumers and businesses will be winners to varying degree.
The proposed reforms to credit card fees from the Reserve Bank of Australia could cut bank revenues by hundreds of millions of dollars overtime. Banks make a lot of fee income from facilitating credit card payments for merchants through what’s known as interchange fees. This revenue is used to buy frequent flyer points from airlines to pass on to customers as rewards.
The changes mean that airlines credit card revenue is also set to fall as a result of the new rules, which will change the way airlines can apply credit card surcharges on tickets. The fees Qantas and Virgin charge on air fares booked and paid for via a credit card have been a constant source of consumer complaint.
The Reserve Bank in fact warned that the proposed changes, including a reduction in interchange fees, and a cap on the highest credit card rates, could see cuts to benefits and loyalty reward schemes, especially for premium cards (like Amex companion cards).
In fact the proposed changes could see credit card users who link their cards to airlines reward schemes, receive fewer points for every dollar they spend.
Under the changes, the RBA and competition regulator the Australian Competition and Consumer Commission will force companies to recover only their costs when they impose surcharges for the use of credit cards.
In addition, those surcharges will only be able to be imposed as a percentage of a transaction’s value, rather than the flat fees currently levied by Virgin and Qantas. For travellers, this is likely to significantly higher credit card surcharges on long-haul flights (international) and reduce them on short flights, such as Sydney-Melbourne or Sydney brisbane, two of the key business flights in Australia.
The RBA’s payments system board is proposing to cap the highest so called interchange fee that can be charged at 0.8%, compared with fees that currently range from zero to around 2.2%.
The big winners will be small and medium businesses, especially in retail, who at the moment pay very high fees due to low volume of transactions.
At the moment, the banks interchange fees must average out to half a per cent over a three year period under the present rules. But the RBA is now proposing that period be shortened to just three months (meaning an effective cap on fees).
The RBA also wants is to cap the fees that American Express pays to banks to issue so called companion cards, which are given to cardholders alongside a Visa or MasterCard and linked to the same account, at the same rate as Visa and MasterCard. This move alone could cut bank fee income by up to half a billion dollars a year.
The RBA wants submissions on its paper and believes it could settle the issue by next May, or earlier (there have been lengthy discussions with card issuers already on the issue).
The Board seeks views on the draft surcharging and interchange standards as well as on other issues discussed in the Consultation Paper. The Consultation Paper also seeks industry views on appropriate implementation dates for any revised standards. Formal written submissions on these issues are requested by 3 February 2016. Given the complexity of issues involving interchange fees and companion cards, it is unlikely that the Board will take any formal decision on changes to the interchange standards before its May 2016 meeting. In the case of surcharging, depending on consultation responses, it is possible that the Board may be in a position to make an earlier decision on changes to its standards.
