Three months ago the governor of the Reserve Bank, Ian Macfarlane, recommended to the major banks that they co-operate with an inquiry by the Australian Competition and Consumer Commission into their system of charges for credit card use. The banks, it seems, rejected that very sensible advice and continued with their system of extracting huge sums of money from consumers, credit-card users and businesses that are virtually forced to accept credit cards.
Now the banks pretend to be all hurt and wounded when the commission threw up its hands in despair and called upon the Reserve Bank to use regulatory powers to pull the banks into line. It seems as if the banks have had long enough to show that market forces, self regulation and competition could deliver a more reasonable system of credit card charging. They have failed and deserve to have regulation imposed.
It is a classic case of market failure. An oligopoly of four banks has managed to set up a system which has all the hallmarks of monopoly. The monopoly yields the banks about $600 million a year, which translates to about one per cent of all retail transactions in Australia. It is done by a cosy arrangement of interchange fees under which the bank where the money is received charges a transaction cost to the bank to which the credit card is attached. The true cost of each transaction is about 65 cents but the banks are charging more than double this and they are passing it on, in one way or another, to the poor consumer. Not only users of credit cards are paying for this bank rip-off. Non-credit-card users consuming ordinary retail items end up paying indirectly because retailers necessarily pass on the commission that they are charged on credit card transactions to consumers in general. That much is evident because the price is the same whether one pays by credit card or cash.
Non-credit-card users also pay, one way or another, for the loyalty and reward schemes that benefit those, usually wealthy, credit-card users who obtain free airline flights and other goodies in proportion to the amount of money that goes through their card.
This is not the first time at the banks are being caught out charging far more than costs plus reasonable proffers on their services. Last year it was revealed that the banks made extortionate profits on ATM transactions. Once again it seemed the market had failed.
In an ideal world, competitive forces should have brought this monopoly down. However, the monopolistic credit-card system is supported by not only the very strong four major banks but also a by a couple of very strong international companies which brand-name the credit cards which are attached to the bank. It seems that even if Mr Macfarlane’s call to the banks to mend their ways had fallen on sympathetic ears, the international credit card companies would have pressured the banks against reform. The international companies would have regarded Australia as small fry in the great scheme of things but as very significant if they became the thin the end of the wedge to attack the whole cosy global arrangement.
Surely, the game is up now. Why should ordinary Australian consumers support huge bank profits and lavish rewards schemes for the wealthy who can pay off their cards every month? For a long time the banks have argued in favour of the user pay principle under which of those who get the service should pay the cost of it. Under that principle they started to charge the actual cost of counter and other labour-intensive transactions to those who used them. They argued that this was the best way to ensure efficient use of resources. Well it cuts both ways. Credit-card users should not have to support the extravagant and artificial charges that the banks charge each other and pass on. Nor should non-credit-card-using consumers have to pay higher retail prices to support the credit card system.
If the banks cannot see this, it is time for the Reserve Bank to make them see it.