The reserve Bank of Australia is on the right track in calling for reform of the credit-card system. the system is shrouded in secrecy, ridden with unfairness and lacking in the competitive forces that help consumers.
The four major banks are taking perhaps as much as $500 million a year in credit-card transaction fees. It is a hugely profitable system for the banks at the cost of consumers, particularly those who cannot manage to pay off their bill each month.
At present merchants are paying 1.2 per cent commission on credit card transactions. Surely, the processing costs to the banks are not related to the amount of the transaction, but the number of transactions. In any event the amount is too high. Merchants are also prohibited from charging the 1.5 per cent to customers who use the cards, or even a flat fee, though anecdotally some bargaining goes on. The upshot is that the cost charged to merchants is shared by all consumers, including those who do not use cards, because costs are passed on in uniform prices whether one uses a card or not. This is quite unfair.
Then there are the high interest rates. Some of the cuts in base interest rates have not been passed on to card users in the same way that home-mortgage rates have been cut. Banks have been far more responsive to the home-mortgage market because there is more competition from home-mortgage operators outside the bank system. It clearly indicates that competition is needed. The Reserve Bank has indicated that it might introduce more competition in the form of allowing retailers and others to issue major credit cards.
The banks justify the high interest rates because so many people use cards and pay them off every month and so do not incur interest charges.
So we have two sorts of cross-subsidisation under the present system – retailers charging the same price whether a card is used or not and high interest rates charged to some people just because others pay no interest charges at all. Neither has much merit. Usually cross-subsidisation is used to provide services to the less well-off or the more remote as a social service. The two forms of credit-card subsidisation do the opposite. The wealthy who can pay their cards off are subsidised by those cannot. The wealthy get the most benefit from rewards schemes. They are heavy users of credit cards but usually pay the card off each month, but their heavy use generates the fees that underwrite the rewards schemes. The struggling low-income earners, lured by easy credit and advertising hype to buy things they do not need with money they haven’t got, end up subsidising high-income earners jetting off on their reward schemes.
And underlying all this are the secret fees the banks charge each other for clearing the funds between cards and banks. These should be made public. The banks charge each other unjustifiably large amounts, they roughly cancel out as far as the banks are concerned, but they get passed through the system to merchants and card users.
The banks have had long enough to improve the credit card system. It needs major reform to introduce competition and to end inefficient cross-subsidisation and secret fees. Consumers deserve better.
Those who always pay off their cards and get rewards do not deserve them – they are only getting them for pushing more money through the credit-card system to the cost of other consumers. And those who do not pay off their cards are most certainly over-paying for their rewards.
The threat to rewards is no argument for keeping the present system.