The Reserve Bank of Australia (RBA) says it is a “reluctant regulator” of credit cards while leaving the door open to force providers to reduce interchange fees.
In a speech on Monday RBA Assistant Governor Malcolm Edey said he was not in a position to predict what the RBA board’s next decision on credit card fee regulation would be, but he said good progress was being made in promoting competition.
“The Reserve Bank is a reluctant regulator,” Dr Edey told the Cards and Payments Australasia 2010 Conference in Sydney.
“We’d prefer to see fees being held down by competition than by direct regulation.
“We believe there’s been good progress in promoting competition over recent years.
“But its not yet clear whether that will be sufficient.”
A review of card payment reforms the RBA undertook in 2007-08 found reforms to date had delivered lower costs to merchants and increased competition and that price signals had been strengthened, transparency enhanced and access improved, Dr Edey said.
Credit card interchange fees had declined to an average 50 basis points from 95 basis points before the reforms, he said.
But the interchange fees were still too high and competitive pressure were still not strong enough to put downward pressure on fees if the regulation were removed, Dr Edey said.
In August 2009 the board deferred a decision to make a further reduction to 30 basis points on interchange fees.
“The Board took the view that good progress was being made by the industry, but that it wasn’t yet enough to provide sufficient confidence that fees would be held down in the absence of direct regulation,” he said.
Dr Edey said the card market was “highly concentrated”.
“In credit cards, for example, the two major schemes in Australia have a combined market share of more than 80 per cent of transactions,” he said.
“They have high levels of penetration of the potential cardholder market, and high rates of acceptance among merchants.”
These conditions could make it “very unattractive” for an individual merchant to stay outside a given card network.
“It wouldn’t be fair to blame them just for being successful, but it is an important feature of the market that has a bearing on competition and efficiency,” he said.
One of the consequences of such an industry structure was that competitive discipline on interchange fees had been “weak”.
In conventional markets, competition generally put downward pressure on prices because players would lose market share after raising a price.
However, with card payments, there were significant pressures going the other way, he said.
“A rise in the interchange fees charged to acquirers can allow issuers to increase their reward points to cardholders, thereby encouraging use of the card.
“In other words, a rise in price can lead to an increase, rather than a decrease, in the effective demand for the service.”
This created a “natural tendency” for average interchange fees to drift upwards over time.
“Within each scheme, there are multiple cards with differing interchange fees and market share tends to shift towards those cards with the higher fees,” he said.
Mr Edey added that there was more to the card payments industry than just interchange fees and regulation.
“This is an industry that’s rapidly innovating, developing new ways to offer services, and also facing continuing challenges like fraud and security,” he said.