Credit Where Credit Is Due?

by  on 4 December, 2015

Vikas Nayak explains why interchange fees should be left to the market, not regulated by the RBA.

The Coalition has passed laws that restrict the ability of merchants to charge surcharge fees on cards that only cover their costs. As a serial credit card user, I’m understandably happy to reduce my surcharges by as much as possible. Some may therefore think that I would be the biggest proponent of this legislation. Unfortunately, this bill is a clear example of the “homeopathic legislation” that plagues Australian parliament.

Firstly, let me explain what “homeopathic legislation” is. I understand not everyone watches our podcast (Taking Liberties) so it might seem a little bit of an “in term” within the libertarian community. Homeopathic Legislation is where additional watered down regulations, legislation, or policies are added to an existing law or legal framework. This does nothing to cure to the problem but is a diluted form of the initial problem that the first piece of legislation tried to deal with. Basically, it’s using diluted laws to solve a legal problem in the same way that a homeopaths creates certain “cures”.

So why is this “homeopathic legislation” coming into effect? You might be surprised to learn that this is largely an Australian phenomenon. Elsewhere in the world, credit card surcharges aren’t actually that significant. Some say that the regulations here are sufficient or that they aren’t tight enough. The reality, however, reveals a different picture. Legislation came about in 2003 when the RBA restricted interchange fees for domestic cards to 0.5% and overturned the “no surcharge” rule imposed by credit card companies on retailers. This was a seldom discussed policy maneuver that directly interfered with the payments system. There is simply no good economic argument for payments system to be regulated by the RBA. Unlike monetary policy, the payments system is a “network infrastructure … of technologies and organisations.” It is neither a utility, nor a public good. The RBA’s primary purpose therefore, is to handle the former, not to distort the price signals of the latter. (Article at: The Conversation).

The RBA essentially overruled the voluntary contracts made between merchants and the credit card companies. Far from acting in the interests of consumers, the regulators imposed credit card surcharges on a largely unsuspecting Australian population. The reasons why “the big end of town” wouldn’t want surcharges to be paid by consumers are self-evident. Credit card companies offer a service to merchants and they want the merchants to pay for that service without having the fee transfer to their product.

But moving aside from the past, we should ask the question “does this legislation address the problem?” Merchants have taken advantage of the RBA ruling and charged the interchange fee rates on international cards (such as 3% on an AMEX traveler card) despite the fact that most Australians probably use a local card. On that point, the government is right to raise the issue of merchant abuse of credit card surcharges.

This legislation however, won’t actually fix the underlying problem that the wrong people are paying for the service provided by credit cards. Merchants, through their banks, have a level of control over which cards they will and won’t accept. The easiest thing for a merchant to do, is to lock out all cards outside of a certain rate and simply standardise their payment rate. The result of this is that while your credit surcharge fee doesn’t change, you might find that all of a sudden your platinum rewards card is no longer working at your local coffee shop.

While this legislation may be a vote winner, we probably shouldn’t be giving the Coalition credit for price fixing legislation. I really hope that the Liberals turn from policies such as this to a more free market approach of letting merchants and credit card companies sort out their own mechanisms for the fees of credit services through private contractual arrangements.

 

Originally published on Menzies House.