Put simply, an interchange fee is a fee paid between banks when a customer uses a credit or debit card to make a purchase. Note: these are not surcharges or consumer fees.
No, interchange fees aren’t as obscure as many people think. Merchants pay fees and charges to their bank to facilitate credit and debit card transactions, and interchange fees are a key component of this. Interchange fees pays for credit and debit card fraud protection, interest-free periods, and credit card rewards programs. Merchants generally have a good level of information about these fees, and merchants all over the world are able to negotiate with their banking networks to lower their costs.
Just because customers typically don’t know about interchange fees, doesn’t mean that these fees are not transparent. That is a bit like saying that a bakery isn’t being transparent because it doesn’t tell you how much it cost to transport the flour to the bakery in order to make a loaf of bread.
As Professors Sinclair Davidson and Jason Potts explain, the economic theory of information in competitive markets says that consumers do not need to see all the costs of the components of a product – they only need to know the products attributes and its total price. So, what really matters for consumers is that they know the fees and charges, and terms and conditions that apply to their own credit or debit card – not the fees that are paid by merchants and their banks.
For more on the transparency argument see IAEP Chairman Iain Murray’s post here.
The real transparency problem surrounds the regulator itself. The RBA’s Payment Board meetings are secretive and non-minuted, meaning that it cannot properly be held accountable for its decisions. Further, no one can explain why the Reserve Bank is in the business regulating interchange fees rather than the Australian Competition and Consumer Commission or another specialised competition regulator.
Interchange fees pays for things like credit and debit card fraud protection, interest-free periods, and credit card rewards programs. Credit cards provide massive benefits to both merchants and consumers. For instance, credit cards allow bigger purchases (through access to credit, and not having to carry large amounts of cash), and they provide businesses with guaranteed payment for goods and services.
Interchange fees are currently regulated by the Reserve Bank of Australia. In an expert economist report RMIT University Professors Sinclair Davidson and Jason Potts found that “the RBA engaged in an extensive regulatory intervention based on poor theory and no empirical evidence.” In a separate report they present evidence supporting the argument that the RBA should not be involved in regulating the payments system.
Concerns have been raised that the RBA’s Payment Board meetings are secretive and non-minuted, meaning that it is not transparent and cannot properly be held accountable for its decisions.
There is currently an inquiry underway looking into matters relating to credit cards, which is being conducted by a standing committee of the Australian Senate.
No. In fact, quite the opposite. Merchants are saving approximately $676 million annually as a result of the Reserve Bank’s regulations, meaning that over the 12 years of fee regulation they have saved over $8 billion in costs. However, there is no evidence that these cost savings have been passed on to consumers as either price cuts or better products.
You can’t regulate away cost. The evidence shows that if the government allows the RBA to impose further price caps, then these funds will be recouped elsewhere - through a combination of higher interest rates, higher annual fees, a slashing of rewards programs, and much shorter interest free periods. Competition will also be hurt, as smaller community-owned banks, building societies and credit unions may no longer offer low-interest credit cards.
In short, this will be a bad move for credit card users.
Click here to download the Australia Taxpayers’ Alliance and IAEP’s submission to the Senate Inquiry.
Click here to download expert economic analysis on interchange fees from Professor Sinclair Davidson and Professor Jason Potts of RMIT University. Click here for their report on who should regulate interchange fees, and click here for their opinion piece published in the Australian Financial Review.
Click here for consumer advocate Christopher Zinn’s opinion piece published in The Daily Telegraph.