May 17, 2006

How do we get central banks off of their interchange crusade?

Australia’s central bank said yesterday it would consider abolishing interchange fees for credit and debit card transactions, following calls from the Australian Merchants Payments Forum to wipe out interchange. The central bank already cut fees by half a couple years ago.

An article in The Australian describes how banks are defending themselves by arguing that fee reforms “could force banks to dump reward points schemes and significantly cut interest-free periods”. That’s not enough of a defense. Pretty weak, actually.

Reward points schemes are for the card issuer’s benefit, and the cardholder’s, one might argue as well. Merchants don’t see why they should be financing the bank’s loyalty program through interchange fees that merchants pay. They also don’t see why they should be financing the interest-free period which they see as a service that the bank offers its cardholders. So they are arguing that interchange should be paid by customers, if at all. Now that they can surcharge customers that pay by card, it appears that a number of merchants are beginning to pass the cost on to cardholders (see an example of credit card surcharges here).

Banks need to find a much stronger defense. If they can’t find any better justification for interchange than what they are using now, and which is clearly not working anywhere in the world, then banks need to create something stronger. Banks need to make payment much more attractive to merchants, and create new payment features that solve real problems for merchants and justify interchange. Not new gadgets like contactless cards that don’t really do much for merchants, but real, substantial, merchant-centric enhancements to the basic, plain, traditional credit and debit card function which merchants don’t want to pay for anymore.

To add insult to injury, The Australian also reports that the central bank rejected an ANZ push to put a cap on credit card surcharges imposed by merchants. Ouch.

1 comment:

CvB said...

Yes merchants in Aust are all rushing to place surcharges on their Card sales to cover fees, however this cost was previously spread across all sales. Of interest is that there has been no commensurate drop in cash prices. As with everything in the payments space - it is ultimately the merchant who ends up gouging.

You also need to draw a distinction between Merchant interchange and ATM interchange in Aust. The mere idea of surcharging in the ATM space has stirred up a frenzy of activity amongst non-bank deployers who are buying up market share on the back of unsustainable business modals, and now trying to influence the direction of public policy to ensure they dont go broke! Surcharging in ATM space has been a failure in evey contry it has been implemented in - it is the density of access which increases, not the spread, and it also drives up the cost to the consumer for the same services.

The cons far outweigh the pros in the ATM space, yet I fear the protagonists will eventually get their way and the good of the many will be sacrificed for the bottom-line of the few.