CabFare welcomes the Recommendations of the Final Report of the Financial Systems Inquiry (AKA “Murray Inquiry”) with respect to Surcharging on Card Transactions. After a 12-month inquiry the Committee reported in December 2014 and one of its areas of recommendation to the Government for reform was Credit Card Regulation (Chapter 3 of the Report). The Treasurer in commenting on the report signaled this as a priority area for the Government to address.
CabFare supports the thrust of the Inquiry’s recommendations on Card Regulation.
In particular we support the need to:
1. Bring all Credit and Debit Cards within a common regulatory framework. There are too many unregulated cards operating in Australia including Cabcharge and Union Pay. This creates technical as well as compliance costs and barriers to an efficient operation of a payment market place. It also leads to different standards in these cards adding additional costs to the wider payment system.
2. Enable the RBA to examine the costs of providing card services to the Australian Community, which is overdue. Such a review has to tackle what are the reasonable costs of acquiring transactions for a merchant including the interchange fees but most importantly the fundamental question of how Merchant Service Fees are set by Card Companies.
CabFare cannot see any justification for maintaining Merchant Fees as a % (ad valorem) of the Transaction Value. These fees are set at different levels for different merchants, and particularly discriminate against small businesses. This approach cannot be justified in an electronic payment system where the costs of acquisition, aside from the Merchant Fee, are fixed.
Merchant Fees should be a flat fee (i.e. “postage stamp”) as the merchant cost to the Card Insurer is common irrespective of the size of the transaction. Card Issuers are using Merchant Fees as a surrogate for lending to the Cardholder. The costs of providing credit are ones that should be borne solely by the cardholder who is obtaining a short-term credit facility.
Using a % Merchant Fee forces the Merchant either to recover the cost as a % of each individual card transaction; or to smear the costs across all sales. If the latter, those who don’t use cards pay for the credit provided to those who do. The current practice sends poor price signals to consumers no matter what approach is followed by the Merchant.
Maintaining ad valorem is clear evidence of “gouging” by Card companies of merchants and should not be used as a way of subsidising unsecured credit provision to cardholders by Card Issuers. Allocating risk and pricing of credit needs to be the focus of the Card Issuer and not viewing the merchant as a low risk “soft target” to subsidise the Card Issuer’s poor risk management practices. CabFare’s position is that a flat Merchant Service Fee would:
i. Make it a simpler and fairer system to all
ii. Drive down costs to consumers
iii. Drive down costs to Card Companies.
iv. Provide Consumers with a simple, easy to understand service fee for using Cards.
v. Enable the cost of Credit provision to be recovered from the party receiving the credit (i.e. The Cardholder).
Opening the Merchant Fees charged by all Card Companies to regulatory scrutiny must be a priority for any comprehensive review by the RBA post the Financial Services Inquiry.
3. Empower the RBA to manage the Card Payment system as the single regulator.
Multiple regulators enable issues to slip between the cracks and promote regulatory overburden. In recent years we have seen creeping regulation of Card Payments by a range of Commonwealth and State Government regulators, as is the case for with Cabcharge.
The failure of the RBA to intervene and bring Cabcharge’s Payment system within the ambit of the other major cards used in taxis has resulted in various State Governments introducing inefficient price cap regulations on taxi non-cash payments service fees resulting in significant competition issues. The “price cap” is a lesson to all those who have argued for such interventions as to why it delivers inefficient and bad market outcomes.
The inaction by the RBA combined with the actions of State regulators has ensured Cabcharge maintained and even increased their market dominance and at the same time continue the practices for which it was fined $15m in 2010. If the RBA had acted on CabFare’s application to it in 2012 to “designate” the Cabcharge card and bring it into the regulatory scrutiny of the Payment Systems Board, perhaps this outcome could have been averted.
The RBA needs to be provided with the sole power to regulate all aspects of the Card payment system. This will cut red tape and make the operation of the card payment system more efficient for all participants.
In response to the Murray Recommendations, the RBA has called for submissions on Credit Card reform by 24 April 2015. Now is the time for the RBA to take decisive action and assume responsibility for all cards used in taxis and limousines. Such action is necessary to remove State Governments and State Taxi and Economic Regulators from meddling in the Banking and Finance system. Something they have demonstrated they are ill equipped to do.
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