I have previously discussed how the Payment System Board is looking at surcharging and interchange fees on credit cards. I have also previously discussed the success of Australia’s price reforms for ATMs. And as I have noted, maybe it is time to put the two together.
I raised this idea briefly in a seminar at Treasury last week. As they did not laugh me out of the room, it is probably worth expanding the idea a bit further.
An ATM network is often thought of as a three-party network: the customer, the customer’s bank, and the ATM owner. But Australia’s recent reforms have made it clear there is a fourth party – the individual or company that provides the location for the ATM machine. The ATM reforms have made the relevant fees transparent to customers and have led to a significant change in consumer behaviour. There has been an increase is competition for the provision of ATM services and increased competition for favourable sites.
In many ways a credit or debit card transaction at a merchant is simply a clever ATM transaction. You swipe your card but instead of getting cash to pay the merchant, the relevant funds are directly moved to the merchant’s bank account. However there is no reason why charging for credit or debit card transactions at a merchant cannot be treated on the same basis as an ATM transaction.
To see this, suppose that the merchant simply sets a price for the relevant goods. There is a single price for all customers. This sounds a bit like the old days of no surcharging. But now suppose you choose to pay using your credit or debit card instead of paying by cash. Like with an ATM, if there is an additional charge that the bank (or supplier of the electronic payments machine) requires a customer to pay then the customer is told of this charge directly by the machine. The customer is given the option of continuing or not continuing to transaction.
What will happen? In the short term I expect some customers will suddenly be faced by a new fee and get very annoyed. But I doubt that this will last for very long. A merchant will not want to support an electronic payments vendor (EPV) if that vendor charges the merchant’s customers a high fee. Rather, merchants will negotiate with different vendors to get payment machines with low customer charges. Similarly banks will want to negotiate with EPVs that charge low or no fees to their credit and debit card customers. As we have seen with ATMs, banks will try and expand their no-fee networks in order to attract customers. So in a relatively short period of time, competition will start working and ensure that the fees for using a credit or debit card properly reflect the relevant costs.
Just as with the ATM reforms, there will need to be some extra (either explicit or implicit) rules. Banks will not be allowed to charge their customers additional fees for a credit card transaction that are hidden on a monthly statement. Rather, if a bank wishes to charge its customers a transaction-based fee then that bank would need to charge the EPV who would then pass the fee onto the customer. Similarly, there would not be a fee to the merchant when money is deposited into the merchant’s bank account. The merchant can however freely negotiate with any or all EPVs.
How does this solve the problems facing the Payments System Board? If the Board is concerned about inadequate surcharging, then this ATM-style reform is able to separate surcharging from the individual merchant. Merchants who have been wary of surcharging for fear of damaging their reputation with customers will no longer face that risk. Any surcharge is clearly between the customer, the EPV and the customer’s bank.
To the degree that the Payment System Board has been concerned about excessive surcharging and price discrimination by merchants, this reform removes the surcharging power from the merchant. It does not solve the problem of online transactions, however I have discussed this elsewhere.
Clearly this idea would need a lot more work before it could be implemented. However it has a significant advantage of mimicking a reform that we know has worked.