The Reserve Bank of Australia (RBA) is currently reviewing the regulatory framework for retail payments. Inter alia, the Reserve Bank is reviewing interchange fees, merchant service fees and least-cost routing of dual-network debit card transactions.
Not unreasonably, the major Australian banks are exercised by the possibility of increased regulation. And in the payments space, there is a weight of evidence that payments revenue is under attack.
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Accenture suggests that about 13% or some $3bn of payments revenue is at risk.
Further downward pressure on card transaction fees places over 8% of Australian payments revenue at risk. And Accenture says greater competition from non-banks potentially puts almost 5% of payments revenue at risk.
Finally, there is potential for lost payments revenue from instant payments. Accenture estimates that this may cost Australian banks about 0.6% of payments revenue.
Cash displacement accelerates but cash far from dead
First off, it is only fair to recognise that Australian consumer confidence in the payments system is high. In addition, new technology is being adopted.
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By GlobalDataTake cash displacement. The use of cash in 2016 accounted for just 37% of all payments, down from 69% in 2007. The decline in cash use is expected to continue but cash will continue to have an important place in Australia’s payments system for years to come.
ATM cash use, while in slow decline is still significant at 13%.
Card payments are now the most frequently used payment method in Australia, with 10 billion debit and credit card payments for a total value of A$678bn billion made in 2018/19.
But as McLean Roche notes in its submission to the RBA, debit cards are the major payment type used by consumers with 35% share. While 2019 growth is only 4% the decade growth is 9.8% per year, the fastest of any major payment type.
McLean Roche also argues that a number of myths need to shot down. Take credit cards for example.
Consumer credit cards in decline
Consumer credit cards are in decline having peaked eight years ago. All the leading metrics are falling – average balance, average spend, revolve rate and number of cards. Corporate and Commercial cards are the only growth story.
But there is scope for rationalisation the country’s payments schemes or consolidating current industry organisations.
ANZ suggests a consolidated ‘Pay.UK-like’ model. That would offer scale, improve the ability to set cross industry investment priorities and manage transition programmes across the industry.
The most interesting area for debate resolves around pricing.
McLean Roche maintains that Australia’s current retail payments products are expensive against other payment options available including EDIs, P2P mobile payments, ‘China mobile’, digital cash and other cash transfer systems.
Its submissions states: “Any discussions about future strategic directions must include the cost of payments. The sector is dominated by the four major banks that have done little innovation and by key acquisitions have in fact reduced competition.
“The last cost of payment study in Australia was in 2014 – which is light years away from the 2020 reality and a different universe from 2030. This is a serious strategic and structural issue which directly impacts policy and resource issues – this needs urgent attention at the highest levels of Government.”
“If we assume Australian retail payment costs are say 1.2% of GDP it is possible to estimate the full cost of retail payments – 2019 est. Australian GDP is A$1.89trn x 1.2% in payments costs would equal A$22.6bn in costs per year.
Potential to save A$11bn+: McLean Roche
“Australia could reduce retail payment cost to 0.6% as Sweden, Denmark, Norway, Belgium and others have done. Costs per year would equal A$11.34bn- a significant annual saving of $11.26bn
“To reduce annual payment costs in Australia by 49% would have enormous economic benefit by improving speed of payments and improve cash flows for businesses and consumers. This type of objective should be the cornerstone of future Australian payment policy.”
For its part, Grant Thornton also argues for lower costs.
“We do believe that further reductions in interchange for both credit and debit products are possible without structurally changing the market. Taking a lead from recent EU interchange fee regulation we believe that the Bank could lower the weighted average for credit cards to 0.30% and the cap on credit card interchange to 0.50%.
“For debit and prepaid cards we believe that the Bank should lower the weighted average to $0.06 per transaction and the interchange cap to $0.12 per transaction.”
Unsurprisingly, the major players disagree. Take ANZ for example. “Customers have long benefited from innovation in the payments system, based on significant investment by issuers and card schemes in contactless cards and in growing their networks.
“Interchange fees create a revenue stream that supports the provision of card services and investment in innovation. Further limiting interchange fees would likely affect commercial attractiveness and benefits offered to customers and competition in the market.
Mastercard, Visa, CBA, ANZ defend status quo
Or CBA – it tells the RBA: “the current level of interchange provides the absolute minimum revenue stream required to incentivise ongoing innovation, promote competition and fund fraud mitigation initiatives and losses.
And Mastercard. “Mastercard has not seen any evidence that merchants pass on cost savings from regulated interchange as reduced prices for goods or services. Most likely, major merchants have benefited by exerting their market power to negotiate lower debit card payment costs and have retained these savings to improve their margins.
Mastercard does not support lowering the regulated interchange benchmarks. Interchange plays a critical role in supporting security, competition, productivity, innovation and consumer choice in the Australian payments market.
And finally Visa. “Further reduction of interchange caps in Australia would certainly impact the Australian consumer’s ability to access financial services. We have witnessed that when faced with margin compression because of reducing interchange rates. Issuers will need to source revenue elsewhere. This nearly always influences the cost and availability of various existing and nascent services for consumers.
This one will run and run – over to the RBA.
