The Reserve Bank of Australia is again reviewing interchange reforms, with the latest rules changes set to become effective as of July 2017. The current version of the rules changes includes commercial credit cards, and the author sets forth an argument as to why this inclusion will hurt small-to-medium enterprises (SMEs). Essentially the case is that with reduced interchange (a maximum of 80 basis points for the 4-party schemes), issuers will have much less financial incentive to offer commercial card products to SMEs, given the risk/reward model, and general lack of interest revenue versus consumer cards. SMEs have increasingly relied upon these cards for cash flow, with interest-free periods that can potentially be stretched to 55 days. The SMEs in Australia are under pressure already given the extended payment terms being demanded by their own paying clients.
The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell has said that, “the majority of small business failures are by far a result of poor cash flow, with slow payments from customers or clients, a leading factor”. She claimed that “the big end of town are delaying payments to those that can least afford it; small-to-medium sized enterprises”.
This is not the first time the RBA has imposed interchange standards for commercial cards, with earlier changes introduced in 2003. Such reforms have been enacted in other markets as well, and clearly articulated, proven intended benefits to any industry participants (other than some reduced merchant costs) been hard to identify. This makes one wonder why indeed regulators feel compelled to impose regulations and industry caps in the commercial cards market. The author goes on to state how important SMEs are to the Australian economy and possible unintended consequences.
The reduction in interchange which the RBA is imposing may cause issuers, including banks, to cut costs by reducing credit risk, which would mean less credit extended to SME’s, via commercial cards. Issuers could also find this segment of the credit card market less attractive and hence be less willing to offer this type of credit card to SME’s………Less commercial payment cards; with less credit offered on them, at higher interest rates, could well be another unintended consequence of the RBA’s intervention into the payments system.
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group
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