From the market which brought cost accounting to credit card interchange, comes a credit card killer: do not reduce interchange, eliminate it. Here is the final report.
- Zero card interchange will all but ‘kill off’ card frequent flyer programmes
- And such a dramatic change in policy would mean a loss of A$2bn: 22% of card issuers revenues
The Reserve Bank study is important to note if you consider the worldwide course the Reserve Bank of Australia’s cost accounting took around the world, spanning from Europe to Asia and Canada, causing rate decreases as it whirled around the globe.
- The Australian Productivity Commission (PC) Final Report into Competition in the Financial System was released last week.
- The PC report reviews whether there has been an appropriate balance between competition and stability in banking, which has entrenched the market dominance of the big four banks in Australia.
- The PC report strongly supports greater competition, transparency and better choices to empower consumers.
- For the payments system, the PC observes that the system “is at a critical turning point” and has major
- The Competition regulator the ACCC, should investigate whether interchange fee regulation favours three-party card schemes, and if distortion exists provide further regulatory intervention;
If the interchange action takes place, watch for interest rates to spike in the Australian market.
- The average merchant fee charged across Australian business is estimated at 1.20%* for Visa and MasterCard. At Amex the rate is 1.42%, Diners Club 1.80% and AfterPay 4-6% plus 30c transaction fee.
- The total interchange that PC is recommending eliminating is $1.978bn which is 22% of total revenues for card issuers
- The elimination of card interchange also throws a huge ‘curve ball’ at frequent flyer programmes which could be fatal. Most card issuers use interchange as the source of revenue to pay airlines for points purchased on behalf of consumers.
Take a look at this study by the Federal Reserve Bank and see if you can guess where this regulatory mess might end up next.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group