However, the reforms also saw a surge in surcharging, particularly in industries with market power where coincidentally the major players all moved in lock step. Typically these surcharges sought to recover the full cost of bank fees rather than the net cost of fees less the benefit to the merchant of direct electronic payment – benefits like lower cash handling costs, faster crediting, higher average spend.
The RBA itself has identified certain industries as very enthusiastic surchargers including taxis, airlines and hotels.
In its March issues paper, the PSB noted its reforms “had improved access, increased transparency and had led to more appropriate price signals to consumers”.
It further noted it had been prepared to step back from more formal regulation of interchange but the industry had not been able to get its act together. Or words to that affect.
“Aspects of the interchange fee system and merchant surcharging practices have raised concerns, some of which were noted in the Board's 2013 Annual Report and the Bank's two submissions to the Financial System Inquiry (FSI),” the PSB said in March.
“There have been some significant changes to the regulation of card payments in other jurisdictions.”
The FSI did indeed make piecemeal reference to payments, in some cases driven by concerted public campaigns, particularly one against surcharging.
Yet, while this latest review will discuss the rapid and even drastic revolution taking place in payments, and address a range of particular industry concerns around fee setting, it will still hinge on who should pay for innovation?
The PSB says as much: “Interchange arrangements in the card systems will also affect the nature of new payment arrangements that are adopted by the payments industry.”
“In particular, a more efficient and lower-cost new payment system might be hampered in its development to the extent that it had to match existing interchange payments to card issuing institutions to ensure the participation of banks in the new system.”
This is the hard core of the debate and there is no easy answer. Apple Pay, the highest profile new player in payments, has taken off in the US but barely anywhere else. One theory is because interchange rates in the US are high enough – more than double Australia - that banks can offer Apple a clip of the deal, encouraging Apple to take a greater role in shifting payments on to bank systems and networks such as Visa and MasterCard through the use of Apple Pay.
A particularly thorough piece of work by Deutsche Bank in the US, “Solving for Frictionless Mobile Payments: Networks in the driver's seat”, analysed how profoundly the payments landscape is changing.
Deutsche argued the “emerging payments growth will be in-app, eCommerce, international expansion, loyalty, and digital marketing”. The report looks at “the evolving emerging payments landscape and the strategies of notable public and private players including Google, Samsung, Facebook, PayPal, Amazon, Square, Stripe and MCX (Merchant Commerce Exchange)”.
However, “the recent Apple Pay launch, along with the marketing blitz by the networks/banks, has led to increased awareness, but adoption and acceptance of mobile payments remains slow,” Deutsche said.
”We believe that the key consumer value proposition, namely targeted offers and loyalty programs, will get an increasing amount of intention.”
But what pays for these programs? Ultimately it is interchange, primarily. Moreover, where schemes such as Visa and MasterCard are developing new security systems for mobile payments, such as tokens, to make merchants and consumers more comfortable, Deutsche doesn't believe it will drive interchange lower.
This is the challenge the PSB faces in its regulatory quest and there are no easy targets. Even where formal “interchange” doesn't exist, such as with American Express, there is a complex interchange of fees and charges between Amex, the Amex network, banks, merchants and others.
Cutting fees in these systems looks attractive up front – it's an easy sell to say $A1 billion a year has been taken off financial institutions. But if in the long term that stifles innovation because it's not attractive to invest and develop, customers and the economy may pay more in the future.