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Economics References Committee - 27/08/2015 - Matters relating to credit card interest rates

ZINN, Mr Christopher, Private capacity


CHAIR: I now welcome Christopher Zinn, who is here in a private capacity and also about the work he does within an international body.

Mr Zinn : I am really appearing as an individual on this one, although I have an initiative called Determined Consumer. It is not very international, but some of the ideas behind it certainly are sourced globally.

CHAIR: I want to thank you for your submission, which was have received and tabled as part of this inquiry. I have got a fair few questions about the specific issue of interchange fees. I am very keen to talk to you about that; I know it is a little bit technical. Before we get to that, I do want to give the opportunity, if you want, to make any kind of opening remarks.

Mr Zinn : Yes, if I may. Thank you very much for the invitation. I have worked at CHOICE, One Big Switch and various consumer organisations and what is emerging is what is called next generation intermediaries, which I think is an exciting future. I define this as being in the marketplace of consumer empowerment. Instead of empowerment and education being something like cod liver oil, which you deliver to consumers, it is something that actually they want and they need and drives change not just to benefit them but also to benefit marketplaces more generally. That is why I think it is relevant in this particular area.

There was mention of the Future of Financial Advice. There was a time then when being involved in a campaigns, both at CHOICE and afterwards, I suddenly decided that we cannot rely on government to bring us change in this area, we cannot rely on industry to do it and we can only rely on ourselves. I think that is one of the ideas behind Determined Consumer. There is a bunch of people who are determined and actually navigate markets quite well. We heard from Paul about the guy, in terms of the RSL, who avoids the pokies. They can actually drive change in others through their example. Certainly, there is a role for protecting vulnerable people through regulation. I also believe there is a very strong role for those the sort of advocates, who are pursuing their own interests, to drive real change as well. As I think we have seen, the idea that you are somehow ashamed for doing something stupid is a much stronger driver to change behaviour than receiving some sanctioned information or whatever.

One of my other interests is technology, being involved with start-ups. I just want to talk about how technology and the energy of the start-up community can really drive some change here—again, in a way that we cannot always predict. I want to talk about interchange fees and loyalty points. They are certainly the kicking boy of the consumer movement, but I will try to find some positive things to say about loyalty points insomuch as they actually drive competition. As I have said, I will talk about the technologies.

One of the things I have also learnt through various campaigns is that sometimes the interests of industry and consumers are aligned—sometimes only for a limited period of time and in certain areas. Certainly, in terms of the very high interest rates from some of the banks, I think that is a clear example of where they are not aligned. As I will go on to explain, I think that for certain parts of banking and financial services consumers on certain issues are aligned and we ought not to ignore that.

I made a number of recommendations: one is particularly in terms of interchanges, in that you really defer any decision and the Reserve Bank does likewise unless there is further expert testimony and analysis on the impacts of consumers; two, consider the interests of those who use and accrue points and the roles of such schemes in driving and not necessarily inhibiting competition; three, foster policies which encourage innovation and competition in the payment system more broadly and do not unduly reduce the incentives for new players to enter the market; and, four, we have talked about consumer warnings but I think that we should call credit cards 'debt cards', because frankly that is what they are.

I take this idea from a book that I will commend you, called How to Speak Money by John Lanchester, which was recently published. He is British author. He really spells out the idea that the use of the word 'credit' is a positive. We give credit to our kids; they get credit. There were some very good work done at Deakin University a few years ago in terms of the letters when there were solicitations to increase your credit limit. The sort of words they used were like getting some sort of Nobel Prize for people; that they had done some kind of great things and they were going to extend their credit to them. I think that while I do not believe that you will be able to regulate to have 'credit card' replaced with 'debt card', again, the kind of empowerment campaign that we could have is a little sticker—perhaps even a point of sale of complying retailers—that people could put on their card just to remind them that actually they are not getting credit when they use their card, they are getting debt.

I will start off just briefly with interchange fees, which is something that—while it is in the terms of reference—consumers have never heard of. They should not really need to hear about it. It is a bank-to-bank fee, but it is actually what pays for credit. Again, when we were hearing of those people who make the most of credit cards and do not pay any interest, what pays for those 55 days? That is the interchange fee. What pays for the fraud protection? I got a call from my bank two weeks ago because there was unauthorised card-not-present use in various salubrious countries around the world.

CHAIR: How was your holiday!

Mr Zinn : That paid for that work. That paid for the refunds that came through. So the interchange fee brings us a benefit.

The RBA has sought to reduce the interchange fee. To simply explain it again, that is a fee paid when I go to a merchant with my card. The merchant's bank pays the bank that issued me with the card an interchange fee. That is a weighted average over three years—it is quite complicated—of 0.5 per cent. It is sought to be brought down to 0.3 per cent. Whenever anyone says, 'We are going to bring a fee down,' you think it is great because the benefits must flow through. But I think there are significant questions about the interchange fee, in particular. This is part of the paradoxical nature. Certainly banks in the past—such as when this happened in 2003—can be seen to have raised annual fees and also interest rates to compensate for the less income they received as a result of a lower interchange fee. Merchants were delivered a great saving in how much they had to pay to those issuing banks. According to the Reserve Bank analysis, they were meant to hand back a whole lot of money—some $1 billion or $2 billion. There is no evidence that that ever happened. So before we decide that regulation in this area is a good thing we need to look much more closely at it.

One reason I am interested in this is a story at CHOICE we were doing about the $20,000 you have to spend to get the electric toothbrush. Someone from the bankers association said, 'You guys are to blame for this.' I asked 'What do you mean?' He said in 2003 when the interchange fee was regulated down that caused a dilution of the points and the value of them. He said, 'You can complain that the points are pathetic, but you are part of the problem.' I took that on board and have been particularly interested in this area.

We have talked about the need for more competition. A lot of the competition in credit cards comes from the customer owned banks, credit unions et cetera. The Customer Owned Banking Association in a submission to you warn that if the interchange fee is reduced they will no longer be able to offer 19 of the 20 cheapest credit cards on the market. Their business model relies on the interchange to pay for those low-fee cards. Groups such as nurses, doctors and teachers are far more likely to have those cards and they will experience the kind of suffering that will happen.

Again, it is not just about looking internationally. The European Commission moved against interchange fees amongst other reforms in 2013. There was a statement that I believe applies exactly here that went out from consumer groups in the UK—the Centre for Responsible Credit, the Money Advice Trust, the Money Charity and Christians Against Poverty—that warned:

… we are concerned that the Commission’s proposals will result in less competition in the market, thereby punishing both ‘savvy shoppers’ and more vulnerable consumers through restricting access to credit, limiting its flexibility and increasing its cost.

This is one of the issues around savvy or engaged consumers. We often talk about unengaged consumers and marginal consumers. I think that is very important. But engaged consumers provide a great example. They provide encouragement for others to change their roles and the things that they are doing.

I will just finally come to innovation. It has been suggested that the interchange fee and arguments about that might keep Apple Pay at bay in Australia. I have no particular brief for Apple but I do for more innovation. If the banks are arguing about this interchange fee and that means that we do not get access to the very best technology, I would be concerned about that. There is no doubt that the interchange fee paid for 'tap and go', which has proved very popular.

Also, there is the start-up community. I have been involved with some start-ups. There are some very exciting, new ideas about how to engage consumers around debt and credit cards. They are not waiting for regulation to happen. They are using the consumer empowerment revolution which comes to us through our devices to drive this change. I will just leave you with those thoughts and I will be happy to answer any questions.

CHAIR: That was quite a lot. I just want to get my head around the interchange fee. You have said quite a bit about it. I know other senators have other questions, but I am going to ask some specific questions on the interchange fee. Effectively it is an interbank fee—the banks paying each other. At some level, that obviously gets passed on to the consumer—correct?

Mr Zinn : It gets passed on to the consumer through prices that the merchant might charge them and through fees that they pay for their credit card, be that the annual fee or the interest rate.

CHAIR: Perhaps it is unjustifiable to be talking about a 20 per cent credit card and a fee that comes off the back of it, because in the RBA submission we were given figures that said that the revenue that comes from credit cards includes $1.4 billion in fees, which averages about $19 per account; $1.5 billion to $1.7 billion in interchange fees, which is a bit of a grey area because they do not actually calculate it but get it reported to them; and $5.4 billion in interest. You are making the point that, if people want to have the services that they have and the availability of what they have, and if we are focusing on driving down the interest component, someone is going to have to pay for this service somewhere, and you are saying that is the interchange component.

Mr Zinn : I am.

CHAIR: I want to put an alternative view, and I want to use a separate example here and point something out to you. Couldn't a criticism there be that that is exactly the same point I could make regarding ATMs? One of the reforms we did in ATMs was making sure that people understood that they were paying for them. You heard, I think, Mr Koch talking about this moments ago. What you are saying to me sounds like it makes complete sense—the idea that, if the money is not going to be made from interest and we want to drive down credit interest, then the money is going to be made from interchange, effectively a fee for service: people paying a fee for using a service. If that is the path we are looking at, should we also be looking at how you make that a bit more transparent as well so that people understand that is what they are paying? Part of my concern with it is that it is so hidden that people do not understand what they are paying for. With an ATM, I know it costs me $2.50 to go and get money out of a machine at Parliament House, and it costs me $1.50 to do it in the CBD of Sydney. I have heard some horror stories that in rural and Indigenous communities it can cost $3.50 to get money out of an ATM, but at least we have that information to build policy around it. If I accept everything you are saying about interchange—you are saying that is perhaps a better way to pay for this product than interest that accrues and this and that, because at least it is one-off; it is paid, it does not build up over time and you are paying a fee for service—is there a way of building transparency into that?

Mr Zinn : The interchange fee does move. I am not a technical expert on how the interchange fee is levied. I hasten to add that I look at this from the consumer point of view. I would suggest that one of the problems with that is that you can tell me that but there is nothing I can actually do with it. Certainly the interchange fee may well be lower if you go to Coles and Woolworths than if you go to a smaller provider, but part of the argument is that, by using the card at any merchant, I actually reduce the cost of them handling cash, which comes at a cost, plus there is a consumer preference to use the plastic as well. While all in favour of transparency, I think the difficulty in explaining the interchange fee, as we have found, is that it is not directly paid by the consumer; it comes through prices and fees. Certainly a greater understanding of it and of who is paying for what will help, but I am not sure that that fee would actually make a difference.

Senator McALLISTER: I have a follow-up on this question of interchange fees and your assessment that at the moment the revenue from those fees supports a whole range of supplementary services that secure the viability of the credit system. What I do not understand is why, in your view of this, those same services would not simply be funded through some other kind of fee that is more transparent.

Mr Zinn : A lot of this is probably to do with the evolution of the credit card system, which has been fast and immediate since Bankcard arrived, I think, in 1976 and there was a $300 limit. It is not my assessment of what pays; I think that is the fact, and the RBA analysis of card services around the world shows that really they all have the interchange. This is why it has been a lively subject in America and in Europe, including Spain—in countries where there are thought to have been issues of regulating the fee downwards. How does that impact the consumer? Perhaps in unpredictable ways.

Senator McALLISTER: Yes, I accept what the revenue is currently used for and that analysis. I suppose my question is: why would not some other source of revenue be substituted to provide those same services that are associated with the overall product?

Mr Zinn : You could say that the annual fee for a credit card should go up, but that is a flat fee, so those people who use a card a lot are actually subsidised by those who use it very infrequently. So it is a user-pays system, albeit filtered through one's bank or the merchant's costs. But, as I say, the argument is that the merchant enjoys a benefit through taking credit and actually they should be prepared to wear some of those costs. I think that the merchants and the airlines have turned this into an art, endlessly complaining about the incredible costs of accepting credit in such a way that that has become completely normalised, as we found with the credit card surcharge.

Senator EDWARDS: I like that word 'normalised'. They just continue to normalise what is clearly not normal.

Mr Zinn : Yes. There have been constant promises that we will regulate the credit card surcharge. It was reported that Treasurer Hockey is going to bring in something soon. I will believe it when I see it, because this has proved very hard. The only thing that regulated the taxi surcharge was state government legislation around the taxis; it was nothing to do with what the federal government could deliver. No systems are perfect. I might just make this point: I think the credit card is a bit like electricity, which we have dealt with before. We take the credit card system and the system of credit incredibly for granted until it does not work—until things go wrong—but it actually delivers terrific utility to a large number of people, for all the reasons that you have discussed, at, I would suggest, a pretty reasonable price if you do not end up paying the interest. So I think we have to value credit card systems more fairly, and we have to be prepared perhaps to pay more or pay for them in ways that are fairer. But it really does not come at no cost.

Senator McALLISTER: Just to conclude this discussion around interchange, at least from my end, why do you think some merchants are passing through the costs associated with this transaction and others are not? As a secondary question, what enables some merchants to pass through what might be described as an unreasonable charge and others to stick with something more proportionate to the actual costs associated with the transaction?

Mr Zinn : Are you talking about the credit card surcharge?

Senator McALLISTER: Yes.

Mr Zinn : There is a merchant service fee, which is another level of complexity; the interchange fee is a bit of it. I think (1) they pass it on because they can, because again a surcharge which is visible gets normalised. We do not complain enough about it. I am sure that if we could get a campaign around airlines and say, 'We're going to boycott Qantas, because Virgin are going to offer us credit card free travel for a month,' we would get Qantas to drop that or at least reduce it substantially very quickly. That is my belief, so I will throw it out there.

In terms of merchants, this issue about the massive savings that they made when the interchange fee has been reduced is interesting. Rod Sims, when talking about the reduction in electricity bills with the abolition of the carbon tax, said that, when there is this adjustment in bills, you should be able to detect 50 per cent of it, and the other 50 per cent trails through time. There has never been any argument, evidence or research that I have seen from the RBA or anyone else to show that the merchants have passed on any benefit from having a lower interchange fee where that has been regulated. I am not saying it is a conspiracy; I am just saying that there is no evidence that it ever happened. So it should not be used as a reason to justify regulating the interchange fee when that can actually shift costs to the consumer.

Senator McALLISTER: Thank you.

Senator EDWARDS: Just on your point, Senator McAllister, you look at the add-ons. The greatest example of consumer movement in reaction to surcharging involves the taxi industry charging 10 per cent for using a credit card. Don't you see what is going on with Uber as karma? You get charged a service fee and then you get charged a fee for using the payment method. Now we have a disrupter, a technology disrupter, that relies on it being paid by credit card. That is for security of payment. Then the supplier of that service gets paid by the company that operates the credit card. Are we just seeing the start of this disrupter technology in terms of what this is? Is it going to be that the airlines are no longer going to be able to get away with this either because there will be other operators that will come in?

Mr Zinn : We have seen an evolution of payment systems. This week I was at the launch of something called Stone and Chalk, which is just around the corner, which is an incubator for these fintech start ups. The New South Wales government has proclaimed the aim to make Sydney the world capital of this. You see young people there and their ideas, many of them particularly focused on, firstly, disrupting the banks and giving them discomfort, but, secondly, drawing in consumers in a new way that they take power and use it in terms of their decisions. Payment systems and the way the cards work and the fact that we will not probably have a card in the very near future—all of that is their meat and potatoes. Certainly we can talk about some regulation and that that has its role et cetera. Butt I would venture to say in 20 years we will look back at this, and the speed of change in terms of what the market and technology has been able to deliver will leave the regulation out of breath and far behind.

Senator EDWARDS: I know. That is the problem. We are just tidying that up with financial advice now, because the big banks saw the superannuation industry as a massively growing industry and so they got into that business. They went and bought those businesses. With the credit cards the way they are, if the banks see disrupter technologies, they might just go and do the Ralph Sarich thing and go and buy the motor and shut it down?

Mr Zinn : The example is peer-to-peer lending. The banks buy into it; they do not shut it down.

Senator EDWARDS: They are already doing that.

Mr Zinn : Yes. They want a bit of it. There is such a range of possible technologies. How do you know which winner to back? The consumer will ultimately decide that, hopefully in ways where they are not constantly seduced by the old messages and the boats and things like that and in ways that they can use credit in a responsible way, using their own responsibility as much as any responsibility that might be regulated.

Senator EDWARDS: My final question adds to what I asked the three contributors that came before you. Do you have any take-home, drop-dead, you-believe-have-to-get-done tweaks to the credit card industry that we should be taking with us today?

Mr Zinn : The thing about the minimum payment reflecting the interest is a pretty key one. It is not one that you can regulate, but the issue of the paper statement over the emailed one is very real. It certainly is for me, because I know that looking at emails very quickly it is very easy to miss what you really need to know. Again, I appreciate that that is not something that you can necessarily regulate. I think portability is very important here. There was a report that came out yesterday from the Centre for International Finance and Regulation particularly pushing portability as an issue that can help. I know there are various submissions that have far more detail about the portability of credit card numbers. It is one of the easiest financial products to switch at the moment. I wonder how much marginal difference making it a bit easier would make. But, again, it is where we can normalise behaviour that you do move. When it is easier to move a card without having to reprocess all the various direct debits et cetera, that ultimately must make some kind of difference.

Senator XENOPHON: What I am scratching my head about is that your former employer CHOICE is saying that lowering interchange fees will make using credit cards and debit cards cheaper for consumers, that lowering interchange fees will reduce costs against the payment system and should make using a card cheaper for consumers, and that the biggest losers here are the banks who will receive less in fees. I know you have been a great advocate for consumers. I am just trying to understand, with your advocacy for consumers and CHOICE's advocacy for consumers, why there seems to be such a different view on interchange fees?

Mr Zinn : The consumer movement is not one sect. It has many people—

Senator XENOPHON: I did not mean to say it was a religion or a cult.

Mr Zinn : I did not mean to draw that analogy too far, but parts of the consumer movement believe in regulation first; other parts come from a far more libertarian side. I think that they all hopefully believe in something that delivers consumer benefit. Ultimately, on some issues we will disagree and we will argue about that with civility. It is not just me saying this. I believe that the consumer-owned banks who provide products, which the consumer movement regularly back and say that people should switch to, are suggesting that this interchange issue could stop them being able to offer those lower cards. I was concerned that the issue could go through to the keeper. Interchange is something that is a bit technical and a bit tricky. I think it is worth having a debate about it, and I am willing to do that. The committee or the RBA may choose not to agree. I will just be happy that there has been a little more ventilation of this issue.

Senator XENOPHON: Finally, what do you say to Senator McAllister, who made the suggestion that the solution is transparency and perhaps competition with interchange fees, rather than resisting what the RBA wants to do?

Mr Zinn : Where do you put the interchange fee? At the point of sale? Do you put it on a website? Does it come on people's credit card bill? What would it mean to them? I am all for transparency where possible, but it is how that transparency influences consumer behaviour. Certainly, because they do not pay that fee directly, you could say, 'I would be better off going to Coles and Woolworths, because there is a low interchange fee', as opposed to going to the local independent market. It does not make much difference to you in the end although it does make a difference to them.

Mr Zinn : Can I just say one thing very quickly. It was being alluded to here. We are talking about a symptom of a problem. Part of this issue is something that the consumer movement does not talk about—and that is consumerism. It is about the society that causes us to spend, spend, spend. The ability to do that on credit on someone else's money is something that many people find hard to resist. When it comes to Christmas and the Retailers Association bang on us about having to spend $45 billion by Christmas Eve or the economy is wrecked: I think we need to push back on that. It is more of a question of what is all this spending for? Why do we need it? I am not against consumerism; there are many aspects that are very useful. But I would suggest one of the underlying causes, as much as the rapaciousness of banks, is part of our society and our economy which requires us to spend, spend, spend—and we are looking at some of the consequences of that.

CHAIR: Thank you, Mr Zinn.

Senator EDWARDS: Thanks very much.