Banks are notoriously opaque about the fees they garner from various products they flog — a practice that caused them some severe reputational damage at the royal commission into their shiftier behaviours six years ago.
There’s nothing in their annual reports to indicate what they make off the card payment system, but the RBA has had a crack at adding it up.
Yesterday in a consultation paper the RBA suggested that a range of reforms it had in mind would reduce the current $2.3 billion in interchange fees earned by domestic issuers (the banks) by $880 million.
The big four retail banks — CBA, NAB, Westpac and ANZ — in keeping with their oligarchical grip on the sector — control 93% of the credit card lending market share, according to the RBA.
Even with a combined annual profit of around $30 billion, $880 million of easy money would, while not disastrous, would not be something the banks would not give up lightly.
The RBA’s reforms have two key planks
The removal of surcharging by merchants on eftpos, MasterCard and Visa cardsand a reduction in the cap on interchange fees paid by businesses.
The RBA’s number crunchers argue reforming both areas would save consumers between $600 million and $1.2 billion a year.
The “merchant” reforms don’t impact the banks much, if at all.
It’s hidden interchange fee where the RBA has the banks in it its sights.
J.P. Morgan’s bank analyst Andrew Triggs says the $880 million target set by the RBA is “overly simplistic of the eventual outcome”.
“The changes are likely to significantly reduce the economics of the cards system in Australia and hence we would expect card issuers/banks to respond with an increase in card fees to credit card customers, a reduction in card rewards, and potentially a change in issuer scheme fees paid to Visa/Mastercard,” Mr Triggs said.
“Net of these second-order actions, we would expect the changes to be largely immaterial headwinds to the major banks.”
Over the road at UBS, it’s a similar take.
“Based on our analysis, the overall impact on the banking sector appears neutral,” UBS bank analyst John Storey said.
“Eliminating surcharges would benefit consumers by enhancing price transparency. However, we believe that allowing merchants to offset this change by lowering interchange fees is a reasonable compromise.”
On UBS analysis the interchange fees charged by the banks are around five time higher than costs incurred in running the credit card systems.
So, what about the $880 million dollar hole?
“We anticipate that banks will likely respond, possibly overtime, by raising cardholder fees, reducing rewards on credit cards, and potentially increasing interest rates.”
At the other end of the transaction, the merchant fee bit, retailers, to large extent, will simply be able to edge up their prices in response to the removal of the surcharges.
Banks, retailers and consumers can now fire off their thoughts to the RBA, with homework due to be complete by August 26.
The RBA says it will publish its final conclusions and implementation timeline by the end of 2025.
Just what the final impact on consumers will be is unclear.
However, one thing is clearer, whatever the outcome, don’t expect to see it show up on the banks’ bottom lines down the track.