Payments Reform in a Muddle

27 April 2006

The Reserve Bank of Australia’s (RBA) decision today to single out the popular Visa Debit payment card for punitive action will boost the number of credit cards in circulation, and increase the risk of greater consumer debt.

General Manager of the Credit Union Industry Association (CUIA), Adrian Lovney, said credit unions are the largest single issuer of Visa Debit cards in Australia.

Mr Lovney said the RBA decision to slash interchange fees on Visa debit cards will push financial institutions to steer customers towards credit cards.

"More credit cards and more personal debt is a perverse outcome from RBA payments reform," Mr Lovney said.

"If only half the Visa Debit cards currently on issue in Australia are replaced by credit cards, there will be an extra two million credit cards in the market.

"The RBA says its objective with payments reform is to promote efficiency and competition – but instead the regulator has become a credit card promoter. We don’t believe this is in the interests of Australian families trying to reduce their levels of personal debt," Mr Lovney said.

"Due to the RBA’s interventions, credit card issuers are compensated via interchange fees for a set basket of costs, including fraud and fraud prevention costs. However, Visa Debit issuers are now denied compensation for fraud costs and are under-compensated for processing and authorisation costs.

"Visa Debit issuers will have to recover those costs from cardholders by potentially increasing card fees – making Visa Debit less competitive against credit cards, and forcing more people into the credit cycle," Mr Lovney said.

Replacing Visa Debit cards with ordinary EFTPOS debit cards is not viable, as Visa Debit offers the greater functionality of credit cards for purchases over the internet, telephone, post and overseas.

"The RBA’s decision will inevitably push card issuers and cardholders away from Visa Debit and towards credit cards. A cardholder buying a $1000 washing machine with a credit card will earn the card issuer an interchange fee of around $5.50 while a cardholder using a Visa Debit card will earn the card issuer 15 cents," Mr Lovney said.

"We welcome the decision of the House of Representatives Economics Committee to hold the RBA accountable for its payments reform muddle through an inquiry and public hearings next month."

For more information:

Luke Lawler, Senior Adviser Public Affairs and Policy
(02) 6232 6666 or 0418 213 025