THE Reserve Bank of Australia has held out the promise of lower retail prices and interest rates for the nation's 10 million credit card users from its reforms to the $89billion card industry.
The reforms, described by consumer advocates as the biggest changes to the banking system since deregulation in the 1980s, effectively have stripped the banks of their ability to set wholesale prices for the card industry.
Instead the RBA will develop a new pricing model it claims will bring savings of $360 million a year. Combined with further changes to the system, consumers could be saving $1 billion annually by 2006, the RBA says.
Treasurer Peter Costello welcomed the reforms and urged the banks to pass on the savings.
Mr Costello also is urging the RBA to introduce more banking reforms -- covering automatic teller machine and EFTPOS fees -- when the credit card changes are introduced in July.
The key RBA reforms announced yesterday are: changes to the cost formula for bank interchange fees (the fees charged between cardholders' banks and retailers' banks for processing transactions); allowing retailers to pass on to consumers the merchants' service fee charged by banks, and; ending restrictions that prevent competitors emerging.
The RBA reforms immediately sparked threats of legal action by the card companies and warnings the changes could bring down the card system.
Mastercard senior vice president and general manager for Australasia, Leigh Clapham, said the central bank's prescriptions would have devastating effects on the economy.
"If the Reserve Bank is allowed to proceed with its announced changes then, instead of positive reform, Australia will have fewer payment alternatives, more expensive payments, lower consumer spending, a shrinking economy, and increased unemployment," he said.
The reforms are a major blow to the banks and credit card companies, which have lobbied for three years to head them off.
ANZ Banking Group, the country's largest card issuer, said it would bear one third of the cost of the reforms and warned its 2003 annual net profit would fall $40 million as a result.
However Stan Moore, policy director for the Australian Retailers Association, said the changes represented a win for retailers and consumers.
"It is going to be hard to reflect the changes in the price of baked beans, but our view is that given retailing is such a competitive market any cost savings to retailers would be ... be passed on to consumers," Mr Moore said.
In one compromise on interchange fees, the RBA appears to have headed off the banks' threats to cut or withdraw interest-free periods on credit card purchases.
Justifying its reform plan, the RBA said consumers were paying "more for retail payments than necessary" because the banks steered consumers to credit cards at the expense of cheaper methods, such as debit cards. Credit card usage in Australia has boomed since the mid-1990s when banks introduced loyalty schemes that reward card users for amounts spent.
Total spending rose by $13 billion to $88.7 billion in the year to June, while outstanding balances on bank-issued credit cards reached $21 billion.
RBA Governor Ian Macfarlane said the reforms would leave the structure and safety of the card market intact, but would improve efficiency.
Mr Macfarlane also promised the reforms would "promote genuine competitions on credit card interest rates".
He said new entrants could cut credit card interest rates in the same way mortgage lending specialists had forced banks to lower home loan rates in the 1990s.
