RBA – Page 74 – Digital Finance Analytics (DFA) Blog

Household Debt Ratio Grinds Higher And Mortgage Discounts Rise

The latest RBA chart pack, just released, shows that household debt, as a percentage of disposable income continues to rise. Also from our analysis, banks are offering larger discounts again.

RBA data shows interest payments are below their peak, but are also rising (though the May cash rate cut will have an impact down the track as mortgage rate cuts come home). However, given static incomes (which are for many falling in real terms), this debt burden is a structural, and long term weight on households and the economy, and is dangerous. However low the interest rate falls, households will still have to pay off the principle amount eventually.

We are also seeing some relaxing of lending standards now, as banks chase investor loans well below 10% growth rates, and continue to offer cut price loans for refinance purposes. Average discounts on both investment loan have doubled.

RBA Cash Rate Unchanged at 1.75 per cent

At its meeting today, the Board decided to leave the cash rate unchanged at 1.75 per cent.

The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. China’s growth rate moderated further in the first part of the year, though recent actions by Chinese policymakers are supporting the near-term outlook.

Commodity prices are above recent lows, but this follows very substantial declines over the past couple of years. Australia’s terms of trade remain much lower than they had been in recent years.

In financial markets, conditions have generally been calmer for the past several months following the period of volatility early in the year. Attention is now turning to some particular event risks. Funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.

In Australia, recent data suggest overall growth is continuing, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators have been more mixed of late, but are consistent with continued expansion of employment in the near term.

Inflation has been quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate overall is helping the traded sector. Over the past year, growth in credit to businesses has picked up, even as that to households has moderated a little. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.

Indications are that the effects of supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. Dwelling prices have begun to rise again recently. But considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.

Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.

Home Lending Rises Again To New Record $1.56 trillion

Latest credit aggregate data from the RBA today, shows lending momentum to business and the housing sector remained strong. As a result, total lending to residential property rose by $6.7 billion or 4.3% to $1.56 trillion, seasonally adjusted, with loans for owner occupation comprising $6.0 billion and $0.7 billion for investment housing. Business lending rose by $6.5 billion, or 0.76% to $854 billion. Housing lending is still growing at 7% annualised, well above inflation and income growth. This is sufficient to maintain home price growth.

Investment lending makes more than 35.4% of all lending for housing, and all lending for housing comprises more than 60% of all lending in Australia. So the banks remain strongly leveraged to the housing sector.

Looking at the 12 month growth rates, we see investment lending sliding from about 10% last year to around 6.5%, business lending growing at 7.4% and lending for owner occupation growing at 7.3%. These growth trends contain the adjustments between owner occupied and investment lending due to reclassification.

The RBA says:

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $40 billion over the period of July 2015 to April 2016 of which $1.2 billion occurred in April. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.

Review of Card Payments Regulation Outcomes

The Reserve Bank has today released the Conclusions Paper and three new standards which they say will contribute to a more efficient and competitive payments system. As expected the review has focussed on reducing excessive payment surcharges, changes to interchange fee bench-marking and the inclusion of the American Express companion card system. The RBA has not designated UnionPay, JCB, Diners Club, or any other systems. Accordingly the RBA’s new standard does not apply to transactions carried out using those systems.

The banks says the new standard is likely to result in some reductions in the generosity of rewards programs on premium and companion cards for consumers. Some adjustment in annual fees on these cards is also possible. Commercial and corporate card products often provide significant benefits free of charge to the company holding the card. It is possible that there will be changes to either the pricing or services provided by these products. These changes are part of the process of improving price signals to cardholders and creating a more efficient and lower-cost payments system.

Note that the new surcharging framework only applies to payment surcharges – that is, to fees that are specifically related to payments or apply to some payment methods but not others. Some merchants apply fees, such as ‘booking’ or ‘service’ fees, which are unrelated to payment costs and apply regardless of the method of payment (this is for instance common in the ticketing industry). The surcharging framework is not intended to apply to these fees but merchants will be required to meet all provisions of the Australian Consumer Law in terms of disclosure of any such fees.

The Review was initiated with the publication of an Issues Paper in March 2015. After extensive consultation with stakeholders, the Bank published some draft standards in December 2015. The Bank received submissions on the draft standards from more than 40 organisations and the staff have had over 50 meetings with stakeholders since their release. There was significant support for the proposed reforms from end users, including major consumer and merchant organisations.

The new surcharging standard will preserve the right of merchants to surcharge for more expensive payment methods. However, consistent with the Government’s recent amendments to the Competition and Consumer Act 2010, the new standard will ensure that consumers using payment cards from designated systems (eftpos, the debit and credit systems of MasterCard and Visa, and the American Express companion card system) cannot be surcharged in excess of a merchant’s cost of acceptance for that card system. Eligible costs are clearly defined in the standard and new transparency requirements will promote compliance with and enforcement under the new framework. With the cost of acceptance defined in percentage terms, merchants will not be able to impose high fixed-amount surcharges on low-value transactions, as has been typical for airlines. The ACCC will have enforcement powers under the new framework, which will take effect for large merchants on 1 September 2016 and for other merchants on 1 September 2017.

The new interchange standards will result in a reduction in payment costs to merchants, which will place downward pressure on the costs of goods and services for all consumers, regardless of the payment method they use. The weighted-average benchmark for credit cards has been maintained at 0.50 per cent, while the benchmark for debit cards has been reduced from 12 cents to 8 cents. The weighted-average benchmarks will be supplemented by ceilings on individual interchange rates which will reduce payment costs for smaller merchants. Commercial cards will continue to be included in the benchmarks, but the Board has decided for the present against making transactions on foreign-issued cards subject to the same regulation as domestic cards. Schemes will be required to comply with the benchmarks on a quarterly frequency, based on weighted-average interchange fees over the most recent four-quarter period. These tighter compliance requirements will ensure that the regulatory benchmarks are an effective cap on average interchange rates. The new interchange standards will largely take effect from 1 July 2017.

To address issues of competitive neutrality, interchange-like payments to issuers in the American Express companion card system will now become subject to equivalent regulation to that applying to the MasterCard and Visa credit card systems. More broadly, to prevent circumvention of the debit and credit interchange standards, there will be limits on any scheme payments to issuers that are not captured within the interchange benchmarks.

These changes to the regulatory framework are consistent with the direction of reforms suggested in the Final Report of the Financial System Inquiry and endorsed in the Government’s October 2015 response to the Report.

How Much Benefit Do Major Banks Get From Implicit Government Guarantees?

In a freedom of information request, released by the RBA we get some insights into the discussion around whether the major banks benefit from the implicit assumption that in a time of strife they will be bailed out by Government.

The credit ratings of Australian banks do benefit to some extent from rating agencies’ perceptions that the Government would support them if they got into trouble. The major banks and Macquarie receive a two notch credit rating uplift from S&P as a result of the rating agency’s expectation that these banks will receive support from the government in a crisis. Other Australian banks do not receive any rating uplift, as S&P does not expect government support.

The released documentation discusses the different modelling approaches and also some of the international analysis which has been done on the subject. The real benefit does appear to change over time (depending on the risks in the system) but the net conclusion is the majors do get benefit. It is hard to put a value in it, but a figure between $1.9 and $3.8 billion (between 14 and 28 basis points) was suggested in 2013.

One submission to the financial system inquiry applied rates from the same study to the non-deposit liabilities of the major banks to estimate the dollar value of the implicit subsidy to these institutions at between $5.9 and $7.9 billion per year.

Systemic risks may be higher as a result.

An implicit government guarantee creates on incentive for creditors to fund banks at rates below those justified by their financial health, thus providing an implicit subsidy. lf of significant size, this subsidy has the potential to distort competition and increase systemic risk.

However you read it, the majors are supported by the implicit Government guarantee. It does not seem to pass through to borrowers or depositors in better rates.

Westpac Turns The Property Investment Lending Tap On

Westpac has lifted the maximum LVR for investment loans to 90%, up from 80% (which was below many other lenders). With the largest share of investment loans they trimmed back their lending to the sector last year in order to get under the regulators 10% speed limit. Now the brakes are off, and with refinance growth slowing, and loans to overseas investors on the nose, lenders are targetting the investment sector. Other underwriting parameters are still tighter than they were.

The Digital Finance Analytics household survey highlighted that demand from investors was on the rise, and last month there was more growth in investment loans, as investors gained renewed confidence in home price growth, and saw the prospect of negative gearing changes dissipate. The RBA’s rate cut was the gilt on the gingerbread.

Given that household lending appears to be the only game in town to force economic growth, it will be interesting to see how the RBA and APRA react to a resurgence in the more risky investment lending sector. They seem happy with a 7% annual growth in credit, a rate way higher than real incomes or inflation, meaning high household debt will go higher still.

Was The Last RBA Rate Cut Needed?

From Business Insider.

The intervention of former RBA governors continues.

Recently Bernie Fraser said he is not “in the slightest” bit worried about letting inflation in Australia slip below the bottom of RBA’s 2-3% band.

His comments have now been reiterated by Ian Macfarlane, the man who followed him as governor of the Reserve Bank.

The AFR reports this morning that Macfarlane, who is now a director of the ANZ bank, took dead aim at market traders and forecasters whom he implies don’t understand the RBA’s approach to inflation targeting.

He said the problem at the Reserve Bank “is that financial markets, particularly offshore, assume a mechanical application of what they regard as the standard model”.

That’s a comment that reflects the reality of how the RBA has conducted monetary policy since the inflation targeting approach was first adopted under Fraser’s reign at the bank.

“The RBA has always prided itself on having a more flexible – as opposed to mechanical – inflation targeting model than other countries,” Macfarlane said.

He’s right on the money. The flexibility the RBA has given itself in the management of monetary policy, and its approach to the wild gyrations of the Australian dollar, are in no small part responsible for Australia’s magic run of 25 years without a recession.

But Macfarlane also appears to have a message to those who believe the RBA will have to cut deeply in the future (my emphasis).

The inflation targeting approach says that if inflation forecasts are below target, we should run an easy monetary policy – we already have that. It doesn’t say that each time we receive an inflation statistic showing it is below target, we have to cut interest rates.

You can read the original story at the AFR here.

RBA Minutes Show Lower Reported Inflation Tipped The Cut … Just

The RBA Board minutes, released today suggests that, inflation outlook apart, things are set fair … so, given the low rate already, why cut at all? Have they been captured by central bank group think? After all, ultra low/negative rates are working so well in er… well, not Japan, Europe, UK or USA… Chances are going lower will just make the journey back to more normal times more painful and longer.

In considering the stance of monetary policy, members noted that the recent data on inflation and labour costs had been lower than expected at the time of the February Statement on Monetary Policy. Although the March quarter outcome for the CPI reflected some temporary factors, the broad-based softness in prices and labour costs signalled less momentum in domestic inflationary pressures than had previously been expected. As a result, there had been a downward revision to the inflation outlook and the profile for wage growth. Underlying inflation was expected to remain around 1–2 per cent over 2016 and to pick up to 1½–2½ per cent by mid 2018.

The recent data suggested that growth in Australia’s major trading partners was likely to be a little softer than previously expected and below its decade average in 2016 and 2017. While growth in the Chinese economy had continued to slow, the growth outlook had remained much as previously forecast based on the expectation of further support being provided by more stimulatory policy settings. The renewed focus of the Chinese authorities on the short-term growth targets had been accompanied by a strong rally in bulk commodity prices over recent months. Higher commodity prices would typically support incomes and activity in Australia. However, the rally in commodity prices was not expected to boost mining investment over the next couple of years.

Sentiment in financial markets had improved following a period of heightened volatility earlier in the year. Despite uncertainty about the global economic outlook and policy settings among the major jurisdictions, funding costs for high-quality borrowers remained very low and, globally, monetary policy was remarkably accommodative.

Domestically, the outlook for economic activity and unemployment had been little changed from that presented three months earlier. The available data suggested that the economy had continued to rebalance following the mining investment boom, supported by very accommodative monetary policy and the depreciation of the exchange rate since early 2013, which had helped the traded sector. GDP growth overall had been a bit stronger than expected over 2015, but appeared to have been sustained at a more moderate pace since then. Growth was forecast to pick up gradually to be above estimates of potential growth later in the forecast period. Accordingly, the unemployment rate was expected to remain around current levels for a time before declining gradually as GDP growth picked up. The exchange rate depreciation since early 2013 was assisting with growth and the economic adjustment process, although an appreciating exchange rate could complicate this.

In coming to their policy decision, members noted that developments over recent months had not led to a material change in the outlook for economic activity or the unemployment rate, but the outlook for inflation had been revised lower. At the same time, they took careful note of developments in the housing market, which indicated that supervisory measures were strengthening lending standards and that the potential risks of lowering interest rates therefore were less than they had been a year earlier.

Members discussed the merits of adjusting policy at this meeting or awaiting further information before acting. On balance, members were persuaded that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.

The Decision

The Board decided to lower the cash rate by 25 basis points to 1.75 per cent, effective 4 May.

Why the Reserve Bank should resist calls to alter its inflation range

From The Conversation.

For economists and others who ‘grew up’ being challenged to achieve low and stable inflation against the background of high and volatile inflation rates that emerged in Western countries in the 1970s (and persisted in Australia through the 1980s), the possibility inflation could be ‘too low’ can seem like something from another universe.

The Reserve Bank of Australia’s 2-3% inflation target was more-or-less unilaterally promulgated by Bernie Fraser (who was RBA Governor from 1989 until 2006).

In a speech just after the 1993 election (at which the Liberal Opposition had advocated the introduction of a 0-2% inflation target, similar to that which had been adopted in New Zealand in 1989), Fraser suggested that:

“If the rate of inflation in underlying terms could be held to an average of 2-3% over a period of years, that would be a good outcome. Such a rate would be unlikely to materially affect business and consumer decisions, and it would avoid the unnecessary costs entailed in pursuing a lower rate.”

Although Bernie Fraser was initially “rather wary of inflation targets”, he explicitly couched the series of interest rate hikes he implemented during the second half of 1994 as being undertaken in order to maintain inflation within the 2-3% range.

The target was formally embodied in a Statement on the Conduct of Monetary Policy agreed between newly-installed Treasurer Peter Costello and newly-appointed RBA Governor Ian Macfarlane shortly after the 1996 election, and has been re-iterated after each change of government and upon each appointment of a new RBA Governor ever since.

Australia’s approach to inflation targeting differs from that of most other countries which have inflation targets in two important respects. First, it does not stem from a government directive, nor is it enshrined in legislation. As former Governor Ian Macfarlane has said, “the government didn’t introduce it, we introduced it”.

The Reserve Bank does not have to “explain itself” to politicians if it “misses” its target for some reason. Second, the target is intentionally and explicitly flexible. It is expressed as a range, to be achieved “on average” and “over the course of the business cycle” (a term which is not anywhere defined), rather than at all times and in all places, as it were.

This means that the Reserve Bank can “tolerate” inflation being either above or below the target for a temporary period if it has good reason to believe that the deviation is only temporary, or is the result of some one-off factor whose influence will soon pass, without needing to take monetary policy actions to push it back into the target range more quickly but which would, in the RBA’s judgement, not otherwise be necessary.

This “flexible inflation targeting regime” has served Australia well over the past two-and-a-bit decades. The target is widely perceived to be “credible” – that is, it is widely recognised and understood that the Reserve Bank will do what it needs to do in order to ensure that it is achieved (as it demonstrated, for example, in 1994 and in 2007).

As a result, it has served to “anchor” inflationary expectations – that is, to give participants in the economy (businesses, consumers, union officials, governments and others) a sound basis for expecting that inflation will average somewhere between 2 and 3% over the medium-to-longer term – as it was intended to do.

And it has allowed the RBA to keep interest rates more stable than would have been the case if it had been required to chase after inflation on each and every occasion on which it temporarily departed from the target range.

With the annual “headline” rate of inflation having been below the bottom end of the 2-3% target range since the December quarter of 2014, and more recently the annual “underlying” inflation rate also having dropped below 2%, some have suggested that the inflation target should itself be lowered.

This would allow the central bank more room to accommodate unusually low inflation without having to cut rates to levels which might risk triggering unsustainable rates of credit growth and/or an asset price bubble.

Ironically, the opposite proposition was put during the resources boom of 2010-12, when some suggested that the RBA should increase its inflation target so as not to have to raise interest rates as much in the face of the inflationary pressures which it was feared that boom might engender.

The RBA resisted such calls on that occasion, and should do so on this. As it is formulated, the RBA’s flexible inflation target gives it latitude to determine how dogmatic it needs to be in pursuit of “low and stable” inflation.

If it were to change its target every time it appeared as though inflation might be either above or below the target range for an extended period, the target would eventually lose whatever role it has as an “anchor” for inflation expectations, increasing the chance that inflation would – as a result of the well-documented propensity of inflation expectations to become self-fulfilling – remain above or below the target for even longer, and perhaps by even wider margins.

Australia’s inflation targeting regime has served the country well, and the challenges it faces at this time are not so great as to warrant altering it.

Author: Saul Eslake, Vice-Chancellor’s Fellow, University of Tasmania

Update On Current Cards Payment Review

Malcolm Edey RBA Assistant Governor (Financial System) has teased us today with an update on the review currently in hand, and yet to be finalised. He highlighted three specific areas of focus. Companion cards (likely to be caught by the interchange regime) , Interchange fees (probable cut/cap in fees and extended to more cards and payments) and surcharging (probably allowed but on a percentage basis).

The economics of the payments systems would be impacted as a result. We think the value of rewards points would likely take a further hit.

Companion cards

It has been just over a decade since the Bank first considered the case for regulating interchange-like payments made by American Express to its partner banks under companion card arrangements.

Since then, issuance of companion cards has grown faster than that for the four-party schemes, and the combined share of credit and charge card transactions accounted for by Diners Club and American Express has noticeably increased. The change largely occurred in two steps coinciding with the introduction of companion cards by the major banks. At the same time, evidence cited in our consultation paper points to a steady increase in the importance of companion cards within the overall American Express card business in Australia. Some merchants have indicated that an increased cardholder base as a result of companion card arrangements has increased the pressure for them to accept American Express cards.

For reasons that I have already outlined, differentials in interchange-like payments can have an important influence on the incentives to use particular payment methods, and these developments in companion card usage suggest that the different regulatory treatments for the two arrangements may have been a factor in shaping the development of the market. In the Bank’s view, an efficient payments system is promoted where the relative prices of different payment methods consistently reflect their relative resource costs.

In reviewing this area, the Bank has indicated that three options have been under consideration. Those options are to retain the current arrangements, to remove regulation of the four-party schemes, and to regulate interchange-like payments for companion cards so that they would be subject to the same cap as the four-party schemes. In its consultation paper released in December last year, the Bank indicated that it favoured the third of those options, and this has formed the basis for further consultation in the period since then.

Interchange fees

The interchange benchmarks set by the Board are the primary instrument for the Bank to anchor credit and debit card interchange fees at a desired level. The current benchmarks of 50 basis points for credit cards and 12 cents for debit have been in place since 2006. As I mentioned earlier, reductions in those benchmarks were considered, but not adopted, at the time of the 2007/08 review.

In the period since then, the Board has remained concerned that interchange benchmarks may still be higher in Australia than is desirable for payments system efficiency. Another concern has been the proliferation of interchange categories over time and the widening dispersion of interchange fees. Often these work to the disadvantage of smaller merchants who do not benefit from preferential strategic rates. As at September last year, the average credit card interchange rate faced by non-preferred merchants was 55 basis points higher than the rate faced by preferred merchants; for debit cards the difference was around 13 cents. At the individual merchant level, these differences can be much bigger.

In its December consultation paper the Bank set out a series of regulatory options in this area. They included retaining the status quo, reducing the weighted average benchmarks, and supplementing those benchmarks with hard caps on individual transactions. A fourth option of removing interchange regulations, while strengthening transparency of these fees to merchants, was also included. The Board’s preliminary assessment was in favour of a mix of the second and third options I just described. This would involve retaining the existing weighted average of 50 basis points for credit cards, supplementing it with a hard cap of 80 basis points on individual transactions, and reducing the debit benchmark to 8 cents. Once again, this was not a final decision but was announced as a basis for the subsequent phase of consultation that is now being completed.

As well as looking at the overall level of interchange fees, the Review is also considering a number of related issues concerning coverage and compliance.

On coverage, the issues discussed in the December paper concern commercial cards, foreign-issued cards and pre-paid cards. Currently commercial cards are included within the scope of the Bank’s interchange standards and hence form part of the calculation for the purposes of compliance with the weighted average benchmark. A number of interested parties have argued that these cards should be exempted, especially in the event that interchange caps were lowered. They argue, for example, that commercial cards typically provide a higher value of associated services than other card types, with fewer non-interchange revenue streams, and that these features could justify higher fees. On the other hand, consultations also suggest that these cards provide significant benefits to both sides of the market, and hence it is not clear that higher interchange fees are needed to promote their use. The Bank has also noted that, since commercial cards typically carry higher interchange fees than consumer cards, their exemption would amount to a de facto loosening of the weighted average cap.

Foreign-issued cards are currently excluded from the benchmark calculations, and the question is whether these should be brought within the scope of domestic regulation for transactions acquired in Australia. Here a key consideration is the possibility of circumvention. Foreign-issued cards used in Australia typically carry a much higher interchange fee than the domestic benchmark, and under current arrangements could be used to circumvent the domestic cap. At this stage, however, the market share of foreign issued cards in Australian card transactions is still relatively small – around 3 per cent. In response to the December consultation document, Mastercard and Visa (among others) have made a number of arguments for retaining the existing treatment of foreign-issued cards, and these are being carefully considered.

For domestic pre-paid cards, the Board is similarly considering whether these should be brought within the scope of the existing standard.

The issue concerning the compliance mechanism can be stated fairly simply. The current mechanism operates on a three-year compliance cycle, such that the weighted average benchmark has to be met in November of every third year. Since the mix of card transactions within any system tends to shift towards the higher cost cards over time, average interchange fees have tended to rise during each three-year period. This in turn has had the paradoxical effect that the actual weighted averages for the Visa and Mastercard schemes have been almost always above the cap. The Board’s intent, however, is that average fees should be below the cap, not above it. That is what a cap means. The review process is consulting on options to tighten the compliance mechanism in keeping with that intent.

A related question on compliance concerns the possible regulation of scheme payments to issuers. These marketing and incentive payments are bilaterally negotiated and can be quite material in value, and the flexibility of such payments means that they can be structured in ways to circumvent interchange regulation. Internationally, regulators have moved to limit these types of payments. Under European regulation, for example, they are treated as if they were interchange payments. As part of its Review, the Board is considering whether a similar treatment should be adopted here. The preliminary position announced in December was in favour of that option.

Surcharging

As I have already mentioned, the Board has long held the view that the ability to surcharge for more expensive payment methods is part of an efficient payment system. The ability to surcharge expands the options available to merchants beyond a binary decision to accept or reject a card, and it allows price signals to pass through to the consumer who decides which payment method to use.

Nonetheless, efficient surcharging should reflect the cost to the merchant. When the Board’s initial surcharging reforms were put in place in 2003 it was expected that market forces would provide a sufficient discipline on surcharging behaviour. Since then, however, evidence of excessive surcharging in some industries has accumulated.

The Board revised its regulation in 2013 to give schemes greater power to prevent excessive surcharging, but those arrangements proved difficult to enforce. This has prompted a further review by the Board as part of its current process. As well as consulting with the full range of interested stakeholders, the Bank has had discussions with the ACCC and Treasury about possible policy approaches. The Board’s proposed response builds on the recent Government measures to strengthen ACCC enforcement powers in this area.

The main elements of the coordinated approach were set out in the December consultation paper. These are, that:

Government legislation bans excessive surcharging, defined as surcharging in excess of the Reserve Bank standard

The Bank’s standard is based on a simple and verifiable measure of the cost of acceptance, with appropriate transparency of costs to merchants

The ACCC has enforcement powers in cases of excessive surcharging by merchants, and

The Bank’s standard continues to stipulate that schemes may not have no-surcharge rules.

Under the Bank’s preferred approach, acquirers would be required to provide merchants with regular statements of the cost of acceptance for each payment method. The cost of acceptance would have to be expressed in percentage terms unless the acquirer fees for that payment method were fixed across all transaction values. As a result, surcharging would normally also have to be percentage based. Among other things, this would rule out the current system of fixed-dollar surcharges in the airline industry, which would appear to result in significant over-recovery of payment costs on low-value fares.