Regulate the right things, please
[Dave Birch] Payment cards made the news headlines this morning. As I was laying in bed listening to the BBC Radio 4 Today programme I was genuinely surprised to hear a lead item about a government proposal to intervene in the retail payments space.
“Excessive” fees for using a debit or credit card to buy items such as travel or cinema tickets will be banned by the end of 2012, under government plans. The move comes amid complaints that airlines, booking agencies and even councils were imposing excessive charges for using a card.
However, firms will be allowed to levy a “small charge” to cover payment processing costs.
So once we’ve worked out what “excessive”, “fee”, “small”, “charge”, “processing” and “costs” means, there should be no problem. Now, I’m not saying that there isn’t an issue. Clearly, there is. People navigate their way through web sites to buy tickets and then find themselves confronted with massive, absurd and incomprehensible surcharges.
Examples of these charges are a £6 per person, per leg “administration fee” charged on all but one card by Ryanair, an £8 per booking charge by Easyjet - plus 2.5% when using a credit card, a £4.50 per booking credit card fee from British Airways, and a charge of up to 17 euros (£14.16) per person by Air Berlin.
None of these charges, note, bear any relationship to what the companies are being charged by their acquirer. Let’s just be clear about that. A debit transaction probably costs an airline about 10p, so adding £15 and then blaming it on the banks is pathetic. But what to do about it? As recent experience in the US shows, if the government attempts to regulate the price that is charged for payment services, then the costs will simply migrate to what isn’t regulated. Look what happened with Durbin.
Bill Hardee, owner of the Warehouse Saloon & Billiards in Austin, Texas, says he recently tallied up his savings. The grand total: $1. He figured he paid $74 less on larger debit-card transactions, but that amount was offset by $73 in higher charges that he paid on small purchases.
The real solution to this problem, if you are going to regulate anything, is to insist that companies make the costs of payment choices clear and then let the market do the work. If you are upset y an airline charging you £12 to use your debit card, then use another airline. At least airlines have competition. Other ticket surcharges are to my mind much worse. I find it as annoying as the next person that the headline prices of things on the web (e.g., concert tickets) do not include the unavoidable additional charge. I can’t believe that people like Ticketmaster really want me to pay in cash instead of by card, so why not show the cost of the card payment (plus “handling charges” and all that sort of crap) in the price of the ticket?
If the government wants to take action, it should adopt my plan to minimise the total social cost of payments and make debit cards the “zero”. In other words, companies should not be allowed to surcharge for debit cards and banks should be required to provide zero interchange debit cards as a condition of holding a retail banking licence. If companies want to surcharge for payment instruments that are worse for society (cheques, cash, credit cards, charge cards, cowrie shells or euros) then that’s fine.
Much as I dislike government intervention in the pricing of anything, unless the costs of cash are to be distributed properly (which they won’t be) this is the only sensible course of action. Making debit cards the “zero” and allowing retailers to surcharge other payment mechanisms (including cash) is fair, with one proviso: that pre-paid cards are counted as debit cards. This is necessary to deliver financial inclusion.
[From Digital Money: Economy class]
I can see at least one problem on the horizon here though. Regulators are sure to want to extend the protections afforded to credit card users to debit card users. Interestingly, in the UK at least, Visa has extended consumer protection to debit cards for some time and now MasterCard is going to do the same thing with its new debit products.
MasterCard is re-launching its debit card portfolio in the UK, offering banks “premier debit” products with the capacity to run sophisticated rewards and loyalty programmes… Loyalty programmes are notoriously difficult to run on the debit platform due to the low interchange revenue, but MasterCard believes that enabling banks to build a rewards platform around their debit portfolio will enable issuers to differentiate their current account offerings significantly.
The network has mandated that all cards be contactless enabled and offer zero liability to the cardholder.
These things aren’t cost free - someone has to pay for those protections since neither Visa nor MasterCard nor the banks will want to do it for nothing and if we raise the cost of debit transactions too high then we get away from the social goal of providing a basic low-cost payment system for the whole of society to use. I notice that regulators are beginning to target prepaid cards as well, thus raising their cost too and limiting their ability to tackle financial inclusion. Why this should be a regulatory priority is beyond me, but there we go.
Although the strict legislation looks likely to curb money laundering, its provisions also mean that prepaid cards can be reloaded up to a maximum of €100 ($133.82). For amounts above that, a full KYC procedure needs to take place every time the card is reloaded with credit above €100.
The issuer then needs to archive that information for five years.
But let’s assume we can find a way as an industry to deal with this. In the meantime, we can get by with debit cards, can’t we? Hhmmm…
O’Connell lists five scenarios in which he feels paying debit should be avoided at all costs:
Personally, I avoid paying by debit at all times and under all circumstances. But it’s perfectly reasonable for people who do pay with debit cards to ask why they are subsidising my enhanced consumer protection, frequent flier miles, cash back and so on. The price quoted for goods and services by UK merchants should include all charges for using a debit card, and that’s that. It is perfectly reasonable to surcharge me for using my credit card: then I as a consumer can decide whether the benefits of using my BA American Express card to buy a ticket at the British Airways web site are worth £4.50 to me or not.
These are personal opinions and should not be misunderstood as representing the opinions of
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