The Cost and Efficiency of Credit Card Schemes – A Comparative Study on the Australian Regulatory Reform for Credit Card

The Cost and Efficiency of Credit Card Schemes – A Comparative Study on the Australian Regulatory Reform for Credit Card

 

Title
The Cost and Efficiency of Credit Card Schemes – A Comparative Study on the Australian Regulatory Reform for Credit Card
Author
Yu-Ting Lin
Keywords
credit card, no-surcharge rule, interchange fee, merchant service fee, cross subsidization, VISA and MasterCard
Abstract
This paper first outlines the Australian recently adopted regulatory framework
for credit card scheme, highlighting the growing concerns over the possible
anti-competitive effects of the setting of interchange fees and the “no-surcharge
rule”.The rate of the interchange fees applied to the credit card use nowadays
raises the concerns of overcompensating the financial institution as well as the
credit card schemes and also, the “no-surcharge rule” restricted the competition
and suppressed price signals that guide the efficient allocation of resources.
In my opinion, the interchange fee should be decided at a cost-based benchmark.
The cost to be included in calculating the formula should be confined
within the related cost of processing and authorizing the transaction, of fraud and
of the interest-free period. Furthermore, the regulatory authority should review
the setting of the interchange fees regularly and related information should be
disclosed to the public in the way that consumers can easily and conveniently access.

As to the no-surcharge rule, for consumers, when they purchase with credit
cards, they don’t have to bear additional cost, though credit card is among the
most expensive payment instruments, but benefit from delayed-payment without interest. On the other hand, the merchants are confronted with the customers’ demand
to accept credit card transactions even when VISA and MasterCard charge
them high fees for using their services. Nowadays, the merchants don’t have any
option but to accept credit card transactions since majority of consumers enjoy
the convenience of creditcard payments. Barred by the “no-surcharge” requirement
from VISA and MasterCard, will the merchants passively shoulder the high
service fee for accepting credit card transaction? Merchants will raise the price of
every items slightly just enough to cover their cost without attracting consumers’
complaints. Consequently, the general consumers in the economy bear the credit
card transaction cost, resulting in the cross subsidization.
By abolishing the no-surcharge rule, merchants have the power to set different
rules according to the payment instruments used. With additional fee charged,
people will make payment decisions based on the cost and benefit analysis, but
not simply using credit card as payment with every transaction. Confronted with
downward sloping usage rate, VISA and MasterCard may be motivated to make
the credit card scheme more efficient.
In long term, the credit card scheme will work in the way that best
contributes to the efficiency and competition.

Abstract Article

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