The latest changes to credit card surcharging are a textbook example of regulatory capture.
Regulatory Capture is a type of corruption that is executed by a group of businesses in a particular industry intertwining themselves so closely with their own regulator that the regulator is no longer an objective arms-length entity, but rather an extension of those businesses themselves
How is this achieved? Through staff movement.
If you look at the executives of the top 4 banks in Australia and then also look at the executives at the banking regulator, they are all the same people who will do a few years working for a bank, then a few years working for the regulator then go back to working for one of the banks
This means all these executives know each other:
- At best, due to these executives needing jobs in the banks after their tenure at the regulator ends, they need to play nice so they can get a job when they return to the banks
- And at worst they are trojan horses sent into the regulator to co-opt it on purpose for their benefit and to the detriment of everyone else.
Why does it matter?
Lets work through an example of what our current government has unwittingly done so you know who the winners and losers are
Under the new legislation, at the behest of the Australian banking cartel:
- Businesses are no longer allowed to charge customers surcharges for bank interchange fees they incur
- Except if you are a bank or credit card company, your ability to charge surcharges is now enshrined in law, legally protected from being evaded.
Who wins = banks and credit card companies
Who loses = Every business in Australia that is not a bank or credit card company
But why don’t they just put up their prices and roll it all into one amount?
This is a common retort, but anybody who has ever run a business before will instantly know the reason why it does not work
As a business you will almost always offer multiple ways for your customers to pay you
- Cash
- EFT / Internet Banking Transfer (when you receive an invoice and pay it as a transfer using internet banking)
- Debit Card
- Credit Card
As the customer you don’t see what happens on the other end of the transaction, and it is a fair point that you would think when you pay the business it just receives their money, but that is sadly not the case.
Cash: When you pay in cash, you instantly have less money, and the business instantly has more money, and the business receives the full amount. A win for both customer & business.
EFT / Internet Banking Transfer: When you pay by making a transfer with your internet banking, you instantly have less money, but the business does not get its money (unless they are also a customer of the same bank) for 3 days, the bank collects the interest earned on this money for those 3 days, and on the 3rd day the business receives the full amount.
Debit Card: When you pay with a debit card, you instantly have less money, but the business does not get its money for 3 days, the bank collects the interest earned on this money for those 3 days, and on the 3rd day the business receives the full amount.
Credit Card (Visa & Mastercard): When you pay using a Visa or Mastercard credit card, you instantly have less money, but the business does not get its money for 3 days, the credit card collects the interest earned on this money for those 3 days, but on the 3rd day the business only receives 99% of the full amount. Visa & Mastercard charge around 1% of the transaction amount as their fee.
Credit Card (Amex): When you pay using an Amex credit card, you instantly have less money, but the business does not get its money for 3 days, the credit card collects the interest earned on this money for those 3 days, but on the 3rd day the business only receives 97% of the full amount. Amex charge around 3% of the transaction amount as their fee.
CAFE BUSINESS CASE STUDY
Now as a consumer you might think this sounds like nothing, it’s a tiny amount. But lets just assume you’re running a small cafe and you have 2-3 staff. Your total income and expenses each year will look something like this
Income - Sales = $500,000
Income - Surcharges = $ 10,000
Cost of Food & Drinks = $150,000
Wages = $150,000
Rent = $ 50,000
Other Business Costs = $100,000
Credit Card Fees = $ 10,000
Profit = $ 50,000
The result of this scenario is that it is a fair user pays system
- If you don’t like surcharges you can pay in cash or by debit card
- If you want to choose to use a more expensive payment method you get charged more, at cost, for making that choice
The direct result of this new legislation is a combination of the 3 options:
- This small cafe owner, who is only just scraping by on $50,000 per year, is forced by law to pay the bank $10,000 in fees, but is banned from recouping this cost by on charging it to their customers. They wear the cost of this grossly unfair new tax, suffering immensely as a consequence.
- The cafe owner puts up their prices to compensate, but now their customers who pay in cash, by debit cards, or EFT end up subsidising those who pay by credit card, which is a more unfair system
- The business stops accepting card payments, and operates as a cash only business
These reforms are well intentioned, but it is easy to see that they are not designed to help consumers or business owners, they are designed by banking executives, to benefit the banks at the detriment of everyone else
