Credit card revolution is on the way

Shaun Drummond
March 14, 2014
The Reserve Bank’s decision to scrap the need for the banking regulator to oversee credit card issuers by the end of 2014 will make it cheaper for a host of competitors to bypass local banks’ card transaction fees by issuing cards directly.
The move will also likely see the proliferation of “virtual numbers” here. These are credit numbers without cards that are increasingly being issued to people overseas by companies, including airlines and travel operators.
Up to 11 competitors are keen to become direct issuers or acquirers (these are the banks that process credit card transactions for merchants) of credit cards in Australia.
New mobile payment providers such as Square are understood to be considering issuing their own credit numbers here. Others include Payvision and Airplus International, a German company owned by Lufthansa that issues single-use MasterCard numbers. Several of these were contacted by The Australian Financial Review, but declined to comment.
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Coles sells insurance backed by Wesfarmers Insurance and credit cards backed by GE Money, and is understood to be seeking a banking licence. However, this change would mean it wouldn’t need one to issue credit cards or numbers on its own.
A spokesman said the supermarket welcomed financial services reforms “which will open up competition and encourage innovation because this will lead to more choice, better service and lower costs for consumers”.
A spokeswoman for MasterCard said it was still seeking further clarification on the details of the changes. But it is known to support the move as it owns the technology that produces one-time, single-use 16-digit credit numbers that use its payments network.
Regulations restricting competition
After a year-long inquiry, the Reserve Bank said last week regulations introduced in 2004 to increase competition with banks who were then the sole credit card issuers and acquirers hadn’t worked and were now restricting competition. It said there was no good reason that card issuers and acquirers should be subject to banking rules because the failure of any one of them did not pose a significant threat to the financial system.
“APRA’s supervision operates to protect the MasterCard and Visa systems rather than the users of those systems,” the RBA said.
“The daily value of transactions in all credit card systems in Australia averaged only $720 million per day in 2012-13, compared with Real Time Gross Settlement payments of $158 billion and Direct Entry payments [transactions below $100,000] of $40 billion.”
Many non-banks issue credit cards, but they do it in conjunction with a bank and must pay fees to them.
In 2004, changes to the banking regulations allowed non-banks to become “specialist credit card institutions”. But in effect they still needed to follow the same capital rules as banks overseen by the Australian Prudential Regulation Authority. The RBA estimates removing this requirement will cut $1.6 million from the cost of becoming a credit number issuer or acquirer.
In 10 years only three competitors to the local banks in direct card issuing and acquiring have emerged – Tyro is an acquirer, GE Capital a direct issuer, with IP Payments just gaining in principle authorisation to become an SCCI.
This has allowed Tyro, for instance, to roll out alternative eftpos terminals to small businesses.
Despite its criticism of banks’ dominance of payments infrastructure, however, Tyro – like others that have gone to the trouble and cost of being licensed as an SCCI – oppose the change.
CEO, Jost Stollman, said it was too early to tell what it would mean for them. “We . . . thought all along that SCCI was a very suitable framework, now that is going to disappear it all depends on how it is handled by the industry.”
The RBA will ask the federal government to repeal Regulation 4 of the Banking Regulations 1966, and expects this to come into effect “later this year”.
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