The Australian Retail Banking and Payments System

State of Play -- September 1999

PREFACE
BENCHMARKS
THE RESERVE BANK
OTHER AUTHORITIES
THE MEDIA

PETER MAIR

pmair@ezy.net.au

PREFACE  -- HAS THE TIDE TURNED?

"opening prayer"
We thank God for the Australian Bankers' Association, John Laws and 2UE—and for the ABC and Media Watch, without whom the tide may be still out for the reform of retail banking markets.
Amen.

John Laws—inadvertent hero
Developments in attitudes to retail banking may split neatly around the John Laws episode and the evidence of the way the banks choose to work. The next phase will tell if the tide has turned truly in favour of reforming retail banking.
 
On the preliminary agenda is both an ABA inquiry into the John Laws matter and the release of the first annual report of the RBA's Payments System Board. Comparison of these outcomes with previous 'output' from both these regulators -- any shift in attitude --will tell a story.

The prospect of some 'open competition' between regulators examining the John Laws matter has receded. The ACCC and the Parliamentary Banking Committee (PBC) have decided to 'defer' their foreshadowed inquiries. One nevertheless lives in hope that both authorities will now step up their scrutiny of retail banking practices, and encourage others to do the same. A main event should be scheduled to follow the preliminary bout with the ABA.
 
This paper reviews developments in retail banking, pre and post 'Laws', developments associated with the banks themselves, various regulatory authorities and the media. What follows, immediately, are some suggested judgmental benchmarks designed to facilitate realistic assessments of the current situation and prospects, policy unchanged.

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Note: John Laws
John Laws is a prominent Australian radio commentator with a large, national audience. Long a harsh critic of Australian banking practices, in early 1999 he began to comment favourably on the Australian banks. It was revealed in July that he had 'done a deal' with the Australian Bankers' Association to change his tune in a 'cash-for-comments' contract worth $1.2 million. This matter is now the subject of a Federal Inquiry in Australia.

BENCHMARKS
 
-- simplicity confused

At one level the non-cash payments system operates straightforwardly—funds, to make a payment, are transferred from one bank account to another. The system works reliably. 
 
People new to the game, however, can be confused by the minced words and jargon in which industry insiders often discuss the way the game works.

Some plain talk.

the technology: slow paper or fast electronic

The choice of payments technology is now between slow 'paper' cheques and fast 'electronic' funds transfers (EFT) -- and between 'cheap' and 'expensive' electronic substitutes.

There is the inertia of habit and established 'franchises' but no one -- banks or customers -- questions that EFT payments are cheaper, quicker and better than cheques (and currency). Banks are, however, exploiting opportunities to make some electronic payments facilities more profitable than others, and heavily promoting the more profitable.

cheques 

Cheques are a redundant, paper payments technology. They are a dead weight on the community—the waste of resources runs to some five billion dollars each year in Australia.  The faster cheque-clearing cycle, recently imposed on the banking industry won't change this basic reality. 

Why cheques remain a prominent payments technology is a mystery worth unravelling, a question worth asking constantly.
 
Part of the explanation is that banks' holdings of transaction deposits, on which minimal interest is paid, are higher because of the delays, associated with cheques, in customers having access to 'cleared funds'.  Another part is the tax-avoiding bartering of 'free' cheque services for 'interest-free' deposit balances—were this unwarranted subsidy removed (or neutralised), cheques would lose favour. That EFT services are priced relatively expensively, and cheque services relatively cheaply, is further evidence of 'competitive' market failure.

The banking industry, and relevant regulators, might be asked to account for the waste involved in the heavy use of cheques.

EFT

The simplicity of EFT is confused by the minced words the industry uses to promote EFT facilities with particular 'product' names.

Behind the 'front' of popular product names -- credit cards, debit cards, BPay, 'phone-banking', direct credits and direct debits and, prospectively, stored value cards -- is a lost simplicity. EFT product-systems should simply establish the means of customer identification, transaction authentication and processing  -- in practice they 'front' for industry agreements on uniformly 'high' prices, among other things.

credit-card games

Credit and debit cards -- signature or PIN -- are essentially the same transaction authenticators. Their apparent separateness has more to do with the opportunities that separation opens to banks for profit taking on 'credit-card' business.  

Any inquiry into the conduct of credit-card businesses, operating with the benefit of private agreements on practices and pricing, would be unlikely to conclude that the terms of the agreements were in the public interest. Why are inquiries not held? Why are these agreements not even registered with the competition authorities?

Credit card fraud, largely an unnecessary consequence of 'signature' rather than 'PIN' authentication, is one price banks are prepared to pay keep the credit-card 'game' separate—current credit-card pricing rules would not be sustainable if the same PIN authenticated both credit-card and debit-card purchase transactions when using the one card.

It should be a matter of public concern that, in Australia, the number of credit-card transactions will shortly exceed the number of debit-card transactions.  This prospect is not in the public interest. No clearer illustration could be given of  'smoke and mirrors' marketing strategies (mis)leading customers to pay a higher, credit-card transaction fee, indirectly, for essentially the same service available by using a debit card or direct entry transaction facility.

 It is well past time for a proper market environment to be re-established so that developments of this kind—an affront to the collective community commonsense—are not viable commercial options for the industry.

BPay

There is every reason to suspect that the same judgment fairly applies to the industry agreements behind the BPay 'phone-banking scheme for bill payments.

-- direct entry facilities

Direct entry transaction processing systems are recognised worldwide as the cheapest, fastest means of making the funds transfers associated with the payment of wages, social security benefits and public utility bills among a broad range of regular payment obligations.

The 'running-dead' attitude of the banking industry to the development and marketing of direct entry, debit and credit, funds transfer facilities in Australia can be fairly lamented. A very long-standing, glaring deficiency in the Australian payments system has yet to be addressed in any purposeful way.

industry cooperatives 

Rules for payments games are set by industry cooperatives -- often, apparently, unfettered by the appointed regulators.

Semi-official, and well-documented, agreements have been reached under the auspices of the Australian Standards Association and rule-making bodies operating in conjunction with the banking regulators to facilitate matters like coordinated cash distribution.

Defacto, a range of other semi-official agreements can be observed to be operating but they are not well documented now, if they ever were.  

Consider, would retailers borrowing money from the general public, be permitted to give tax-free entitlements to free goods to the lenders (depositors) instead of paying 'interest' on which tax would be payable? Who authorised the banks to do this?

Many agreements between key players in the industry seem to operate without official scrutiny.  These agreements include those reached by members of the credit card cooperatives (Visa and MasterCard); the sponsors of BPay; members of the Australian Bankers' Association and some elements of agreements within the scope of the Australian Payments Clearing Association (APCA). 

Many aspects of these private, industry agreements are likely to be both necessary and unobjectionable -- some aspects of the agreements warrant review against public interest criteria.

industry agreements

The nature of the retail banking industry is such that agreements on trade practices, including elements of uniform pricing, are probably essential to the proper functioning of payment systems.

The observed 'voluntary' behaviour of the industry is nonetheless such that the establishment (or endorsement) of any necessary agreements would preferably involve accountable public officials and community representatives.  As things stand the way this industry operates is objectionable on any reasonable criteria of outcomes consistent with a properly functioning market and proper regard for the public interest.

no new competitors (the brutal reality)

Put simply, there is no market at work in the payments system.  It is now clear that there is no prospect of new entry to retail banking - none. The ' market' is not contestable in any meaningful sense. 

In the normal course one might again call for more competitive industry structures and arrangements.
  
The results of such calls, ambitions, and (well-intentioned, but misguided) official posturing over the past two decades could not be more clear—there will be no substantial, effective new entrants into the Australian retail banking industry in the foreseeable future.
 
The only possible new entrants of any substance are established national companies with national product and service distribution networks—sensibly or not, the prudential regulatory authorities preclude such non-bank commercial enterprises from holding a banking authority in their own right. The 'potential' competition is relegated to the status of 'agents for banks'. 

All the portents about competition in retail banking are to the contrary—for fewer substantial players and for an increasingly dominant role being played by the major national banks.
 
That is the reasonably assessed reality.  Policy unchanged, it cannot be otherwise.  Australia would do well to recognise this reality and work out how best to ensure that the retail banking industry meets the reasonable needs of the community on reasonable terms -- and preferably without the waste of resources and slick trade practices now so prevalent.

THE RESERVE BANK

I preface my remarks about the Reserve Bank by praising the way the Bank has conducted its approach to monetary policy --especially the open, full-information, commentary on the assessment of the economy underlying its policy decisions. Right or wrong, we all get our chance to understand how the Bank sees the situation and to put a critical alternative view if we choose.
 
I look forward to the day when I feel the same way about the Bank's approach to its charter to encourage the retail payments system to work efficiently in the general public interest.

-- a couple of 'wides' bowled, not even a quick single taken, its not cricket!

"Those who expected—or feared—that the Board would begin to swing lustily as soon it reached the crease can be reassured that it is more interested in building a long and carefully constructed innings.  Payment system evolution is that sort of match!"

John Laker, Assistant Governor RBA (Financial System) & Deputy Chair, Payments System Board (16 June 1999)

-- before Laws

The publicly available contributions of the Reserve Bank to the evolving debate on payment system reform, were made in mid-June before the exposure of the deal between John Laws and the ABA.

These contributions comprise papers published in the Reserve Bank Bulletin titled:

"Bank Fees in Australia" (June Bulletin)

"Consumer Credit and Household Finances" (June Bulletin); and

"The Role of the Payments System Board" (July Bulletin)

These contributions are quite fairly remarkable.
 
Given the responsibilities that the Reserve Bank now has to promote the efficiency of the retail payments system, and the analytical and policy expertise available to the Bank, one wonders how these documents survived the usually rigorous drafting processes applied to the Bank's publications.

"Bank Fees in Australia" 

This contribution was apparently made in response to a request from the Parliamentary Banking Committee.  It was published, and provided to the Committee, a day or two before the Governor appeared before the Committee to discuss a range of issues, including bank fees and charges.
  
The central, and generally irrelevant, focus of the paper was whether or not, bank fees and charges collected by banks had increased by more than the interest margins, taken by banks on their borrowing lending activities, had declined.

-- the RBA said

Remarkable, 'analytical' comments in this paper include:

"the (current) level of fees remains well short of the decline in interest margins" (p.8)

Aligning "margins" and "fees" confuses separate elements of banking business --"intermediation" and "payments" -- and distracts attention from the question of whether retail intermediation business or retail transaction business is being conducted appropriately, when viewed on its own.  While the confusion of banks' costs and revenues, between  'intermediation' and 'payments' business, may be endemic in the retail banking industry, its apparent relevance to an analytical assessment by the Reserve Bank is questionable. Indeed the clear separation of these elements would seem to be an essential precondition to market-based efficiency reforms in the retail payments system.

"This (margins should have contracted) process was slow at first and suffered a setback in the early 1990s as banks restored their profitability to offset the high levels of bad debts they had incurred at that time". (p.1) 

This observation begs some questions. About whether bank customers, rather than bank shareholders, should have paid for the re-capitalisation required to make good the bad-management, losses of some banks in the late 1980s. And about whether someone -- other than Aussie Home Loans -- should have had the prominent public-policy responsibility for correcting the evident failure of the housing loan market to work fairly.
   
"... prices of these (payments) services have risen and now more closely reflect their economic cost". (p.2) 

This observation while tritely true, given that most bank fees are new, ignores a more relevant question—do the fees charged for different services properly reflect either the absolute or relative costs of providing those different services.  They don't.  

Even if, as reported by the RBA, banks actually charged 75 cents for cheques that cost some $3, is this the right relative price signal compared to the $1.30 charge for an "other bank ATM" for which the cost is very likely to be much less.  Or is the total price charged, directly and indirectly, for a credit card transaction—some $2 plus—relatively appropriate viewed against the minimal costs incurred by banks in providing the transaction service. 
 
Given that the price relativities are so clearly inappropriate, one might question the Bank's observation that the customers are provided "with incentives to use low cost services, and to economise on expensive activities and accounts" -- especially when the Bank later observes that "the average charge for payments made by cheque..... has grown more slowly than charges for other payments instruments".

Another point of contention,

"The cost of fees is larger for businesses than households (p.7&8) fees earned from households... amounted to about $1.4 billion in 1998... about 30% of banks' domestic fee income. ... Banks earned fees of about $3.1 billion from businesses in 1998, about 70% of banks' domestic fee income " (p.4&5).

The reality is that fees paid by businesses (e.g.: the $750 million merchant service fees for card transactions) are business costs recovered from household customers in prices charged for goods and services purchased.  This confusion of the true incidence of bank fees between the business and household sectors lies at the heart of the prevailing 'smoke and mirrors' marketing of so-called "free" credit card transactions—and it permeates the pricing structures for EFTPOS, BPay and other transaction services.  There should be no mistake about who ultimately pays the cost of the retail payment system—the household/business sector split only catches the first-round effect.

-- (more) important issues, not addressed by the RBA

Given that banks' costs of running the non-cash payments system -- staff employed, branch premises, computer networks and processing systems -- probably run to about $5 billion per annum: -- Could a better and less costly mix of payments services be conceived?

How does the community --households and businesses --pay, directly and indirectly, the (suggested) full $5 billion per annum cost banks incur providing those retail payment services?

•	If explicit transaction fees run to some $1.5 billion per annum, how is the shortfall of some $3.5 billion per annum recovered from customers?

•	How much of the cost of the retail payment system is met from cross-subsidies originating in the non or low payment of interest on customer deposit balances (or overcharging for loans)?

•	How much of the revenue shortfall is paid for by personal tax avoidance endemic in the bartering of underpriced payment services for underpaid interest on deposit balances (overcharged interest on business customer loans)?

•	How does the community reconcile over-paying, usually implicitly and indirectly, for a range of services offered by banks under co-operative (collusive?) uniform pricing arrangements underpinning the credit card, EFTPOS, BPay, ATM etc. industry schemes.

A range of sophisticated marketing tactics, apparently unleavened by any effective regulatory oversight, has somehow convinced the community that they never did pay much for their banking services: in fact, for many years customers have (over) paid for inefficient transaction services. One key to exposing the illusion is for the community to be properly informed about how much they have paid for popular transaction services, indirectly or implicitly, and the mechanics of the processes used to ensure that they paid while being led to believe it was a free lunch.

The RBA could give clearer guidance about issues arising in the confusing mix of no prices, explicit prices, implicit prices, tax breaks and other sources of cross subsidies to cost recovery in the retail payment system. Whether 'margins' have fallen more than 'fees' have risen is not the most relevant question. 

The community needs help in understanding whether the Australian retail payment system is working properly in any absolute sense and whether the current array of cost/price signals is delivering the right incentives for properly informed choice between payment instruments. It isn't, and they are not. The charter of the RBA's Payments System Board would seem to have been prompted by a similar assessment. Perhaps next time?

"Consumer credit and household finances"

While this contribution ranged widely across issues relevant to 'household finances', it touched on the role of credit cards in relation to both 'credit' and 'transactions'.

Relevant comments (p.11-17) included:

.... the increasing household preference toward the use of credit cards to make payments...  partly to take advantage of reward programs.
Recent growth in loans outstanding has been concentrated in revolving lines of credit....  Examples of revolving lines of credit include personal overdrafts... and credit cards.

...users (of credit cards) are not seeking longer-term finance to make purchases, but rather are using credit cards as a medium simply to make payments.

The greater use of credit cards to make payments reflects... a desire by households to minimise the impact of fees (presumably explicit fees) charged by banks on transaction accounts; and the increased convenience of using credit cards to make payments by telephone or computer.

..  Since 1996, the number of transactions in which credit cards have been used has doubled.

This contribution simply reported 'facts'—nonetheless it is reassuring to know that the Bank is aware of those 'facts' about credit cards. One hopes the Bank might subsequently make reference to them (and supporting industry agreements) when it is forming judgements about the appropriate place of credit cards as a transaction medium in the retail payment system.

Perhaps in the forthcoming first report of Payments System Board?

John Laker  --"The Role of the Payments System Board"

This first venture of the Payments System Board into the public arena was very welcome.
  
On the one hand it endorsed common testimony to the inefficiency of the present, retail payment system. On the other, while identifying emerging focal points around which the push for reform might gather pace, it hardly presaged a clear determination to move promptly to address obvious, long-standing problems.

Instead we have a Board balking --

at the definition or measurement of efficiency; needing to do a good deal of pioneering work to gather the facts, digest them and develop rigorous benchmarks on costs and performance .. to be assessed against international best practice ... complex and painstaking work that must be done well .. 
 
To continue the cricketing analogy chosen by John Laker, there seems to be little inclination 'to take a quick single' (don't count shorter cheque clearing times) in a game where at least some of the balls in the air might easily be put 'over the clocktower'. 

This Board is playing for Australia—for openers, can we please have even a 'Bill Lawry' back to the crease while a 'Bradman' warms up in the nets?

To use an alternative analogy, can the lessons which the Reserve bank has learned so painfully and well, about the importance of well functioning markets in pursuing monetary policy objectives, be translated, and effectively applied, to the obviously failed market in which retail payment system efficiency founders?

common ground?

Putting aside the rhetoric of,

evolution; watershed; strong regulatory powers; determine rules of participation; rules on access; set standards; arbitrate on disputes; gather information; co-regulatory approach; safeguards for the private sector; transparency; full consultation; recognition of the interests of all; careful stocktake or 'benchmarking'; safety; the mandate ... for a more competitive, efficient and flexible financial system in Australia; no doubt about the Board's authority or its ability to initiate change where this is deemed necessary 
.
the Board's preliminary stocktake was reassuring.

The stocktake included assessments of,

considerable scope to increase efficiency; Australia's heavy dependence on cheques; the number of cheque payments per head in Australia has been on the rise; total payments system costs relatively high; potential for substantial gains in efficiency, especially from substituting electronic forms of payment for cheques; wrong mixture of payment types; costs higher than necessary; middle of the field .. efficiency ..  not at international best practice;

-- there was a light on,

direct debits.. the most economical way of paying routine bills..  little used in Australia .. in sharp contrast to comparable countries ..  Australia lagging well behind .. Australia is going backwards ..  APCA has been working (ineffectively did I hear?) on changes to the direct debit system for some years  .. the Board believes .. the Board has .. the board is now considering how best to take this exercise forward .. to bring Australia up to best practice in this area.

However, while clearly testifying to the failure of the direct-debit market, the Board has chosen the route of 'directing/leading the market' rather than addressing more fundamental reforms to ensure the market works properly on its own. 
 
This will be an entertaining spell at the crease for the RBA --  especially as the banks' fast bowlers actually worked effectively, outside the APCA framework, to put the substitute, BPay system, in place, and they will not lightly surrender such a good wicket.

A credible public policy objective would be a doubling of the share of direct-entry transactions from 25% to 50%: a substitution of some 750 million transactions per annum. A conservative estimate might put the banks' potential 'lost profit' from this transition at $1 for each transaction, and some $750 million in total. 

Only a proper market could deliver such an outcome—politely asking the banks to 'volunteer' to give up $750 million p.a. is unlikely to be an effective approach. Watch the banks more experienced batsmen carefully craft their turn at the crease! Bet on the banks to win this match.

and, there was a light off,

At the beginning of the 1990s, EFTPOS and credit cards together accounted for around 15% of non-cash payments but that share has now risen to almost 40%.  The story with credit cards is somewhat more intriguing .. a reasonably  mature product by the close of the 1980s .. credit card usage per capita has gathered pace in recent years, and is now (much) above 1990 levels.

Why would a relatively mature product suddenly get a new lease of life ..  new classes of payments .. loyalty and reward programs .. (apparent) marginal cost (to customers) actually negative .. (real) cost, of course, positive borne by merchants directly .. mixed up in all this is the interchange fee paid to (credit card) issuers .. an interesting mixture of pricing and incentives to say the least .. but probably a clue

A clue. Spare my days.

Apart from credit cards, what about BPay, EFTPOS etc., where the same style of 'co-operative' industry agreements would seem to be in place covering pricing, among other features of these products.

Can we have the basic-economic-analysis-light on please? Perhaps the switch might be found in the chapter and verse of the book dealing with modern approaches to cooperative monopolisation and industry pricing agreements.

--after Laws

Whether attitudes in the Reserve Bank, and on the Payments System Board, about acceptable behaviour of banks, have changed in the wake of disclosure of the John Laws deal, may be revealed in the first report of the Payments System Board to be published in September 1999.  

With the spectators now a little restive about the slow rate of anyone scoring runs off the bank industry team, it might be expected that the PSB might even consider taking an easy 'six'.

-- the RBA's annual report

The recently released annual report of the Reserve Bank itself made some encouraging remarks.

One vital aspect of this (the overall stability of the financial system) is responsibility for the payments system.... the Reserve bank has been given formal responsibility for the safety and efficiency of the Australian payments system, a responsibility exercised by the Payments  System Board.

In the RBA report's brief discussion of payment system developments, the catch phrases included,

... promoting efficiency and competition .... new and comprehensive powers ... responsibilities and powers unique amongst central banks and supervisory authorities ... did not draw on these broad powers during 1998/99 .... undertake a benchmarking .... the benchmarking has identified some areas—such as .... the usage of direct debits—where there is obvious potential to improve efficiency.

We will see shortly what may be in store.

OTHER REGULATORY AUTHORITIES

Apart from the work of the Parliamentary Banking Committee, which took an interest in the matter of margins, fees and charges, there is nothing on the public record to indicate that other relevant regulators -- the ACCC, APRA and the Treasury/tax authorities -- have been taking much of an interest in retail banking and payments system matters.

The ACCC

There are a number of issues in the context of payment systems that remain outstanding with the ACCC -- for example, it is now two years since the ACCC refused to authorise rules proposed by APCA for the conduct of the Consumer Electronic Clearing System.  This system has of course continued to operate, presumably inappropriately in the view of the ACCC.

The '4 Pillars'-- Australia's major banks  -- probably think this authorisation process is a bit of fun -- even though not authorised, they continue to run the system on their rules—they know it can't be stopped. Less funny, they appear to have taken the ACCC decision, not to authorise CECS, as a reason to never again ask for approval of an 'industry-scheme' -- they will now make 'rules', in frameworks outside APCA, that are not referred to the ACCC for approval. 

I really think these people need shortening up, properly.

Be that as it may, one would expect that the ACCC would be reviewing its hands-off attitude to a number of banking industry agreements, including about uniform pricing, that many find objectionable.  Moreover, one would expect that the newly agreed working relationship between the ACCC and the Reserve Bank, would be starting to pay dividends in terms of joint regulatory appreciation of what is actually happening and whether that fits reasonably with the legislation about acceptable trade practices.

As well, press reports suggest that the ACCC has reached an understanding with its counterpart in the United States for sharing information about the acceptability of trade practices which extend beyond particular national boundaries -- the Visa and MasterCard agreements might be expected to come within range of this international cooperation. 

Even a superficial perusal of the information publicly available on the website of the US Department of Justice makes it clear that the US authorities are not mincing their words in framing an anti-trust action against Visa and MasterCard. Against that, this 'action' in the US already has a long, and somewhat ineffective, history -- further development of this matter is likely to be protracted and costly.  

A probably more effective approach to resolving these issues, in the US and elsewhere, would see action taken under the tax law to ensure that the value, of any "interest-free", credit card borrowing concessions, is deemed to be taxable, income-in-kind, in the hands of credit card users.  Similarly the tax authorities should probably deem to be taxable, the income in-kind paid to depositors as underpriced transaction services. Others have been 'caught' by the tax law when other approaches failed.

-- other, overseas, developments

A couple of items of interest:
 
•	in the UK the chairman of the retail banking inquiry now underway has been given an extension of time, claiming a lack of cooperation from the major UK banks ; 
•	in Canada, the Finance Minister has mooted changes to the banking law to permit non-bank commercial corporations to wholly own a banking enterprises with capital of less than $1 billion (something we might hope APRA would take notice of); and 
•	additionally, in the United States, the Federal Reserve System has recently established policy and operational committees to foster reform of the retail payment system.

 Fixing international problems may need international cooperation. 

THE BANKS 

What can be said about the contribution over recent months of the banks, their senior executives and their ABA, and their other industry body, APCA?  Much!

-- after Laws

The banks have been quiet since the revelations of the ABA deal with John Laws.  The banks are on the back foot.  

The new man at the NAB, and new chairman of the ABA, acknowledged the 'angst' engendered by the John Laws deal. He claimed the advantage of being new to the job in distancing himself from a matter on which he had 'just picked up the file' (presumably he has put two letters in his draw for his successor at the ABA)

Somewhat remarkably, a little later, a press report of ABA reflections on the John Laws matter could be read as suggesting that the responsibility lay with Bob Joss—the previous chairman of the ABA, and recently-departed head of Westpac, now back in the USA.  Reportedly he, the only key player no longer in Australia, was the one "particularly insistent" that the 2UE deal proceeded. While that blame may be fair, in fact as well as appearance, such behaviour would seem to have been at odds with the exemplary good character publicly displayed by Bob Joss in his time at Westpac. I would like to ask Bob Joss.

Much was, however, heard from 'the trenchant critic', David Murray, at the Commonwealth Bank.  A climate of polite disbelief seemed to surround public reaction to his remarks. Remarks to the effect that he knew the proposed deal with John Laws was in some ways wrong, but he did not stop it proceeding by withdrawing the Commonwealth Bank's support -- apparently because he was unwilling to disrupt the ABA. 

This seems to be consistent with the David Murray we have come to know. Are there any other industry-things, done under the auspices of the ABA, that David Murray, on reflection, did not really want to do?  David Murray was reported, on 25 August, to be at a loss to know what more he could do to turn around community attitudes to Australian banks. A loss indeed.

Hopefully what needs to be said about the Australian banks will be said, authoritatively, in the report of the other ABA—the Australian Broadcasting Authority—on the John Laws matter. Among other things, the source and content of the 'notes' on which John Laws based his broadcast comments will, hopefully, be openly reviewed.

-- before Laws: a new year, a new strategy

One thing that happened, around the end of 1998, is that the banks 'softened' their line—became less aggressive and more conciliatory to the community. No more stirring reminders to the community about how good the banks are.  

Factors at work included the pending departure of banking's 'man of iron' from the NAB to BHP; the 'need' to get the public on-side if banks merger ambitions were to become 'politically' palatable and the 'resurrection' of the ABA. Tony Aveling -- Westpac appointed, experienced troubleshooter  -- was the new chief with a penchant for writing to the press to correct misapprehensions about the 'image' of banks.

Tony Aveling brought a more conciliatory, though similarly diversionary, tone to his role than that used by some other banking CEOs.  While that politeness is welcome, he still speaks for his masters' interests and not in the public interest.

Concurrent with the John Laws deal being on foot, there was some unusually interesting press reports about banks' plans for the future of the retail payments system. One would like to think that these discreetly announced plans will come to fruition, and that the Payment System Board, and the ACCC, have been kept well informed of the way these initiatives will practically unfold.  One would like to think that.

the 'plans'

Towards the end of May it was reported, and attributed to an ANZ spokesman, that in considering options for rural banking services, the 'reverse EFTPOS' strategy being developed by the four major banks through the Australian Bankers' Association was an example of the possibilities.  ('Reverse EFTPOS' would enable bank customers to make deposits to their account with any bank, at any EFTPOS terminal, including those operated by retailers in no-bank, rural areas.) 

That same report, mooting a shared-facilities deal between the ANZ and Westpac banks, quoted a comment that "culturally I don't think the NAB can cope with deals that require sharing".

Not surprisingly, a few days later another press report talked about changes in the pipeline in the evolution of electronic banking --  "Word is out that the banks are linking up so that you can make electronic transfers to other people's accounts.  Says Haydn Park, from the National Australia Bank: 'you will be able to pay anybody, at any time, anywhere you like.  The facility will be launched within the next 12 months'.  The Commonwealth Bank endorsed these comments.

Good stuff. What does the Payments System Board and ACCC know of these plans?

The practical realities

Among other things a game is being played out by the banking industry which, on the face of it, would seem to confront the authority of the ACCC and PSB. Discouraged (in 1996, by the PSA) from imposing a new more profitable uniform pricing agreement on the interchange of debit-card transactions, banks have effectively sidestepped this warning by marketing " free" credit-card transactions and credit-card debit cards coupled with newly imposed, direct customer fees for conventional debit card transactions. 

Perusal of the RBA statistics on transaction card activity suggests that before long the number of monthly credit card purchase transactions will exceed the number of debit card purchase transactions. It would be very difficult to see such a development as being in the public interest.

One further wonders, however, what 'regulatory forbearance' might be an essential precondition to the major-bank plans unfolding. 

One implication is that the four major banks are developing the plans under the auspices of the ABA rather than APCA (where many would think this sort of industry cooperation belongs).  Working through the ABA might suggest that what the banks have in mind is an arrangement in the mold of the BPay and credit card schemes -- 'cooperative' industry arrangements not registered with the ACCC, nor, apparently, tested for their appropriateness against public-interest criteria. 

Are the banks saying 'our way, or no way'?

BPay

The banks have also been doing an active articles-in-the-press, marketing job on BPay  -- consider the following extracts from recent press reports:

BPay was the next giant leap.  It allowed consumers to break out of this closed-circuit environment to pay their bills to corporations that banked elsewhere.

Until BPay's introduction in 1997, 70% of household bills were paid over the counter.  It has also got rid of the need to write cheques, address envelopes and look for postage stamps.  BPay transaction fees vary from institution to institution.  Some banks include it in their free-free transaction limit, charging about 55 cents to 60 cents thereafter.  National Australia Bank charges 40 cents for each transaction. But whether its 40 cents or 60 cents it still cheaper than the cost of 45 cent local stamp and envelope and a lot less stressful than the alternatives. For further information check out the BPay website.

Guess the (not 'which') bank this journalist was talking to.

Note the failure to mention, or report, anything about the cheaper direct-entry system, including the automatic, not-even-a-phone-call, bill-payment payment facility that direct entry offers both customers and billing corporations.  Why not?

bank mergers

Another journalist put his shoulder to the wheel, in early May, with some, un-refreshingly familiar, opinions on banking and bank mergers.  Consider:

Even setting aside the rather basic point that (bank) fees are neither onerous nor unfair  -- we are simply being asked to pay for services directly, and more cheaply (?), that we used to pay for indirectly through usurious interest margins. (my emphasis)

What exactly are two big banks going to be able to do that's so nasty that the four big banks aren't already doing today?  As with fees and closing branches  and the like? 

The banks need to be allowed to compete globally precisely so that we are not all going to be banking with Citibank and Deutsche by, say, 2010. I wonder how many branches they would open in country towns?

....  We can keep them separate and "Australian" owned, and we can watch them become irrelevant in both economic and cultural terms.

It would seem that the air needs to be cleared in a number of areas --bringing forward an open public debate on the background issues that will need to be resolved before irrevocable 'bank merger' proposals crystallise, looks increasingly attractive.

-- APCA (the other, reserve-grade, industry association)

A somewhat unusual public exchange of views between the banks and retailers, among others, took place in the Australian Financial Review in early June.

Picking up on the Wallis Committee's 1997 description, of the Australian Payments Clearing Association (APCA), as a 'closed shop', the observation was made that little has happened to alter the perception. Key points made in elaboration of that assessment included:

(new entry) into payments has been minimal, virtually non-existent... nothing to indicate it will change any time soon... aspiring entrants are frustrated... an attempt to offer ATM/EFTPOS facilities has not been realised because the big banks refused to sponsor it... wait their turn in an information technology project queue....  the club's apparent reluctance to widen membership or loosen stringent technical standards... (the payments system) is still the only true anti-competitive element of the financial system.

A published response from the Acting Chairman of the Australian Payments Clearing Association, showed disdain for the view that retail banking, retail payments and related industry associations are, effectively, closed shops.

Industry insiders no doubt smiled wryly at some points made in APCA's response.  It included rhetorical remarks about:

... the 'Wider APCA Membership' project ... the thrust of the industry's attempts to engage new players ...  the distinction between the role of APCA and the commercial ownership and operation of ATM and EFTPOS networks .... membership criteria are clear and reflect actual and prospective participation in payments ... de-institutionalise entry criteria   ... membership based on actual activity ... actual participation on a clear, objective basis 

One may well ask, how can major retailers, for example, -- undoubtedly major 'actual activity' participants in the payments industry -- not be eligible to be recognised as "direct" payments industry participants "on a clear objective basis"?   It would be interesting to know how much of the $800 million or so being paid to banks by the business sector, as merchant service fees for card transactions, is paid by (the customers of)  'the big 12' retailers.  One might ask whether these big-payers, on behalf of their customers, might reasonably be given an insiders voice on the way the retail payments game is being played?

-- a new deal for Y2K?

We await the revelation of the banks' new strategy  -- and whether it might be formulated in a climate better disciplined by the public-authority referees that have been appointed to oversee this retail banking and payments game.

THE MEDIA

Hopefully a (revised) code of media ethics and journalism standards will emerge from the public inquiry crystallised by the John Laws affair.

While, no doubt a difficult area for public policy intervention, the Australian community needs more effective arrangements to monitor media behaviour than the randomness of relying on the independent-on -leaks, ABC.

The way the John laws matter unfolded was instructive.  Even casual listeners would have tumbled to the fact that John Laws had changed his tune and, one-way or another, had found a rich vein of 'factual' information that was favourable to the banks. I did.

As well, for whatever reason, John Laws told listeners, in early May, enough for them to realise that there was a commercial arrangement between himself and the ABA. Paraphrasing, he said on the one hand it entailed "telling the truth about banks", and on the other, the ABA sponsoring the production, by John Laws, of two-part historical anecdotes that were run either side of "telling the truth about the banks".

The ABC's, 'Media Watch', program first ran the story on John Laws in early June -- again this left listeners with a clear impression about the existence of a deal between John laws and the banks.

Presumably the story would never have broken fully, as it subsequently did early in July, if the ABC had not obtained a copy of the, actual or draft, contractual agreement between John Laws and the ABA.

This story will unfold further before the ABA inquiry, but probably only slowly, reaching whatever conclusions next year.  In the meantime it might be hoped that journalists and media companies will take steps to ensure the community gets the benefit of balanced commentary on commercial business issues.

It would also seem to be reasonable, in the meantime, that the transcripts of what was said by John Laws about the banking industry were made public. They cannot be secret, and if 'copyright' is claimed to preclude their publication, there are well-established ways of resolving that issue in the public interest.

Publish-what-was-said, has the hallmarks of a fair, natural-justice approach. If what was said was reasonably true, publication would go to the credit of the players -- if not, then the likely public reaction would be an appropriate opportunity for any 'mistakes' to be clarified. Waiting for a year or so after the event to fix things seems inappropriate on either score -- does it not?

While the John Laws matter may stand out as a focal point of community interest and concern, it is not the only example of unreasonably favourable treatment of commercial issues by the media generally. 

Insiders in any industry can recognise 'flowers' blooming in the media that were 'planted' by particular business or political interest groups -- usually identified in the story. 

One could perhaps reasonably ask that the journalists involved only run stories from commercial sources that don't object to the journalist seeking out alternative points of view, and running them concurrently.

For the moment, we wait for the proper authorities to do a proper, public policy, job to clarify the rules of the media game.