Australian Competition Watchdog Takes Aim At Currency Conversion

Australian regulators have launched a wide-ranging inquiry into currency exchange practices within the banking, cards and remittance sectors, in response to concerns over transparency, pricing and competition.

Treasurer Josh Frydenberg on Tuesday granted approval to the Australian Competition & Consumer Commission (ACCC), setting out that it must examine pricing and costs related to foreign currency conversion, as well as the “nature and extent of competition” between providers.

The watchdog has already opened industry consultations and launched a public questionnaire, which will run until October 22. It has been tasked with delivering a full report to the Treasury by May 31 next year.

“In 2016, Australians sent around $8.8bn (US$ 6.3bn) overseas,” the commission said.

“The World Bank has found that the cost of sending money from Australia is significantly higher than both the G20 average and the global average cost.”

An accompanying issues paper added that within the G20 group, the only countries where consumers are charged more to send money internationally are Japan and South Africa.

The ACCC said it has received numerous consumer complaints about the provision of such services, including concerns about exchange rate mark-ups and fees charged for foreign currency transfers and card payments.

Some complaints accused banks and payment providers of providing insufficient transparency around costs, particularly related to intermediary bank charges and card conversion fees, warning in some cases of “potentially misleading advertising”.

It cited a damning report published in August by the Productivity Commission, an independent body that supports government action, which took aim at issues ranging from the cost of card acceptance to access to banking infrastructure.

The paper left little outside its scope, including references to cross-border fund transfer services provided by banks and non-bank providers such as TransferWise, as well as prepaid travel cards, credit and debit cards when used on a cross-border basis, and remitters such as Western Union.

“We are aware that new, ‘low-cost’ suppliers have begun offering services to Australian customers in recent years but that, anecdotally, it appears that they have not captured a significant share of the market and that their entry has not significantly impacted the prices charged by some existing suppliers, such as the big four banks,” said the Australian Competition & Consumer Commission.

Despite the range of providers available, however, the regulator added it is also aware of “recent articles alleging a lack of competition for such services in Australia”.

In terms of competition, the ACCC admitted it does not currently have a reliable overview of market share and that there are complexities in the market that are not yet fully understood.

“We are keen to understand who suppliers consider to be their closest competitors and why,” its issues paper explained.

“For example, do the major banks regard new online peer-to-peer suppliers, such as CurrencyFair and TransferWise, to be close competitors for foreign currency transfers?”

An important factor that will be considered is whether new providers face barriers to entry or expansion, and if so, whether those barriers are affected by the reaction of large incumbent institutions.

The regulatory framework around cross-border transfers will also be considered.

“We are also aware that there is a reasonably complex regulatory environment to be navigated by new entrants, which may contribute to overall high sunk costs to enter,” the paper said.

It cited the purchased payment facilities regime, which has only been used by one firm — PayPal — since its introduction in 1998. That regime is already subject to separate scrutiny from the Council of Financial Regulators, which is examining whether changes should be made to broaden opportunities for non-banks.

Another consideration for the ACCC will be access to payments systems.

Those unable to connect directly to interbank systems or international correspondent banking networks are reliant on gaining indirect access, which the report said “often requires the services of banks which are also competitors”.

Input is being sought from industry participants on regulatory barriers they have encountered, whether de-risking by banks has affected their businesses, and if they can provide examples of failed attempts at entry or expansion.

Consumers, meanwhile, have been asked who their preferred suppliers are and whether they find it easy to switch between them.

The four issues to be examined by the Australian Competition & Consumer Commission are:

  • The pricing of foreign currency conversion services.
  • Costs to supply foreign currency conversion services.
  • The nature and extent of competition between suppliers.
  • How prices are communicated and factors limiting the ability of consumers to effectively compare prices.

Three of the four areas of focus singled out by the ACCC relate to pricing of cross-border payment and foreign exchange services.

It will examine how providers set retail exchange rates and the fees they charge, as well as how those rates and charges are affected by underlying operating costs.

Some specific models will be looked at, such as “drip pricing” — a controversial practice where charges are added as the customer proceeds through the payment journey.

At the same time, the ACCC intends to assess whether providers are able to maintain high margins in a competitive market.

Consumers are being asked whether they have concerns about specific providers or currency pairings, while businesses are told to provide information on different business models and their implications on the cost of providing services.

Transparency is also in scope.

“We are also aware that some suppliers advertise that they provide ‘no fee’ services, while still charging an exchange rate mark-up,” it said.

“The ACCC seeks further information on how retail exchange rates and fees are presented to consumers, whether consumers are able to make effective price comparisons and, if not, why not.

“The ACCC would also like to understand the extent to which non-price factors, such as transaction speeds, are valued by customers.”