Cabcharge

Cabcharge Limited

Type	Public company (ASX: CAB)
Industry	Land transport
Founded	Australia, 1999 partnership between two companies
Headquarters	Sydney, Australia
Key people	Reg Kermode, Chairman & Chief Executive Officer[1]
Products	Transport-related services in Australia, UK and Europe
Revenue	A$174.5 million (2010)
Website	www.cabcharge.com.au

The Cabcharge account payment system was established in 1976 to provide a way to pay for taxi fares by non cash means throughout Australia and participating countries. Cabcharge listed on the Australian Securities Exchange ASX: CAB in December 1999 and is an ASX 200 company. The company has since diversified and its key activities now include technology, taxi payments and increasing control in the Australian bus industry through ComfortDelGro.

The company's activities are sometimes controversial and it has faced strong criticism at times from inquiries and regulatory bodies. Cabcharge was the subject of Federal Court proceedings in 2010 over alleged anti-competitive practices including predatory pricing activities. It was fined heavily and forced to pay a record high $15 million settlement for these behaviours.^[2] The company is also facing criticism of profiteering for the 10% surcharge it imposes on taxi fares paid by card and the matter is currently being investigated by the Reserve Bank of Australia.^[3] The surcharge is being reduced by law to 5% in Victoria following recommendations made by the Taxi Industry Inquiry and a further review of the surcharge in that State may lead to the figure being set at well below 5%.^[4]

Cabcharge was awarded a Shonkey Award by the consumer magazine Choice in 2012 for its 10% surcharge on taxi fares paid by card.

Outline

Cabcharge's principal activities include:

• Provision of charge account facilities for businesses and individuals to enable non cash payment of taxi fares.
• Development of a Point of Sale system that allows taxi users to pay their fare using third party charge, credit and debit cards and Cabcharge products. The system requires passengers to pay a 10% surcharge on their fare although the surcharge is currently being reviewed by the Reserve Bank of Australia following public comments and complaints that the surcharge is excessive.^[3]
• Software development.
• Provision of taxi booking and dispatch services through Taxi Networks in NSW (Combined Communications Network^[5]) and Victoria (13CABS^[6]). Additional capture of taxi owners, operators and drivers is practised through provision of services including repairs and installation of in-vehicle equipment, insurance, vehicle leasing and training.
• Development of taxi-related hardware and software like taxi security camera systems, meters, and transaction processing equipment.
• Provision of taxi booking and dispatch through CityFleet UK with operations in London, Edinburgh, Liverpool, Birmingham and Aberdeen in a joint venture with Singapore-based ComfortDelGro Corporation Limited.
• Operation of buses and coaches in NSW and Victoria through a joint venture with ComfortDelGro. Cabcharge has a 49% shareholding in ComfortDelGro Cabcharge. In NSW this operates Westbus, Hillsbus, Hunter Valley Buses and CharterPlus and in Victoria, Eastrans, Westrans, Davis Bus Lines, Ballarat and Benders Busways, Geelong.

Concerns about Cabcharge Activities

Cabcharge's commercial activities have been controversial at times and the company has faced regular accusations of excessive charging or profiteering and predatory and anti-competitive practices. The company was recently subject to adverse court proceedings and a major settlement arising from these behaviours.

10% surcharge on taxi fares paid by card

Cabcharge provides EFTPOS terminals, free of charge, to approximately 97% of taxis in Australia. The Company incurs the costs associated with transactions including card and other product production, in-taxi processing, administration, fraud protection and investigation, provision of statements and driver education. However, this situation also allows the company to exert substantial and anti-competitive control over most of the Australian taxi industry^[2] and to engage in profiteering activity.

Criticism of 10% surcharge

Cabcharge has been criticised for the 10% surcharge it collects on taxi fares paid by credit and debit cards and for the general anti-competitive control it exerts on other industry participants through its control of electronic payments and other areas of the taxi system such as vehicle and related repairs and installation of in-vehicle equipment, insurance, vehicle leasing and training. Criticism has emanated from various sources including the chair of the Taxi Industry Inquiry, Professor Allan Fels, the former head of the Australian Competition and Consumer Commission, and leading card companies. The 10% charge is currently being reviewed by the Reserve Bank of Australia.^[3]

Criticism by Professor Allan Fels

Professor Fels recently approached the Reserve Bank of Australia to help lower the 10% surcharge. He has been reported as saying that -

"Cabcharge has a monopoly. You have no choice if you pay electronically, you have to pay 10 per cent extra. That's really high. There is no competition. You either pay 10 per cent or you pay cash."^[7]

"The 10 per cent surcharge looks extremely high," he said. "For Victoria, the charges total (is) $25m (a year), so extrapolating that for Australia it must be around $100m. When a consumer pays the taxi fare, there are many hands in the till . . . if they pay by card, Cabcharge gets 10 per cent. We think that needs to be looked at."^[8]

Criticism by major credit operators

Representatives from major credit card operators Visa and MasterCard have also criticised the 10% fee -

"Visa spokesman Adam Wand yesterday said Cabcharge was making taxi passengers pay more than 10 times the average "merchant fee" charged by banks, and five times more than the average fee charged by retailers, based on Reserve Bank data. "Surcharges in the order of 10 per cent are simply excessive and way above the cost of accepting a Visa card," he said. "It's certainly more than 10 times the average Reserve Bank published cost."

"MasterCard head of strategy David Masters said there was "no way" that credit-card processing could cost Cabcharge 10 per cent of a fare. 'I don't know how they can justify it,' he said yesterday. 'There is no question it pads out their bottom line, rather than reflecting the cost of the transaction.'"^[8]

Action by Victoria to reduce the surcharge to 5% and below

The State of Victoria is reducing the Cabcharge surcharge to 5% and less through law. The State enacted legislation in late June 2013 to reduce non cash surcharges to 5%^[4] arising out of recommendations of the Taxi Industry Inquiry. The new laws also require the Essential Services Commission to review the charge at that level which may lead to the fee being reduced significantly below 5% and more in line with Cabcharge's reasonable costs for providing a non cash payment option in cabs. The new laws are not yet in force. Other States and Territories are expected to follow Victoria's lead.^[9]

Other Criticism

In an article in Victoria's Herald Sun newspaper, John Legge noted that customers in that state paid at least $350 million in taxi fares with banking cards, for which 95% of Victoria's taxis use the Cabcharge system. Legge noted that Australian Competition and Consumer Commission penalised Cabcharge $15 million for abusing its industry dominance.^[10]

Reserve Bank action to limit card surcharges in response to the criticism

Reserve Bank (RBA) data is reported as showing that banks charge merchants an average fee of 0.81 per cent to process Visa or MasterCard payments, while the average fee passed on from the merchant to customers is 1.9 per cent for Visa and 1.8 per cent for MasterCard.^[8]

The RBA considers that some companies charges are excessive and, as a result, it is drafting new rules to compel offenders to limit their charges to the costs actually incurred by merchants.^[3]

"In the gun will be the 10% charge imposed by Cabcharge and similar companies for using credit cards to pay taxi fares... RBA data shows the cost to the merchants is typically 0.81 per cent."^[3]

Findings of the Taxi Industry Inquiry

The Taxi Industry Inquiry headed by Professor Fels has made a number major criticisms of Cabcharge and its activities in a recent report.

General anti competitive conduct

"There are now significant anti-competitive forces at play within the industry, most notably the concentration of power with the major taxi networks and Cabcharge."^[11]

"The inquiry is concerned primarily about the effectiveness of competition in markets for payments processing and payment instruments. Over time, it appears to the inquiry that Cabcharge has been extremely effective in stifling the development of competition in these markets."^[12]

Predatory use of payment instruments

"In relation to payment instruments, if the market is defined for taxi-specific payment instruments, then Cabcharge has a very strong position in this market. It appears to have largely captured the network effects and has reenforced this by integrating into payments processing and network services."^[13]

"There is a high level of market concentration in the non-cash payment systems market with one enterprise, Cabcharge, historically holding market power in both taxispecific payment instruments and payments processing. Cabcharge is the only significant taxi-specific payments instrument, and Cabcharge estimates that its electronic payment processing system is found in approximately 97 per cent of Australian taxis, limousines and water taxis, including all – or nearly all – taxis in Victoria."^[14]

"...markets for payment instruments and processing are characterised by strong network effects. Cabcharge has been able to take advantage of these network effects by tying its branded cards to its processing facilities; that is, only Cabcharge EFTPOS terminals are permitted to process Cabcharge cards. Cabcharge has not given other payment providers access to process Cabcharge’s own cards and vouchers. As Cabcharge cards are the most widely used payment instrument, and the only significant taxi-specific payment instrument, a taxi operator that does not have the ability to process these cards will be seriously disadvantaged. This means that alternative processors face a significant barrier to establishing a market presence. Market inquiries indicate that Cabcharge branded charge account cards and eTickets account for up to 40 per cent of non-cash transactions in the taxi industry. This was a key issue that the Australian Competition and Consumer Commission (ACCC) sought to address in ACCC v Cabcharge Australia Ltd [2010] FCA 1261".^[15]

Predatory activities through mergers and service controls

"Numerous vertical mergers involving Cabcharge have been cause for concern for the ACCC over the past 15 years. Cabcharge’s acquisition of network service providers (NSPs) in Australian capital cities is considered to have given Cabcharge valuable influence over the payment systems installed in its affiliated taxis and raised barriers to entry that have protected its position in the payments system market." ^[16]

"Through its NSPs, Cabcharge also provides a wide range of services to the industry, including driver training, taxi vehicle ‘fit-outs’, taxi cameras and meters, licence brokerage and insurance for taxi operators. It is the inquiry’s view that these activities have implications for competition in the payments services markets. More specifically, they help to maintain market power in payment instruments and payments processing: that is, Cabcharge is not likely to be seeking to ‘foreclose’ downstream markets by providing affiliated NSPs with lower cost access to payments services, but is seeking to make it more difficult for entrants into payments processing to provide services to taxi operators. Through this strategy, elements of the market essentially become foreclosed to other processors, making it harder for them to build scale and compete with Cabcharge. This protection of the 10 per cent surcharge is a key consideration for Cabcharge given that income from the service fee contributes around $87.3 million to its annual revenue (almost 50 per cent of the company’s total annual revenue)."^[17]

Observations about Cabcharge's 10% surcharge

"... even with the lessening of some barriers to competition – such as access to processing Cabcharge-branded cards and the removal of the MPTP-Cabcharge monopoly – the 10 per cent surcharge is likely to remain common practice. Market pressure for a reduction in the surcharge may only occur if and when taxi operators and networks effectively compete for consumers by lowering fares and the costs of associated payment methods." ^[18]

"The inquiry is concerned that consumers pay excessive fees for processing electronic payments of taxi fares. The significant market power historically exercised by Cabcharge in setting its 10 per cent service fee appears to act as a ‘marker’ for other payments service providers. This is a particular concern in relation to general bank issued or third party payment instruments, given that average surcharges applied by merchants in other sectors are between one and four per cent."^[19]

"The lack of access to Cabcharge branded cards has also reduced competition nationwide in markets for taxi payments processing. However, the Victorian Government has little power to effect change in this area. Competition law rests in the federal domain, with the ACCC being responsible for ensuring that payments system arrangements comply with the competition and access provisions of the Commonwealth Competition and Consumer Act 2010. As discussed above, the ACCC has endeavoured to address the commercial barriers to entry in the past and continues to monitor Cabcharge’s behaviour. The inquiry supports the ACCC’s continued scrutiny of this issue."^[20]

"... the inquiry remains concerned about the 10 per cent surcharge currently imposed on Victorian taxi users. The fact that half of these fees overall are funnelled back to drivers, NSPs and operators strongly suggests that the 10 per cent is unnecessarily high and that there will be significant consumer benefit in lowering the charge to a level where these payments are minimal or eliminated."^[21]

Concluding criticisms about misuse of commercial power

"Perceptions of poor service performance, high fares and a low level of innovation are major contributors to stagnating demand for taxi services. The uneven distribution of income derived by the taxi industry also has an impact on service quality. Licence holders benefit significantly from the scarcity of licences; others in the industry with market power, such as network service providers (NSPs) and Cabcharge, also do well. On the other hand, taxi drivers engaged by operators receive around half the wage they would be entitled to if they were treated as employees. Taxi operators who are paying fees to licence holders under assignments are also under increasing cost pressures. ... there are now significant anti-competitive forces at play within the industry, with many years of constraints on competition creating an industry mindset that is heavily focused on protecting incumbent interests, rather than seeking ways to improve services to consumers."^[22]

"NSPs generally appear to have significant market power. They have few competitors and, in many cases, have no other competitors in their allocated zones. There appear to be significant economies achieved by having larger network size, but regulation has also contributed to high market concentration. Where firms have significant market power, this may be extended into other markets by vertical integration and other vertical relationships. Of particular concern in this regard, are the links between Cabcharge and one of the major metropolitan NSPs and the extension of NSP activities to in-vehicle equipment supply."^[23]

"The inquiry’s view is that commercial barriers set up by Cabcharge are best addressed by the ACCC and the Reserve Bank of Australia, who oversee and enforce regulation of anti-competitive behaviour in payment systems markets and the efficiency of the payment systems and are best placed to ensure regulatory consistency between the states."^[24]

Fine for misuse of market power and predatory pricing

In September 2010, the Federal Court imposed the highest ever penalty for misuse of market power when Cabcharge settled court proceedings with the Australian Competition and Consumer Commission (ACCC). The case resulted in Cabcharge being fined $15 million ($14 million in civil penalties and $1 million in costs) for breaching the Commonwealth Trade Practices Act.^[25]

Background

Cabcharge provides payment systems for taxi operators and drivers to manage non-cash taxi fares. The company holds a dominant market position in these services across Australia as it supplies almost 97 per cent of Australian taxis with its electronic payment system. The ACCC began proceedings in June 2009 in the Federal Court of Australia against Cabcharge. The ACCC action alleged that Cabcharge had breached the Trade Practices Act (TPA) by misusing its market power and entering into an agreement to substantially lessen competition. The action centered on Cabcharge's conduct in refusing to deal with competing suppliers to allow Cabcharge payments to be processed through EFTPOS terminals provided by rival companies and supplying taxi meters and fare updates at below actual cost or at no cost.^[25]

To breach the TPA, a corporation must have misused its substantial market power to:

• eliminate or substantially damage a competitor
• prevent the entry of a person into that market or any other market; or
• deter or prevent a person from engaging in competitive conduct in that market or any other market.

The relevant section of the TPA^[26] was amended numerous times since September 2007 to strengthen the ACCC's ability to successfully bring proceedings for alleged contraventions. For example, in September 2007, the TPA was changed^[27] to prohibit corporations with substantial market share from engaging in predatory pricing. Predatory pricing occurs when a company sets its prices below cost for a sustained period for one of the anti-competitive purposes referred to above. In November 2008, the TPA was changed again to make clear the circumstances when corporations had 'taken advantage' of their market power. This change sought to deal with the evidentiary difficulties the regulator encountered in establishing this element in earlier cases. Since January 2007, the courts have also been given power to impose a civil penalty for each act or omission contravening the TPA. Civil penalties can now be imposed were up to the greater of $10 million, three times the value of the benefit obtained from the misconduct, or 10 per cent of the annual Australian turnover of the company involved.

Settlement between Cabcharge and the ACCC

On 24 September 2010, Justice Ray Finkelstein of the Federal Court of Australia approved the settlement of the action between Cabcharge and the ACCC. The court declared that Cabcharge had breached the TPA by taking advantage of its substantial degree of power in the Australian markets for the supply of services to enable non-cash payments for taxi fares and charges by taxi passengers and non-cash instruments that could be used only for the payment of taxi fares and charges.

Cabcharge admissions to breaches of the law

To settle the proceedings, Cabcharge admitted to three contraventions of the Trade Practices Act. The company agreed to the issue by the court of declarations, compliance orders, civil penalties of $14 million and costs of $1 million.^[25]

Sydney Morning Herald allegations

Cabcharge's CEO Reg Kermode has been the subject of a sustained campaign of criticism by Sydney Morning Herald journalist Linton Besser. Besser calls Kermode, "The Taxi Tsar".^[28] Besser claims that Cabcharge and Reg Kermode "...along with the industry's other big players, continues to benefit from millions of dollars worth of free taxi plates issued to it by successive governments..." as a result of political and bureaucratic connections and favouritism stretching over a generation.^[29]

Winner of one of Australia's shonkiest products

The Australian consumer magazine Choice confers awards annually, the Shonkey Awards, to recognise Australia's poorest or "shonkiest" products. Choice states that the competition "recognises and reprimands misleading claims, false advertising, lack of transparency, faulty goods and/or poor service."^[30]

Cabcharge was awarded a Shonkey in 2012 for its 10% surcharge on taxi fares paid by card.^[30][31]

See also

• Anti-competitive practices
• Predatory pricing
• Profiteering
• Monopoly
• Cartel
• Taxi Industry Inquiry
• Australian Competition and Consumer Commission

References

External links

• Cabcharge corporate website
• Taxis Combined Services website
• ASX - Cabcharge

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