ACCC takes on lord of taxi business

THE Australian Taxi Industry Association held a conference in Sydney in May 2004. Perhaps a year from now, a Federal Court judge will decide whether the following private conversation took place there.

It will be alleged that the undisputed doyen of the industry, Reg Kermode (pictured), was asked some blunt questions by Frank Hart, whose Melbourne company, Martin Meters, makes taxi meters.

Hart: And Reg, what do you think you're doing giving away 54 new Cabcharge taximeters to Frankston Taxis, replacing all our meters and saving yourself the conversion cost at the same time? Are you trying to run us out of business?

Kermode: No. I didn't know they were your meters in Frankston. (Another Cabcharge executive) handled all that. Frank, I am not trying to put you out of business. I'm trying to put Gary Schmidt out of business."

To the Australian Competition and Consumer Commission, that conversation is evidence that Kermode crossed the line from robustly battling in the rough and tumble of commerce to an illegal misuse of the substantial market power of the company he runs, Cabcharge Australia.

Gary Schmidt is still in business, selling the taxi meters his Schmidt Electronic Laboratories has been making at its Melbourne factory since 1980.

But he says this fact surprises him. When Cabcharge expanded from its traditional turf of processing taxi payments into selling meters in 2004, Schmidt thought his company had 12 months left at best.

"Reg and I have had a long and tumultuous relationship," he says. "I thought they would wipe us right out. Probably Cabcharge, Reg and myself would be the most surprised people in this whole thing because I'm sure he expected to wipe me out quickly and completely and I expected the same."

Schmidt says 27 per cent of his meters were removed from taxis and replaced by Cabcharge's between 2004 and 2007.

His survival does not make him optimistic. "Our market share continues to decline," he says. "Unless drastic action is taken in the very near future, I fully expect that this company and our other competitors will be forced out of the taxi meter market and Cabcharge will be the only taxi meter supplier left in this country."

Schmidt's experience is only part of the case launched by the ACCC last week. At its heart is an issue that affects the taxi passengers who spend more than $1 billion a year paying their fares other than by cash.

For the privilege of paying by bank debit card, by credit card or by charge account, they - we all - pay a 10 per cent surcharge.

According to the regulator, that surcharge is a $100-million-plus bonanza that Cabcharge has broken the law to protect.

At 82, Reg Kermode's age makes him stand out in the ranks of people running Australia's top-200 publicly listed companies. He is also conspicuous because of the financial results Cabcharge produces.

In the 2008 annual report, Kermode noted that shareholders had enjoyed compound annual growth in net profit for the past four years of 20 per cent.

"If you look at our performance over many years, we are basically only matched or bettered by a few mining stocks," he wrote.

Kermode, who oversees the day-to-day running of this powerhouse from Cabcharge's low-key East Sydney base, is well connected, successful and feared.

In the past decade he has seen off challenges from the owner of one of the best-known global brands in electronic money, Visa Inc, and from the most innovative and aggressive Australian financier, Macquarie Bank.

The secret to the stunning earnings record is Cabcharge's role in the way money travels from your wallet to the drivers of the taxis you travel in. The

10 per cent service fee is charged every time a card is swiped through a Cabcharge terminal, and Cabcharge terminals are installed in 95 per cent of Australian taxis.

That 10 per cent bypasses the drivers, the operators and the owners of licences. A portion of it is paid to taxi networks, which use it for marketing and promoting Cabcharge. Most of it goes straight to Cabcharge.

Since the fee was first levied in 1976, costs have plummeted, usage has skyrocketed and the rate of the surcharge has not moved an inch.

In late 1999, Visa objected to its customers having to pay the 10 per cent surcharge and pulled out of its agreement with Cabcharge. In early 2002, Visa backed down, citing "inconvenience to corporate card users who were not worried by the extra 10 per cent".

Macquarie took on Cabcharge more directly. In 2006 it launched a two-pronged business running taxis, chiefly for disabled people, and processing payments.

The bank figured that if it offered drivers a share of the surcharge, it could buy its way into this nice little earner itself. It accepted defeat in early 2008, selling the businesses

in separate management

buy-outs.

In the 2008 annual report, Kermode showed no sign of anxiety about challenges to his business model. "We consider cash to be our major competitor in the market for taxi fare payments," he wrote.

A clutch of companies would beg to differ. Since 2002, eight rivals have tried to break into the market by installing alternative Eftpos terminals in taxis.

Now the competition watchdog has backed up years of commentary its own plus that of state pricing regulators and other authorities with a legal assault on Cabcharge's dominance.

The ACCC alleges that Cabcharge misused its market power by refusing to deal with rivals on commercial terms, that it underpriced its taxi meters to lock in Eftpos customers, and that it struck a deal with a Townsville network that included removing a rival's Eftpos terminals.

The regulator's chief task is to prove three things. First, it must show that Cabcharge has "a substantial degree of market power". Its statement of claim lists Cabcharge's grip on many aspects of the industry. It directly owns 10 taxi networks, including Sydney's largest, Taxi Combined Services, and Melbourne's second largest, Black Cabs Combined, which run the booking and despatch systems critically important to drivers.

It also directly owns licences to operate taxis, the level of industry where the decision is made on which equipment to install in the vehicles.

It offers a nationwide charge card, mainly used by corporate and government customers. It supplies Eftpos machines that process these Cabcharge-branded cards and, increasingly, credit cards and bank debit cards. Its other activities include offering driver training, finance, insurance and, since 2004, supplying taxi meters that are integrated with its Eftpos terminals.

The second hurdle for the regulator is to prove that Cabcharge used that dominance to refuse an approach from a competitor to negotiate over allowing its branded corporate card to be processed on a non-Cabcharge Eftpos terminal, in return for a fee.

The third hurdle for the regulator is to convince the court that Cabcharge's motive was to eliminate or deter competitors.

Cabcharge has not yet commented on the allegations, other than to say it "always behaves appropriately" and "the company will be defending it and we will be doing it in court rather than in commentary through the media".

One line of defence open to it will be pointing to not only the survival of Schmidt's company and Martin Meters, but also the tenacity of rivals who offer competing Eftpos machines unconnected with meters.

In fact, there has been competition of a sort in this payment-processing part of the market since 1982 when Cabcharge struck a deal with American Express and Diners to process their credit cards on the old-fashioned "click-clack" manual machines.

A market niche was spied by so-called "factorers" to process the vouchers. They typically pay the drivers immediately in cash and then deal directly with the issuers of the cards. This unofficial system offers the drivers a strong incentive. They are paid faster than by dealing with Cabcharge and, crucially, are typically paid a share of the 10 per cent surcharge.

More recently, rivals to Cabcharge have begun to offer a similar "factoring" service to drivers but using electronic processing, which is cheaper, faster and less prone to fraud than the paper system.

While there is broad agreement that 95 per cent of Australia's 18,000 taxis contain a Cabcharge Eftpos terminal, a growing number of taxi operators are installing second terminals.

Win or lose, Cabcharge faces a protracted, expensive, distracting battle with a powerful regulator in the full glare of publicity, which will highlight to consumers the size of the fees they are paying.

Kermode has an impressive track record defending his market share. But this time, he will be fighting the ACCC in the rarefied atmosphere of the Federal Court while his business is under escalating attack in the taxi depots around the nation.