Media Release Designation of Credit Card Schemes in Australia

Following a decision by the Payments System Board, the Reserve Bank has today brought credit card schemes in Australia under its regulatory oversight. It has formally “designated” as payment systems subject to its regulation under the Payment Systems (Regulation) Act 1998, the credit card systems operated in Australia by Bankcard, MasterCard and VISA. Designation is the first step in establishing standards and access regimes for a payment system to deal with public interest issues. The decision to designate was taken after consultations with a range of interested parties.

The credit card systems designated by the Bank have two unique characteristics that raise public interest questions about efficiency and competition:

• the systems have wholesale fees (known as interchange fees) set collectively by the financial institutions that are members of these systems, but that are otherwise competitors in providing credit card services to cardholders and merchants. Interchange fees are an important determinant of the fees facing cardholders and merchants in credit card systems; and
• membership of the international card systems (MasterCard and VISA), either for credit card issuing or acquiring, is restricted in Australia to authorised deposit-taking institutions. Such membership rules based on institutional status may be more restrictive than necessary to protect the safety and integrity of the systems. Bankcard is currently reviewing its membership rules.

The Financial System Inquiry (the Wallis Committee) highlighted interchange fee arrangements and restrictions on access to credit card systems as areas of concern, to be followed-up by the Payments System Board and the Australian Competition and Consumer Commission (ACCC). These same characteristics of credit card schemes are also currently the focus of competition regulators in other countries.

After an investigation, the ACCC in March 2000 formed the view that the collective setting of credit card interchange fees was a breach of the Trade Practices Act 1974. Accordingly, it advised the credit card systems and their members that they should seek authorisation of the interchange fee agreements if they could demonstrate that those arrangements were in the public interest. Discussions between the ACCC and a group of banks continued from that date. Recently, however, the Chairman of the ACCC reached the conclusion that the authorisation process was unlikely to meet the ACCC's competition and efficiency concerns, within an appropriate time-frame, and wrote to the Governor recommending that the Bank consider using its powers to achieve reform of the credit card systems in Australia.

With its mandate to promote efficiency and competition, the Payments System Board has also been taking a close interest in the operation of credit card systems in Australia. It has undertaken a detailed study of card schemes, and has set out its findings in a booklet, Debit and Credit Card Schemes in Australia: A Study of Interchange Fees and Access, published jointly with the ACCC in October 2000. The study identified a number of shortcomings in competition in the provision of card services, which have raised the cost to the community of the retail payments system. In the case of the credit card systems, the study found:

• interchange fees are not reviewed regularly by system members on the basis of any formal methodologies;
• interchange fees are higher than can be justified by costs, and system members lack clear incentives to bring these fees into line with costs;
• price signals are encouraging the growth of credit card usage at the expense of other payment instruments, particularly debit cards and direct debits, that consume fewer resources; and
• restrictions by credit card systems on which institutions can enter the acquiring business were unjustified and restrictions on access to card issuing needed to be reviewed.

The Bank will now proceed to establish, in the public interest, standards for the setting of interchange fees and a regime for access to the credit card systems. However, the standards will not cover the setting of credit card fees and charges to cardholders and merchants, or interest rates on credit card borrowings. In developing its approach, the Bank envisages an extensive consultation process, leading to the publication of a consultation document which will explain the public interest issues and outline the Bank's proposed standards and access regime. Interested parties will have a further period for comment before the Bank's regulatory framework is finalised. As set out in their Memorandum of Understanding, the Bank and the ACCC will ensure that credit card systems and their members would not be at risk under the Trade Practices Act 1974 as a result of complying with the Bank's requirements.

The Board considered whether the “three party” card schemes in Australia – American Express and Diners' Club – should be brought under its regulatory oversight at this point. These schemes compete with Bankcard, MasterCard and Visa for card members and merchants, but have quite different characteristics. They do not have collectively determined interchange fees, nor access rules that discriminate on the grounds of institutional status. The Board will take into account the competitive dynamics of the industry in any decisions it takes, but sees no case on public interest grounds to designate the “three party” card schemes to deal with issues relating to collective fee setting and access restrictions.

The RBA/ACCC study was also critical of “no surcharge” rules in card schemes that prevent merchants passing on to cardholders the cost of using their payment cards. In the study's view, such rules – which are imposed by the credit card systems as well as American Express and Diners' Club – suppress price signals that guide the efficient allocation of resources. The Bank will review whether the imposition of “no surcharge” rules by card schemes is in the public interest. Any decisions taken by the Bank in this area would, of course, apply to both credit card systems and “three party” systems.

The Bank hopes to have its regulatory framework in place, after full public consultations, by the end of 2001.