Media Release Reform of Australia's Payments System: Conclusions of the 2007/08 Review

The Reserve Bank is today releasing the conclusions of the extensive review of the payments system reforms undertaken by the Payments System Board.

In the Board's view, the reforms have significantly improved competition in the Australian payments system. The reforms have liberalised access and removed restrictions on merchants that had weakened competition in the system. They have also increased transparency and have led to more appropriate price signals to consumers.

These improvements in competition have allowed the Board to consider stepping back from the regulation of interchange fees. However, the Board is only prepared to do so if industry participants take further steps to reduce the risk that deregulated interchange fees in the credit card systems would increase from current levels. This reflects the Board's ongoing concern that, despite the improvements over recent years, the competitive forces acting on interchange fees remain relatively weak.

As outlined in the Board's Preliminary Conclusions released in April, the competitive environment would be further improved by: changes to the EFTPOS system to improve its ability to compete effectively with the international card schemes; further modifications to the honour-all-cards rules to allow merchants to make separate acceptance decisions for any card for which there is a separate interchange fee; and greater transparency regarding the various fees levied by the card schemes.

The Board's concerns regarding the potential for credit card interchange fees to rise in the absence of regulation could also be addressed by the schemes providing a commitment to limit their average interchange fees to current levels (0.5 per cent of the transaction value). This possibility was raised during the consultation process and the Board is prepared to consider this approach. If such a commitment were forthcoming, the benefits from the above modification to the honour-all-cards rules would be reduced, and accordingly the Board would not see a need for this change to be made.

A final decision will be made in August 2009. If at that time the Board judges that insufficient progress has been made, interchange regulation will be retained. As discussed in the Preliminary Conclusions, if this were the outcome, the Board's current thinking is that the benchmark for credit card interchange fees would be reduced from its current level of 0.5 per cent to 0.3 per cent. In the EFTPOS and scheme debit systems, the Board is proposing that the weighted average of interchange fees be constrained to be between 5 cents paid to the issuer and 5 cents paid to the acquirer. This would provide the systems with additional flexibility to that in the original proposal, while ensuring that the same regulatory framework applies to all debit card systems. If regulation of interchange fees were to continue, the Board would not require further modifications to the honour-all-cards rules to allow separate acceptance decisions for any card with a separate interchange fee.

In addition to its conclusions on the regulation of interchange fees, the Board has also concluded that:

• there is no case for allowing the schemes to reimpose no-surcharge rules on merchants;
• the current modification to the honour-all-cards rules, allowing separate acceptance decisions for scheme debit and credit cards, will remain. In addition, the Board encourages the schemes to permit merchants to make separate acceptance decisions on pre-paid cards and to ensure that interchange arrangements do not discriminate against merchants who do not accept all cards. The Board would consider regulation in these areas if this were necessary; and
• further transparency of scheme fees and average interchange fees will be required. The Bank will continue to discuss with industry participants how this might best be achieved.

The Board's review has benefited from extensive input from industry participants over almost two years. The Board would like to take this opportunity to thank all those who have participated in this exhaustive process.