Australians Discuss Payment System Reforms

Lowe describes perhaps the most notable impact from the reforms as the marked reduction in merchants' costs of accepting credit cards where the average merchant service fee for the MasterCard and Visa schemes is now around 0.9 per cent of the transaction value, down from 1.4 per cent immediately prior to the reforms. Based on the current levels of credit card spending this represents a saving to merchants of around A$700 million per year.

With respect to the specifics, he addressed five major areas including, perhaps the most visible, the reforms of interchange fees.

The first, and most controversial, of these is interchange fees. These fees are payable between financial institutions and are not transparent to either cardholders or merchants, but they have a pervasive influence on the prices that financial institutions charge for payment services. These fees are not subject to normal competitive pressures and, in the Bank's view, had been set in a way that was distorting payment patterns in Australia.

Prior to the reforms, the structure of these fees meant that cardholders were often charged by their financial institution to make an EFTPOS transaction, but often received quite large per-transaction subsidies, through reward points and interest-free credit, when making a credit card transaction. As a result, we had the rather anomalous situation in which cardholders were being charged significantly more to use the relatively low-cost payment system. We could see no convincing reason why this was the case.

Given this assessment, the Bank has reduced interchange fees in the credit card system and the two debit card systems. The reforms to the credit card system in 2003 saw interchange fees fall from around 0.95 per cent of the transaction value to around 0.55 per cent. More recently, three weeks ago, the Bank announced reforms that will see interchange fees in the EFTPOS system – which flow in the opposite direction to the credit card system – fall from around 20 cents a transaction to around 5 cents. Interchange fees in the Visa Debit system – which flow in the same direction as the credit card system – will also fall significantly.

The lowering of credit card interchange fees has, as expected, prompted a change in price signals. The prospective changes to the debit card systems will have a similar effect. The fall in debit card interchange fees will also substantially reduce the risk that the Visa Debit system (and its MasterCard equivalent) might eventually drive out the EFTPOS system, simply because the structure of interchange fees made it much more attractive for financial institutions to offer and promote the Visa Debit system. I would like to make it clear though that the Bank's regulation of various interchange fees is not motivated by a desire to protect the EFTPOS system, or by a desire to reduce credit card debt, or by a desire to see greater use of the lowest-cost method of payment. Rather, it reflects the view that the efficiency of the overall system is promoted by the various payment methods competing on their merits, rather than through interchange fees, which themselves are not subject to competition.

I might also note that this interest in interchange fees is not confined to Australia. Over the past few years, these fees have been subject to regulatory investigation in a wide range of countries, including the United Kingdom, Spain, Switzerland, Israel, Mexico, Germany and the Netherlands. And in the United States, these fees have been, and continue to be, subject to numerous court cases. In each of these countries, the concerns are essentially the same as those expressed in Australia. Namely, that interchange fees are not determined in normal competitive markets, and that the levels at which they have been set are not typically in the best interests of the community at large.