ACCC recommends Reserve Bank consider using powers to reform credit card schemes

The Australian Competition and Consumer Commission has recommended to the Reserve Bank of Australia that it consider using its legislative powers to progress reform of the credit card schemes in Australia, ACCC Chairman, Professor Allan Fels, said today.

"The ACCC has been engaged in discussions with Australia's leading banks in relation to the reform of arrangements for credit card interchange fees and membership of credit card schemes since March 2000.

"While these discussions have led to some movement on options for change in relation to interchange fees, the ACCC has come to the view that the Reserve Bank by way of its legislative powers could progress the issue in a manner which is likely to provide greater public benefits. The need for reform was highlighted in the findings of the joint study into interchange fees and access for credit and debit card schemes published by the ACCC and the Reserve Bank in October 2000".

Under the Payment Systems (Regulation) Act 1998, which is the responsibility of the Payments System Board of the Reserve Bank, the Reserve Bank can 'designate' a payment system where it considers it to be in the public interest to do so. The Reserve Bank then has the power to impose an access regime and/or to set standards, including arrangements for the setting of interchange fees, with respect to the operation of the designated system. The Reserve Bank is required to engage in a public consultation process before imposing an access regime or setting a standard.

"The ACCC has written to the Governor of the Reserve Bank recommending that the Reserve Bank consider designation of the credit card schemes", Professor Fels said. "The ACCC understands that the Payments System Board is considering that letter.

"The ACCC remains committed to promoting reform of the operation of the credit card schemes in Australia and believes that action by the Reserve Bank could achieve this much needed reform in the most timely and effective manner. Under the Memorandum of Understanding between the ACCC and the Reserve Bank, the ACCC would be closely consulted in any action the Reserve Bank takes to promote reform of the payments system".

The ACCC and the Reserve Bank both have legislative responsibilities for access and competition policy in the payments system. The ACCC has a longstanding role in the Australian payments system as part of its general responsibilities under the Trade Practices Act 1974. In relation to payment systems, for example, a number of arrangements between the banks are subject to the ACCC's scrutiny because they involve agreements between competitors. Following the recommendations of the Wallis inquiry, the Reserve Bank has been given new powers to regulate the payments system to promote competition and efficiency.

The ACCC supported the Reserve Bank having legislative powers in this area when the Wallis inquiry was held and, in accordance with a subsequent Memorandum of Understanding, the ACCC and the Reserve Bank work closely together to ensure that a consistent approach is taken to regulatory policy in the payments system to promote competition and access in this important sector of the economy.

The Wallis inquiry recommended that interchange arrangements should be reviewed by the Reserve Bank and the ACCC. In October 2000, the RBA and the ACCC published their joint study of interchange fees and access in debit and credit card schemes. The report found, among other things, that issuing credit cards to consumers and providing merchants with the capacity to accept credit card payments generates revenues that are well above the average cost of providing these services.

In relation to credit card interchange fees, the report found that application of formal cost-based methodologies would suggest interchange fees should be well below current levels. The report was also critical of the current restrictions on membership of the credit card schemes.

"The ACCC's concern from the outset has been with the manner of the setting of interchange fees and their level, together with issues of restricted membership of credit card schemes. These concerns are expressed in the joint RBA/ACCC study", Professor Fels said.

"In March 2000, the ACCC completed its two year investigation and concluded that the interchange fee agreements were in breach of the price fixing prohibitions of the Trade Practices Act. The ACCC at that time advised the banks that they should seek authorisation of the agreements if they could demonstrate that those agreements were in the public interest* and indicated a willingness to discuss all issues with a view to achieving reforms of the system.

There have been few signs of willingness by the major banks to embrace substantial reform on the key issues.

"In response, in July 2000 the banks proposed to conduct a review of interchange fee arrangements, one of the two major issues of concern to the ACCC. They did not agree to include any review of membership arrangements, the other key issue.

"The ACCC instituted proceedings in September 2000 in relation to the NAB alleging unlawful price fixing.

"Since then the banks, including NAB, widened the study to include membership issues. The study was submitted in January 2001 but the ACCC considered that it did not contain proposals with any significant change in the fee setting arrangements other than it made them more transparent and the banks were so told.

"In March, the banks submitted a revised proposal which, although embodying some possible changes in the methodology of setting interchange fees did not address sufficiently a number of deficiencies in the system, including membership issues, which were identified in RBA/ACCC study.

"There are legislative mechanisms available to the RBA, which has worked closely with the ACCC in assessing options put to us in recent months. All this seems to offer the possibility of a more direct and timely resolution of the questions raised in the RBA/ACCC study".

Interchange fees

A typical credit card transaction involves four parties: (i) the cardholder, (ii) the card holder's bank (known as the 'card issuer'), (iii) the merchant and (iv) the merchant's bank (known as the 'merchant acquirer'

Interchange fees are fees that the card holder's bank (the card issuer) charges the merchant's bank (the merchant acquirer) for each credit card transaction accepted by the merchant. The interchange fee applies when a customer pays for products using a credit card issued by one institution but the merchant uses another institution to process its card payments. The interchange fee comprises a significant part of the merchant service fee charged by merchant acquirers to their merchants.

*Authorisation provides exemption from legal action for conduct that might otherwise breach the Trade Practices Act. The ACCC can grant such exemptions only where it is satisfied that the detriment of the anti-competitive conduct is outweighed by accompanying public benefit.

Background

In response to a complaint, the ACCC commenced its investigation in 1998 by seeking information from the major banks on credit card interchange fees and pursued this investigation through 1999 by obtaining information under the compulsory disclosure provisions of the Trade Practices Act.

In March 2000, the ACCC informed nine leading banks and MasterCard, Visa and BankCard that it had formed the view, following its investigation and having obtained supporting advice from Senior Counsel, that the banks' conduct in setting credit card interchange fees contravened the price fixing provisions of the Trade Practices Act. The ACCC demanded that the banks cease this conduct or apply for authorisation and indicated that it was prepared to commence legal proceedings if this matter was not resolved expeditiously.

The ACCC held a series of discussions with the banks and card companies which led to a proposal by the banks in July 2000 to conduct a review of the arrangements for setting interchange fees. However, the banks were not prepared to also review restrictions on membership which, in the ACCC's view, operated to restrict competition and access in relation to credit card schemes. Also, the banks, at that time, did not signify that they would necessarily seek authorisation.

The ACCC in September 2000 issued proceedings against the National Australia Bank. Following the ACCC's action against National, the banks, including National, agreed to include membership criteria in their review. The banks submitted a proposal resulting from this review to the ACCC in January 2001 and were subsequently informed that this proposal did not address the ACCC and the RBA's competition and efficiency concerns.

A further proposal submitted in March, although making some changes, still failed to meet the ACCC and the RBA's major concerns. More than a year after the ACCC informed the banks of its view that they are in breach of the Trade Practices Act, the ACCC is yet to see a proposal that adequately addresses the competition and access issues that have been raised by the ACCC and the RBA.

The ACCC is concerned that this process is not proceeding in a way that will lead to the necessary reform in the public interest in the foreseeable future. Because of this, the ACCC has recommended to the RBA that it consider using its powers to impose an access regime or standard in relation to the credit card schemes.