ACCC welcomes Reserve Bank consultation document on proposals to reform credit card schemes

The Australian Competition and Consumer Commission welcomes the Reserve Bank of Australia's consultation document outlining proposals for reform of the credit card schemes operating in Australia, Visa, MasterCard, and Bankcard.

"These reforms should hand over to consumers and small business several hundred million dollars currently being accumulated mainly by banks through high interchange and merchant service fees", ACCC Chairman, Professor Allan Fels, said today. "Interchange fees are the fees which banks charge one another when processing each other's credit card transactions and total about $775 million.

"Business and consumers currently pay the high cost of Australia's credit card payment system.

"The RBA and the ACCC in October drew attention to the very high level of interchange fees compared with their costs and the RBA regulatory proposals seem likely to reduce them by several hundred million dollars, bringing them into line with specified costs.

"The interchange fees are paid to banks, credit unions and building societies that issue cards to consumers by banks that handle the merchant side of the transaction (the 'merchant acquirer'). The 'merchant acquirers' charge merchants (retailers, utilities and others) about $1.5 billion annually, about half of which is made up of the interchange fee.

"Looked at from the merchant perspective, every time a merchant accepts a payment by credit card the merchant must pay a merchant service fee to the bank.

These fees can be as high as four per cent of the value of the transaction for a small business, although the average is 1.8 per cent.

"These reforms are good news for small business in particular, who benefit from significant reductions in the burden of these bank fees.

"Consumers and business will also benefit from greater competition and efficiency in the payment system.

"The reforms will open the door for non-banks to issue Visa and MasterCard credit cards and also offer merchant services. At present, only authorised deposit taking institutions (i.e. banks, credit unions and building societies) can issue Visa and MasterCard credit cards.

"More competition should lead to lower prices overall for credit card services, in a manner comparable to the way in which consumers benefited from new entry into the mortgage market by non-banks which pushed down the interest margins on home loans.

"These important reform proposals follow on from the Joint Study by the ACCC and the RBA into interchange fees and access arrangements for credit and debit card schemes, published in October 2000, and the ACCC's enforcement action in relation to credit card interchange fees".

The RBA's reform measures have three elements:

- the first is the reduction in the interchange fee - the fee that banks charge each other when processing credit card transactions and which is passed on to all merchants;

- secondly, the end of the restrictions imposed by credit card schemes which prevents merchants from recovering from card holders the costs of accepting credit cards;

- third, and perhaps most important, an end to the credit card closed shop operated by financial institutions (mainly banks, but also credit unions and building societies) which will open up the schemes to more competition.

"The expected savings for business and consumers will result from both a regulated reduction in the level of interchange fees, and greater competition in both the credit card issuing market and the merchant servicing market.

"The ACCC also supports ending the Visa/MasterCard practice of imposing restrictions to prevent merchants from recovering from credit card holders the cost of accepting credit cards. This does not necessarily mean that retailers will introduce such a charge. There have already been indications that a significant number of retailers would not introduce a charge.

"The Reserve Bank and the ACCC have worked closely to ensure that Australia has a competitive and efficient retail payments system that operates in the public interest.

Background

The ACCC will continue to work with the Reserve Bank in this area. Under the Memorandum of Understanding between the ACCC and the Reserve Bank, and consistent with the Explanatory Memorandum to the Payment Systems (Regulation) Act 1998, the ACCC will continue to be consulted by the Reserve Bank about its proposed reforms of the payments system.

In its 1997 Final Report, the Financial Systems Inquiry, (Wallis Committee) highlighted interchange fee arrangements and restrictions on access to credit card schemes as areas of policy concern. The inquiry recommended that a new Payment System Board within the Reserve Bank should consider whether interchange fee arrangements were appropriate for credit (and debit) cards.

In March 2001, the ACCC recommended to the Reserve Bank that it consider using its powers to reform credit card scheme arrangements, including interchange fee arrangements.

In October 2000, a Joint Study published by the ACCC and the RBA clearly identified the case for reform. It 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 their average cost to the banks of providing these services. The Joint Study also found that application of formal cost-based methodologies suggest interchange fees should be well below current levels. In addition, the Joint Study was critical of the current restrictions on membership of the credit card schemes.

In March 2000, the ACCC informed Australia's nine leading banks and MasterCard, Visa and Bankcard that it had formed the view that the banks' conduct in setting credit card interchange fees contravened the price fixing provisions of the Trade Practices Act. The ACCC commenced legal action on this basis in September 2000. This legal action with withdrawn following the decision by the RBA to regulate interchange fees.

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.