ACCC welcomes Reserve Bank credit card reforms

The Australian Competition and Consumer Commission welcomes the Reserve Bank of Australia's credit card reforms, ACCC Chairman, Professor Allan Fels, said today.

"The ACCC has worked closely with the Reserve Bank since the designation of the credit card network in April 2001 and strongly believes that the reforms will lead to a more competitive and efficient credit card network in Australia.

"Increased competition and efficiency will be to the benefit of both Australian businesses and consumers.

"The Reserve Bank has announced three reform measures:

• first, the introduction of a system allowing new entrants to issue credit cards or provide merchant services.

"The access reforms will open up the 'closed shop' credit card market while at the same time ensuring, through the Australian Prudential Regulation Authority, the safety of this market for all participants.

"Importantly, the opening up of the credit card market has the potential to lower prices overall for credit card services, in a manner similar to the way in which new entry into the mortgage market by non-banks pushed down the interest margins on home mortgages. This will be of significant benefit to both consumers and businesses.

• second, a standard establishing a cost based methodology for the calculation of interchange fees

"Interchange fees in Australia have traditionally been set without any external scrutiny or public accountability. The Reserve Bank interchange fee reforms will break open these closed doors and replace them with a process that is both transparent and open to public scrutiny.

"The regulated reduction in interchange fees should also lead to a reduction in the burden of bank fees paid by retailers, particularly small businesses. Competition in the retail market should ensure that businesses pass this benefit on to consumers.

• and finally, the end of the restrictions imposed by credit card schemes which prevent merchants from recovering from card holders the costs of accepting credit cards

"Merchant pricing restrictions currently prevent businesses from recovering the cost of accepting credit card payments directly from those consumers who pay for goods or services by credit card. This means that businesses have no choice but to pass the cost of accepting credit card payments through to all consumers in the price of retail goods and services.

"The means that consumers using credit cards are not necessarily those who ultimately bear the cost of their credit card transaction and that consumers who do not use credit cards may be subsidising those that do.

"While overseas experience suggests that a majority of merchants may not choose to impose a credit card fee, businesses that do elect to charge such a fee must ensure that they do not breach their statutory competition and consumer protection responsibilities. Consumer protection responsibilities for such transactions are vested in the Australian Securities and Investments Commission".

Background

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 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. On this basis the ACCC instituted proceedings in the Federal Court in September 2000. Following the Reserve's Bank designation of the credit card schemes, these proceedings were discontinued without any finding by the Court.

In October 2000, a Joint Study published by the ACCC and the Reserve Bank 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 2001, the ACCC recommended to the Reserve Bank that it consider using its powers to reform credit card scheme arrangements, including interchange fee arrangements.

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.