NO.047

REFORM OF CREDIT CARD SCHEMES

The Government welcomes the release today of proposals to reform credit card

schemes in Australia. The introduction of an objective, transparent and cost

based benchmark should result in a reduction of nearly 40 percent in average

interchange fees in Australia. Interchange fees are fees banks charge each other

for operating the credit card system.

Reform of the Australian payments system, including credit cards, was a key

recommendation of this Government’s Financial Systems Inquiry (Wallis

Report).

Arising out of that report, the Government enacted the Payment Systems (Regulation)

Act 1998 (the Act) giving power to the Reserve Bank of Australia (RBA) to

determine standards in a designated payment system.

The credit card schemes of Bankcard, Visa and Mastercard were designated in

April 2001.

The Reserve Bank has laid out a methodology as a standard under which, it is

estimated, average interchange fees will fall from around 0.95 per cent

of the value of each credit card transaction at present to around 0.55-0.6 per

cent in the second half of 2003. Based on the current annual revenue of $900

million from interchange fees, this would imply a reduction in interchange fees

of $300 – $400 million once the reforms take effect.

This fee reduction, by an average of around 40%, will benefit consumers through

a reduction in the general level of prices.

The Government welcomes the proposal to open the credit card market to greater

competition by reducing barriers to entry. New entrants will be subject to authorisation

and supervision by the Australian Prudential Regulation Authority to ensure

that they meet prudential standards.

More competition will put downward pressure on pressure on credit card fees

and credit card interest rate margins. After mortgage originators entered the

market for home loans (around 1995), interest rate margins fell from around

4% to around 1.8% today.

The Government would like to see similar competitive pressure on credit card

interest rates, which have remained relatively high compared with trends in

mortgage interest rates.

Currently, credit card scheme rules provide that retailers must not charge

different prices for products depending on the method of payment. This means

that the higher cost of credit cards is built into higher prices for all goods.

The RBA’s reforms will enable retailers to offer discounts to customers who

use less costly forms of payment, such as cash or EFTPOS.

This will mean that the costs of credit card services will be borne by those

who use them, rather than the whole community.

However, based on experience in the United Kingdom and given the strong competitiveness

of the Australian retail sector, the Government does not expect that surcharging

for credit card use will be widespread.

To ensure that credit card scheme participants can comply with the new RBA

standards, regulations will be made under the Act to ensure that compliance

with the RBA’s standards would not be taken to breach the Trade Practices Act.

These reforms are important proposals to increase transparency, promote competition

and ensure a more efficient payment system that will benefit consumers as well

as Australia’s financial system.

CANBERRA

27 August 2002

Contact: Niki Savva

02 6277 7340