The controversial reforms have been developed over a three-year period during which there has been extensive consultation and heated debate with card operators and financial institutions.

Specifically, the RBA is proposing the adoption of an "objective, transparent and cost-based benchmark which will be used as a basis for determining interchange fees in credit card schemes"; the end of the restriction imposed by credit card schemes which prevents merchants from recovering from cardholders the costs of accepting credit cards; and the end of the restriction imposed by credit card schemes which limits the entry of new competitors into the schemes - paving the way for the entry of specialist credit card institutions authorised by the Australian Prudential Regulation Authority (Apra).

Reserve Bank governor, Ian Macfarlane, comments: "The reforms will reduce the size of the transfer from the community to financial institutions for credit card usage and will, over time, promote genuine competition on credit card interest rates and on the service fees charged to merchants."

The cost-based benchmark for each credit card scheme, which sets a ceiling on average interchange fees in the scheme, will be applied by scheme members. Based on recent information provided to the Reserve Bank by each of the four major banks, average interchange fees in Australia are expected to 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 – a reduction of around 40 per cent.

The reform measures will apply to the card schemes operated by Bankcard, MasterCard and Visa, which were recently designated as payment systems by the Reserve Bank. American Express and Diners Club have each given an undertaking to the central bank that they will also remove their restrictions on merchant pricing.

The new standard on merchant pricing will come into force on 1 January 2003 and the changes to interchange fees on 1 July 2003. The access regime will come into force once Apra has finalised its prudential standards for specialist credit card institutions, expected by the end of 2002.

The credit card companies and banks had campaigned against the reforms, which they argued would lead to higher fees for credit cards and more investment in less sophisticated payment schemes, such as debit cards, cash and cheques.

Australian Treasurer Peter Costello has called on the country's banks to accept the decision. "These are important reforms. It will make our system more competitive," he says.

He says the proposed 40% cut to credit card interchange fees will reduce those fees banks charge each other by between A$300 million and A$400 million each year.