Source: Reserve Bank of Australia
When the Bank announced its reforms to the credit card systems in Australia in August 2002 it indicated that it would review the credit and debit card systems and the Bank’s reforms in five years time.
In light of this commitment, in September 2006, the Bank sought submissions from interested parties on the content of the review and how it might best be undertaken. These submissions were considered by the Payments System Board at its meeting on 28 November 2006.
Reflecting the submissions, the Board has agreed that the review's scope should be broad and that the process should be open and transparent. The review will not just include the reforms to the credit card systems, but also include reforms to the debit card systems, as well as interchange fees and access arrangements in other payment systems. This reflects the fact that the Bank has always viewed the various reforms as part of a package aimed at improving the efficiency of the overall payments system. The review will examine the development of the payments system over recent years and the implications for competition and efficiency, and assess whether the various standards and access regimes remain appropriate.
The Bank is not proposing to extend the review to include the issues of payment system technology and architecture, given the current work that is being undertaken by industry on these issues. The Bank will nevertheless continue to monitor closely developments in this area.
As background to the review, the Bank will undertake two substantial pieces of research. The first will be a comprehensive study of the resource costs involved in different methods of payment, including cash. This study will update and significantly extend the results published in the Joint Study released in October 2000, which dealt only with the cost to financial institutions of debit and credit card payments. The second will be a study of how various payment methods are used in different circumstances, including the potential for substitutability between various forms of payment. The Bank plans to commence both studies in early 2007 and will be seeking the co-operation and input of a broad range of industry participants. Both studies are expected to be completed by late 2007.
As part of the review the Bank is also planning to hold a payments system conference in conjunction with the Centre for Business and Public Policy at the Melbourne Business School. This conference will draw together academics, policymakers and industry representatives from both Australia and overseas. While the exact timing is yet to be determined, the conference is likely to be held towards the end of 2007.
The review itself will commence in mid 2007 with the Bank releasing a paper setting out what it sees as the key issues. This paper will form the basis for the first round of consultations with interested parties. Following this consultation and the conference with the Melbourne Business School, the Bank anticipates releasing the preliminary conclusions of the review in the first half of 2008, and then consulting widely on these conclusions. Any specific proposed changes to the current standards/access regimes would then be considered at the end of this process, with any changes again subject to a further round of consultation. While the timetable inevitably needs to have some flexibility, the Bank expects to complete the entire review process, including any changes to the current standards/access regimes, by late 2008.
One issue raised in a number of submissions and considered in depth by the Board was whether a body other than the Bank should conduct the review. In the Board's view it is appropriate for the Bank to review the reforms, a conclusion also reached by the House of Representatives Standing Committee on Economics, Finance and Public Administration in its recent review of the payments system. The Board is confident that the broad scope of the review, as well as the open and transparent process being proposed, will allow all interested parties to present their analysis and views prior to the Board reaching any conclusions.
Credit Card Interchange Fees
At its recent meeting, the Payments System Board also discussed concerns by some parties that particular aspects of the credit card interchange standard had the potential to distort competition between the card schemes.
The current standard requires that the weighted-average interchange fee in each of the MasterCard and Visa schemes be no higher than a benchmark of 0.50 per cent (0.55 per cent including GST) as at 1 November 2006, and at any time in the next three years when an interchange fee is altered. In calculating the weighted average, the standard requires that each scheme use weights that reflect the structure of its own business over the previous year. This general approach arose out of the original consultations that the Bank conducted on the credit card standards. During those consultations it was suggested that rather than set interchange fee benchmarks for particular classes of transactions, it was preferable for the Bank to allow the schemes to set their own interchange categories and fees provided that the weighted-average fee remained below the appropriate benchmark. The Bank agreed to this approach and, in an effort to minimise the compliance burden, required that the weighted-average fee be no higher than the benchmark only once every three years (or whenever interchange fees were changed), rather than continuously.
The recent resetting of interchange fees has led some parties to argue that the backward-looking and scheme-specific nature of the weights used in calculating the average interchange fee, together with the compliance timetable, have the potential to affect the nature of competition between the schemes. At a minimum, it is appropriate that this issue be included in the 2007/08 review. However, given the timing of the review, the Bank is seeking views from interested parties on whether this issue should be examined sooner. It is also seeking views on how the compliance aspects of the credit card, and possibly Visa Debit, interchange standards might be altered to address any concerns about the impact of the standards on competition between the schemes.
Submissions should be made by 1 February 2007. All submissions will be placed on the Bank's website, and all parties making submissions will have the opportunity to have discussions with the Bank.
The Bank collects a wide range of data useful in monitoring developments in the Australian payments system. These data, which are provided voluntarily by market participants, include transaction values and volumes and merchant service fees. As part of its ongoing monitoring, the Bank recently sought additional data from MasterCard and Visa on interchange revenue and transactions on credit cards and scheme debit cards. After extensive discussion with the Bank, Visa has declined to provide the data voluntarily and accordingly, the Bank has required Visa to do so under the Payment Systems (Regulation) Act 1998.