Attachment "B"

Attachment 'B'

Pertinent extracts from the below three payments system/credit card reports provided in Sharon van Etten's (Media & Public Relations Office) email sent Thurs, 10 Nov '11 2:27pm:

Strategic Review of Innovation in the Payments System: Results of the Reserve Bank of Australia’s 2010 Consumer Payments Use Study June 2011,
Payment, Clearing and Settlement Systems in the CPSS Countries – Volume 1 (The Red Book)
Payment Systems in EMEAP Economies (EMEAP Red Book July 2002)

I note from 1. above that the Payments System Board of the Reserve Bank has long considered that strong price signals to consumers about the relative costs of different payment methods are important for an efficient and competitive payments system. To that end, a number of reforms have been initiated to strengthen price signals to consumers. These include -

a) reforms to the charging of ATM fees, which increased their transparency and flexibility, and

b) earlier reforms to remove rules which prevented merchants surcharging for credit and scheme debit cards.

I note from 2. above that:

a)         RBA has taken a number of steps to improve the competitiveness and efficiency of debit and credit card systems in Australia. In 2001, the RBA designated the Bankcard, MasterCard and Visa credit card systems under the Payment Systems (Regulation) Act 1998 which determined standards which -
*          lowered interchange fees;
*          removed restrictions on merchants charging customers for use of credit cards, and
*          imposed an access regime that facilitates entry by new players to the credit card market.
The interchange fee Standard requires the fees (paid by transaction acquiring institutions to credit card issuing institutions) to be no higher, on a weighted average basis, than a cost-based benchmark. The interchange Standards have led to lower interchange fees.
Interchange fees in the Visa and MasterCard systems are paid by the 'transaction acquirer' to the 'credit card issuer' and are subject to regulatory caps - a weighted average of 50 basis points for credit card transactions, and 12 cents for debit card transactions.
'Transaction acquirers' generally charge merchants an ad valorem fee for card transactions and a separate fee for line and terminal rental.
Both 'transaction acquirers' and 'credit card issuers' pay a variety of scheme fees to Visa and MasterCard for services including transaction processing and marketing.
Cardholders do not generally pay transaction fees, but may face fixed annual fees for credit cards or monthly account keeping fees for debit card accounts.

b) RBA's payments system policy is determined by its Payments System Board (PSB) which is responsible for 'inter alia' promoting competition in the market for payment services, consistent with the overall stability of the financial system.

c) RBA's payments system policy, namely the powers to carry out those policies are vested in the RBA in four separate Acts (Reserve Bank Act 1959; Payment Systems (Regulation) Act 1998; Payment Systems and Netting Act 1998; Cheques Act 1986) of which the centrepiece is the Payment Systems Regulation) Act 1998, under which the RBA may:

'designate' a particular payment system as being subject to its regulation. Designation has no other effect; it is simply the first of a number of steps the Bank must take to exercise its powers;

determine rules for participation in that system, including rules on access for new participants. Since access is inextricably linked to efficiency the Bank works closely with the Australian Competition and Consumer Commission (ACCC) (see below);

set standards for safety and efficiency for that system. These may deal with issues such as technical requirements, procedures, performance benchmarks and pricing;

direct participants in a designated payment system to comply with a standard or access regime; and

arbitrate on disputes in that system over matters relating to access, financial safety, competitiveness and systemic risk, if the parties concerned wish.

d) "The Payment Systems (Regulation) Act 1998 also gives the RBA extensive powers to gather information from payment system participants and operators."

e) The Government's intent was that the RBA would treat these powers as 'reserve powers', to be exercised if other means of promoting efficiency, competition and stability proved ineffective. Accordingly, the Government built considerable flexibility into the new regulatory regime. Under this co-regulatory approach, the private sector continues to operate its payment systems and may enter into cooperative arrangements, which may be authorised by the ACCC under the Competition and Consumer Act 2010. However, if the RBA believes that there may be benefits in exercising its formal powers in a system that it oversees to improve access, efficiency or safety, it may, as a first step, invoke its powers to designate that system. It may then decide, in the public interest, to set an Access Regime or impose Standards for that system. In doing so, the RBA is required to take into account the interests of all those potentially affected, including existing operators and participants. Full public consultation is required and the RBA's decision-making processes are subject to judicial review.

f) Credit cards provide prearranged revolving credit, up to a specified limit. Payments for goods and services and withdrawals of cash are made against the Line Of Credit. About 330 different types of cards are available from over 70 issuers. The features on offer may include:

* interest-free period of up to 55 days;

* annual fee (ranging from around AUD 24 to AUD 1,200 per annum); and

* loyalty scheme. In recent years a number of new credit card products have been offered, including low interest rate cards and complementary American Express cards with existing MasterCard/Visa accounts.

g) At the end of June 2010, there were 20.5 million Australian-issued credit and charge cards which could be used to access 14.6 million credit and charge card accounts, compared to 15.6 million cards and just under 12 million accounts in June 2005. During 2009/10, credit and charge cards were used to make 29 million cash withdrawals (total value AUD 11 billion) and 1,530 million non-cash transactions, with a value of around AUD 222 billion. The use of credit cards for cash withdrawals has declined in recent years, with 37 million cash withdrawals and 1,169 million non-cash transactions, worth around AUD 153 billion, made in 2004/05.

h) Billers for BPAY transfers pay a fee to their financial institution for every payment received through BPAY. The biller's financial institution pays a wholesale fee to the payer's institution of 45.1 cents for a payment from a deposit account, or 40.7 cents plus 0.297% of the transaction value for a payment from a credit card account.

I note from 3. above that:

a) The Payment Systems (Regulation) Act 1998 gives the Reserve Bank powers to regulate the payments system and purchased payment facilities (such as travellers' cheques and stored value cards). This Act allows the Reserve Bank to obtain information from payment system participants and to set access regimes and determine risk control and efficiency standards for designated payment systems. In addition, the Reserve Bank has the power to authorize parties, other than authorized deposit-taking institutions (see section 1.2.1), to act as the holder of the value stored in purchased payment facilities.

b) Credit cards are issued mainly by banks and provide prearranged revolving credit, up to a specified limit. Payments for goods and services and withdrawals of cash are made against the Line Of Credit. Restrictions on annual fees for credit cards were removed in 1993. Most issuers offer a range of structures: annual fees of AUD18-30 per annum with up to 55 days interest-free; no annual fees and higher interest rates; lower interest rates with interest charged from the date of Purchase etc.