Before examining the proposed EFTPOS standard, it is worth considering the

approach taken by the RBA with respect to the credit card reforms. In October 2000

the RBA and the ACCC jointly published a study on interchange fees and access. The

object of the Joint Study was to assess whether interchange fees were encouraging

efficient provision of debit and credit card services.

The RBA was concerned that the user-pays principle was not operative in the credit

card system. The resource cost of using credit cards were not being borne by

transactors” in the total prices they faced, because they paid no transaction fees or

other charges such as interest. Instead the resource costs were being borne by

system were being pushed onto merchants who had no choice but to pass the costs

onto the general public.

The irony of this is that the RBA is now proposing to impose a uniform interchange

fee with respect to EFTPOS, the effect of which merchants will face higher costs and

have little choice but to pass these higher costs on to the general public.

price signals facing customers using credit cards were not established on the same

basis as other payment instruments. It concluded:

In clear contrast to credit cards, the RBA found no imbalance in EFTPOS transaction

prices and costs when it published its final consultation paper on credit card reforms

in August 2002. The RBA observed:

The position has only improved since then, in that per transaction fees (for those

The RBA made the point that reform of credit card interchange was needed as

financial institutions actively promoted credit cards because it was the payment

instrument for which they received the highest return. Despite it being a costly

instrument for financial institutions to provide, the interchange pricing arrangements

for credit cards, which were collectively set by the members of each scheme,

encouraged the use of a relatively high-cost payment instrument over lower cost alternatives.

The credit card standard established a cost based benchmark based only on issuers’

eligible costs. These included issuers processing, authorisation, fraud and interest free funding costs.

Whilst the new benchmark led to a significant reduction in average interchange fees,

the standard still allows issuers to recover a significant part of their costs from

acquirers and merchants rather than from their cardholder customers.

In other words, the distortion that the RBA was seeking to remove still remains.

Credit card issuers have not altered their fee structures to impose transaction fees for

credit card transactions, although they are free to do so. Credit card issuers benefit

from greater use of credit cards and transaction fees would act as a disincentive to their use.

For many customers a credit card still remains a subsidised method of payment. If the

balance is paid off by the due date, the cardholder receives a subsidy equal to the

value of the interest free period. The issuers’ costs of offering this subsidy are paid for

by a combination of annual fees on cardholders, a typically high interest margin on

It also remains the case, based on data published in the Joint Study, that even with

lower interchange fees, credit cards provide the highest return, and are more

profitable, for issuing banks than debit cards. There is no reason to expect issuing

banks to suddenly commence promoting debit cards over credit card, and issuing

banks have never suggested that this would occur. Designation of the EFTPOS

payment system and regulation of interchange fees will not alter this.

The reality is that banks will continue to offer many cardholders a subsidy to use

credit cards and banks will continue to promote their use ahead of debit cards.

Consistent with the approach taken with respect to the credit card reforms, and the

conclusions it reached with respect to EFTPOS debit cards, there is simply no case for

the introduction of any form of regulatory intervention. To the extent that there is

concern that this subsidy leads to over-use of credit cards relative to the use of

EFTPOS, the more appropriate approach would be to address this concern by further

reforming credit cards. For example as originally proposed, the RBA could disallow

the cost of providing the interest free period as an eligible cost in the credit card standard.

14 During the course of the Study, a separate investigation of interchange fees in credit

15 The Reserve Bank's Reform of Credit Card Schemes in Australia - IV Final Reforms and Regulation