The Reserve Bank of Australia has today released, for public discussion, a Consultation Document outlining proposed reforms to credit card schemes in Australia.

In releasing the Consultation Document, the Governor of the Reserve Bank, Mr Ian Macfarlane, said: “The Reserve Bank has been reviewing credit card schemes for over two years now and has heard submissions from all the major participants – the credit card schemes, the banks and other deposit-taking institutions, consumers, retailers and small business. It has weighed up the views and come to a judgment that some of the main restrictions imposed by the credit card schemes do not serve the public interest.” The Consultation Document concludes that the cost to the community of the credit card network is higher than it would be if more competitive conditions prevailed.

The proposed reform measures involve:

• an objective, transparent and cost-based methodology for determining wholesale (“interchange”) fees – the fees paid to card issuers by financial institutions which provide services to merchants, whenever merchants accept credit cards for payment;
• 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 which prevents the entry of new players into the credit card schemes. Under the proposed reforms, specialist credit card service providers, as long as they were supervised by the Australian Prudential Regulation Authority, would be eligible to enter the credit card schemes.

The Governor added that: “Though the Consultation Document does not specifically address credit card interest rates, the proposed opening of the credit card market to new participants offers the prospect of genuine competition in this form of lending. It is worth recalling that it was the entry of specialist mortgage originators that spurred competition in the residential mortgage market.”

The proposed reform measures will apply to the credit card schemes operated in Australia by Bankcard, MasterCard and Visa, which were formally “designated” by the Reserve Bank as payment systems subject to its regulation in April 2001. Designation was the first step to be taken before the Reserve Bank could use its powers under the Payment Systems (Regulation) Act 1998. The publication of the Consultation Document is the second step in this process.

Along with the Consultation Document, the Reserve Bank is publishing a report it commissioned on the operations of credit card schemes by Professor Michael Katz, an international expert in network economics, as well as two volumes of submissions that parties were prepared to put on the public record.

The Reserve Bank is issuing its proposed reform measures for the designated credit card schemes in draft form, as required by the Payment Systems (Regulation) Act 1998. Interested parties have an opportunity to comment on the draft measures before they are finalised.

Copies of the Consultation Document and the supporting volumes are available at the Reserve Bank of Australia and on its website (www.rba.gov.au).