At its meeting on 15 February 2005 , the Payments System Board decided to release draft standards for the EFTPOS and Visa Debit payment systems for public comment. The Board also considered the case for designating the American Express and Diners Club payment systems. It concluded, after considering some voluntary changes to current arrangements by American Express and Diners Club, that designation was not in the public interest at this time. The Board also decided to seek comment on the need for change to the interchange standards for the Bankcard, MasterCard and Visa systems.

EFTPOS and Visa Debit

The Reserve Bank has today gazetted draft standards for the EFTPOS and Visa Debit systems and released a Consultation Document setting out the draft standards and the reasons why these standards are proposed. The Bank is seeking submissions on these standards and its reasoning by 29 April 2005.

Decisions on the final form of any standards, which will take into account submissions received, will not be taken by the Payments System Board until after the current Federal Court case challenging designation of the EFTPOS system has been decided. If warranted, the Bank will conduct further consultation after the determination of this case.

Three standards are proposed with the aim of improving competition and efficiency in the Australian payments system.

The first two standards deal with interchange fees – the per transaction fees paid between a cardholder's and a merchant's financial institution – in the EFTPOS and Visa Debit systems. In the Bank's opinion, the current levels of these fees are not conducive to the efficiency of the Australian payments system. In reaching this opinion, the Bank has considered not just the EFTPOS and Visa Debit systems, but also their interaction with other payment systems, including credit cards. It has also considered how the overall payments system is likely to evolve over time if the current incentives facing merchants, financial institutions and cardholders are left unchanged.

An important effect of current interchange fees is that cardholders face higher effective prices for EFTPOS transactions than they do for Visa Debit or credit card transactions. This is despite the EFTPOS system having lower operating costs. The proposed standards seek to address this distortion in prices and costs.

If the proposed standards are implemented, the maximum interchange fee in the EFTPOS system is likely to be around 5 cents paid to the merchant's bank. This compares with the current average fee of around 20 cents. In the Visa Debit system, the interchange fee paid to the cardholder's bank would fall from an average of around 40 cents, to a maximum of around 15 cents. The combined effect of these proposed changes would be to reduce the gap between the two interchange fees from around 60 cents at present to a maximum of around 20 cents. The EFTPOS standard would also further reduce the gap between the interchange fees in the EFTPOS and credit card systems.

These proposed changes are likely to lead, in time, to more attractive pricing of EFTPOS to cardholders and a greater willingness of financial institutions to promote EFTPOS. If the current arrangements were to continue there would be a considerable risk that these institutions would steer customers away from EFTPOS to either credit cards or other types of debit cards. The end result would be an increase in merchants' overall payment costs and an increase in the general price level. The Bank is of the view that it is in the public interest for the various payment methods, including Visa Debit, to compete on their own merits, rather than on the basis of interchange fees that are subject to limited competition.

The Bank recognises that, should these standards be implemented, different eligible costs will apply in the credit card, EFTPOS and Visa Debit standards and that interchange fees will continue to flow in different directions. This outcome reflects the wide variation in initial interchange fees in the three payment systems and the Bank's preference for an evolutionary, rather than revolutionary, approach to payments reform.

The Bank has already announced its intention to review the standards for the credit card schemes in 2007. At that time, it also intends to assess whether the public interest would be promoted by placing the arrangements for the setting of interchange fees in all three systems on a more consistent basis.

The third standard proposes removal of the current requirement that merchants accepting Visa credit cards also have to accept Visa Debit cards. In the Bank's opinion this restriction limits normal competitive forces. If merchants accept Visa credit cards they are unable to decline acceptance of Visa Debit cards even if they judge it in their business interest to do so. In addition, merchants are required to pay the same fee for Visa Debit transactions as they do for Visa credit card transactions, despite the Visa Debit product not offering an interest-free line of credit. The proposed standard effectively removes these restrictions on merchants. It also formally applies the no-surcharge standard to the Visa Debit scheme.

The Bank expects that similar arrangements would apply to other scheme-based debit arrangements that might be introduced in Australia.

The Bank has also considered access arrangements in the EFTPOS system. While the draft regime being developed by the Australian Payments Clearing Association (APCA) represents an improvement on existing arrangements, the Bank has recently written to APCA raising a number of concerns with the proposal. If these concerns are not addressed satisfactorily, and in a timely manner, the Bank will consider issuing a draft access regime for public comment as a first step towards reform of access to the EFTPOS system.

American Express and Diners Club

Over recent months the Bank has examined whether it would be in the public interest to regulate the American Express and Diners Club card payment systems. This follows the issuing of American Express cards by two banks and the establishment of a partnership between another bank and Diners Club.

The Bank considered, in particular, whether there was a case to regulate the payments between American Express and Diners Club and their bank partners. It concluded that, at this stage, such regulation would not improve the overall efficiency of the payments system. In its view, regulation of these payments would have relatively little effect on merchant charges. Further, the existing incentives facing issuers of these cards could only be addressed through considerably more extensive regulation than that currently existing in the credit card schemes.

In the Bankcard, MasterCard and Visa schemes, the interchange fee paid by the merchant's bank to the cardholder's bank has an important influence on the charge levied on the merchant by its bank. In contrast, in the American Express and Diners Club arrangements, the causation runs the other way. Merchant charges are determined largely independently of the payment to the partner banks: instead, the fees that merchants pay influence the size of the payments to the banks. Given this, regulating the payments that flow between American Express and Diners Club and their partners would be likely to have little effect on merchants' costs of accepting the cards. This is in contrast to the credit card schemes, where merchant service fees fell quickly following the reforms to interchange fees.

On the issuing side, regulation of specific payments to the partner banks would be likely to lead to other forms of payment, leaving the incentive of banks to participate in the arrangements largely unchanged. One possible response might have been to regulate the totality of payments, including marketing payments, between American Express and Diners Club and their bank partners. Such regulation would then also be required in the Bankcard, MasterCard and Visa schemes. The Bank's view is that, at the current time, this form of extensive regulation is not in the public interest.

While the Bank is not intending to regulate the payments between American Express and Diners Club and their bank partners, it has had concerns about a number of clauses in these schemes' agreements with merchants. The relevant clauses have had the effect of reducing competition between the schemes by limiting merchants' ability to steer customers to lower-cost means of payment. Given this, the Bank has sought the agreement of American Express and Diners Club to either delete or change these clauses. It has also sought greater transparency in the average fee charged by the schemes. In response, both American Express and Diners Club have agreed to:

1. reword clauses in their merchant agreements that currently prohibit merchants from encouraging cardholders to use another card; and
2. publish their average merchant service fee in Australia on a quarterly basis. Diners Club has already done so.

American Express has also agreed that, should it seek to introduce a debit or prepaid card in Australia, it will not require merchants to accept such cards as a condition of accepting its existing cards, provided schemes issuing similar cards are subject to the same requirements.

As a result of these changes merchants will now have at least three options if they are not satisfied with the cost of accepting American Express or Diners Club cards: they can decline acceptance of any cards issued by the schemes; they can accept the schemes' cards but charge customers for using the cards; or they can accept the schemes' cards but indicate to customers that they would prefer another payment method be used. In addition, merchants will be better informed about how their particular merchant service fee compares with the average fee.

Finally, to provide all interested parties with a sounder basis for analysis, the Bank has written to the Bankcard, MasterCard, Visa, American Express and Diners Club schemes asking for their agreement to the publication of market share data. The data would be published regularly in the Reserve Bank Bulletin.

Credit card interchange fees

Under the existing credit card interchange standards the benchmark interchange fees differ amongst the Bankcard, MasterCard and Visa schemes. This reflects differences in average eligible costs across the schemes at the time the benchmarks were calculated. In part, these differences in costs are attributable to varying costs across issuers and varying representation of issuers across the three schemes.

One consequence of these arrangements is that the scheme with the highest interchange fee may be at a competitive advantage in encouraging institutions to issue its cards, particularly if the higher fee is not offset by the issuer facing higher costs when issuing cards belonging to that scheme. Accordingly, the Bank is seeking submissions on whether the standards should be amended so that the same benchmark interchange fee applies in all schemes. This is the approach being proposed for scheme-based debit cards. One possibility would be to set a benchmark based on average eligible costs measured across all three credit card schemes. An alternative would be to set a benchmark based on the costs of the lowest-cost scheme.

Submissions should be made by 8 April 2005.

Submissions

All submissions will be published on the Bank's website. Parties making submissions on either the Bank's draft standards for EFTPOS and Visa Debit or on whether changes should be made to the credit card interchange standards should address them to:

Head of Payments Policy
Reserve Bank of Australia
GPO Box 3947
Sydney NSW 2001

or

payments@rba.gov.au