Reform of Australia’s Payments System:
Issues for the 2007/08 Review – May 2007
V. Developments in the Market for Payment Cards
- This section summarises the significant developments in the Australian payments system over the past five or so years. Some of these developments are related to the reforms while others reflect more general factors.
- Recent years have seen a continuation of the trend towards electronic payments which has been evident for the past two decades (Graph 1). The number of cheques written in 2006 was 39 per cent lower than in 2000 and, while comprehensive data on the use of cash are not available, the value of cash withdrawn through ATMs, and the amount of currency in circulation, have generally grown in line with the value of consumption over recent years. In contrast, the value and number of credit and debit card, BPAY and direct entry transactions have all grown considerably faster than consumption.
- Over the past couple of years, both the number and value of debit card payments have grown more quickly than for credit cards (Graphs 2 and 3). This is a reversal of the pattern seen from the late 1990s, when growth in credit card spending was particularly rapid. Although the number of debit card payments is roughly equal to the number of credit card payments, total spending on credit cards remains significantly higher, reflecting the larger average size of credit card transactions.
- According to survey data from Roy Morgan Research, in the year to March 2007, 54 per cent of Australians aged 18 years and over held a credit or charge card, much the same as in 2001.
- Within the credit card system, the combined market share of the Bankcard, MasterCard and Visa schemes was 83.4 per cent of the value of transactions over the year to March 2007. This is down around 2 percentage points since 2003. The bulk of this decline occurred in the second quarter of 2004 when two banks began issuing American Express credit cards. Since mid 2004, there has been little change in the combined market share of these schemes (Graph 4).
Over recent years, there have been a number of new
card products offered to consumers. These include:
- the introduction of pre-paid cards by the major credit card schemes. In November 2006, two of the major banks launched non-reloadable pre‑paid cards which can be used at almost any merchant that accepts MasterCard or Visa credit cards. Some vendors also market non‑reloadable cards as an alternative to travellers cheques, debit cards or credit cards when travelling overseas, including cards denominated in foreign currencies; and
- the introduction in November 2005 of a MasterCard-branded debit card. This card operates in a similar way to the Visa Debit card already on issue.
- In addition, credit card issuing institutions have expanded the range of ‘premium’ products, such as silver, gold and platinum cards and, in some cases, have marketed these cards extensively. According to survey data from Roy Morgan Research, in the 12 months to March 2007, 27 per cent of credit card holders had a silver, gold or platinum card, up from 17 per cent four years earlier.
- Many credit card issuers have also issued low-rate cards, with interest rates on these cards averaging 11.45 per cent compared with rates of around 17 to 18 per cent on more traditional credit cards. Many of the low-rate cards have been marketed extensively, including through offering low, or even zero, interest rates on balances transferred from existing credit card accounts.
- The domestic Bankcard credit card scheme closed in the first half of 2007 after many years of declining market share.
- Since the prohibition on surcharging of credit card transactions was lifted in 2003, there has been a steady increase in the number of merchants that levy a surcharge. Survey evidence suggests that surcharges are currently applied by around 14 per cent of very large merchants and around 5 per cent of very small merchants (Graph 5). In some cases, merchants have begun to accept credit cards – with a surcharge – where they were previously too expensive to accept without the surcharge.
- Most merchants that do surcharge apply the same percentage rate for all credit and charge cards. However, there are some merchants who choose to apply a higher rate for, or only apply a surcharge to, the more expensive American Express and Diners Club cards than for MasterCard or Visa. Survey evidence indicates that the average surcharge for MasterCard and Visa transactions is around 1 per cent, while the average surcharge for American Express and Diners Club cards is about 2 per cent.26
- As a result of the reforms, the average interchange fee in the MasterCard and Visa systems has fallen from around 0.95 per cent to around 0.50 per cent currently.
- Under the credit card interchange Standard, MasterCard and Visa have the flexibility to set interchange fees as they see fit, subject to the requirement that the weighted-average fee is no higher than the benchmark established in the Standard at specific points in time. When the Standard was first introduced in 2003, both schemes chose to have three separate interchange rates. In 2006, when the benchmark was recalculated, both schemes introduced an additional interchange category for premium cards with a much higher interchange fee. Visa also introduced a range of other categories with different interchange fees, with some of these being flat fees. The various fees are shown in Table 3.
- Historically, interchange fees were related to the method of processing. Recent changes have, however, meant that interchange fees are now also related to the type of merchant or, more significantly, the type of card. This has meant that in some cases, higher interchange fees apply because the cardholder has chosen one type of card over another.
- In the scheme debit systems, interchange fees have historically been the same as for credit cards. Reflecting this, in November 2003 interchange fees in the Visa Debit system (the only scheme debit system then in operation) fell in line with the reduction in credit card interchange fees. When the Visa Debit interchange Standard became effective on 1 November 2006, the weighted-average interchange fee in that scheme was required to be no more than 12 cents. At the same time, MasterCard voluntarily agreed to set interchange fees for its debit card in accordance with this benchmark. The various interchange fees in the scheme debit systems are shown in Table 4.
- In contrast to the systems operated by MasterCard and Visa, interchange fees are bilaterally negotiated in the EFTPOS system. Prior to the reforms, the average fee was around 20 cents, with the fee being paid by the cardholder’s financial institution to the merchant’s financial institution. Under the EFTPOS interchange Standard, bilateral interchange fees for EFTPOS transactions that do not involve a ‘cash out’ component are required to be between 4 and 5 cents. The interchange fee for transactions that involve a cash-out component is not regulated.
- The net effect of these changes is to significantly lessen the differences in interchange fees across the various card-based payment systems. Graph 6 shows the average interchange fee on a $100 payment for the three types of card-based payment systems and how they have changed since the Bank’s reforms were introduced. On a $100 payment, the difference between the average interchange fee for credit card and EFTPOS transactions has been more than halved from around $1.15 to under $0.55; and the difference between scheme debit and EFTPOS interchange fees has been reduced from around $1.15 to under $0.17.
Merchant service fees
- The decline in credit card interchange fees has led to a significant decline in merchant service fees for credit cards. Since the reforms, the average merchant service fee for Bankcard, MasterCard and Visa has fallen by around 0.56 percentage points to 0.84 per cent (Graph 7). This decline is larger than the decline in interchange fees, suggesting increased competition between acquirers.
- Merchant service fees for American Express and Diners Club have also fallen since the reforms, although the decline has been smaller than that in the other schemes. Since the September quarter 2003, the average fee in the American Express scheme has fallen by 0.27 percentage points, while the average fee in the Diners Club scheme has fallen by 0.19 percentage points.
- The reduction in merchant service fees represents a significant cost saving to merchants. At current levels of spending, a 0.56 percentage point reduction in fees in the MasterCard and Visa schemes is worth around $870 million per year, while the reduction in fees in the American Express and Diners Club schemes represents a further saving of $80 million per year. These savings have been slightly offset by the small increase in the combined market share of American Express and Diners Club. In total, the Bank estimates that given patterns of card use over the past year, merchants’ costs of accepting credit cards are around $900 million lower than they would otherwise have been. Based on the levels of spending since the reforms were introduced, merchants have saved a total of around $2.2 billion in lower merchant service fees. To the extent that customers have switched from using credit cards to debit cards there are likely to have been additional savings.
- The changes to interchange fees in the debit card schemes are only recent. Preliminary evidence from merchants, however, suggests that merchant service fees for EFTPOS transactions have risen by around 15 cents, in line with the reduction in the interchange fee received by acquirers from around 20 cents to around 5 cents.
Pricing to cardholders
- Since 2003, there have been a number of changes to the effective pricing of credit cards to cardholders. For most cards, the value of reward points has been reduced. Currently, a cardholder using a standard card issued by the large banks needs to spend around $16,200 to earn a $100 shopping voucher. This is up from around $12,400 in 2003, representing an effective increase in the price of a credit card transaction of around 0.2 per cent of the transaction value (Table 5). Some issuers have also introduced caps on the number of points that a cardholder may accrue over a specified period.
- Annual and other fees on credit cards have also increased. The average annual fee on a standard rewards card has increased from $61 in June 2002 to $85 in June 2006; and from $98 to $140 on gold rewards cards.27 Cash advance fees, late payment fees and over-limit fees have also increased. In total, average fee revenue on bank-issued personal credit cards has risen from around $40 per account in 2002 to around $80 in 2006.28
- As noted above, a number of issuers have introduced low-rate cards, reducing the cost of borrowing on a credit card. The interest rate margin on traditional cards remains high, at an average of around 11.3 percentage points above the cash rate, and has shown little change since the reforms.
- The pricing of EFTPOS transactions has also changed, particularly with the introduction of ‘all you can eat’ transaction accounts. In the early part of this decade it was not uncommon for cardholders to face a fee of around 50 cents per EFTPOS transaction after a certain number of electronic transactions were made in a given month. While some transaction accounts still operate in this way, most now offer an unlimited number of electronic transactions for a fixed account keeping fee of around $3 to $7 per month.
- Foreign ATM fees have also risen over the past few years. In 2001, foreign ATM fees charged by the five major banks in Australia ranged between $1.25 and $1.50 per withdrawal. Currently, these fees range between $1.50 and $2.00.29 Interchange fees have not changed in this time.
- Over the past few years, there have been a number of new participants in the card payments industry.
- GE Money received authorisation from APRA in 2004 as a Specialist Credit Card Institution (SCCI), allowing it to undertake credit card issuing and acquiring. MoneySwitch received an SCCI authorisation from APRA in 2005, permitting it to acquire credit and debit card transactions. In 2006 MoneySwitch’s authorisation was extended to allow it to provide BPAY and direct debit services in conjunction with its acquiring services.
- A number of non-banks have also entered the credit card market by establishing partnerships with banks. Most of these participants have concentrated on attracting borrowers through low interest rate credit cards – an area that has also been the focus of many existing issuers.
- East & Partners (2007).
- Source: Cannex. Averages for credit cards with an interest-free period issued by major banks. Reserve Bank of Australia (2007) provides additional detail.
- Reserve Bank of Australia (2007).
- Source: Cannex.