Common Benchmark for the Setting of Credit Card Interchange Fees – November 2005 2. Background

In April 2001, the Bank designated the Bankcard, MasterCard and Visa credit card schemes as payment systems under the Payment Systems (Regulation) Act 1998. In August 2002 it determined a standard for interchange fees in each of these schemes.[1]

These standards were introduced to improve competition and efficiency in the Australian payments system. In the Bank's view, interchange fees in the credit card systems are not subject to the normal forces of competition and were set at levels that did not promote the efficiency of the payments system. A comprehensive discussion of these issues can be found in the four volumes entitled Reform of Credit Card Schemes in Australia released by the Bank in 2001 and 2002 and available on the Bank's website.[2]

Under the current standards, each scheme appoints an expert to collect cost data from nominated scheme participants and to verify that the costs are eligible costs as defined in the standard. These eligible costs include issuers' authorisation and processing costs, fraud-related costs, and the cost of funding the interest-free period. The expert then provides the data and its calculation of a benchmark based on those costs to the Bank. The standards then require that in each scheme the weighted-average interchange fee be no higher than that benchmark.

The current benchmarks came into force on 30 October 2003. The effect of the standards has been to reduce the average interchange fee from around 0.95 per cent of the credit card transaction value to a little below 0.55 per cent.

The individual credit card schemes are not required to publish the scheme-specific benchmarks, but they are required to publish any interchange fees they set. These fees differ slightly across the schemes, refl ecting differences in the benchmarks. The average interchange fee is lowest in the Bankcard system and highest in the MasterCard system (see Table 1). Each of the interchange fees in the MasterCard scheme are around two basis points higher than the equivalent fees in the Visa scheme.

Table 1: Interchange Fees, June 2005
Per cent of transaction value
Bankcard MasterCard Visa
Electronic 0.49 0.46 0.436
Standard 0.49 0.62 0.595
Commercial n.a. 1.12 1.095

Sources: Bankcard, MasterCard and Visa websites
The electronic rate applies to transactions where the card is swiped and the signature verified. The standard rate applies to most other transactions, including those using manual processing and those over the internet or telephone. The commercial rate applies to transactions involving commercial cards.

Under the existing standards, the current benchmarks are due to be recalculated no later than 30 September 2006, and interchange fees are required to be in conformity with them from 1 November 2006. This timetable has not been affected by the change in standards discussed in this document.