Common Benchmark for the Setting of Credit Card Interchange Fees – November 2005 3. The Effect of Scheme-specific Benchmarks

As discussed in the earlier consultation document on these standards, some participants in the credit card schemes have argued that a scheme with relatively high interchange fees enjoys a competitive advantage in attracting issuers of credit cards, as the higher interchange fees deliver more revenue to the issuer per dollar spent by cardholders. This argument raised questions about whether the efficiency of the system could be further improved by a modification to current arrangements.

In evaluating this argument, the Bank considered whether the additional interchange revenue was offset by additional costs to the issuer from issuing cards under a scheme with relatively high interchange fees. Here, two types of costs are relevant: those that are scheme specific and those that are issuer specific. If higher interchange fees are fully explained by differences in scheme-specific costs (such as scheme fees), there would appear to be little incentive to issue cards in the scheme with relatively high interchange fees, since the higher interchange revenue would simply be offset by higher payments to the scheme. On the other hand, if differences in the benchmarks are explained by costs specific to issuers, such an incentive may exist.

The cost data available to the Bank suggest that most of the eligible costs are specific to the issuer – these include the cost of fraud and fraud mitigation, as well as the cost of funding the interest-free period. These costs are largely invariant to which scheme cards are issued under, as they reflect the nature of cards offered by the financial institution (for example, the institution's choice about the length of interest-free period it offers on its cards) more than the scheme they are issued under. Importantly, the data available to the Bank also suggest that the variation between scheme benchmarks is, to a significant extent, explained by these issuer-specific costs, rather than scheme-specific costs. Taking this into account, earlier this year the Bank came to the view that competition and efficiency may be improved by adopting a common benchmark, rather than scheme-specific benchmarks.