Reform of Australia's Payments System 3. The Board's Reforms and the Central Issues

The Board's various reforms are summarised in Table 1, with further details provided in the Preliminary Conclusions. Consistent with its responsibilities set out in the various Acts of Parliament, the Board has sought to improve the efficiency of the overall payments system and to promote competition in the system. It has done this by:

  • increasing the transparency of the system;
  • requiring the removal or modification of restrictions imposed on merchants that hinder competitive forces (in particular no-surcharge rules, honour-all-cards rules, and no-steering rules);
  • liberalising access arrangements to both the debit and credit card systems; and
  • promoting more appropriate price signals to consumers by reducing interchange fees in the debit and credit card systems and requiring the removal of restrictions on merchants.
Table 1: Payments System Reforms
Interchange fees
Credit cards Weighted-average interchange fees in the MasterCard and Visa schemes must not exceed 0.50 per cent of the value of transactions.
MasterCard and Visa must publish their actual credit card interchange fees.
Visa Debit The weighted-average interchange fee for Visa Debit transactions must not exceed 12 cents per transaction.
Visa must publish its actual debit card interchange fees.
EFTPOS EFTPOS interchange fees for transactions that do not involve a cash-out component must be between 4 and 5 cents per transaction.
Merchant restrictions
Honour-all-cards Visa is not permitted to require a merchant to accept Visa Debit cards as a condition of accepting Visa credit cards, or vice versa.
Visa Debit cards must be visually and electronically identifiable as debit cards, and acquirers must provide merchants with information required to electronically distinguish Visa Debit and Visa credit card transactions.
Surcharges The card schemes must not prohibit a merchant from imposing a surcharge for MasterCard or Visa credit card transactions, or for Visa Debit card transactions.
Access Regimes
Credit cards and Visa Debit Schemes must treat applications for membership from Specialist Credit Card Institutions on the same basis as those from traditional authorised deposit-taking institutions (ADIs).
A participant in the MasterCard or Visa credit card schemes, or the Visa Debit system, must not be penalised by the scheme based on the level of its card issuing activity relative to its acquiring activity, or vice versa.
Schemes must make available the criteria for assessing applications to participate in the MasterCard credit card system, or the Visa credit or debit card systems. The schemes must: assess applications in a timely manner; provide applicants with an estimate of the time it will take to assess an application; and provide reasons for rejected applications.
EFTPOS The price of establishing a standard direct connection with another participant must not exceed a benchmark published by the Reserve Bank, currently $78,000 (ex GST).
An existing acquirer (issuer) cannot require a new issuer (acquirer) to pay (accept) a less favourable interchange fee than any other issuer (acquirer) connected to the acquirer (issuer).
Voluntary Undertakings
American Express and Diners Club American Express and Diners Club have provided the Bank with written undertakings to remove restrictions in their credit and charge card schemes preventing merchants from charging any fee or surcharge for the use of a card.
American Express American Express has provided the Bank with a commitment to modify provisions in its merchant contracts that would otherwise prevent a merchant from ‘steering’ a customer's choice of payment instrument. Also, in the event that American Express introduces a debit card in Australia, the merchant agreements and pricing for that product will be separate to those for credit and charge cards.
MasterCard MasterCard has provided the Bank with a written undertaking to voluntarily comply with the Visa Debit interchange Standard and the honour-all-cards Standard as they apply to credit and debit card transactions, as well as the Standard on surcharging as it applies to debit card transactions.
EFTPOS Access Code Under the EFTPOS Access Code developed by the Australian Payments Clearing Association, new and existing EFTPOS participants have specific rights to establish direct connections with other participants within a set time frame.
Scheme data Since August 2005 the Bank has published aggregated data on the average merchant fee for each of the schemes as well as data on market shares.

The Board's assessment of the effectiveness of these various reforms is set out in its Preliminary Conclusions, with this assessment not changing materially as a result of the most recent round of consultation (see Section 6 below).

Looking forward, the Board has focused particular attention on two interrelated aspects of the current competitive environment that have the potential to impair efficiency and competition in the overall system. These are:

  • the difficulty that merchants can have in exerting downward pressure on interchange fees; and
  • the difficulties arising from the current structure and governance of the domestic debit card system (the EFTPOS system), which potentially limit its ability to compete with the international card schemes.

The Board's judgment has been that the competitive forces acting on interchange fees, particularly in the credit card system, are somewhat different to those in operation in most other parts of the economy. One reason for this is the structure of the incentives facing merchants. In the Board's view, in the absence of close oversight there is a significant risk that the aggregate cost that merchants pay for accepting some payment instruments (most notably credit cards) will be greater than the aggregate benefit that they receive. This distortion can arise despite the fact that each merchant that accepts credit cards judges the net benefit of doing so to be positive. The reconciliation between the aggregate and individual perspectives is found in the fact that part of the benefit that an individual merchant perceives is that of ‘stealing’ business from other merchants. But merchants cannot collectively steal business from themselves; one business's gain is another's loss. By acting individually, therefore, merchants can in aggregate end up paying more for credit card acceptance than the benefit they receive. These extra costs can then be used to subsidise cardholders' use of credit cards, which can lead to distortions in overall payment patterns in the economy.

As set out in the Preliminary Conclusions, the Board's assessment is that the various reforms have increased the competitive pressures on interchange fees, although these pressures are still not particularly strong. A central issue for the Review has therefore been whether additional steps could be taken to further enhance the competitive environment or develop safeguards that provide some assurance that, if the current regulations were removed, average interchange fees would not rise materially.

The second, and related, issue is the competitive dynamics in the debit card systems. For many years, Australia has benefited from having a widely used, low-cost debit card system (the EFTPOS system) which, to some extent, operates in competition with the payment systems operated by the international card schemes. Looking forward, there are likely to be benefits to both consumers and merchants from continuing to be able to choose amongst a variety of different payment systems, each of which competes on price and the range of services that it offers. In this regard, the Board has been concerned that the current governance arrangements in the EFTPOS system may limit its ability to act as an effective competitor to the international card schemes. The central issue here is whether changes to these governance arrangements would promote both competition and innovation in the Australian payments system over the years ahead.