Merchant Card Payment Costs and Surcharging – Consultation Paper –
July 2025 Interchange Fees

Interchange fees are paid by the merchant’s PSP to the customer’s card issuer when a card payment is made, with the PSP passing on these costs to the merchant. These wholesale fees are set by the card network. The RBA has set caps and weighted-average benchmarks for interchange fees on domestic debit (and prepaid)¹ and credit card transactions, which have helped to reduce card payment costs. The PSB’s view is that interchange fee regulation has contributed to a more efficient payments system over time. Reviewing these regulations is important to ensure the settings remain in line with this objective.

3.1 The level of domestic interchange fees

Card schemes set interchange fee rates for different types of transactions using different interchange categories. Certain preferential interchange fee categories also apply for different merchants. The card schemes publish their interchange fee categories and rates on their respective websites.²

The RBA Standards No. 1 and No. 2 of 2016 currently place caps on individual interchange fees on domestic transactions, and provide a benchmark for weighted-average interchange fees on those transactions over a rolling 12-month period (Table 1).³

The RBA first introduced cost-based benchmarks on a per-scheme basis in 2002 (taking effect from 1 July 2003), which resulted in each card scheme having a different weighted-average benchmark. The regulations were later amended in 2005 to establish a common benchmark, based on cost data collected from issuers and the definition of ‘eligible costs’. The common benchmark for credit of 0.5 per cent applied to all designated card schemes at the time, first taking effect from 1 November 2006. A benchmark for debit was also initially set at 12 cents per transaction and has been reduced in subsequent reviews to its current level of 8 cents. Interchange benchmarks were introduced to constrain the potential for interchange fees to distort efficient payment choices and to put downward pressure on the overall resource cost of payments. Establishing a weighted-average benchmark allows schemes to set different interchange rates (both below and above the benchmark level) and the flexibility to encourage certain behaviours such as adopting new technologies.

The RBA first introduced caps in 2017, following the 2015–16 Review of Card Payments Regulation (RBA 2016). These caps, or ‘ceilings’ on individual interchange categories, were introduced to supplement the weighted-average interchange benchmarks. Caps were imposed at levels that required reductions in several interchange fee categories, including for commercial cards and premium consumer cards. The caps also narrowed the range of interchange fees faced by merchants that do not benefit from strategic or preferred rates, and reduced the difference in interchange fees paid by merchants on strategic rates and those on non-strategic rates.

Overseas jurisdictions that regulate interchange fees have generally adopted caps rather than weighted-average benchmarks. Europe, the United Kingdom and New Zealand have adopted caps for domestic debit and credit interchange. The United States uses caps on individual domestic debit transactions but does not regulate interchange on credit. Brazil previously had a weighted-average benchmark for debit transactions but replaced this with a cap in 2023. Australia appears to be unique in adopting both benchmarks and caps for debit and credit interchange (see Appendix B: International Comparison of Card Surcharging and Interchange Frameworks).

Domestic credit card transactions are subject to a weighted-average interchange benchmark (0.5 per cent of transaction value) and cap on individual fees (0.8 per cent of transaction value). The weighted-average interchange fee on domestic credit card transactions is close to the 0.5 per cent benchmark. Interchange on these transactions amounted to around $1.5 billion or around 65 per cent of merchant service fees for credit transactions in 2023/24 (Graph 1). These fees are higher in Australia than in some other jurisdictions, notably Europe and the United Kingdom (which have caps of 0.3 per cent). The weighted-average benchmark in Australia was originally set based on calculations of ‘eligible’ costs for issuing credit cards in 2006, which included the costs of funding any interest-free period. Given changes in the card payments landscape over the past two decades, these costs and the methodology for calculating the weighted-average benchmark require review. This includes reconsidering what is included in the ‘eligible’ costs of issuers, to be borne by merchants.

The weighted-average interchange fee on domestic debit cards has drifted noticeably below the weighted-average interchange benchmark of 8 cents per transaction and is now far below the caps (of 10 cents per transaction or 0.2 per cent of transaction value). This suggests that the benchmark and caps are no longer exerting downward pressure on interchange fees. Interchange fees for domestic debit transactions amounted to around $650 million or around 30 per cent of merchant service fees on debit transactions in 2023/24.

Groups representing consumers and small merchants, as well as acquiring-focused PSPs, advocated for lower credit and debit interchange fee benchmarks in their submissions to the Issues Paper, on the basis that:

• high fees are no longer required to promote payment cards given widespread adoption
• the fixed costs of processing payments can be spread across a larger volume of transactions
• interchange fees are no longer the primary driver of innovation, as evidenced by continued innovation despite a steady decline in fees.

By contrast, international card networks, major banks, groups representing large merchants, and some PSPs opposed lower interchange benchmarks, arguing that:

• existing benchmarks are low by global standards
• merchant service fees have declined since earlier changes to interchange settings came into effect in 2017
• investment in critical services and innovation by issuers might fall in response to lower interchange fee revenue
• competition in the issuing market might weaken, because lower interchange fees could threaten the viability of smaller issuers or new entrants, which tend to rely heavily on interchange revenue
• the benefits of card payment services to end users may decline; specifically, issuers could charge higher card fees or reduce the value of card benefits or rewards programs, and acquirers could capture the savings from lower interchange fees by increasing their margins
• transaction authorisation rates could decline, as lower interchange revenue may reduce the incentives for issuers to authorise some (e.g. riskier or high-value) transactions
• the competitive balance could be distorted in favour of unregulated payment methods, particularly in the credit card market, which faces competition from issuers of charge cards.

There is also reason to consider the case for regulatory intervention to narrow the gap between ‘strategic’ or discounted interchange fees for large merchants and the fees paid by small merchants. The fraud risk to issuers associated with processing transactions for small merchants may be slightly higher than for large merchants, due to small merchants being less likely to have internal fraud-prevention measures. This may result in the costs to issuers of processing transactions for small merchants being slightly higher than for large merchants. However, feedback from issuers has indicated that any difference in processing costs is unlikely to be significant, and the PSB considers this difference alone does not justify the gap between the interchange fees paid by merchants on strategic rates and those paid by small merchants. There was strong support from stakeholders for narrowing the gap between strategic merchant interchange rates and the rates paid by small merchants, but little consensus on the best approach to adopt.

Policy options

The PSB is considering several options for interchange fee settings. These options are not mutually exclusive, and some may be pursued together.

Option 1: Retain the current benchmarks and caps on both debit and credit (status quo)

This option maintains the current interchange benchmarks and caps for designated debit schemes (benchmark of 8 cents, and cap of 10 cents or 0.2 per cent of transaction value) and credit schemes (benchmark of 0.5 per cent and cap of 0.8 per cent of transaction value).⁴

Option 2: Reduce the credit cap to 0.3 per cent and abolish the benchmark

The credit interchange framework would be simplified to a cap-only regime, with the cap set at 0.3 per cent of the transaction value.

Option 3: Reduce the credit benchmark to 0.3 per cent and the cap to 0.5 per cent

The benchmark for weighted-average credit interchange fees would be reduced from 0.5 per cent of the transaction value to 0.3 per cent and the cap from 0.8 per cent to 0.5 per cent.

Option 4: Reduce the cent-based debit benchmark and the cap to 6 cents, and the ad-valorem cap to 0.12 per cent

The cent-based debit benchmark for weighted-average interchange fees would be reduced from 8 cents to 6 cents and the cap from 10 cents to 6 cents (and the ad-valorem cap from 0.2 per cent to 0.12 per cent). The cent-based sub-benchmark for weighted-average interchange fees on single-network debit cards would also be reduced from 8 cents to 6 cents in line with the debit benchmark.

Option 5: Apply separate interchange regulation to commercial credit cards

The reductions in interchange from Options 2 or 3 would apply to consumer cards only, and the current interchange cap of 0.8 per cent would continue to apply to commercial credit card transactions.

Considerations

Competition in well-established payment card networks can counterintuitively result in higher interchange fees and thereby lead to higher merchant service fees and costs for consumers (RBA 2007; Fletcher 2023). This is because networks competing for issuers’ cards are incentivised to offer higher interchange fee revenues for issuers to allow issuers to generate higher profits, offer more generous rewards to cardholders and increase the use of their cards. If the network is mature (i.e. widely used by consumers and accepted by merchants across the economy), merchants may feel that they have little choice but to continue accepting the network’s cards, despite the higher cost through high interchange fees. A logical competitive response from other mature networks in the payments system is to increase their interchange fees as well.

The PSB has long held the view that this dynamic warrants regulation of interchange fees, which should be set by taking into account the costs borne by issuers in issuing cards and processing transactions, to bring the market closer to efficient outcomes. As part of this Review, the RBA has conducted a study of these costs (see Appendix C: Further Details on the Issuer Cost Study). The PSB has also considered whether the categories of eligible costs for inclusion in the cost-based methodology remain appropriate.

Eligible costs for issuers for calculating cost-based benchmarks for interchange

The RBA first adopted a definition of eligible costs for calculating the cost-based benchmark for interchange in 2002 (RBA 2002). This definition was intended to capture costs borne by issuers related to network considerations that should be appropriately passed on to merchants, taking into account that issuers also have other sources of revenues to cover costs. Under the methodology adopted, these eligible costs should be limited to those that would be unavoidable in the provision of card network services to merchants.

The Issues Paper asked whether it remained appropriate for merchants to effectively bear the cost of funding interest-free periods through interchange fees. The RBA originally included the cost of funding interest-free periods as an ‘eligible cost’ when setting the current benchmark. However, the RBA flagged at the time that this inclusion was not intended to be permanent and would be subject to subsequent reviews of the benchmark.

Card networks have argued in the past that merchants should continue to bear the cost of funding interest-free periods through interchange because they receive value from the provision of interest-free periods, through greater use of credit cards. They have contended that this value includes more impulse purchases and higher spending by consumers, with the merchant not having to incur any costs related to the provision of credit. Indeed, the emergence of higher cost ‘buy-now, pay-later’ services that are accepted by some merchants suggests that these merchants derive benefits from services that effectively provide interest-free credit to consumers.

The PSB’s view is that the benefits from interest-free periods do not solely accrue to merchants. Cardholders arguably receive the most substantive value from access to interest-free credit by delaying the cost of their purchases. As a result of providing a credit product with an interest-free period, issuers also derive benefits in the form of higher interchange income from larger transaction values than may have occurred otherwise and increased customer attraction and retention.

Applying a user-pays approach suggests that most of the cost of funding interest-free periods should be borne by the issuer and cardholder, rather than entirely by the merchant. If the cost of these interest-free periods were effectively removed from interchange fees and instead recouped from cardholders, cardholders would bear closer to the true cost of their credit card usage, which would lead to more efficient decision-making in the payments system. Issuers could recover these costs from cardholders via higher cardholder fees or higher interest rates, or could mitigate these costs by shortening interest-free periods. Demonstrating the ability of issuers to adjust these features, there has been strong growth in credit card fees over recent years and some issuers have reduced the length of their interest-free periods from 55 days to 44 days.⁵ Some issuers have also recently announced reductions in card benefits.⁶

The PSB also considers it appropriate that costs associated with credit losses and loyalty programs remain outside the scope of eligible costs for determining interchange fees. Costs associated with credit risk and credit losses are standard features of the provision of credit to customers, which are most efficiently borne by the customer. Similarly, given the maturity of established card networks in Australia, there are little to no system-wide benefits associated with loyalty or rewards programs that could justify their cost being distributed across participants in the payments system rather than borne by the individual cardholder.

Benchmarks and caps

The adoption of benchmarks has given the schemes flexibility to set different interchange rates and encourage certain behaviours such as adopting new technologies. However, it has also resulted in small merchants paying much higher interchange rates than large merchants that are able to negotiate lower strategic interchange rates. It is not efficient nor competitive for small merchants to be effectively subsidising large merchants.

This issue was raised in previous reviews and caps were introduced in 2017 partly to address this concern. However, small merchants are currently still paying much higher interchange rates than large merchants, typically at rates that are above the benchmark. Setting caps at lower levels informed by the Issuer Cost Study should have the effect of further reducing this gap, but raises the question of whether benchmarks are still the most efficient way to regulate interchange fees.

• For credit – where there is an ad-valorem cap, a lower cap informed by issuer costs would make the benchmark redundant.
• For debit – where there are separate cents-based and ad-valorem caps, retaining benchmarks would restrain any upward drift in weighted-average interchange rates as general prices increase over time, and ensure intended cents-based caps are not circumvented by schemes adopting ad-valorem rates.

Another benefit of eliminating the credit benchmark may be to reduce the frequency of changes to the schemes’ credit interchange schedules. As weighted-average credit interchange fees charged by the schemes have been close to the benchmark, the schemes need to make frequent adjustments to their interchange fee categories and rates to comply with the RBA’s interchange regulations. Reducing the frequency of these changes should help to improve the efficiency of the card payment system for participants.

One potential consequence of lower caps will be less flexibility for schemes to set differential interchange rates, though flexibility will remain up to the cap. Differentiation to promote certain behaviour or technologies can alternatively also be achieved through adjustments to scheme fees.

The Issuer Cost Study found that eligible issuer costs were significantly below the current benchmarks and caps. This supports a lowering of these benchmarks and caps (Table 2). This is consistent with feedback received in some submissions that the cost per transaction for issuers has come down over the years, because the fixed costs of processing transactions are spread over a larger volume of transactions as adoption of card payments has increased (Graph 2; Graph 3). This reinforces the PSB’s view that maintaining the current interchange fee settings (Option 1), and the higher costs these impose on merchants and their payments service providers, is difficult to justify in Australia’s mature card system.

Reducing the domestic credit interchange cap to 0.3 per cent and abolishing the benchmark (Option 2) would be consistent with the cost-based approach taken historically by the RBA when setting interchange regulations. The RBA adopted a common cost-based benchmark for all designated schemes in 2005 (RBA 2005). Based on calculations using the definition of eligible costs, the common benchmark was set at 0.5 per cent of transaction value and took effect from November 2006, subject to regular reviews. Subsequent reviews of interchange regulation have not altered the level of the benchmark for credit interchange. The Issuer Cost Study estimates the current average cost of processing credit transactions is 0.22 per cent, including the cost of funding interest-free periods, and is only 0.10 per cent if the cost of funding interest-free periods is excluded. Therefore, a domestic credit interchange cap of 0.3 per cent would fully cover the average cost for issuers of processing credit transactions.

These reductions would bring credit interchange fees into line with jurisdictions such as Europe and the United Kingdom. It is estimated that this would reduce domestic credit interchange fees in Australia by around $720 million per year as rates that are above the cap are brought to the cap.⁷

The PSB considers that the case for substantially lowering credit interchange rates would be even stronger if surcharging were removed on credit transactions, since the latter would eliminate the ability of merchants to pass the costs of these transactions on to cardholders and incentivise the use of lower-cost payment methods through differential surcharging.

There is a strong case to reduce the cent-based debit benchmark to 6 cents and the ad-valorem cap to 0.12 per cent, given declines in average interchange fees over recent years. As a result of strong competition between the schemes, average interchange fees across all debit schemes are currently under 6 cents and below 0.12 per cent, which is well below the 8 cent benchmark and 0.2 per cent ad-valorem cap (see Graph 4; Graph 5). Lowering the benchmark to 6 cents and the ad-valorem cap to 0.12 per cent would help to ensure that interchange fees do not increase in future were the competitive dynamics between schemes to change. Retaining a cents-based benchmark also mitigates against schemes introducing more ad-valorem rates to circumvent the cents-based cap, which would otherwise raise payment costs in dollar terms.

Lowering interchange caps would substantially reduce the gap between interchange fees paid by large merchants and small merchants (i.e. under Options 2, 3 and 4). On average, smaller merchants (that are not eligible for strategic interchange rates) pay around 13 basis points per transaction more than large (strategic) merchants on debit transactions and 36 basis points more on credit transactions (Graph 6). This difference – which can be present even for transactions of the same type and value – often results in large merchants being charged interchange fees that are below issuer costs, with small merchants partly subsidising these costs through higher interchange fees. For example, the lowest strategic merchant rate offered by the international card schemes is 1 cent, which is well below issuer costs of 5 cents. While some participants noted that smaller merchants are less likely to have their own internal fraud protection systems, none of the largest issuers indicated that transaction processing costs were materially different for small and large merchants. This indicates potential inefficiencies in the card payments system. Given that higher interchange fees are largely paid by smaller merchants, the benefits of lowering interchange caps would be most pronounced for smaller merchants. The reductions in domestic interchange caps could generate interchange savings of around $550 million per year for smaller merchants. However, it is unclear whether total interchange fees would be reduced to the same extent. This would depend on whether schemes choose to raise the interchange fees for strategic merchants, which are currently as low as 1 cent per transaction.

The proposed interchange caps in Options 2 and 4 would not be expected to result in a significant reduction in fraud prevention, safety or innovation in the Australian card payments system, despite arguments to the contrary from the international card networks. The PSB is unconvinced by those arguments because:

• The debit interchange cap of 6 cents is above the average costs of 5 cents for issuers to issue cards and process transactions. The issuer costs measured in the study include the cost of funding innovation and fraud protection, both directly by issuers themselves, and through the scheme fees that they pay to the card schemes, which the schemes use to fund innovation and fraud protection initiatives (among other things).
• Reducing debit interchange caps (as per Option 4) to 6 cents and 0.12 per cent would not necessarily result in a substantial reduction in interchange revenue for issuers, because the effective average interchange fee on debit transactions is already below these caps. Any significant reduction in interchange revenue for issuers would be a result of decisions by the schemes, such as if they decide to continue setting interchange fees for strategic merchants well below the issuer cost for these transactions.
• Issuers have been able to fund innovations and fraud protection measures for debit transactions at the existing levels of debit interchange fees, including tokenisation, click-to-pay, dual-network routing compatibility and eftpos online functionality.
• The results of the Issuer Cost Study suggest that the proposed lower interchange levels for credit cards would be above issuers’ costs, even including the cost of funding interest-free periods. This indicates that issuers would still be able to maintain other service levels and continue to innovate even with lower interchange fees.
• The PSB has not seen compelling evidence in submissions or elsewhere that there is a strong relationship between the level of interchange and fraud prevention, safety or innovation outcomes in the current market. For example, no evidence has been presented to suggest that fraud prevention, safety or innovation has been compromised in Europe following reductions in interchange rates implemented by the European Commission. By contrast, there is evidence in the public domain that the European card payments market is considered innovative at current levels of interchange, including the development and adoption of new tokenisation, fraud mitigation and online checkout initiatives.⁸
• The schemes would continue to be able to offer ‘targeted discounts’ on interchange to promote the adoption of innovations by merchants/acquirers (such as contactless card payments or tokenisation). This could similarly also be achieved through adjustments to scheme fees.
• The proposed interchange caps would not be expected to result in a significant reduction in competition in the card-issuing market from smaller issuers. Some stakeholders argued that reducing interchange would disadvantage small and medium issuers, as smaller issuers are particularly reliant on interchange fees to fund their card-related services and to grow their business more generally. This could potentially have consequences for competition in the card-issuing market. Evidence from the Issuer Cost Study suggests that smaller issuers do face materially higher costs than larger issuers (Table 3). However, a benchmark and cap of 6 cents for domestic debit is in line with the current average interchange rate charged, so depending on the interchange fees that the schemes set, smaller issuers would not necessarily face a significant reduction in interchange revenue from current levels. The lower credit benchmark of 0.3 per cent is also above smaller issuers’ costs once the cost of funding interest-free periods is removed; as explained above, the PSB’s view is that most of the cost of funding interest-free periods should be borne by the issuer and cardholder, rather than entirely by the merchant.

The PSB also considered lowering the credit cap to 0.5 per cent and lowering the credit benchmark to 0.3 per cent (Option 3). An interchange framework that combines benchmarks and caps can provide additional flexibility for networks to differentiate fees and encourage certain behaviours. However, this option would be less effective at reducing the large difference in interchange fees paid by small and large merchants. Large merchants with bargaining power would be able to continue negotiating strategic rates significantly below the benchmark, leaving small merchants to pay higher interchange fees and effectively subsidise large merchants. Consistent with this, the current lowest credit interchange fees are around 0.2 per cent for the top tier of strategic merchants, whereas small merchants would likely be paying closer to the 0.5 per cent cap.

Commercial credit cards

Commercial credit cards are regulated as part of the RBA’s interchange standards and are included for the purposes of testing compliance with the weighted-average credit interchange benchmarks. Interchange fees on commercial credit card transactions tend to be well above average interchange levels, typically sitting near the credit interchange fee cap of 0.8 per cent. Mastercard and some PSPs submitted that commercial credit cards should not be subject to interchange caps, or if they are, they should be subject to higher caps than consumer cards, especially if interchange caps were to be lowered. They argued that:

• commercial credit cards involve higher transaction values and complex risk profiles, which results in higher costs for issuers and so requires higher compensation through interchange
• reductions in interchange for commercial credit cards could result in less issuance of commercial credit cards, thereby reducing access to credit for small and medium businesses
• some issuers rely on commercial credit cards for a large share of their revenue, so lower interchange could result in reduced investment in the payments sector and a more concentrated (and therefore potentially less competitive) issuer market
• reducing interchange fees, without special treatment for commercial credit cards, would disadvantage four-party networks (i.e. Visa and Mastercard) in competing with the charge cards of three-party networks such as American Express, which are not subject to interchange caps and can therefore offer more generous rewards⁹
• commercial cards are not subject to interchange regulation in jurisdictions such as Europe, the United Kingdom and New Zealand.

The PSB has considered these arguments in assessing whether the interchange cap on commercial credit cards should remain at 0.8 per cent, with any reduction to credit interchange applying only to consumer cards (Option 5).¹⁰

The PSB remains unconvinced by stakeholder views that commercial and consumer credit cards warrant differential interchange treatment. Both types of cards serve similar purposes in facilitating payments and managing expenses and are ‘must-take’ for merchants (in the case of four-party cards). There is no clear evidence, including from the Issuer Cost Study, that issuers incur higher costs on commercial cards than on consumer cards on a percentage basis (Table 4).

The PSB is also sceptical of the view that merchants should bear the cost of commercial card programs through higher interchange. Submissions highlighted that these programs primarily deliver benefits to commercial cardholders, including risk management and reporting tools, integration with expenditure management software, enhanced fraud protection, and ongoing relationship management. Applying a user-pays approach would support the costs of these programs being borne by commercial cardholders rather than merchants. To the extent the provision of these additional services or functionality may impose additional costs on issuers, they could be better managed from an efficiency perspective for the payments system through higher cardholder fees or a reduction in program benefits.

The PSB’s longstanding principle is that regulation should seek to be competitively neutral and would be concerned if a reduction in commercial card interchange resulted in a deterioration in competition by advantaging unregulated three-party networks. This might occur if three-party networks were able to fund higher rewards through merchant fees and offer those rewards to cardholders, winning market share from four-party network commercial cards. The PSB notes that in recent years, three-party card schemes have had around a 50 per cent share of the commercial card issuing market. However, the PSB considers that this risk is mitigated by several factors:

• Costs of issuing commercial credit cards will remain below the reduced interchange cap. As estimated in Table 4 above, the average per-transaction eligible cost to issuers of commercial card transactions is 0.08 per cent (excluding the cost of funding the interest-free period) and 0.2 per cent (inclusive). These cost estimates are substantially below the proposed interchange cap of 0.3 per cent in Option 2.
• Acquirers that offer simple merchant plans that include American Express in the same flat fee charged for debit and credit card transactions may exert pressure on American Express to lower the wholesale fees it charges those acquirers in line with those charged by four-party networks if American Express wants to remain included in those plans.
• Some merchants may be able to constrain the ability of American Express to raise its prices by threatening or choosing not to accept American Express altogether; unlike Visa and Mastercard, American Express is not a ‘must-take’ card for many merchants.
• The Government has proposed reforms to the PSRA that would bring three-party networks clearly within the regulatory perimeter. In 2021, when the RBA previously considered its interchange regulations, the PSB was concerned that a reduction in the credit interchange benchmark and cap could provide an advantage to three-party card schemes because these arrangements are not subject to the RBA’s interchange regulations, which allows them to fund more benefits for consumers through higher merchant fees. However, the Government has proposed reforms that would bring three-party networks within the scope of the PSRA, with these reforms receiving broad support when reviewed by the Senate Economics Legislation Committee (2024). This is a significant development, that would enable the RBA to consider taking regulatory action under the PSRA if efficiency or competition issues were to arise involving the three-party networks.

Retaining a higher interchange cap on commercial cards could lower competition and efficiency in other ways. It could lead to higher average interchange fees for these cards and higher overall payment costs – for instance, interchange fees on Mastercard and Visa commercial cards are around 1.5 per cent in Europe, which is significantly above the costs borne by issuers for those cards (based on the Issuer Cost Study). Another key concern is that issuers could respond to any carve-out in interchange regulation for commercial cards by heavily promoting more expensive commercial cards. New business models could also emerge that seek to arbitrage differences in interchange.¹¹ Differential treatment of commercial cards would also increase the complexity of the interchange framework.

There are also good reasons why commercial cards should be treated differently in Australia relative to other jurisdictions that currently do not regulate them. In Europe, credit cards (including commercial cards) are much less prevalent in general and therefore are a much smaller share of total payment costs for merchants, which reduces the need to regulate them. To account for their use, surcharging on those commercial cards is typically allowed in Europe, while it is banned on regulated consumer cards. This approach would introduce a significant degree of complexity if mirrored in the Australian market due to the interaction with the PSB’s preferred surcharging policy, which may undermine broader policy objectives.

Net compensation

The RBA’s ‘net compensation’ provisions are designed to prevent circumvention of the interchange fee regulation and the PSB’s assessment is that they are broadly operating as intended. However, the RBA has become aware of a potential regulatory gap where indirect issuer participants sponsored by overseas entities may not technically be captured, either directly or indirectly, by the net compensation provisions. Although the RBA does not believe this gap is currently being exploited, it does raise the possibility of an uneven playing field. The PSB proposes to amend the net compensation requirements to ensure all Australian issuers are subject to the requirements, irrespective of the domicile of any sponsor. The RBA seeks feedback on whether Australian issuers sponsored by overseas entities are capable of complying with the proposed changes. The PSB also proposes to amend the net compensation provisions to capture transactions acquired overseas to reflect the PSB’s intent, consistent with existing practice.

For further details on the proposed changes, see Appendix D: Draft Standards.

3.2 Interchange fees on foreign card transactions

The cost of accepting foreign-issued card transactions is much higher for acquirers and merchants in Australia than for equivalent domestic card transactions. Foreign cards used in Australia account for around 20 per cent of total interchange fees paid by merchants in Australia, despite only accounting for around 3 per cent of total transactions. These fees are also significantly above the levels Mastercard and Visa have agreed to set on equivalent transactions in Europe and the United Kingdom. These high costs for foreign card transactions are also raising the costs to consumers for domestic card transactions, given the increasing prevalence of single-rate merchant plans that charge merchants the same rate for domestic and international card transactions.

Many stakeholders supported measures to lower interchange fees on foreign card transactions, citing their high total costs and in line with broader efforts by the G20 countries to reduce cross-border payment costs.¹²

By contrast, Mastercard, Visa and a few PSPs opposed introducing a cap on interchange fees for foreign card transactions. In their view:

• a cap on interchange fees for these transactions would have little overall impact on merchant costs, given they account for a low share of card transactions
• foreign card issuers may block or restrict the use of their cards in Australia, or impose prohibitive fees on users for doing so
• higher interchange on foreign card transactions is justified because they are more complex and riskier for issuers than domestic card transactions
• it would provide an advantage to unregulated networks
• it could disrupt the business models of some challenger fintechs and potentially entrench incumbent banks.

Policy options

The PSB is considering three options for the treatment of foreign-issued card transactions acquired in Australia.

Option 6: Continue to exclude foreign card transactions from the RBA’s interchange regulation (status quo)

Card networks would continue only to be expected to publish international multilateral interchange fee rates or amounts on their websites.

Option 7: Cap interchange on foreign card transactions at 1.15 per cent of value for debit and 1.5 per cent of value for credit

Interchange on foreign-issued card transactions acquired in Australia would be capped at 1.15 per cent of value for debit transactions and 1.5 per cent for credit.

Option 8: Cap interchange on foreign card transactions differentially for card-present and card-not-present transactions

Interchange on foreign-issued card transactions acquired in Australia would be capped at 0.2 per cent of value for debit transactions and 0.4 per cent of value for credit transactions, where card payments are made in-person in-store (‘card-present’ or CP; including transactions made in-store with a device such as a mobile wallet). Interchange on online (‘card-not-present’ or CNP) transactions would be capped at 1.15 per cent of value for debit transactions and 1.5 per cent for credit transactions.

Considerations

The weighted average interchange fee on foreign card transactions is around 1.75 per cent, which is three and half times higher than the domestic credit interchange benchmark. Furthermore, interchange fees on foreign card transactions can be as high as 2.4 per cent of value, which is three times the highest domestic credit interchange fees.

Most submissions that commented on foreign card transactions acknowledged that interchange on those transactions should be higher than domestic card transactions, given higher processing costs and fraud risks.

However, the current very high levels of interchange charged on foreign card transactions acquired in Australia do not appear justified, particularly for CP (in-person) transactions:

• Australian issuer costs (inclusive of issuers’ transaction costs, fraud costs and scheme fees) on international transactions are much lower than the levels of interchange charged on foreign cards in Australia (Graph 7).
• Evidence from the Issuer Cost Study indicates that processing costs for Australian issuers are only slightly higher for international card transactions compared with domestic card transactions.¹³ These costs for Australian issuers are estimated to be only 1–2 basis points of transaction value higher on international card transactions. Assuming that this cost differential between domestic and international transactions for Australian issuers is indicative of the cost differential for foreign issuers, then processing costs would only justify slightly higher interchange fees on foreign card transactions processed in Australia relative to transactions using domestic cards.
• Fraud rates on CP transactions acquired in Australia are low for foreign-issued cards and only slightly higher than the very low fraud rates on domestic cards. Fraudulent transactions are around 0.1 per cent of the total value of foreign CP transactions in Australia and 0.04 per cent for domestic CP transactions. This difference could only justify slightly higher interchange on foreign CP transactions than on domestic transactions.
• While higher interchange fees appear justified on CNP (online) transactions relative to CP transactions to compensate foreign issuers for higher fraud costs, it is questionable that current levels of interchange are warranted in a relatively low-fraud jurisdiction such as Australia. Fraud rates on foreign-issued CNP transactions are significantly higher than for CP transactions, at around 0.4 per cent of transaction value. CNP transactions account for around 90 per cent of fraudulent transactions in Australia on foreign-issued cards. However, fraud rates on foreign-issued cards acquired in Australia have been falling and are around one-third of that on Australian-issued cards used overseas. The Australian Payments Network (2024) attributes this difference to the robust fraud prevention measures put in place by Australian merchants over recent years. This indicates that there is a relatively low fraud rate in Australia for international card transactions, which raises doubt about the appropriateness of the high interchange rates being paid by Australian acquirers and merchants.
• Evidence from the Issuer Cost Study indicates that net scheme fees to issuers on international card transactions are on average around 17 basis points higher than on domestic transactions. Scheme fees account for the majority of the difference in costs between domestic and international card transactions. Issuer scheme fees on international transactions are often set at a regional level and are likely to be common across issuers outside of Australia. Therefore, the 17 basis point difference in scheme fees could explain less than one-fifth of the 125 basis point difference between domestic and international interchange rates paid by Australian acquirers and merchants on credit cards.

Overall, the RBA considers that high interchange fees on foreign card transactions disproportionately inflate payment costs for merchants, and consequently increase prices for all cardholders. A cap on interchange fees for these transactions would improve efficiency by reducing the cross-subsidisation of foreign issuers and cardholders by Australian merchants and cardholders. In the PSB’s view, it is appropriate to set the caps to reflect expected differences in issuers’ costs for foreign-issued card transactions acquired in Australia. Similarly, differences in fraud rates across payment types (i.e. CP versus CNP) should be appropriately reflected in the caps to promote the efficient allocation of costs.

Mastercard and Visa have agreed to cap interchange fees on foreign-issued card transactions in Europe. Interchange on foreign-issued CP transactions acquired in Europe is capped at 0.2 per cent for debit and 0.3 per cent for credit; these caps are the same as for domestic transactions. Interchange on CNP transactions is capped at 1.15 per cent for debit and 1.5 per cent for credit. These caps have been in place in Europe since 2019 and were recently extended for another five years by mutual agreement between the networks and the European Commission.¹⁴ Mastercard and Visa also voluntarily set interchange rates at the same levels in the United Kingdom. Meanwhile, the New Zealand Commerce Commission is also proposing differential interchange caps on foreign-issued card transactions for in-person and online transactions.

The PSB has used the interchange rates on international transactions in Europe and the United Kingdom as a useful starting point for considering appropriate caps for international transactions in Australia. In Option 8, the caps on CNP transactions would be the same as relevant levels in Europe and the United Kingdom, and well above the interchange caps on domestic transactions. This would more than account for the higher fraud costs on international CNP transactions. The RBA notes that the UK Payment Systems Regulator (PSR) recently concluded that these rates are ‘unduly high’ and higher than if the schemes were subject to competitive constraints in setting these fees. The PSR is considering capping interchange on international CNP transactions at lower levels (PSR 2024b).

The PSB acknowledges the arguments for interchange rates on CP transactions to be higher for international transactions than for domestic transactions. Consistent with this, in Option 8, the cap for international CP debit transactions would be 0.2 per cent, which is above the proposed 0.12 per cent cap for domestic debit transactions. Similarly, the cap for international CP debit transactions would be 0.4 per cent, which is above the proposed 0.3 per cent cap for domestic credit transactions. Taking the weighted average of the caps on CP and CNP transactions in Option 8, the amount of interchange that foreign issuers would be receiving under these caps would still be around three times higher than the costs faced by Australian issuers for processing international transactions.

The PSB is unconvinced by the arguments raised by the international card networks that reducing interchange on foreign-issued cards would disrupt cross-border transactions or result in significant harm to sectors such as tourism or export industries. In Europe, cross-border payments increased following the introduction of the European interchange regulations. The European Commission attributed this to the wider acceptance of foreign-issued cards by merchants as the cost of accepting these cards fell (European Commission 2020). The PSR found no evidence that levels of cross-border interchange fees lower than those in Option 8 had a negative impact on users of the card systems, including issuers and acquirers, in the United Kingdom or in the European Economic Area (PSR 2024b). The availability of alternative payment methods for tourists and foreign importers transacting with Australian merchants also mitigates the risk of harm to those sectors (these alternative payment methods include cash for in-person payments, and account-to-account or digital wallet transfers for online payments).

Foreign issuers have alternative sources of revenue other than interchange to recover any reduction in revenues as a result of the interchange caps proposed in Option 8. It is common for issuers globally to charge ad-valorem foreign transaction fees to cardholders of up to 3 per cent of transaction value.¹⁵ Issuers can also offer cards that do not charge cardholders additional fees for international transactions but carry higher annual fees. Reallocating some of the costs of foreign card transactions towards the users of those cards, who get significant benefits from making cross-border transactions, would align with a user-pays approach to efficiency in the Australian card payments system.

The PSB is of the view that consumer and commercial cards do not warrant differential interchange treatment for cross-border transactions. There is no clear evidence, including from the Issuer Cost Study, that issuers incur higher costs on a percentage basis for cross-border transactions involving commercial cards than consumer cards. As for domestic transactions, the PSB considers that both types of cards serve similar purposes and are ‘must-take’ for merchants (in the case of four-party card networks). The PSB is also sceptical that merchants should bear the cost of commercial card programs through higher interchange fees. As noted in section 3.1, the proposed reforms to the PSRA would allow the RBA to consider taking regulatory action if efficiency or competition concerns were to arise involving the three-party networks.

There is a risk that the international card networks could seek to circumvent any new caps on foreign interchange by increasing scheme fees and using those to compensate foreign issuers, or by increasing the margins on the foreign exchange rates they set. To address this risk, the draft standards for consultation include an anti-avoidance clause and would require schemes to publish their scheme fees on foreign card transactions. The RBA will monitor these scheme fees and would consider further regulatory action if required.

3.3 Preliminary assessment

The PSB’s preliminary assessment is that the efficiency of the payments system would be substantially improved by:

• reducing the domestic credit interchange cap to 0.3 per cent of transaction value and abolishing the benchmark (Option 2)
• reducing the domestic debit interchange benchmark to 6 cents per transaction and cap to 6 cents or 0.12 per cent of transaction value (Option 4)
• introducing a cap on interchange fees on foreign-issued card transactions (Option 8) at:
  • 0.2 per cent of transaction value for debit and 0.4 per cent for credit for card-present transactions
  • 1.15 per cent of transaction value for debit and 1.5 per cent for credit for card-not-present transactions.

These proposed lower interchange levels are consistent with the RBA’s historical cost-based approach to setting interchange fees, and reflect the PSB’s view that merchants should not fully bear the cost of interest-free periods on credit cards. International evidence indicates mature card markets continue to function well under interchange settings around the levels proposed for domestic and international transactions. Lowering interchange caps would also narrow the gap between interchange fees paid by small and large merchants, thereby reducing the cross-subsidisation of the payments costs of large merchants by small merchants.

The PSB also takes the view that removing the credit benchmark would simplify the interchange framework and reduce the regulatory burden. It is likely that interchange fee schedules would become simpler under a cap-only framework, as has been seen in other jurisdictions, while compliance costs would lessen for the card networks. The PSB’s view is that a credit interchange cap of 0.3 per cent would still provide considerable scope for flexibility and differential pricing for schemes. Schemes could also provide differential pricing by offering discounted scheme fees. However, the PSB proposes to retain the debit interchange benchmark to prevent upward drift in weighted-average interchange rates as general prices increase over time and ensure intended cents-based caps are not circumvented by schemes adopting ad-valorem rates.

The PSB expects PSPs to pass on savings to merchants in full to deliver the benefits outlined above. The PSB’s proposed transparency measures are intended to support this outcome and serve to increase public scrutiny on fees more broadly (see Chapter 6: Transparency of Merchant Fees).

Endnotes

Later references to ‘debit’ in this chapter refer to ‘debit (and prepaid)’. 1

See Visa (2025); Mastercard (2025c); Australian Payments Plus (2025). 2

A reference to interchange fee caps in this chapter refers to the effective prevention of card schemes from setting interchange fee rates on a per-transaction basis above the level of the cap. This has the effect of capping the rates of each individual interchange fee category. A reference to benchmarks in this chapter refers to regulation ensuring card schemes do not charge total interchange fees in a given period above the level of the weighted-average benchmark on a per-transaction basis. 3

As at the publication of this paper, the RBA has designated eftpos debit and prepaid, Mastercard debit and prepaid, Visa debit and prepaid, Mastercard credit, and Visa credit. 4

See Gao (2025); the major banks have reduced interest-free periods on many credit card products from 55 days to 44 days over recent years. 5

For examples, see Citi (2025); NAB (2025); Westpac (2025). 6

Lowering the credit interchange cap to 0.3 per cent could result in interchange fees for different categories converging towards the cap (i.e. interchange fees that are below the cap may increase), as happened in Europe. 7

See, for example, Mastercard Europe (2025); Mastercard (2025b). 8

A transaction on a four-party network (i.e. Visa and Mastercard) involves four parties – the cardholder, the card issuer, the merchant and the merchant’s payments provider (the acquirer) – as well as the scheme. A transaction on a three-party network (such as American Express) involves three parties – the cardholder, the merchant and the scheme (acting as sole-issuer and sole-acquirer). Rewards programs on four-party networks may be funded through interchange, whereas on three-party networks they are funded directly through fees from the merchant. For further information, see RBA (2024a); Chan, Chong and Mitchell (2012). 9

Given most of the arguments raised were related to credit cards, the PSB did not consider treating commercial debit cards differentially to consumer debit cards. 10

For example, the RBA is aware of at least one instance of an issuer seeking to arbitrage similar rules in another jurisdiction by issuing a prepaid card that allowed its customers to make payments with any of their other cards (including American Express) and collect the associated points, even if the merchant did not accept that card. Because the card was a commercial card, the issuer would earn the difference between the (typically lower) consumer interchange fee it paid to its customer’s issuer and the (typically higher) commercial interchange it received from the merchant’s acquirer. 11

The G20 roadmap to enhance cross-border payments, established in 2020, includes a target for total ‘retail’ cross-border payment costs of 1 per cent. On average, Australian merchants currently pay around 2.5 per cent to accept international cards, including interchange fees and scheme fees. 12

The cost of processing foreign card transactions for domestic issuers is used as an indicator of the costs for foreign issuers to process transactions in Australia because the RBA is not able to directly survey foreign issuers. 13

For more information, see European Commission (2019); European Commission (2024). 14

For example, see ANZ (2025); HSBC (2025); Wells Fargo (2025). 15