Payments System Board Annual Report – 2007 Card Payment Systems

Over recent years, much of the Board's effort has been devoted to improving efficiency and competition in Australia's retail payments system, particularly the card-based systems. This work has focused on: establishing clearer price signals to cardholders; removing restrictions on merchants; improving access; and increasing transparency. This chapter of the Annual Report summarises the main developments in these areas over the past year.

Interchange Fees

As part of the reform process, interchange fee differentials between the credit card, EFTPOS and scheme debit systems have been reduced. The Board's focus on these fees has reflected three interrelated factors. The first is that interchange fees can play an important role in influencing the prices that merchants and cardholders pay for payment services and, thus, they can affect the use of various payment methods. The second is that, historically, these fees have not been subject to the normal forces of competition. And the third is that the levels at which these fees had been set were not encouraging efficiency of the overall payments system; in particular, consumers were facing relatively high effective prices for using the payment systems with relatively low costs.

Credit cards

When the regulation of interchange fees in the MasterCard and Visa systems first became effective on 31 October 2003, each scheme was required to reset its fees so that the scheme's weighted-average fee was no higher than a scheme-specific benchmark. At the time, these benchmarks – which were based on the costs of credit card issuers – were both around 0.55 per cent (excluding GST), compared with a weighted-average interchange fee of around 0.95 per cent previously. The Standard establishing these arrangements required that the benchmarks be recalculated every three years using updated cost estimates. The first such recalculation was conducted in the third quarter of 2006, with the new benchmark of 0.50 per cent becoming effective on 1 November 2006. Unlike the scheme-specific benchmarks that applied for the first three years, this benchmark applies to both the MasterCard and Visa schemes, following the modification of the Standard in November 2005 to establish a common benchmark (see the Payments System Board Annual Report 2006). The decline in the benchmark, from around 0.55 per cent three years earlier to 0.50 per cent currently, reflects lower average costs for transaction processing and authorisation, and for fraud prevention.

At the same time that the schemes reset their interchange fees on 1 November 2006, they both introduced new interchange categories (Table 6). While, under the Standard, the schemes must ensure that the weighted-average interchange fee is no higher than the benchmark on the specified dates, there are no restrictions on individual interchange fees, or on interchange categories. In 2003, both MasterCard and Visa chose to have only three separate interchange rates – electronically processed transactions, standard transactions and transactions on commercial cards. When the benchmark was recalculated both schemes introduced an interchange category for premium consumer cards set at 0.90 per cent, substantially above that of existing consumer rates. Both schemes have also introduced a range of other categories over the past year. In particular, both schemes now provide low interchange rates for payments to government, utilities and charities. They have also both introduced higher rates for transactions where a card with a chip is used in a terminal that is not chip enabled. Visa introduced these new rates in November 2006, with MasterCard introducing its new rates in June 2007.

Both schemes have also introduced lower rates for large merchants who meet certain conditions. Both schemes have transaction thresholds that merchants must meet to become eligible for the discounts. In addition, Visa requires merchants to commit to enhanced security standards under its Merchant Alliance Program while MasterCard's ‘tiered merchants’ rate requires merchants to accept all of MasterCard's products (credit, debit and pre-paid). These lower rates override other categories. This means, for example, that a premium credit card used at a merchant that qualifies for these discounts will attract the lower interchange fees associated with these programs, rather than the higher premium interchange rate.

In the lead‑up to the new benchmark becoming effective on 1 November 2006, a number of industry participants raised concerns that the compliance aspects of the Standard had the potential to distort competition between the card schemes. Under the Standard, the weighted-average interchange fee in each scheme must be no higher than the benchmark as at 1 November of every third year, and at any time in the intervening three years that the scheme alters its interchange fees. In calculating the weighted-average fee, each scheme is required to use weights that reflect the structure of its own business over the previous financial year. Some parties have argued that the use of backward-looking, scheme-specific weights, together with the relatively infrequent compliance timetable, was distorting the nature of competition between the schemes. In particular, a scheme could set a relatively high interchange fee on categories of transactions where it had a lower share of cards than the competing scheme and, thereby, ‘catch up’ to the competing scheme.

After considering the issue at its November 2006 meeting, the Board called for submissions from interested parties. In particular, it invited views on how the compliance aspects of the credit card, and possibly Visa Debit, interchange Standards might be altered to address any concerns about the effect of the Standards on competition between the schemes.

Submissions on these issues were requested by 1 February 2007, with nine submissions being received. All parties making submissions were also given the opportunity to discuss their submissions with the Bank, and seven parties opted to do so. The views put to the Bank in submissions and follow‑up meetings were considered by the Board at its meeting in February 2007.

A number of the submissions argued that the current arrangements could result in significant shifts in market shares between schemes, driven by ‘gaming’ of the Standard rather than genuine competition, and that revisions to the Standard should therefore be considered prior to the planned 2007/08 review. Specific suggestions included: introducing more frequent compliance; the use of industry-based, rather than scheme-based, weights in determining each scheme's compliance with the Standard; and altering the Standard so that all interchange fees, rather than just their weighted average, had to be below the benchmark.

Other submissions, however, argued that the structure of the Standard should be considered only as part of the broader review, and not before. These submissions cited the increased costs associated with an early change to the Standard, as well as the regulatory uncertainty that this might create. Some also noted the advantages of considering any changes to the Standard in the context of a full review of the Bank's reforms.

After considering the various arguments, the Board was not convinced that any potential benefits from making changes to the Standard before the 2007/08 review would outweigh any potential costs. The Bank announced this decision in a Media Release on 5 March 2007, indicating that the Board will continue to monitor developments closely, and would be prepared to reconsider its decision if it received clear evidence of significant distortions to the market arising from the operation of the Standard.

Debit cards

As part of the package of reforms to Australia's debit card systems announced in April 2006, the Bank introduced interchange standards for the EFTPOS and Visa Debit systems. These standards came into effect on 1 November 2006, the same date as the new credit card benchmark came into effect.

In the scheme debit systems, interchange fees have historically been the same as in the credit card systems. Prior to November 2003, these fees averaged around 0.95 per cent of the transaction value (excluding GST). They then fell to around 0.55 per cent when the credit card reforms were introduced. In contrast, interchange fees in the EFTPOS system are flat fees – historically averaging around 20 cents per transaction – and flow in the opposite direction to those in the credit card and scheme debit systems (that is from issuers to acquirers).

These differences in interchange fees in the two types of debit card systems meant that on a $100 debit card transaction, an issuer was around 75 cents better off in terms of interchange revenue if its customer used a scheme debit card rather than an EFTPOS card. The Board was concerned that, if this situation persisted, the EFTPOS system would have difficulty competing simply because of the structure of interchange fees, which themselves were not subject to the normal forces of competition.

The EFTPOS interchange Standard requires that interchange fees in the EFTPOS system (which are bilaterally negotiated) be between 4 and 5 cents (excluding GST) if the transaction does not involve a ‘cash out’ component. Interchange fees for transactions that do include cash out are not covered by the Standard; the Bank's liaison suggests that in some cases the interchange fees on these transactions remain at around 20 cents or higher while, in other cases, the fees have fallen in line with the new rates for purchase transactions.

The Visa Debit interchange Standard operates in a similar fashion to that of the credit card interchange Standard, in that the weighted-average interchange fee must be no more than a cost-based benchmark. Based on information supplied by industry, the Bank announced on 29 September 2006 that the benchmark was 12 cents (excluding GST).

In announcing the Visa Debit interchange Standard the Bank indicated that the same arrangements would apply to the debit card schemes operated by both MasterCard and Visa. It also indicated that the schemes could provide undertakings that they would comply with the Standard rather than having it formally gazetted. In particular, in April 2006 the Board announced that ‘the Visa Debit Standard on interchange fees will only be gazetted, if, by 1 July 2006, Visa has not provided the Bank with an enforceable undertaking that would deliver the same outcomes as the Standard. Similarly, the Bank will consider designating the MasterCard debit system, and then imposing a standard, if by 1 July 2006, MasterCard has not provided the Bank with an enforceable undertaking to the same effect.’[12] MasterCard voluntarily agreed to set interchange fees for its debit card in accordance with this benchmark. In contrast, Visa did not and, consequently, on 7 July 2006, the Bank gazetted the Visa Debit interchange Standard.

As for credit cards, both schemes have a number of different interchange categories for different types of merchants and types of payments (Table 7). MasterCard has also introduced a chip rate for its debit cards, applicable when a card with a chip is used in a terminal that is not chip enabled. MasterCard initially had a relatively simple structure with only electronic and standard rates. At the end of June 2007, it released a table of rates very similar to those of Visa. MasterCard also introduced a ‘tiered merchants’ rate for large merchants that is substantially below other interchange rates. This rate requires merchants to meet volume thresholds but, unlike MasterCard's tiered merchants rate for credit cards, does not require merchants to accept all MasterCard products.

Overseas developments

When the Board first began examining interchange fees there were relatively few instances in which these fees had been subject to close scrutiny or analysis in other countries. This has changed significantly over recent years. In the United States this scrutiny has come as a result of legal actions taken by private parties, while in other countries it has resulted from actions taken by the competition authorities and, less commonly, by the central bank.

In the United States, private anti-trust litigation has alleged anti-competitive practices in the setting of interchange fees in the MasterCard and Visa systems. A large number of actions by merchants were consolidated in 2005 and are currently before the US District Court for the Eastern District of New York.

Both MasterCard and Visa began publishing their interchange fee schedules in the United States in late 2006, updating these schedules in the first half of 2007.[13] These schedules reveal interchange fee structures for both card schemes that are substantially more complex than those implemented in Australia. In particular, there are as many as 30 merchant/authorisation categories for each single card type. In announcing its new interchange schedule, Visa estimated that its effective system-wide interchange rate for the United States would be 1.77 per cent in 2007, up from 1.76 per cent in 2006; MasterCard has not published its average interchange rate.[14]

In Europe, the European Commission (EC) continues to investigate MasterCard's cross-border interchange rates, and in 2006 published a report on payment cards as part of an inquiry into retail banking.[15] The report found that:

  • interchange fees did not seem necessary for the profitability of card businesses at a majority of banks;
  • many domestic payment systems operated without interchange fees;
  • there were large variations across countries in interchange fees, suggesting a lack of an objective basis for the fees; and
  • there was little evidence of competitive forces between schemes affecting interchange fees.

The EC inquiry's final report, released in January 2007, suggests that anti-trust enforcement action may be appropriate to address the level of interchange fees in some networks.[16]

Competition authorities in a number of countries have also taken action against the credit card schemes. In the past year, authorities in New Zealand and Poland announced actions related to credit card interchange fees. In New Zealand, the Commerce Commission initiated proceedings against MasterCard, Visa and member institutions of the two schemes, alleging price-fixing in the setting of interchange fees. And in Poland, the multilateral setting of interchange fees was found to be illegal by the Competition Authority (this finding is currently on appeal). In addition, in Israel, the industry reached an agreement with the Competition Authority to reduce interchange fees from a reported average of 1.25 per cent to 0.875 per cent by 2012.

Although interchange fees in most countries are not generally made public, some information has become available in recent years, largely as a result of industry agreements with regulators. In cases where there has been regulatory pressure, interchange fees have tended to decline.

Honour-all-cards Rule

On 1 January 2007, the honour-all-cards Standard covering the Visa system came into force; MasterCard provided a voluntary undertaking that had the same effect for the MasterCard system. The effect of this Standard and undertaking is that the schemes are no longer allowed to require that merchants accept debit cards as a condition of accepting credit cards and vice versa. There are also requirements that scheme debit cards must be visually and electronically distinguishable from scheme credit cards.

While not directly affecting interchange fees, this Standard means that merchants that accept credit cards are free to refuse acceptance of scheme debit cards if they feel the price they are charged does not reflect the value they receive. This is particularly relevant in Australia because scheme debit cards are typically issued as multifunction cards, such that transactions are processed through the EFTPOS system if the ‘cheque’ or ‘savings’ button is pressed at the point of sale, or through the scheme networks if the ‘credit’ button is pressed. Thus a merchant (other than an online merchant) can be confident that, in most situations, if it refuses to accept a scheme debit card, the customer could still pay just by pressing a different button on the card processing terminal. It seems likely that these considerations have had an influence on negotiations over the pricing of scheme debit interchange fees, particularly those for larger merchants for which both MasterCard and Visa have introduced lower interchange fees.


An important part of the package of reforms has been the removal of the credit card schemes' no-surcharge rules. Since these rules were removed on 1 January 2003, the Board has been monitoring the extent to which merchants have been prepared to pass directly to customers the cost that they incur in accepting credit cards. In 2006, as part of this monitoring, the Bank commissioned East & Partners to include additional questions on surcharging in its survey of merchant acquiring business.

The results of the East & Partners survey show that, while most merchants do not surcharge for credit card payments, surcharging is becoming more common. In June 2007, 17 per cent of very large merchants imposed a surcharge on credit card transactions compared with 7 per cent two years earlier (Graph 11). Surcharging by smaller firms is less common but the number of merchants surcharging continues to increase.

Most merchants that surcharge apply the same percentage rate for all credit and charge cards. However, there are some merchants that 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 transactions on American Express and Diners Club cards is about 2 per cent.[17]

Merchant Service Fees

Merchant service fees in the credit and charge card schemes have continued to fall over the past year. The average merchant service fee for the Bankcard, MasterCard and Visa schemes fell by 0.09 percentage points over 2006/07, taking the decline since the implementation of the reforms in 2003 to around 0.60 percentage points (Graph 12). This decline is larger than the decline in interchange fees, suggesting increased competition between acquirers for the business of merchants.

Merchant service fees for American Express and Diners Club have also fallen over the past year by around 0.10 percentage points. Since the end of September 2003, the average fee in the American Express scheme has fallen by 0.29 percentage points, while the average fee in the Diners Club scheme has fallen by 0.18 percentage points.

These reductions in merchant service fees represent a significant cost saving to merchants. Based on the card schemes' transaction values over 2006/07, the falls in merchant service fees imply a saving of around $890 million on Bankcard, MasterCard and Visa purchases, and around $80 million on American Express and Diners Club purchases. These savings are offset slightly by the small increase in the combined market share of American Express and Diners Club since the reforms were implemented such that the net saving to merchants was around $920 million in 2006/07. Since the reforms came into effect in 2003, merchants have saved a net total of at least $2.5 billion which, in the normal course, would be passed through into lower prices for goods and services.

The Bank does not currently collect separate data on merchant service fees for scheme debit cards. Historically, these fees have been the same as for credit cards, and so fell alongside those for credit cards in late 2003. However, with interchange fees on scheme debit cards now different from those on credit cards, merchant service fees on scheme debit transactions are expected to eventually reflect this difference. Indeed there is some evidence that merchant service fees are being ‘unbundled’ to reflect the merchant's specific mix of both transaction and card types. Similarly, most merchants were historically offered a blended rate on MasterCard and Visa transactions but this is beginning to change for at least some merchants.

In the EFTPOS system, the fall in interchange fees has also affected merchant service fees. However, given that interchange fees in the EFTPOS system are paid by the issuer to the acquirer, the fall in interchange fees has led to an increase in merchant service fees. Prior to the EFTPOS interchange Standard coming into effect, the average merchant fee was minus 2 cents, reflecting the fact that some large merchants were paid by their acquirer whenever an EFTPOS card was used. Data from financial institutions suggest that since September 2006 the average merchant service fee has increased by around 10 cents per transaction, compared with a reduction in interchange fees of around 15 cents (Graph 13).

Pricing to Cardholders

As expected, the reforms have affected the pricing of credit cards not only to merchants, but also to cardholders. While most of the changes to cardholder pricing occurred in previous years, a number of issuers of credit cards have continued to make adjustments to pricing and the range of products offered.

The average annual fee on a standard rewards card was broadly unchanged over the year to June 2007 at $85, while the average fee on a gold rewards cards was $140. Average cash advance fees, late payment fees and over-limit fees have increased over recent years. There is, however, wide variation between card types. Cards in the small, but relatively fast-growing, premium category, for instance, can have an annual fee of several hundred dollars. Other cards, including low-rate cards, are sometimes available with no annual fee.

The value of reward points has also generally declined over recent years. Currently, a cardholder using a MasterCard or Visa card issued by one of the major banks will have to spend, on average, around $16,300 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 8). Some issuers have also introduced caps on the number of points that a cardholder may accrue over a specified period.

The average interest rate margin on standard credit cards rose somewhat during 2006/07 to be around 11½ percentage points in June 2007. The margin has, however, been fairly constant over the past five years, after rising in the early part of this decade. By contrast, the margin on low-rate cards is as low as half of that on standard cards, significantly reducing the cost of borrowing for some holders of credit cards. Average margins on low-rate cards have tended to fall over the past two years, as a number of issuers have not fully passed on increases in the cash rate.

The pricing of EFTPOS transactions to cardholders has also changed over recent years, particularly with the introduction of ‘all you can eat’ transaction accounts. All the major banks now offer accounts with an unlimited number of electronic transactions including EFTPOS, own ATM, BPAY and direct entry transactions for a fixed account keeping fee of around $5 per month. In contrast, average foreign ATM fees have risen over the past year. In particular, some financial institutions increased the fees they charge customers for using another bank's ATM from $1.50 to $2.00.


Over recent years, there have also been important reforms affecting access to a number of Australian payment systems. In 2004 and 2005, the Bank introduced access regimes for the credit card and Visa Debit schemes. In this past year, the Bank and the industry finalised their work on liberalising access to the EFTPOS system. This involved the establishment by the industry of an EFTPOS Access Code, complemented by an Access Regime implemented by the Bank. The Code provides new and existing participants with the right to establish direct connections with participants in the EFTPOS system and sets a time frame under which connections must be established. The Access Regime sets a cap on the price that an existing participant can charge to establish a new connection and includes provisions that will help ensure that negotiations over interchange fees are not used to frustrate entry.

The Access Code is relatively new so it is difficult to judge its full effect at this stage. Nonetheless, there are indications that it has improved access opportunities with a number of enquiries and at least two applicants taking advantage of its provisions. Notwithstanding this, EFTPOS connectivity is generally implemented alongside other links, such as for credit cards or ATMs, and this can affect the timing for businesses to complete their overall projects. The Board will continue to monitor the use of the EFTPOS Access Code to ensure it is meeting its objectives.

Automated Teller Machines

The Board has, over many years, been monitoring developments in the ATM system and in particular, industry attempts to introduce reforms that would increase competition and efficiency. During the past year the Bank has been actively involved in facilitating this reform after the industry was unable to come to an agreement on the way forward.

The Board has had a long-standing concern about the structure of the ATM system in Australia. The Joint Study, published in 2000, identified a number of aspects of the system that the Bank felt could be improved. In particular it noted that the level of interchange fees was not closely related to costs and there seemed to be few competitive forces that would act to change the level of interchange fees. Furthermore, the interchange fee system was not transparent and could not allow for variations in the cost of providing ATMs at different locations. At the time, the Bank noted that an alternative to the interchange fee system would be to introduce a direct charging system whereby the ATM owner would set the charge for using a particular ATM and inform the consumer of this at the time of the transaction.

Since then, the industry has engaged in a number of efforts to develop a model for reform that would address the concerns the Bank raised in the Joint Study. Notwithstanding this effort, a consensus around a reform model failed to emerge. Over the past year, however, there has been a renewed effort to finalise reform. This was driven by the Australian Bankers' Association (ABA) and, after input from other participants in the industry, a proposal has been agreed.[18] It involves:

  • the development of an objective and transparent access code by the Australian Payments Clearing Association (APCA), setting out the conditions that new entrants are required to meet, the rights of new entrants, and the requirements on current participants in dealing with new entrants;
  • the clear disclosure of any charges levied by the ATM owner before the customer proceeds with a withdrawal, with the customer able to cancel the transaction at no cost; and
  • the abolition of the bilateral interchange fees paid by banks and other financial institutions to ATM owners for the provision of ATM services. These fees – which average around $1 per transaction – are neither transparent to customers nor subject to the normal forces of competition. With these fees abolished, ATM owners will be free to charge customers who use their ATMs but must disclose the fee, increasing the overall transparency of pricing.

The new framework is expected to be in place by 1 October 2008.

Under this proposed reform model, multilateral interchange fees in sub-networks – either those currently in existence (in the Rediteller and Cashcard networks) or those that may form in the future – would be possible. However, the Board's view is that if such fees exist, they should be publicly disclosed. In addition, the rules that govern access to sub-networks should be transparent and objective and not impair efficiency and competition in the payments system.

While an industry agreement has been reached on the broad shape of the reform model, a number of details still need to be finalised. In particular, one issue that remains to be resolved is how to implement the proposal for zero interchange fees. Although a regulatory solution might be one option, the Board's preference is for this issue to be addressed by the industry and it is willing to work with the industry to facilitate such an outcome.

The Board acknowledges the significant concessions made by some industry participants in reaching agreement on this reform package. Although the process has taken some time, the reforms represent a successful example of the industry and the Bank working together to improve competition and efficiency in the Australian payments system.


Reserve Bank of Australia, Media Release 2006-02 ‘Payments System Reforms’, April 2006. [12]

MasterCard, MasterCard Worldwide: U.S. and Interregional Interchange Rates, February 2007; Visa, Visa U.S.A. Interchange Reimbursement Fees, April 2007. [13]

Visa, Press Release ‘Visa USA Updates Interchange Rates’, April 2007. [14]

European Commission, Press Release ‘Competition: Commission sends Statement of Objections to MasterCard’, June 2006; Kroes N, Speech to the 13th International Conference on Competition and the 14th European Competition Day ‘Fact-based competition policy – the contribution of sector inquiries to better regulation, priority setting and detection’, March 2007; European Commission, Interim Report I – Payment Cards, April 2006. [15]

European Commission, Sector Inquiry under Art 17 of Regulation 1/2003 on retail banking (Final Report), January 2007. [16]

East & Partners, Special purpose market report prepared for the Reserve Bank of Australia ‘Australian Merchant Acquiring and Cards Markets’, 2007. [17]

Reserve Bank of Australia Media Release 2007-13, ‘Reform of the ATM System in Australia’, 31 August 2007. [18]