Payments System Board Annual Report – 2008 Developments in the Payments System

The Board continues to monitor developments in payment systems, both domestically and internationally. The past year has seen a continuation of many of the trends noted in the Board's Annual Reports of recent years, including strong growth in debit card use, declining cheque use and increased electronic crediting and debiting of accounts. In addition, fraud rates remain low overall, although they have risen in some areas. Another notable feature over the past year has been a steady increase in the extent of surcharging for credit card transactions. Payments processed through the high-value real‑time gross settlement (RTGS) system continued the steady increase seen over previous years.

Trends in Retail Payments Use

Cash payments

As part of its review of the payments system reforms over the past year, the Reserve Bank undertook a major study into how individuals make payments. A central element of this study was a survey of how around 600 individuals paid for goods and services over a two-week period in June 2007. The results of this survey were published in Household Payment Patterns in Australia in April 2008.[1]

A particular focus of the study was the use of cash as, unlike most other payment instruments, there are no comprehensive statistics on the use of cash to make payments. The study found that despite the very strong growth in the use of electronic payment methods over recent years, cash remains the most widely used payment method, accounting for around 70 per cent of all consumer payments (Table 2). It is particularly important for small transactions, accounting for nearly all payments under $10 and close to 90 per cent of transactions under $25. In part, this reflects the fact that the tender time for small cash transactions is considerably shorter than for other forms of payment, allowing transactions to be completed more quickly. In addition, cash is anonymous, is accepted almost universally for point-of-sale transactions, and some merchants impose minimum transaction values for card payments. Not surprisingly, the use of cash is highest in industries where transaction sizes tend to be small; for example, in the take-away food sector cash accounts for around 95 per cent of the number of transactions.

The survey also provided some insights into how consumers obtain cash. Around 65 per cent of both the number and value of withdrawals are from ATMs, while EFTPOS cash-outs make up around 20 per cent of the number of withdrawals, but only ten per cent of the value. Over-the-counter withdrawals are relatively uncommon but, on average, are for relatively large amounts and account for around 20 per cent of the value of withdrawals. The average value of withdrawals from all sources is around $180, which supports around seven cash payments.

Assessing how the use of cash has changed over time is difficult because of the lack of time-series data on its use. One guide though is data on the aggregate value of ATM withdrawals and EFTPOS cash-outs. These data show a decline in the value of withdrawals relative to household consumption over the past couple of years, suggesting that individuals are substituting electronic forms of payment for cash (Graph 1).

In absolute terms, the number of ATM withdrawals rose by around three per cent in 2007/08, while EFTPOS cash-outs increased by six per cent. The proportion of these ATM withdrawals conducted at ‘foreign’ ATMs fell slightly in the first half of 2008, reflecting increases in ‘foreign’ fees charged by some banks (see ‘Pricing to cardholders’ later in this chapter), but remains close to its average of recent years (Graph 2). [2] In June 2008 there were 25,650 ATMs in Australia, up 9 per cent on 3 years ago, and there were 657,500 EFTPOS terminals.[3]

Non-cash payments

Data on the use of non-cash payment methods are available via the Reserve Bank's ongoing statistics collection. Of these payment methods, debit cards, credit cards and credit transfers made through the direct entry system are the most common forms of payments. Each of these methods accounts for around one-quarter of the total number of non-cash payments, although in value terms, direct credits make up almost half of total non-cash payments, reflecting the use of this system for many large payments, including salaries. On average, each person made around 250 non-cash payments during the year.

Overall, non-cash retail payments in Australia rose strongly in 2007/08, as they have for the past decade. The total number of payments increased by 9 per cent, and the total value by 13 per cent (Table 3). The long-term shift towards electronic payment instruments continued, with the number of cheques written per person declining further and use of all electronic payment instruments rising (Graph 3).

The broad trends in Australia are similar to those seen in many other countries. In 1998, cheques accounted for almost half of all non-cash payments in the major countries, but by 2006 this share had fallen to less than a quarter (Graph 4). Conversely, the share of payments using cards has increased rapidly, although there are significant differences across countries in the type of cards that are used (Table 4). Credit cards are heavily used only in a narrow range of countries (including Canada, the United States, Australia and the United Kingdom) whereas the use of debit cards is widespread. One area where developments in Australia have differed, up until recently, from those in many other countries is that credit card use was growing more rapidly than debit card use (Graph 5). For example, over the period from 2000 to 2006, debit card payments per capita in the major countries grew at an annual average rate of 16 per cent, compared to an average increase of 5 per cent for credit cards, whereas in Australia growth in credit card use outpaced that for debit cards. Over the past three years however, this pattern has reversed in Australia, with growth in debit card transactions now faster than that for credit card transactions.

Card-based payments

Around 1.6 billion debit card transactions were made in Australia in 2007/08, compared with 1.4 billion credit and charge card transactions. Despite the number of credit and debit card transactions being broadly equivalent, the value of credit card transactions is close to double the value of debit card transactions, reflecting the significantly higher average transaction size of credit card transactions ($144 compared with $69).

The study of payment patterns undertaken by the Bank as part of its review of the payments system reforms provides some insights into these patterns. While cards are used less frequently than cash for very small transactions, they account for the majority of consumer payments of between $50 and $200, with debit cards tending to be used for lower-value transactions than credit and charge cards. For example, EFTPOS is the most commonly used card-based payment method for payment values up to $35, and is used about twice as much as credit and charge cards for transaction values under $25. In contrast, credit and charge cards are used more often for higher-value transactions, partly reflecting daily transaction limits – typically of $800 or
$1,000 – for EFTPOS.

Use of EFTPOS is skewed towards supermarkets and petrol stations; these two categories account for 40 per cent of EFTPOS transactions and 32 per cent of EFTPOS values. On the other hand, credit cards tend to be used more heavily in sectors with relatively high transaction sizes and where payments do not take place at the point of sale. These include the ‘housing and utilities’, and ‘travel and accommodation’ merchant categories.

Card use also differs according to the age group and income level of the cardholder, and whether the cardholder tends to pay off his/her credit card balance each month (a transactor) or carry a balance from one month to the next (a revolver). In general, the use of EFTPOS relative to credit cards declines with age and income; and transactors tend to use their credit card more frequently than revolvers – reflecting the fact that revolvers incur an interest charge immediately on an additional purchase.

In total, the number of card-based payments in Australia increased by 11 per cent in 2007/08. Debit card payments grew significantly faster than credit card payments, increasing by 15 per cent, compared with seven per cent for credit card payments (Graph 6). The difference was less marked in value terms; debit card payments increased by 15 per cent, while the value of credit card payments increased by 11 per cent. The average size of a credit card payment rose by $5 in 2007/08, while the average size of a debit card payment was little changed. Since 2003, the average debit card transaction has increased by only three dollars, while the average credit card transaction has increased by around $20.

The increase in the number of credit card transactions in the past year partly reflects the five per cent increase in the number of credit card accounts. Balances outstanding on credit and charge cards rose by 10 per cent, with an average balance of $3,139 in June 2008, up from $3,014 in June 2007. The proportion of total balances accruing interest remained around its long-run average of 72 per cent. The number of debit card accounts increased by four per cent over the year.

One driver of the recent growth in debit card use is the increased promotion of scheme debit cards by a number of banks. A scheme debit card draws funds from a deposit account held at a financial institution, much the same as an EFTPOS card, but does so through the networks owned by the international card schemes. Scheme debit cardholders are able to not only make payments at the point of sale but also in card-not-present environments (such as online purchases) as they would with a credit card, but using their own funds.

The Bank has recently amended its statistics collection to better reflect developments in the debit card market. Existing data do not allow for separate identification of EFTPOS and scheme debit transactions; new data are being collected on the number of scheme debit cards on issue and the split of debit card payments between those processed through the EFTPOS network and those processed through scheme networks. Preliminary data suggest that scheme debit accounts for around one-fifth of the value of debit card payments and a somewhat smaller proportion of the number of debit card payments. The Bank will begin publishing these new data during the coming year once validation and quality control checks have been passed. The Bank has also amended its statistics collection to capture EFTPOS deposit transactions once they are introduced.

Other electronic payments

Direct entry payments continued to grow strongly in 2007/08. Direct debits and direct credits each grew by around 10 per cent in number and around 14 per cent in value.

The average values of direct entry payments are higher than the average values of other non-cash retail payments. In 2007/08, the average value of a direct debit was $8,355 and the average value of a direct credit was $5,218. Direct credits are typically used for payments such as salary, rent, social security and tax refunds, while direct debits are used for mortgage repayments and regular bill payments. Many service providers, particularly those in the telecommunications, internet and pay-television industries, now stipulate payment by direct debit as a condition of standard contracts, while others encourage its use via their fee structures. The consumer survey found that more than 60 per cent of respondents had a direct debit from a deposit account during the two-week survey period.

An alternative to direct debit for electronic bill payments is BPAY, with BPAY payments accounting for around four per cent of the number of non-cash retail payments, but only one per cent of the value. Growth in BPAY payments has been stronger than most other payment instruments, with the number increasing by 14 per cent, and the value by 20 per cent, over 2007/08. The average BPAY payment was $709, up from $676 in 2006/07. This is higher than the average value of card payments but significantly lower than the average value of direct entry payments. Use of BPAY tends to be concentrated in a small number of merchant categories for which payments are typically large and infrequent. These include housing and utilities, and insurance payments, as well as payments of taxes and fines.


While the use of all forms of electronic payments continues to increase, the number of cheque transactions has declined steadily over the past decade, with cheques currently accounting for 7 per cent of the number and 13 per cent of the value of non-cash payments. Consumers tend to use cheques more frequently to pay for services and utilities than for goods purchased at retailers; the survey of the use of payment instruments suggested that around 13 per cent of payments for professional services are made by cheque. In 2007/08 cheque payments decreased by eight per cent, although their value increased by three per cent.

Other Retail Payments Developments


Fraud rates on payment instruments in Australia remained relatively low in 2007 compared with rates overseas. Credit and charge cards continue to be more prone to fraud than proprietary debit cards (EFTPOS/ATM cards) and cheques. In 2007, the fraud rate on credit and charge cards was around 44 cents for each $1,000 transacted (0.044 per cent), compared with the proprietary debit card and cheque fraud rates of around seven cents and one cent, respectively, for each $1,000 transacted (Graph 7). The substantially lower fraud rates for proprietary debit cards than for credit and charge cards primarily reflects the extra security of PIN (rather than a signature) authorisation of proprietary debit card transactions and the fact that these cards cannot be used when the card is not present (i.e. over the internet, phone, mail and fax).

The fraud rate for Australian‑issued credit and charge cards increased considerably from around 37 cents for each $1,000 transacted in 2006 to the current level of 44 cents per $1,000 transacted. This increase is mainly attributable to a rise in fraud related to card-not-present transactions.

Taking debit and credit cards together, the weighted-average fraud rate was 28 cents for each $1,000 transacted during 2007, compared with 24 cents during 2006. Despite the increase, this fraud rate remains relatively low by international standards; for example, it is less than one third of that experienced in the United Kingdom over the same period where high card-not-present fraud was experienced in conjunction with the introduction of chip and PIN security for point-of-sale transactions.

In addition to the increase in fraud on Australian-issued cards, there has been an increase in fraud in Australia on cards issued overseas, primarily due to an increase in counterfeiting and skimming (the use of altered or illegally reproduced cards) and an increase in fraud on transactions where the card is not present. The introduction of chip and PIN in some countries has meant that fraudsters are increasingly being driven to countries that have not yet implemented this technology; for example, following migration to chip and PIN in the United Kingdom, there has been an increase in fraud committed in Australia on UK-issued cards. In contrast, there has been a decline in fraud committed on UK-issued cards in countries that have migrated to chip and PIN.[4]

In Australia, some steps have been taken in this direction. Over the past year, the card schemes have provided financial incentives to issuers and acquirers to upgrade to chip in the form of differential interchange rates. In addition, from 4 June 2008, cardholders in Australia have been given the option of authorising scheme debit and credit card transactions at point of sale by entering a PIN rather than signing the receipt. By providing the option of authorising by PIN, the new arrangements are intended to reduce fraud for point-of-sale transactions and may also lower tender times.

Instances of cheque fraud in Australia remain low, with around 1,600 occurrences in 2007 compared with around 2,400 in 2006, although when fraud does occur it tends to be for high values; in 2007, cheque fraud averaged around $9,200 for each fraud, compared with an average of around $340 for each card fraud.


One of the Board's objectives has been to improve the price signals that consumers face when making payments. One important element of the reforms has therefore been the removal of the schemes' no‑surcharge rules and the Board has closely monitored the extent of surcharging. According to data from East & Partners' half-yearly survey of the merchant acquiring business, surcharging continues to increase, although the majority of merchants still do not surcharge (Graph 8). Surcharging is most common among very large merchants, with around 26 per cent of merchants with annual turnover in excess of $340 million placing a surcharge on at least one of the cards they accept.[5] The survey suggests that the fear of losing customers is the main reason merchants do not surcharge, but some merchants also cite administrative or technological difficulties.

The surcharge on a particular card generally tends to be set around the level of the merchant service fee paid for that card, although some merchants apply a single surcharge to all of the cards they accept. Surcharges on American Express and Diners Club cards are around 2 per cent on average, while those on MasterCard and Visa cards are around 1 per cent on average.

Interchange fees

The Board's reforms to interchange arrangements have resulted in lower interchange fees and a smaller differential between the fees in the various systems (Graph 9). Interchange fees for credit card transactions have halved since 2003 while those on scheme debit have fallen by considerably more. Furthermore, the difference in interchange fees between the EFTPOS and scheme debit systems has declined from around $1.15 on a $100 transaction prior to the reforms to around $0.17 currently.

As discussed in last year's Annual Report, MasterCard and Visa introduced new interchange categories and reset their interchange fees in 2006/07. Under the new structures, the interchange fee paid depends on a number of factors, including: the nature of the account (consumer/commercial/premium); the merchant industry (government/charity/petroleum); and the card type (chip enabled). Lower interchange fees were also introduced for micropayments and high-volume merchants (Table 5). Neither scheme changed interchange categories and fees during 2007/08.

In 2006/07 the schemes also increased the categories of interchange fees on scheme debit products. There is a mix of flat per transaction fees and percentage fees and some variation in interchange fees for a similar transaction between schemes (Table 5).

An interchange benchmark for EFTPOS transactions was established in 2006, at between four cents and five cents for a purchase-only EFTPOS transaction – flowing from the issuer to the acquirer. Actual interchange fees are negotiated bilaterally between participants. Previous liaison has suggested that the interchange fee for transactions involving a cash-out component has in some cases fallen in line with the benchmark for purchase-only transactions, while in others the fee has remained around, or slightly higher than, the pre-regulated rate of 20 cents per transaction paid to the acquirer.

Merchant service fees

The average merchant service fee for the regulated four-party schemes was unchanged over 2007/08, after having fallen a total of 0.59 percentage points since the reforms were introduced in 2003 (Graph 10). This decline has been larger than that in interchange fees so that the margin between merchant service fees and interchange fees has fallen considerably (Graph 11). There is also some evidence that the modifications to the honour-all-cards rules for MasterCard and Visa have helped some merchants negotiate lower fees on scheme debit transactions.

American Express and Diners Club have seen a modest further reduction in their average merchant service fees. The average fee fell 0.06 percentage points during 2007/08 to 2.11 per cent, some 0.32 percentage points below the average merchant service fee prior to the reforms.

The aggregate net savings to merchants over 2007/08 from declines in merchant fees across all four schemes since the reforms were introduced is estimated at $1.1 billion. Equivalently, this represents a reduction in costs for merchants of around 72 cents per credit or charge card transaction over the period.

In the EFTPOS system, interchange fees flow from the issuer to the acquirer – the opposite direction to scheme products. As a consequence, the Board's reforms to reduce interchange fees have led to higher, rather than lower, merchant service fees. Average merchant service fees for the EFTPOS system increased modestly in 2007/08 after increasing by 9.3 cents in the previous year (Graph 12). Nonetheless, increased competition in the acquiring market has reduced the margin between interchange fees and the merchant service fee over time (Graph 13). Since 2005, this margin has fallen by around seven cents per transaction.

One factor affecting the acquiring market is the ability of large merchants to effectively bypass acquirers. In 2007/08 a second major retailer launched its own switch, allowing it to send transactions directly to major issuers, and hence bypass the scheme networks for a substantial proportion of transactions.

Pricing to cardholders

The average annual fees on both standard and gold credit cards at the largest banks were unchanged in 2007/08 at $85 and $140 respectively (Graph 14).

The decline in the value of reward points has continued over the past year, albeit at a slower rate than in previous years. A useful benchmark for comparing reward programs is the spending required to obtain a $100 shopping voucher. For a MasterCard or Visa credit card issued by one of the four largest banks, a cardholder needs to spend, on average, around $16,700 to obtain a $100 voucher, up from $16,300 in 2007, and $12,400 in 2003 (Table 6). Caps on the number of points that a cardholder can earn during a given period have also been introduced by some issuers.

Interest rates on credit cards rose substantially over 2007/08, reflecting, in part, a rise in the Reserve Bank's target cash rate and tighter funding conditions more generally (Graph 15). The average interest rate spread to the cash rate on standard credit cards rose by 70 basis points to 12.25 percentage points. Interest rate spreads on low-rate cards rose by 50 basis points on average, reversing the downward trend of recent years. Despite this rise, the average interest rate spread on low-rate cards, at 5.4 percentage points, was still below the levels seen when these cards were first introduced and less than half the average interest rate spread on standard credit cards.

The pricing of EFTPOS transactions to cardholders has not changed significantly over the past year, as ‘all you can eat’ transaction accounts remain the standard pricing model for many banks. These accounts come with an unlimited number of electronic transactions, including EFTPOS, own ATM, BPAY and direct entry transactions, for a fixed account-keeping fee of around $4-$6 per month. However, the fees that banks charge their customers to use an ATM not deployed by that bank rose over 2007/08, with all of the largest banks now charging $2. It is anticipated that there will be significant change to the way that banks and ATM deployers charge customers for ATM transactions following the introduction of ATM industry reforms in March 2009. Further details on these reforms are provided in the chapter ‘Other Regulatory Responsibilities’.

High-value Payment Systems

Over 2007/08, the number of transactions settled across the RTGS system rose by around 14 per cent, while the value increased by 16 per cent. On average, over 30,000 transactions settled per day over this period, with a value of around $194 billion (Graph 16). On the peak value day in 2007/08, around 47,000 RTGS transactions were processed with a total value of $312 billion.

Although specifically designed as a system for the settlement of large-value payments, a significant number of small‑to‑medium sized payments are settled in the RTGS system, with the number of such payments growing strongly over recent years. The number of payments over $1 million has, until the 2007/08 period, remained fairly constant (Graph 17). The more recent growth in this category of payments appears to have been driven by banks' customer payments, of which the number over $1 million rose by 21 per cent over the year.

Around 90 per cent of the value of interbank settlements takes place through the RTGS system, with the remainder occurring on a deferred net basis. Around 70 per cent of the value of RTGS settlements arises from banks' domestic and correspondent banking customer payments, including foreign exchange-related payments. The remainder is accounted for by the settlement of transactions in debt securities and money market instruments.

Payments related to equity transactions are settled across Exchange Settlement accounts in a daily net settlement batch: the CHESS batch. The average value of participants' cash settlement obligations in this batch in 2007/08 was approximately $630 million. Similarly, interbank obligations arising from retail payment systems are settled across Exchange Settlement accounts in a batch: the 9am batch. In 2007/08 the average value of participants' obligations in the 9am batch was $1.7 billion. Due to the effect of multilateral netting, this is significantly less than the total interbank exposures arising from retail payment systems which are typically around five to six times higher than the net.


Reserve Bank of Australia, Payments System Review Conference, April 2008. [1]

A ‘foreign’ ATM is an ATM owned by an institution other than the cardholder's financial institution. [2]

Source: Australian Payments Clearing Association. [3]

APACS, Fraud – The Facts 2008, April 2008. [4]

East & Partners, Australian Merchant Acquiring and Cards Markets: Special question placement report prepared for the Reserve Bank of Australia, June 2008. [5]