Australia Attempts to Reform
Bank Credit Card Pricing

In spite of strong objections from Visa and MasterCard, Australia's central bank has ordered major changes in the way that credit card banks price their services. As John Shaw explains in his article in the Wall Street Journal, the central bank claimed that the sweeping changes "would lower costs and promote competition." The Reserve Bank of Australia has adopted three new rules to accomplish this objective.

First, the Reserve Bank of Australia ordered that interchange fees be cut by about 40 percent to a range of 55 to 60 cents on the dollar. The change is to become effective in January 2003. The central bank alleges that the collective determination of interchange fees by the card association (i.e., the member banks) violates antitrust laws. The assumption is that Australian card issuers have not been passing along the efficiencies associated with improved system technologies to merchants. A corollary assumption might be that the merchants would pass the interchange savings on to consumers. However, the central bank adopted a second rule that will allow retailers to levy a surcharge on purchases made with credit or charge cards "to defray some of the cost of the bank fees."

The central bank issued the rules after a three-year inquiry. Further, the Australian Competition and Consumer Commission approved the findings. The two agencies "were concerned about secret price fixing in the credit card industry. The central bank governor, Ian MacFarland, announced that the new rule "will ensure a more transparent payment system and reduce the size of the transfer from card users to financial institutions. "They will also promote genuine competition on credit card interest rates and service fees." As an additional boost to competition, the Reserve Bank adopted a third rule which will remove the current requirement that card issuers operating in Australia must also take deposits in Australia. The central bank expects this will promote entry by foreign banks, especially monoline card issuers. The new entrants would be regulated by the Australian Prudential Regulatory Authority.

Not surprisingly, the card industry has objected strongly to the changed rules. For example, Gordon Wheaton, Visa's executive vice president for Australia and New Zealand commented: "The new regulations are clearly not in the public interest, and are a bad outcome for consumers and small business. . . Despite the claimed need for credit card reform to deliver better efficiency, more competition, and savings for the community, the RBA's package has one inescapable outcome: Consumers will pay more for the use of credit cards. The RBA is trusting merchants to pass any reductions in merchant service fees on to consumers. Common sense says that these reductions will end up in the pockets of the merchants, along with the new surcharge fee merchants will now be allowed to charge consumers for using their credit cards. This will be a bonanza for the large merchants with consumers footing the bill."

The Australian credit-card market alone is significant for both Visa and MasterCard. Visa has 13 million of its credit cards in use in this country of 19.3 million people. Currently, credit card debt per capita is about $1,200—three times the level in 1996. Since the central bank's order is subject to review, Visa has indicated that it might appeal the ruling. American Express is exempted from the ruling that reduces the interchange fee because it alone determines its interchange rate. However, merchants will be allowed to surcharge American Express card transactions.