Australian Credit Card Interchange Regulation

In an effort to force issuers to pass along declining costs of processing credit card transactions, last year the Reserve Bank of Australia (RBA) issued a regulation that will require issuers to tie interchange rates to their average processing costs. This effectively puts a ceiling on interchange rates. The regulation becomes effective next month (October, 2003). Moreover, as of January 2003, the RBA forced issuers to allow merchants to levy a surcharge on consumers for credit card transactions, and loosened its rules so that nonbanking companies—such as U.S. monoline card issuers—could more easily enter the Australian market. Visa and MasterCard have sued the RBA to block the changes, arguing that such rulemaking was outside its jurisdiction. An Australian court heard arguments in the case in May and June, and a decision is expected in the next few months.

Even though the interchange rule is not yet effective, the American Banker reports big changes have occurred in the Australian card market. Apparently banks are already increasing fees on credit cards and trimming the benefits in card loyalty programs to offset the looming decline in interchange revenue. So much for those who say we can't expect a change in behavior before a law is fully implemented. As a consequence, consumers are reportedly canceling card accounts, and low cost, no frills cards are enjoying rising popularity. Net growth in new credit card accounts in Australia was actually negative in 2002. Thus far, only one major merchant, Qantas Airlines, has announced that it will impose a surcharge (1%) on credit card transactions.