Productivity Commission recommends Payments System Board ban all card interchange fees, by mid-2019
Reserve Bank conducted extensive Review of Card Payments Regulation over 2015/16; new interchange standards came into force on 1 July 2017
International experience highlights that bans on interchange can have unintended consequences
Point of View
The Productivity Commission, in the Inquiry into Competition in the Australian Financial System Draft Report, publicly released in February 2018, has recommended that the Payments System Board should ban card payment interchange fees by mid-2019.
Interchange fees are a feature of the ‘four party' card model. Interchange fees are paid by the acquiring bank to the issuing bank on transactions routed through a card scheme network. the fees are intended to offset some of the issuing bank costs of issuing and authorising cards. The schemes, such as Visa and MasterCard, set multilateral interchange fees, which are capped by the Reserve Bank.
In offering a rationale for the ban, the Commission stated that “regulation of bank interchange fees and surcharging has proved complex and there is little genuine commercial justification for interchange fees.”
Most submissions addressing the topic appeared to oppose the ban on interchange fees.
There are a range of costs associated with developing and running a payment network. Different participants receive different benefits. Consumers receive security, fraud detection, interest free days and payment convenience (which is underpinned by investment in innovation). Merchants receive the ability the accept non-cash payments, they do not have to write off credit losses, and they can improve customer convenience.
The international schemes and many banks noted that interchange is an effective and efficient way to balance costs across these participants.
Furthermore, a ban on interchange would – clearly – not remove the underlying costs involved with maintaining the system and investing for innovation. Therefore, it is likely that a complete interchange ban would merely shift associated costs elsewhere. This point was made by the Australian Retailers Association (ARA) in its submission.
This was highlighted by some submissions that pointed to international experience. The 2010 ‘Durbin amendment’ in the United States radically reduced interchange fees. However, this led to increased costs to consumers elsewhere. Similarly, another submission noted that an interchange ban would likely disproportionately impact smaller banks, which primarily operate on the issuing side and have a smaller asset base across which to spread costs.
Furthermore, many submissions pointed out that the Reserve Bank had only recently conducted the Review of Card Payments Regulation. While the Reserve Bank had considered banning interchange fees, it ultimately decided against this. In its submission, the Reserve Bank stated that factors in this decision included “the risks of significant effects on the competitive balance between three and four-party credit card schemes or of a significant increase in circumvention efforts.”
The changes resulting from the Reserve Bank’s interchange review only came into effect on 1 July 2017. Therefore, some submissions suggested to wait and assess what effect these reforms might have (noting that the Reserve Bank itself will review the fees again in five years).
The Final Report is due to be provided to Government in July 2018, and will likely be publicly released later this year. It will be interesting to see whether the Productivity Commission maintains this recommendation.