The Reserve Bank of Australia’s
intervention into the country’s payment system had far-reaching
effects which are still being argued about today. A new study from
the central bank has put a positive spin on its reforms and how
they have influenced consumer payment trends. Victoria Conroy reports.

Australian reforms: Interchange feesPayment reforms implemented in 2003 by the Reserve
Bank of Australia (RBA) which, among other things, saw card
interchange levels reduced significantly and merchant surcharging
outlawed, are still generating controversy today, and have even
been held up by other national regulators as far afield as the US,
Canada and Europe as the definitive template for similar reforms

Not surprisingly, in a periodic review of the
effect of its reforms published in July 2009, the RBA has attempted
to put a positive spin on the aftermath by examining the effect of
price incentives on consumer payment patterns using transaction
level data gleaned from a sample of 662 Australians over a two-week
period in 2007.

The RBA’s study found that although some
slowing in credit card payment growth was inevitable from the rapid
pace experienced during the late 1990s, “there appears to have been
a shift in the relative growth in the two card payment instruments
[credit and debit]. Further, this shift appears to have coincided
with the shift in relative prices resulting from the reforms.”

Cash and non-cash payment

Although cash still accounts for
around 70 percent of consumer payment volumes and 38 percent of
value, consumer choice of payment method is closely related to the
transaction amount, with cash being most commonly used for nearly
all transactions under A$10 ($8) and three-quarters of transactions
between A$11 and A$25. At the other end of the scale, cheques and
the bill pay scheme BPAY are used more for high-value payments,
accounting for 29 percent of payments above A$500.

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EFTPOS, MasterCard and Visa debit card
payments comprise 15 percent of all transactions, followed by
MastCard and Visa credit card transactions (9 percent) and American
Express and Diners Club cards (1 percent). Cards are used
extensively across all but very low transaction values.

Cards inhabit a broad space but there are
several differences. For transactions between A$25 and A$200, debit
and credit cards account for 45 percent of transactions. Credit
cardholders who are primarily transactors use their cards more
often than revolvers, for around 22 percent of transactions
compared to 12 percent for revolvers, and 35 percent of spending
value compared to 22 percent for revolvers, Conversely, revolvers
tend to use debit cards more often than transactors, mindful that
additional purchases will accrue more interest charges and increase
the relative price of credit cards compared to other payment

Loyalty programme participation appears to be
more common for transactors, with three quarters of transactors
participating in loyalty programmes compared to 59 percent of
revolvers. On average, credit cardholders with loyalty programmes
use their credit cards around twice as often as those who do not
participate in a loyalty programme.

However, the RBA’s study also that credit card
reforms have brought about a reduction in the generosity of loyalty
programme rewards, with an average spend of A$16,700 now required
to obtain a A$100 shopping voucher compared with A$12,300 in

The RBA’s study also stated that loyalty
programme holding has an effect on credit card use, saying that if
for whatever reason loyalty programmes had been removed from all
credit cards in 2008, its study suggested that the total value of
credit card spending in 2008 would have been around 20 percent
lower, or alternatively amounting to A$163 billion instead of the
observed A$204 billion.

“The results indicate that the probability of
a credit cardholder using a credit card to make a payment is 23
percentage points lower for a base case cardholder that does not
participate in a loyalty programme, than a cardholder that does
have a loyalty programme,” the RBA said.

The Australian influence

The RBA’s reforms and its subsequent
conclusions cited findings in a separate study from Andrew Ching,
assistant professor of marketing at the University of Toronto, and
Fumiko Hayashi, a senior economist at the Federal Reserve Bank of
Kansas City. Their joint academic study, Payment Card Rewards
Programs and Consumer Payment Choice, based on a 2005 survey of
3,000 cardholders and published in May 2009, claimed that a
reduction or elimination of loyalty programmes would only “cause a
small percentage of consumers to switch from electronic payment
methods to paper-based methods”.

“The majority of consumers who
currently receive rewards on credit and debit cards would continue
to use credit and debit cards, even if rewards were no longer
offered,” the academic study found.

This conclusion is “consistent with the
experiences in Australia, where the three major credit card
networks, Bankcard, MasterCard and Visa, were mandated to reduce
their interchange fees in 2003,” the study said.

“Although the value of the rewards points for
these three networks has been reduced dramatically since the
reforms, we observed that the usage pattern of credit cards has
remained essentially unchanged. Nevertheless, we still find that
rewards on credit and debit cards encourage consumers to use these
payment methods. This suggests that removing rewards from credit
cards would likely hurt card issuers who primarily issue credit
cards, but benefit those who primarily issue debit cards.

“We also find the effect of removing credit
card rewards are greater than that of removing debit card rewards,
and consequently, removing rewards from both credit and debit cards
would reduce credit card transactions, but increase debit card