When interchange levels were reduced in
2002, dire consequences were predicted for the Australian credit
card industry. While there has certainly been a shake-up, the end
result has been adaptation strategies rather than destruction.
Grant Halverson reports.

The Reserve Bank of Australia’s (RBA) 2002 ruling on credit card
interchange was the first step in ‘refining’ the payments system in
Australia. The reforms were broadly aimed at opening up the credit
card system and increasing competition, and had three main

1. to provide open access to the card associations, namely Visa and
MasterCard, enabling non-banks to join and issue association

2. to reduce credit card interchange fees to a more suitable level.
The interchange rate in Australia ranged between 80 and 120 basis
points. The weighted average – which reflects lower rates paid by
high-volume customers – was 94 basis points. The RBA determined in
2002 that interchange would reduce to 50 basis points, effective
October 2003; and

3. to ban the no-surcharging rule imposed on retailers by the
card associations.

The Australian ruling was noteworthy because the RBA was the first
central bank to make a definitive decision on the contentious issue
of association membership and the raft of fees and charges, many of
which were not transparent to consumers.

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The Australian market

The Australian banking market is characterised by the dominant
position of its four largest banks – ANZ Banking Group (ANZ),
Commonwealth Bank of Australia (CBA), National Australia Bank (NAB)
and Westpac Banking Corporation (Westpac) – which dominate the
credit card market, issuing 80 percent of cards and holding 84
percent of receivables.

The government has restricted takeover activity and mergers between
these four banks. Foreign banks that have entered the Australian
market have found the entrenched nature of the Australian banks
difficult to overcome.

With a population of 20 million, 13 million credit card accounts,
16 million credit cards and A$39 billion ($30.4 billion) in
receivables, Australia is the eighth-largest credit card market

Total bank-issued credit card receivables are around A$33 billion
or A$2,870 per account with another A$2 billion of non-bank issued
credit cards. Some 7 million private label cards account for a
further A$18.5 billion of consumer debt.

Other cards players in the Australian market include American
Express with 1.3 million cards and A$3 billion in receivables, and
Citibank’s subsidiary, Diners Club, with 420,000 cards and A$450
million in receivables.

Financial consequences of reforms

Interchange had been a significant source of revenue for credit
card issuers in Australia. The concern in the global card industry
was that the Australian position could influence decisions on
interchange elsewhere, thus setting a benchmark that could result
in substantially lower interchange in other markets.

Card issuers received about A$750 million in interchange fees
during 2002 (or A$46 per card), representing 18 percent of total
revenue. (In practice, interchange revenue ranges between 10
percent to 35 percent of total revenue for individual

The RBA decision to reduce interchange to 50 basis points would
reduce issuers’ revenue by 8 percent to 14 percent.

Clearly, there was scope for Australian card issuers to recover
lost interchange revenue. The revolve rate in the Australian market
averaged 68 percent of consumers, compared with 90 percent in the
US and 85 percent in the UK. An increase in revolve rates to 75
percent would replace lost interchange revenue.

Major Australian issuers derived 5 percent to 8 percent of revenue
from annual fees, which had all but disappeared in the US, UK and
Canada. Conversely, they derived a meagre 5 percent of revenue from
other fees such as foreign exchange, over-limit and late payment,
that made a much higher contribution to revenue in other

Market reaction

Visa and MasterCard immediately announced their intention to sue
the RBA as the only means of appeal open to the associations. The
case was subsequently dismissed, raising questions about this type
of tactic.

Retailers, which stood to benefit to the tune of A$300 million in
2003, remained non-committal. Their main concerns were based on the
next phase of the RBA reform process, including debit cards and
electronic funds transfer at point of sale (EFTPOS). Several major
Australian retailers had their own switching capability and
benefited from debit card interchange, which faced threats from the
second phase of reforms. The possible reductions for retailers
could range from A$25 million to A$35 million for retail switch

The Australian Competition and Consumer Commission did not
undertake a formal price surveillance programme to ensure retailers
passed on the interchange reductions to consumers. This would seem
to have been a major error, as a number of retailers did not pass
on the reduction.


Although surcharging was possible from 1 January 2003, little
changed in the initial period. Larger merchants, including Qantas
Airways and telecoms provider Telstra, began testing market
reactions and implementing surcharges in 2003.

Small- and medium-sized businesses also began selective
surcharging, which affected the merchant acceptance rates for
American Express and Diners Club charge cards more severely than
those for Visa and MasterCard.

Today, many retail and service providers surcharge some or all
credit cards, with the key driver being local area

Fee increases

It was clear the credit card issuers faced a strategic dilemma. The
RBA’s interchange reforms were a particular problem for issuers
with successful frequent flyer programmes, which moved to increase
fees before the RBA announcement and to offset changes in their
frequent flyer programmes.

The result was a significant increase in credit card fees. In 2002,
credit card fees totalled A$425 million; by 2005 they had increased
to A$899 million, a 112 percent increase according to RBA figures.
Yet credit card account numbers have increased by only 14 percent
over the same period.

All of the issuers increased fees in 2002-03 by an average of 38
percent. ANZ increased card fees by an average of 48 percent,
effective from December 2002. The most notable increase was the
Qantas ANZ Classic Card, the annual fee for which grew by 48
percent from $27 to $40; its reward fee grew by 67 percent from $33
to $55, with an additional reward fee imposed on each add-on card
of $55 (previously there had been no fee). The cost of Visa Gold
totalled $150 including rewards, while an additional card increased
to $65.

CBA announced fee increases effective from January 2003, with the
Classic Bankcard, MasterCard and Visa increasing from $45 to $59 –
a 31 percent increase, including the reward fee. A Gold MasterCard
or Visa fee increased by 39 percent from $82 to $114.

St George, Australia’s fifth-largest bank with total assets of
A$107 billion as of September 2006, increased its base MasterCard
credit card fee by 51 percent.

American Express restructured its rewards programme, introducing
two levels of fees with 10 percent and 136 percent increases.
However, the reward points were diluted while annual fees remain

Several card issuers also applied a new range of fees and charges
from 20 January 2003. These included increases in ATM fees,
overseas cash advances, foreign exchange conversion fees and
over-the-counter cash access fees. At the same time, low-rate
balance transfer products were introduced, with instant success.
Consumers could switch to lower-rate, low-fee cards such as Members
Equity, Bank West’s Lite MasterCard, St George’s Visa and ANZ
low-rate card.

Frequent flyer programmes

Australian credit card issuers offered generous airline reward
schemes, which had been funded from interchange revenue. With lower
interchange revenue, such reward schemes needed to be restructured,
diluting benefits and increasing fees for cardholders. The major
consequence has been that consumers have switched from credit to
debit cards. Debit card transaction spending increased 73 percent
from 2003 (18.25 percent per year), while credit card spending has
grown at 32 percent (8 percent per year). This was a clear
objective of the RBA reforms.

Summary of consequences

The RBA changes were positioned as ‘reforms’ that would be
advantageous for both consumers and merchants, but there has been
little evidence of benefit. Changes to airlines and frequent flyer
programmes had as much influence as the RBA changes.

The decision by the RBA to undertake a staged approach to payments
reforms would seem to have been a mistake. The changes to credit
cards in 2002-03 allowed market forces to adapt to possible changes
to debit cards and EFTPOS, diluting the potential of real reform of
the payments market.

It is clear that the Australian regulators are not acting in
isolation. All major regulators around the world are aware of the
RBA’s stance and are prepared to follow its lead in dealing with
controversial fees. Regulators are responding to a growing trend
among consumers who have become restless over bank charges, privacy
and the level of service they receive.

A clear consequence of the RBA decision has been a change in
consumer spending patterns, with debit card spending double that of
credit cards in the last four years. This has revenue implications
for card issuers that need to be understood. Credit card
receivables have grown 14 percent per annum while spending has
increased 8 percent per annum since 2002.

Non-banks staying away

The RBA made great play of the rule changes that would allow
non-banks to issue Visa and MasterCard cards. However, since 2003
no major non-banks have entered the card market as independent
individual issuers. The successful market entries have all involved
partnerships with existing banks – examples include Virgin Money
and Westpac, Aussie Home Loans and ANZ.

There is also evidence that major offshore card issuers have
bypassed the Australia market because of the protracted nature of
the RBA reforms, preferring to enter markets where conditions
appear more stable.

Retailers were the major beneficiaries of the RBA changes,
receiving a reduction in interchange (at last estimate valued at
A$450 million) with little enforcement requiring them to pass the
benefit to card users.

The Australian banks’ strategic bind of facing RBA changes and
significant changes to their reward programmes was in the end
solved by increases in card fees, revolve rates and the
introduction of new low-rate cards.

Effect on closed-loop merchant systems

Some industry experts expected that American Express and other
closed-loop merchant systems could benefit from the RBA ruling,
since their operations do not involve interchange. However, this
has not happened. American Express and Diners Club are under
greater pressure because of higher merchant commission rates and
have experienced more suppression and surcharging than Visa or

Developments in Australia followed precedents set in Norway and
Finland in the early 1990s, where both governments threatened to
ban merchant commissions entirely. In both cases, the demise of
credit cards was widely predicted. However, the credit cards
industry in these markets has adapted to change and continues to
flourish, as it surely will continue to do in -Australia.