Proposed Changes to the Credit Card Interchange Standard:
A Consultation Document – July 2005 5. A Draft Revised Standard

In deciding on the specific variations to the existing standard, the Bank considered a number of issues. These included: how a common benchmark should be established; the date on which a revised standard would come into effect; and the mechanics of the calculation. On the first two issues, the Bank has clear preferences, which are explained below. On the third, it can see two viable options for calculation which arrive at essentially the same result. To give interested parties the opportunity to comment, the Bank has released two draft Standards that incorporate these alternative methods of calculation, only one of which would be adopted.

In general the revised standards use the same language as the existing credit card interchange standard, except where revisions are necessary to give effect to the changes discussed above. There are, however, two minor further variations. The first deals with the selection of nominated scheme participants (in version A) and nominated participants (in version B). The second relieves participants in the schemes from the obligation to certify compliance with the Standard; the administrators of the schemes remain responsible for doing so.

A common benchmark

The Bank considered two ways in which a common benchmark could be determined. The first is to use the weighted-average eligible costs of the designated credit card schemes and the second is to use the eligible costs of the lowest-cost scheme.

The former option is the Bank's preferred approach. This reflects two considerations. The first is that this option will, as discussed above, promote stronger incentives for all schemes to lower their costs. The second is that using the lowest-cost scheme would lead to a significant drop in the average level of interchange fees in the Australian credit card industry. This is not the Bank's intention; the proposed change is aimed at improving incentives, rather than reducing the overall level of interchange fees. At this stage, the Bank's view is that it would be inappropriate to lower average fees without more extensive analysis and consultation. The Bank has previously noted that it will conduct a review of arrangements in 2007.

A related matter is the treatment of Bankcard in any such weighted-average benchmark. Some submissions argued for the exclusion of Bankcard on the grounds that it is considerably different from the other schemes (predominantly because it is a domestic scheme rather than an international scheme). The Bank's view, however, is that there is a stronger case to include all the designated schemes. Both draft standards therefore propose that Bankcard be included in a weighted-average benchmark.

Timing of the change

A common view in consultations was that any change to the method of calculating a common benchmark should be made at the same time as the scheduled 2006 recalculation of the benchmarks. The Bank supports this view and both draft standards propose a commencement date of 1 July 2006.

The mechanics of the calculation

The Bank considered two approaches to calculating the weighted-average benchmark, both of which yield essentially the same result.

In the first, which is set out in Version A, each scheme would continue to appoint an independent expert to calculate a cost-based benchmark. These benchmarks would be provided to the Bank along with the value of transactions on which they are based. The Bank would then weight the cost-based benchmarks by relative transaction values in each scheme to calculate the common cost-based benchmark to apply to all three schemes. Under this approach, the current processes would remain in place but one more step would be added – that of the Reserve Bank calculating a weighted-average common benchmark. Issuers would still be required to allocate costs between schemes, with a different set of issuers potentially being included in the calculations for each scheme. Each scheme would propose an independent expert, who would be agreed to by the Reserve Bank.

In the second approach, which is set out in Version B, the scheme-based calculations would be abandoned. Instead, the Bank would nominate those issuers that account for at least 90 per cent of the value of credit card transactions in the designated schemes. An independent expert proposed by the issuers in the schemes, and agreed to by the Reserve Bank, would then be provided with eligible costs by each of the nominated issuers. These costs would be added together and divided by the total value of credit card transactions undertaken on credit cards issued by the nominated issuers, to yield a common cost-based benchmark. The key difference between this approach and the first one is that there would be no need for each issuer to allocate costs between schemes – eligible costs would be those relating to credit card issuing in total. In addition, members of the schemes would only need to meet the cost of one independent expert rather than three experts.