Common Benchmark for the Setting of Credit Card Interchange Fees – November 2005 4. Consultation

Given the above assessment, in February this year, the Bank sought comments from interested parties as to whether establishing a common benchmark was in the public interest. In total, the Bank received nine submissions and provided an opportunity to those who had made submissions to discuss their submissions with the Bank; five parties took up this opportunity. All submissions are on the Bank's website.

One group (the majority) argued that the Bank should change the Standard to require a common cost-based benchmark for all designated schemes.^[1] These parties argued that the current differences in interchange fees are a factor in the marketplace.

Amongst the submissions supporting a common benchmark there were two broad approaches advocated.

The first, by the Australian Merchant Payments Forum (AMPF), was to base a common benchmark on the costs of the lowest-cost scheme. Other submissions did not support this approach on the basis that it would result in Bankcard's costs providing the benchmark. They argued that Bankcard's costs refl ect those of a small, domestic scheme and are not representative of the costs of credit card issuing more generally. Visa, in particular, argued that Bankcard's costs are not refl ective of a growing dynamic network and that if the Bank were to adopt such a benchmark, the capacity of schemes to develop new products for the benefit of society would be reduced.

The second, and more widely supported approach, was to base the benchmark on the weighted-average costs across the schemes. Some submissions argued that Bankcard should be excluded from this weighted-average on the basis that its costs are not representative of the industry as a whole.

In contrast to the submissions supporting a common benchmark, MasterCard and the Commonwealth Bank argued that the Credit Card Interchange Standard should not be changed.

MasterCard argued that establishing a common benchmark would eliminate the remaining competition in the setting of interchange fees. It argued that competition between schemes with respect to product offerings and scheme fees would be diminished. MasterCard also argued that a common benchmark would result in under compensation of issuers in the higher-cost scheme and over compensation of issuers in the lower-cost scheme.

The Commonwealth Bank argued that if a cost-based methodology is to apply, it should reflect actual costs incurred; an outcome which would not be achieved by setting a common benchmark. It also argued that facilitating different interchange fees between schemes is pro-competitive and noted that, in its view, the independent experts appointed by the schemes to calculate their benchmarks play an important role, and it would be undesirable to abolish this role.

Westpac indicated that it was not convinced of the need for change but, if the Bank were to institute such a change, it would support a common benchmark determined by costs averaged across the three schemes.

The draft standard

Reflecting the results of its own analysis and the above consultation, the Bank released two versions of a draft standard for public consultation on 20 July 2005. The draft standards proposed that a common benchmark, equivalent to the weighted-average of the current individual benchmarks, would apply to all schemes. Under one version (Version A), each scheme would continue to appoint an independent expert to calculate a scheme-based measure, equivalent to the current benchmarks, with the Reserve Bank calculating the common benchmark as a weighted-average of these measures. Under the other version (Version B), a single expert would verify costs and conduct calculations across all issuers, with issuers not having to identify costs by scheme.

In addition to further comment on the arguments for a common benchmark, the Bank sought specific comment on three issues. The first was the method for calculating a common benchmark. The second was the date when the changes should be introduced. And the third was whether Version A or Version B was preferred.

Three parties made submissions by the due date of 23 August 2005, and a further four parties made late submissions. All submissions have been considered and posted on the Bank's website. Parties who made submissions were also offered the opportunity to meet with the Bank and three parties took up this opportunity.

All submissions were relatively short, with most parties having set out their views on the substantive arguments in the earlier round of consultation. Some reiterated previous opposition to a common benchmark but then put their views about their preferred form of a common benchmark should one be introduced. MasterCard argued strongly against any regulation of interchange fees in the four-party systems.

On the first issue – the method of calculation for the common benchmark – comments largely reiterated those that had been made earlier in the consultation process. The AMPF argued that the benchmark should be calculated based on the lowest-cost scheme, while most other submissions argued for a weighted average across schemes. The National Australia Bank added that the Bank should consider requiring schemes to adopt the same interchange rate for each transaction type.

With respect to the question of timing, there was general agreement that, should a change be made, it should be implemented to take effect at the time that the existing benchmarks are due to be recalculated in 2006.

On the issue of how the calculation should be performed, submissions were relatively evenly divided. A number of banks (but not all) supported Version B (under which a single expert would be appointed), while MasterCard and Visa supported Version A (under which there is one expert per scheme). Those supporting Version A noted that there were practical difficulties associated with Version B, particularly in choosing a single expert that was acceptable to all the nominated participants. Notwithstanding this, a view that was frequently expressed was that it would not make a significant difference one way or another which version was chosen.

The other main issue to receive comment was the method for selecting the nominated scheme participants. The draft standard proposed to move to a method where cost data had to be collected from the minimum number of financial institutions required to reach 90 per cent of the transactions in the scheme in Australia. This is in contrast to the current arrangements which allow the schemes to choose the financial institutions to be included in the cost study, provided that the chosen institutions account for at least 90 per cent of the transactions in the scheme in Australia. Visa argued that this proposed change would mean that there would be delays in identifying the nominated participants and that this could create undue burden for the marginal institutions as they could not effectively plan for the cost study because they would be uncertain if they were included or not.

Footnote

See submissions by ANZ, the Australian Merchant Payments Forum, Creditlink, CUSCAL, National Australia Bank and Visa. [1]