REPORTS FROM LEADING ECONOMISTS RAISE CONCERNS ABOUT RBA/ACCC JOINT INTERCHANGE FEE STUDY

Reports released for public debate

Sydney, 11 May, 2001: The Reserve Bank of Australia (RBA) should give full consideration to the concerns of leading economists about the RBA/ACCC Joint Study into Interchange Fees and Credit Card Membership Schemes.

ABA Chief Executive David Bell today publicly released four reports by leading experts that highlighted concerns with the Joint Study. (These reports are available to the public on the ABA Web Site at: (www.bankers.asn.au)

The RBA/ACCC Joint Study has motivated the Australian Competition and Consumer Commission (ACCC) and the RBA to intervene in the credit card payment market. The RBA is undertaking a process of consultation after its ‘designation’ of credit cards under the Payments Systems (Regulation) Act 1998. Designation is the first step in the process which allows the RBA to set the rules for participation and operation of the credit card system.

"The ABA supports the involvement of the RBA which used its powers of designation as a first step to the potential reform of interchange arrangements, " Mr Bell said.

"Given the central role the RBA/ACCC Joint Study has played in motivating regulatory intervention in the credit card system, we believe the RBA must consider the concerns of its Joint Study."

"Ideally, the RBA should address the concerns of its Joint Study before the release of the formal consultation document proposing a model for setting interchange fees and scheme access rules."

"The banks have faced severe public criticism on the basis of information contained in the Joint Study and it is unfortunate that this has occurred while there are concerns about the Study’s analysis and findings."

Mr Bell said the concerns raised by the leading economists about the Joint Study included:

• ‘Closed’ credit card schemes, such as American Express, are not investigated;
• The long-term costs of developing the credit card schemes are not recognised;
• The full marketing costs of credit cards are not accepted;
• Network benefits (to merchants) are not properly understood;
• The costs to merchants of accepting cash and cheques (as opposed to credit cards) are not considered;
• The risks carried by acquiring banks on behalf of merchants are fundamental, but overlooked;
• The role of acquiring banks in monitoring merchant behaviour is not recognised;
• The assumption that Australia’s credit card schemes are ‘mature’ is not supported;
• A greater need to recognise that debit and credit cards offer quite different value propositions to both cardholders and merchants;
• International evidence on the impact of abolishing the "No Surcharge" rule is not considered.

Mr Bell, representing the seven review banks (see below) said that he will raise these issues with the RBA in bilateral discussions.

Seven review banks

1. Australia & New Zealand Banking Group Limited
2. Bank of Queensland Limited
3. Bank of Western Australia Limited
4. Commonwealth Bank of Australia
5. National Australia Bank Limited
6. St George Bank Limited
7. Westpac Banking Corporation Limited

Please note:

Background note attached which directly quotes the leading economists on the concerns raised about the Joint Study.

Complete copies of the four reports can be found on the ABA website: www.bankers.asn.au

The four reports are:

1. ‘Credit Card Schemes in Australia ­ A response to the Reserve Bank of Australia and Australian Competition and Consumer Commission Joint Study’, Prepared by Network Economic Consulting Group for VISA International Service Association, January 2001.
2. ‘Economic Review of Credit Card Scheme Membership Rules’, Report to ‘The Review Banks’, 'The Allens Consulting Group', January 2001.
3. ‘Role of Interchange Fees in Credit Card Associations: Competitive Analysis and Regulatory Issues’, Joshua S.Gans and Stephen P. King, University of Melbourne, April 2001, (published in the The Australian Business Law Review)
4. ‘Joint Bank Review of Credit Card Membership and Interchange Fees ­ Report on Credit Card Interchange Fees to Review Banks’, Frontier Economics, January 2001.