Bills Digest No. 35 2005–06
Payment Systems (Regulation) Amendment Bill
2005
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Payment Systems (Regulation) Amendment Bill
2005
Date Introduced: 10 March 2005
House: House of
Representatives
Portfolio: Treasury
Commencement: 1 July 2005
The purpose of the Payment
Systems (Regulation) Amendment Bill 2005 (the Bill) is to allow the
Reserve Bank of Australia (RBA) to continue to control excessive
bank charges on credit card transactions by exempting from the
operation of Part IV of the Trade Practices Act, the setting or
charging of interchange fees that accords with its interchange fees
standards.
The RBA has been active in trying to reform the payments system
to make it more competitive and to encourage the take up of more
efficient payment mechanisms. As the RBA points out:
Australia is among the first countries in the
world to make efficiency of payment systems a statutory objective
of the central bank. The RBA's initial work in this area has
focused on cheque-clearing times, interchange fees associated with
ATMs, credit cards and debit cards (undertaken in conjunction with
the Australian Competition and Consumer Commission) and on
encouraging the take-up of direct debits as a means of bill
payment.(1)
The RBA has concentrated recently on the interchange fees. These
are fees that banks charge each other when someone uses a credit
card. The interchange fee involves a payment that goes from the
merchant s bank to the purchaser s bank and is paid at an agreed
rate. In 2000 the Reserve Bank, together with the Australian
Competition and Consumer Commission, published a study on Debit and Credit
Card Schemes in Australia which dealt with credit card
schemes, EFTPOS and 'foreign' ATM transactions. The RBA basically
alleged that the card schemes acted against the public interest.
High fees were charged to merchants and provided banks with high
profits that funded loyalty schemes and often encouraged consumers
into expensive debt. So long as the consumers paid off their credit
cards on time they not only had a free payments mechanism but were
rewarded through points schemes. Nevertheless, merchants paid very
high fees to their own bank, some of which was then passed on to
the customer s bank through interchange fees. However, to encourage
the take-up of credit cards, banks prevented the merchants from
recovering their costs from consumers.
The costs of credit card fees were probably passed on to
all consumers. The whole system was tightly controlled
through the main banks influence over the three card schemes:
Bankcard, Mastercard and Visa. All of the main banks were members
of the three different schemes.
According to the RBA the schemes:
-
did not have objective and transparent cost-based mechanisms for
imposing fees on merchants
-
prevented merchants from recovering their costs from customers,
and
-
prevented competition from potential new issuers of credit
cards.
All of this was important in a wider context. Profits for the
big four banks (ANZ, Commonwealth Bank, National Australia Bank and
Westpac) were $12.3 billion in the latest 12 months for which
figures are available.(2) That means bank profits for
the top four banks are around 1.5 per cent of Australia s GDP.
Putting that differently, of every $100 spent in Australia, $1.50
ends up as profit for the big four banks.
In the past the RBA has presented evidence to the effect that
bank margins are falling as a result of competition. However, bank
profits have not been falling because the fall in margins has been
compensated by the increase in fee income. For example, the fees
charged to households were $1.162 billion in 1997 and increased by
196 per cent to $3.443 billion in 2004. Fees on business increased
by 93 per cent, from $2.880 billion to $5.562 billion, over the
same period.(3) Banks seem to have been able to shift
their profit sources away from the traditional markets that may
have become more competitive and towards areas where they seem to
have more market power. In this case the fees that have increased
so rapidly have fallen particularly hard on transaction deposit
accounts, credit cards and merchant fees. In effect the banks have
put their own monopoly tax on important elements of the payments
system. However, that then distorted the payments system and so
attracted the interest of the RBA.
The RBA addressed the credit card interchange fee issue in three
main ways. It permitted merchants to pass on any credit card fees
to consumers and allowed new credit card issuers to access the
market. However, for present purposes the important change was the
introduction of a cost-based maximum interchange fee that could be
charged. The standard interchange fee covers costs and a reasonable
return to the bank. The RBA announced the new lower fees that were
to apply from 31 October 2003.(4) As a result banks
income from merchant service fees fell from $1.837 billion in 2003
to $1.522 billion in 2004.(5)
Initially, the new standard interchange fee imposed by the RBA
took account of the different cost structures of the different card
schemes. However, the RBA has since sought industry views on its
new proposal to set a common interchange fee and asked for comment
on two possible options:
-
setting the fee based on the average costs of the three schemes,
or
-
setting the fees based on the lowest cost scheme.
Of those two options, the banks supported the former. However,
the ANZ made the point that the average should exclude Bankcard.
While Bankcard is the cheapest, it does not cover international
transactions and other usage that drives up the Visa and Mastercard
costs.(6) The outcome of this consultation has not yet
been finalised.
Credit card schemes and their members, the main banks,
originally opposed these reforms and Visa tried to hold them up
with a legal challenge. However, the reforms have now been bedded
down.
To appreciate the operation of the proposed provision, it is
necessary to understand that the compliance with the interchange
fees standard determined by the RBA could amount to conduct which
is prohibited by the operation of Part IV of the Trade
Practices Act 1974 (TPA). Justice Deane, then a Justice of the
Australian Federal Court, has explained the aim and purpose of Part
IV of the TPA, noting that:
Part IV of the Act is headed "RESTRICTIVE TRADE
PRACTICES". The general purpose and scope of the Part can be
described by saying that it contains provisions which proscribe and
regulate agreements and conduct and which are aimed at procuring
and maintaining competition in trade and
commerce.(7)
Compliance with the interchange fees standard can be seen as
restricting competition. However, the TPA accepts that some
restrictive practices may be of some benefit and provides
exemptions under certain circumstances. One of these exemptions can
be created under paragraphs 51(1)(a)(i) or (ii) of the TPA whereby
practices which are designated by law or subordinate legislation
for the purposes of these paragraphs must be disregarded when
deciding whether a particular practice may contravene Part IV of
the TPA.
By implementing proposed new section 18A, the
legislature will designate compliance with the RBA s interchange
fees standard as exempt practice for the purpose of Part IV of the
TPA and, as a result, compliance with the standards will not
attract the legal consequences of a violation of this Part.
Concluding Comments
A provision with the same effect has been operating as part of
the Payment Systems (Regulation) Regulations 2003. However, this
provision was due to sunset on 30 June 2005 because under section
51(1C)(c) of the TPA, the operation of provisions prescribed by
regulations is limited to a maximum of two years.
The proposed amendment to the Payment Systems (Regulation)
Act 1998 (the Act) will incorporate the exemption into the Act
to which, under the TPA, no time limit applies. As a result, the
exemption will exist until it is repealed by Parliament.
-
Reserve Bank of Australia, Australian Payments System, available
at:
http://www.rba.gov.au/PaymentsSystem/australian_payments_system.html,
accessed 5 August 2005.
-
For the Commonwealth Bank, that includes the half-years ending
in June and December 2004. For the other banks, the figures include
the half-years to September 2004 and March 2005. Figures from
Annual Reports and half yearly Reports.
-
These figures are taken from the latest annual survey of bank
fees published in Banking fees in Australia , the
Reserve Bank Bulletin, May 2005, pp. 65 69.
-
Reserve Bank of Australia, Interchange fees for the Bankcard,
Mastercard and Visa credit card schemes, Media
Release, No. 2003-14, 31 October 2003.
-
RBA, 2005, op. cit.
-
Australia and New Zealand Banking Group Limited, Proposed
changes to credit card interchange: Submission to the Reserve Bank
of Australia,
Submission, 14 April 2005.
-
Refrigerated Express Lines (A/Asia) Pty
Limited v Australian Meat and Livestock Corporation (1980) 44
FLR 455.
David Richardson and Thomas John
29 August 2005
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
© Commonwealth of Australia 2005
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Published by the Parliamentary Library, 2005.
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