Zero card interchange will all but ‘kill off’ card frequent flyer programmes writes Grant Halverson. And such a dramatic change in policy would mean a loss of A$2bn: 22% of card issuers revenues

The Australian Productivity Commission (PC) Final Report into Competition in the Financial System was released last week.

The PC report reviews whether there has been an appropriate balance between competition and stability in banking, which has entrenched the market dominance of the big four banks in Australia.

The PC report strongly supports greater competition, transparency and better choices to empower consumers.

For the payments system, the PC observes that the system “is at a critical turning point” and has major recommendations.

Australia: the first market to reduce card interchange

It is 15 years since RBA/Payments Board ‘reforms’ reduced credit card interchange, effective January 2003.

Payment recommendation summary:

  • The regulator (RBA/Payments System Board) should ban all interchange fees by the end of 2019. All other fees should be made transparent and published;
  • The Competition regulator the ACCC, should investigate whether interchange fee regulation favours three-party card schemes, and if distortion exists provide further regulatory intervention;
  • Merchants should be given the capacity to select the default route that is to be used for payments by dual network cards;
  • By the end of 2019, the ACCC should investigate what additional disclosure methods could be used to improve consumer understanding of fees for foreign transactions;
  • There needs to be a review of the regulation of Purchased Payment Facilities (such as Paypal) and to simplify the regime.
  • The Government should make the ePayments Code mandatory. The Code sets out basic rules for who pays for unauthorised transactions and establishes a regime for recovering unauthorised payments;
  • The New Payments Platform (NPP) should be subject to an access regime to ensure that there continues to be competition for new entrants to join in, and
  • Investigate ways for the NPP to promote competition, such as additional functionality for PayID to give customers the ability to send/receive bank transfers and other payments.

The Government will await the final report of the Royal Commission before they definitively respond to the PC expected to March 2019. It is also significant that the UK payments regulator (Payment System Regulator) announced a comprehensive review of acquiring on 3 August .

Card interchange: the key numbers

To give some scope of the impact of total reduction on domestic interchange (RBA can’t change overseas prices) the key numbers need to be examined.

Total credit card spend 12 months to May 2018 ex RBA site A$330bn .

To get to domestic interchange you need to take out a number of transaction types, such as overseas spending, AMEX/Diners Club, Commercial Cards which are at a different rate. Cash withdrawals are also set at different rates.

Total Credit Card Spend $330bn
Overseas spend Visa/MC   $28bn
Overseas spend Amex Diners Club     $8bn
Local spend Amex/Diners Club     $50bn
Commercial Cards     $62bn
Cash withdrawals      $9.2bn
Sub Total    $157.2bn


The domestic spend by Visa and MasterCard credit cards in Australia is therefore $172.8bn.

The average merchant fee charged across Australian business is estimated at 1.20%* for Visa and MasterCard. At Amex the rate is 1.42%, Diners Club 1.80% and AfterPay 4-6% plus 30c transaction fee.

ZipMoney is 4% plus 15c transaction fee.  The average rate includes all other fees and charges including terminal fee and monthly fees.

The average merchant revenue for Visa/MasterCard acquirers is $2.851bn.

Card Interchange for Visa and MasterCard credit cards is 0.75% or $1.296bn.

Interchange on Commercial Cards x $62bn  = $682m

Therefore, the total interchange that PC is recommending eliminating is $1.978bn which is 22% of total revenues for card issuers

The card companies have been experts at introducing new fees or increasing fees to recoup any loses they suffer. This happened in 2002/3 when the RBA reduced interchange and has continued since.

Card interchange: will consumers benefit?

Will retailers pass the 0.75% on to consumers in price reductions?

Past experience is that reductions are not passed on by retailers to consumers.

Consumers have suffered increased fees and charges while not receiving any benefits. The PC is largely silent on this key issue.

There was no mention of the very high merchant rates charges to eCommerce sites or the much higher fees charged by AfterPay and ZipMoney for instalment products. Both AfterPay and ZipMoney exploit a perceived legal loop hole by claiming they do not provide credit and therefore do not need to comply with credit regulations.

The elimination of card interchange also throws a huge ‘curve ball’ at frequent flyer programmes which could be fatal. Most card issuers use interchange as the source of revenue to pay airlines for points purchased on behalf of consumers.

Banks will need to justify this revenue as a marketing expense or generate new fees to pay for airline points. Most bank programmes already have annual fees for frequent flyer use: expect these to increase by 75-100% per year.

How have the card issuers recovered monies from consumers since 2003?

  • Annual fees – increased by 390% from A$24 average in 2002 to $94 in 2017.  That is despite 2.6 million zero fee cards in Australia;
  • New 3% FX fee in 2002 on all foreign charges generate A$1.2bn billion per year by credit, debit and charge cards, which includes eCommerce – plus inflated exchange rates;
  • Statement dates reduced by 2-4 days x reduced funding average $330bn in sales and $52bn in receivables. This costs consumers A$335m per year in lost float;
  • Frequent Flyer fee increases average A$35 per year in fees;
  • Other fees that did not exist pre 2003. These include: late fees, over limit fees, increases in cash advance fees eg lotteries, gamble fees.

This does not include debit card revenues increasing by A$700m.

Grant Halverson is CEO McLean Roche Consulting. Grant has CEO experience in Retail Financial Services/Payments and Financial Technology and has been an investor in Fintech