Payment Systems (Regulation) Act 1998 - The Setting of Wholesale ('Interchange') Fees in the Designated Credit Card Schemes

Interchange fee: A wholesale fee payable by an acquirer to an issuer in relation to a credit card transaction. It is typically a percentage of the transaction value but may be a flat fee. The Standard caps the average of all interchange fees in a scheme.

Acquirer: A participant in a scheme that provides services to merchants to allow them to accept credit cards. Acquirers pay interchange fees to issuers.

Issuer: A participant in a scheme that issues credit cards to its customers. Issuers receive interchange fees.

Scheme: The MasterCard system and the VISA system, designated as payment systems under section 11 of the Payment Systems (Regulation) Act 1998 on 12 April 2001. The Standard applies only to these two schemes.

Nominated Scheme Participants: Issuers that, in aggregate, issued credit cards used in at least 90% of credit card transactions by value in a scheme in the prior financial year. Only these participants’ cost data is used to calculate the cost-based measure. The scheme administrator or participants determine which issuers meet this threshold.

Cost-based measure: For each scheme, the ratio of eligible costs incurred by nominated participants to the value of credit card transactions by those participants, expressed as a percentage. Eligible costs are limited to four categories: processing costs (receiving, verifying, reconciling, settling); fraud and fraud prevention costs; authorisation costs; and the cost of funding the interest-free period. Notably excluded are costs such as marketing, rewards, and general overhead not tied to transaction processing. The interest-free funding cost is calculated using the average of the RBA cash rate over three financial years, not the current rate.

Common cost-based benchmark: The weighted average of the cost-based measures for each scheme, weighted by each scheme’s share of total credit card transaction value across all schemes. This single benchmark applies to both MasterCard and Visa. For example, if MasterCard has a cost-based measure of 0.5% and Visa 0.7%, and MasterCard has 60% of transaction value and Visa 40%, the common benchmark would be (0.6 × 0.5) + (0.4 × 0.7) = 0.58%. This means a scheme with lower costs can still charge up to the benchmark if the other scheme is higher, and vice versa.

Average of interchange fees: The weighted average interchange fee in a scheme, calculated by dividing the total interchange revenue that would have been payable had the current fee schedule been in place in the previous financial year by the total transaction value in that year. This is a backward-looking ex ante measure, not a trailing average of actual fees charged.

Compliance date triggers: The cap applies on 1 November of each third year (2006, 2009, etc.) and on any date an interchange fee is introduced, varied, or removed. This means even a single fee change outside the triennial cycle brings the cap into force anew, requiring immediate compliance.

The Standard directly binds all participants in the MasterCard and Visa credit card systems in Australia. This includes:

Issuers (banks, credit unions, building societies that issue credit cards): They receive interchange revenue. The cap limits the aggregate interchange they can earn, which may reduce their ability to fund cardholder benefits such as rewards programs, interest-free periods, or lower annual fees. Issuers that are nominated scheme participants must compile and provide detailed cost data to an independent expert and to the RBA every three years, imposing significant compliance costs. All issuers must ensure that their scheme’s average fee does not exceed the benchmark; if their scheme breaches, every participant could be affected, even if they individually did not set the fees.

Acquirers (banks or specialist payment processors that provide merchant facilities): They pay interchange fees. A lower cap reduces their costs, which in theory could lead to lower merchant service fees. However, acquirers may not pass on savings if other costs (e.g., scheme fees, technology) remain unchanged. Acquirers also have a duty under paragraph 5 to do all things necessary for compliance, which may include internal monitoring and reporting.

Merchants: They are not directly regulated but are indirectly affected because acquirers’ costs influence merchant service fees. A lower interchange cap may reduce merchants’ costs of accepting credit cards, potentially lowering prices for consumers. However, merchants may also face non-transparent scheme fees that are not captured by the cap.

Cardholders: They may see changes in card benefits if issuers adjust rewards programs, annual fees, or interest rates in response to lower interchange revenue. The cap may reduce cross-subsidies from merchant fees to cardholder rewards, which could affect card usage patterns.

Independent experts: Appointed by each scheme and approved by the RBA to review cost data. They must be independent of the scheme participants and have the accounting expertise to assess whether costs are eligible. Their work is crucial to the benchmark calculation.

Scheme administrators: MasterCard and Visa entities in Australia must publish interchange fee rates, certify compliance annually, and provide aggregate transaction data to the RBA by 15 September in recalculation years. They also coordinate the identification of nominated participants and the engagement of the independent expert.

The Reserve Bank of Australia: The RBA calculates the common cost-based benchmark, publishes it, may waive or suspend recalculations, and may approve off-cycle recalculations. It also receives annual certifications and cost data. The RBA has no direct enforcement role under this Standard (that lies with the Payment Systems Board under the Act), but it is the central regulatory actor.

Other payment schemes: Not directly affected, but the Standard may influence regulatory expectations for debit card or other credit card schemes (e.g., American Express, Diners Club) if they are later designated under section 11.

Duty to comply: Each participant must “do all things necessary on its part to ensure compliance with this Standard” (paragraph 5). This is a broad, positive obligation requiring active monitoring and internal controls. It extends beyond simply not breaching the cap; a participant must take steps to ensure the scheme as a whole complies, which may be difficult if fees are set by a central body rather than individual participants.

Duty of nominated participants to provide data: Nominated issuers must provide their cost-based measure, eligible cost data (broken into the four categories), transaction values, and transaction counts to the independent expert and to the RBA by 15 September of each recalculation year (paragraphs 15 and 16). They must also provide aggregate transaction data to the scheme administrator.

Duty of scheme administrator: The administrator must publish interchange fee rates on the website or make them generally available (paragraph 21). It must certify annually in writing to the RBA by 30 November that interchange fees over the prior twelve months ending 31 October were in compliance (paragraph 22). This certification is a key accountability mechanism; false certification could have legal consequences under the Act.

Right to request recalculation: If changes in eligible costs or other factors warrant, a scheme or participant can seek the RBA’s written agreement for an off-cycle recalculation of the cost-based measure and common benchmark (paragraph 18). This provides a mechanism to adjust the cap if costs rise substantially, but the RBA has discretion to refuse.

RBA’s right to waive or suspend recalculations: The RBA may at any time, by website notification, waive or suspend the requirement to recalculate (paragraph 19). This gives the RBA flexibility to avoid unnecessary administrative burdens if the benchmark remains appropriate, but also creates uncertainty for participants who plan for future caps.

Right to have a common benchmark: Participants benefit from a single benchmark applying to both schemes, reducing complexity compared to separate caps. However, this also means that a cost increase in one scheme pushes up the benchmark for both, potentially giving the lower-cost scheme room to raise fees.

No private right of action: The Standard does not create a direct cause of action for merchants or cardholders. Enforcement is through the RBA and the Payment Systems Board under the parent Act. However, a breach of the Standard could be used as evidence in other proceedings (e.g., competition law).

Interpretive rule: The Standard is to be interpreted “by looking beyond form to substance” (paragraph 7). This gives the RBA scope to treat arrangements that structurally evade the cap (e.g., side payments disguised as other fees) as non-compliant.

The Standard itself does not prescribe specific penalties. Enforcement mechanisms derive from the Payment Systems (Regulation) Act 1998, under which this Standard is made. Section 19 of that Act allows the Payment Systems Board to give binding directions to participants in a designated payment system to ensure compliance with a Standard. Failure to comply with a direction is an offence under section 20, carrying a penalty of up to 100 penalty units for an individual or 500 penalty units for a body corporate (at 2008 rates, roughly $11,000 and $55,000 respectively, but subject to indexation). Additionally, the Board may seek injunctions under section 21 to restrain conduct that would breach a Standard.

The annual certification requirement (paragraph 22) creates a formal record of compliance. If a scheme administrator certifies that fees were compliant when they were not, the administrator may face liability for false or misleading statements under general law or under the Act. The scheme administrator and participants who provide false data to the independent expert or the RBA risk similar consequences.

The independent expert’s role is to verify eligible costs. If an expert colludes with participants or misclassifies costs, they could be liable under contract or professional standards, but the Standard does not impose direct penalties on the expert.

The RBA can enforce the cap by issuing a direction to a scheme administrator to adjust fees if the average exceeds the benchmark. Before doing so, the RBA would likely consult with the scheme. Non-compliance with a direction may lead to court proceedings for penalties or injunctions.

The Standard also provides for severability (paragraph 6): if a part is invalid, the rest remains in force. This protects the overall scheme from being struck down on technical grounds.

In practice, the primary enforcement tool is the RBA’s ability to require recalculations and data submissions, and the reputational and commercial risk of being found non-compliant. The RBA has not historically been aggressive in imposing penalties, but the threat of designation cancellation for the entire scheme looms if a scheme repeatedly flouts the Standard.

The Standard is made under section 18 of the Payment Systems (Regulation) Act 1998, which empowers the RBA (through the Payment Systems Board) to impose access regimes, set standards, and regulate fees in designated payment systems. This Act operates alongside the Trade Practices Act 1974 (now Competition and Consumer Act 2010). Interchange fee arrangements had previously been challenged under competition law (e.g., collective price fixing claims by merchants). The Standard provides a regulatory framework that either displaces or modifies the application of competition law to interchange fees within designated schemes. Specifically, section 53 of the Payment Systems (Regulation) Act 1998 provides that compliance with a standard or direction under the Act does not contravene the Trade Practices Act, giving participants a statutory defence. Thus, if a scheme’s fees are within the cap, they are shielded from competition law challenges regarding interchange fees. However, other fees (scheme fees, cross-border fees) remain subject to competition law unless separately regulated.

The Standard interacts with the Australian accounting standards and generally accepted accounting principles (GAAP), which govern how participants record eligible costs (paragraph 14). This creates a layer of accounting regulation: cost classification must be consistent with GAAP, and the independent expert must assess eligibility against those standards. Disputes over what constitutes an eligible cost could involve accounting standards bodies or courts.

The Standard does not address privacy law, but the collection and submission of transaction data to the RBA and independent experts may require compliance with the Privacy Act 1988 (Cth), particularly if cardholder-level data is involved (though aggregated transaction values may not be personal information).

The Standard’s transparency requirement (paragraph 21) to publish interchange fee rates interacts with any confidentiality agreements between schemes and participants. The publication mandate overrides contractual confidentiality to the extent necessary.

The cap on the average interchange fee may interact with the RBA’s prior regulation of other payment systems, such as the Debit Card Standard and the EFTPOS system. These are separate instruments but share a similar cost-based methodology. The interplay means that schemes operating both credit and debit products must comply with multiple standards.

The Standard also interacts with the RBA’s oversight powers under the Banking Act 1959 and the Corporations Act 2001, insofar as participants are often authorised deposit-taking institutions or financial market participants. Non-compliance with the Standard could be a factor in prudential assessments.

Australian consumer law (formerly the Trade Practices Act, now the Australian Consumer Law) may apply to misrepresentations about interchange fees or compliance, but the Standard itself does not create consumer rights.

The original Standard (Standard No. 1) was made on an undisclosed date but came into force before 1 July 2006. The current instrument was determined as a replacement, registered on the Federal Register of Legislative Instruments (FRLI) on 22 February 2006 (F2006L00468) and commenced on 1 July 2006. It replaced Standard No. 1 for MasterCard and Visa.

The first (and only, as at the compilation date) variation was the Variation of Interchange Fee Standards (F2008L04668), registered on 18 December 2008, with effect from 8 December 2008. This variation made several amendments to the original 2006 Standard:

• Paragraph 10 (transition provision) was amended. The transition provision had originally limited interchange fee changes before 1 November 2006 to the benchmark calculated under Standard No. 1. The amendment likely clarified or updated the reference.

• Paragraph 11 (the main cap provision) was amended. This may have clarified the date trigger or the formula.

• Paragraph 12 (the list of dates triggering the cap) was amended. The original paragraph 12 stated: “(i) 1 November 2006 and 1 November of each third year thereafter; and (ii) the date any interchange fee is introduced, varied, or removed in that Scheme.” The amendment may have refined the wording but kept the same structure.

• Paragraph 19 was added. This paragraph gave the RBA the power to waive or suspend the recalculation requirement and to continue the existing benchmark. This was likely a response to industry concerns about the administrative burden of triennial recalculations when market conditions are stable.

• Paragraphs 20, 21, and 22 were amended. Paragraph 20 (calculation of average interchange fee) may have been clarified; paragraph 21 (transparency) ensured publication methods; paragraph 22 (annual certification) likely aligned the certification date with the new recalculation cycle or clarified the compliance period.

The variation was a minor but important tweak, reducing rigidity by allowing the RBA to suspend recalculations. It suggests the RBA recognised that the three-year cycle might impose unnecessary costs if the benchmark remained appropriate.

No further amendments are noted in the compilation up to 18 December 2008. The standard has likely been varied further since 2008, but that is outside the source.

The instrument itself does not record any litigation. The notes and tables show only the primary instrument and one variation, with no references to court proceedings. However, the underlying regulatory framework has been subject to challenge.

The most significant known litigation relating to the interchange fee standards is the case of MasterCard Asia Pacific Pte Ltd v Reserve Bank of Australia [2003] FCA 1523, which challenged the RBA’s designation of the MasterCard and Visa systems under section 11 of the Payment Systems (Regulation) Act 1998. That challenge was dismissed, and the designation was upheld. That case predates this particular Standard, but it is context: the Standard exists because the schemes were lawfully designated.

There is no record of any subsequent challenge to the 2006 Standard or the 2008 variation. This may reflect the fact that the Standard, by capping fees at a level determined by issuer costs, provides a form of regulatory safe harbour. Well-resourced participants faced with a cap may have calculated that compliance is cheaper than litigation. However, the possibility of judicial review of the RBA’s decisions (e.g., in calculating the benchmark, in approving the independent expert, or in refusing an off-cycle recalculation) remains open under the Administrative Decisions (Judicial Review) Act 1977. The “look beyond form to substance” interpretive clause may also be a source of challenge if the RBA applies it aggressively.

The annual certification requirement creates documentary evidence that could be used in private litigation by merchants alleging that a scheme misrepresented compliance. But no such private actions are recorded in the instrument.

In summary, the compilation shows a regulation that has been implemented without reported court challenges. The absence of litigation suggests that the cost-based methodology and the common benchmark have been accepted by the industry, or at least not worth the cost of fighting in court.

The benchmark is common, not scheme-specific: The common cost-based benchmark weights each scheme’s cost measure by its transaction share. This means that if one scheme has a lower cost measure, the other scheme’s higher costs pull the common benchmark up. A lower-cost scheme can then raise its average fee up to the common benchmark without increasing its own costs, effectively subsidising the higher-cost scheme. This distorts incentives for cost control. Conversely, if one scheme’s costs rise, the common benchmark rises for both, allowing the other scheme to increase fees without justification.

The average interchange fee is calculated on a backward-looking, hypothetical basis: The cap is tested using the previous financial year’s transaction values and the current fee schedule. If transaction values shift significantly (e.g., a surge in high-value transactions), the hypothetical average may not reflect actual revenue. A scheme could be compliant today but become non-compliant retrospectively if the previous year’s transactions change (unlikely) or if the fee schedule is altered. More importantly, the use of a single year’s data means the cap is not sensitive to seasonal fluctuations or growth rates.

Eligible costs exclude major categories such as rewards and marketing: The Standard explicitly includes only processing, fraud, authorisation, and interest-free funding costs. Rewards program costs, marketing, and general overhead are excluded. This means the cap is set at a level that may be far below the total costs of issuing credit cards, particularly for premium cards with heavy rewards. Issuers must absorb these costs from other revenue sources (e.g., annual fees, penalty interest, or merchant service fees that are not interchange). The consequence is that the Standard may reduce the viability of high-reward cards, thus limiting consumer choice.

The interest-free funding cost uses a three-year average cash rate: Paragraph 13(iv) specifies the average of the RBA cash rate over the three financial years prior to the benchmark calculation. This creates a lag. If the cash rate has risen sharply, the benchmark understates the true cost of funding the interest-free period, squeezing issuers. Conversely, if the cash rate has fallen, issuers get a higher allowance than current costs justify. This lag introduces a potentially significant distortion in volatile interest rate environments.

Any fee change triggers a compliance test: Under paragraph 12(ii), on “the date any interchange fee is introduced, varied, or removed” the average must not exceed the benchmark. This means a scheme cannot introduce a new fee category (even a very small one) without first checking compliance. Even a routine change to a flat fee or a promotional rate can cause a breach if the resulting average exceeds the cap. This discourages fee innovation and flexibility. In practice, schemes may need to simulate the impact of every fee change before implementation, increasing compliance costs.

The RBA may suspend recalculations indefinitely: Paragraph 19 allows the RBA to waive or suspend the requirement to recalculate at any time, by notification on its website. If the RBA decides, for example, that the benchmark is too low and should not increase, it can simply suspend recalculation, leaving the cap fixed. There is no right of appeal. Participants cannot force a recalculation even if costs have risen substantially; they must seek the RBA’s agreement for an off-cycle calculation (para 18), which is discretionary. This creates regulatory risk and dependence on the RBA’s goodwill.

Compliance certification is retrospective and tight: The scheme administrator must certify compliance for the twelve months ending 31 October by 30 November (para 22). If a breach occurred earlier in the period, the certification would be false unless corrected. The administrator has only one month after the period ends to review all fee changes and ensure compliance. Given that fee schedules may be complex, this creates a risk of inadvertent false certification.

Participants are jointly responsible even if they don’t set fees: Paragraph 5 says each participant must do all things necessary to ensure compliance. In MasterCard and Visa, the interchange fees are set by the scheme’s board or by a fee schedule agreed among participants. An individual issuer that disagrees with the fee structure but cannot influence it is still obligated to ensure compliance. This could theoretically require participants to threaten withdrawal from the scheme if non-compliance occurs, which is a drastic remedy.

Step 1: Identify your role. Determine whether you are an issuer, acquirer, scheme administrator, or a participant that is both. If you are an issuer that is among the nominated Scheme participants (top 90% by transaction value), additional obligations apply.

Step 2: Know the current benchmark. Monitor the RBA’s website for the published common cost-based benchmark (by 30 September in recalculation years). If the RBA has suspended recalculation, the last published benchmark continues. The benchmark is expressed as a percentage of transaction value. Keep a record of the current benchmark and the dates it applies.

Step 3: Calculate your scheme’s average interchange fee. For each scheme you participate in (MasterCard and/or Visa), compute the hypothetical total interchange revenue that would have been generated in the previous financial year if the current fee schedule were applied. Divide this by the total transaction value in that same period. The result is the average interchange fee. Compare this to the benchmark. Ensure it does not exceed the benchmark. This calculation must be done:

• On 1 November of each third year (2006, 2009, etc.);
• On the date any interchange fee is introduced, varied, or removed;
• Before implementing any fee change (to confirm compliance).

Step 4: Maintain data and accounting records. For nominated issuers, keep detailed accounting records of eligible costs, classified into the four categories per paragraph 13(i)-(iv). These records must comply with Australian accounting standards and GAAP. You will need to provide this data to an independent expert appointed by the scheme and approved by the RBA, as well as to the RBA itself, by 15 September in each recalculation year. For non-nominated issuers, you still need to ensure the scheme’s average is compliant, but you will not be required to submit cost data. However, you should have internal processes to verify the scheme’s compliance.

Step 5: Engage with the independent expert process. If you are a nominated issuer, cooperate with the independent expert in providing data. Ensure the expert is independent and has access to the necessary information. The expert will determine whether costs are eligible and calculate the scheme’s cost-based measure. You may need to provide supporting documentation for cost categorisation.

Step 6: For scheme administrators: Ensure that interchange fee rates are published on the scheme’s website or made generally available, as per paragraph 21. On or before 30 November each year, provide a written certification to the RBA stating that the scheme’s interchange fees for the twelve months ending 31 October were compliant. Maintain records of all fee schedules and the calculations used to verify compliance.

Step 7: Monitor fee changes. Any change to interchange fees (introduction, variation, or removal) triggers a compliance assessment. Before making a change, simulate the new average fee using the previous financial year’s transaction data. If the change would put the average over the benchmark, do not implement it unless you can offset it with reductions elsewhere to bring the average down. Consider using fee structures that are flat or have low variability to avoid triggering frequent recalculations.

Step 8: Respond to RBA waivers or recalculations. If the RBA announces a waiver of recalculation on its website, note that the existing benchmark continues. If the RBA agrees to an off-cycle recalculation, prepare and submit data as per paragraphs 15-16.

Step 9: Establish internal compliance policies. Since paragraph 5 imposes a broad duty on each participant, implement a compliance program that includes:

• Designating a compliance officer responsible for interchange fee oversight.
• Regular monitoring of the scheme’s average fee.
• Training for staff involved in fee setting or cost reporting.
• A process for approving any fee changes that includes a compliance check.
• Documentation of all calculations and decisions.

Step 10: Review non-compliance scenarios. If you discover that the scheme’s average fee has exceeded the benchmark, immediately notify the scheme administrator and the RBA. Determine the cause and take steps to adjust fees to bring the average below the benchmark as soon as possible. Self-reporting may mitigate enforcement action. Evaluate whether to seek a direction from the RBA to adjust fees, or to use the off-cycle recalculation provision to justify the higher level if costs have genuinely increased.