August 8, 2010
As financial institutions grapple with the impending regulation of debit card interchange fees it is worth taking a look at what happened in Australia. The Reserve Bank of Australia (RBA) announced is final reforms to regulate credit-card interchange fees in 2002 after a three year process. The RBA is the Australian central bank. The RBA adopted a cost-based approach to determine the interchange fees. That reduced the credit card fees from 95 basis points to around 55 basis points—about a 40 percent reduction in the fees. They then decided to regulate signature debit interchange fees. In late 2006 they announced that this would reduce signature debit fees from 40 cents per transaction to 15 cents per transaction. These were subsequently reduced to 12 cents per transaction and extended to PIN-debit as well.
Twelve cents per transaction is 30 percent of the pre-regulation interchange fee of 40 cents and 25 percent of credit-card interchange fee of 95 basis points on a $50 transaction (a rough guess). To put it another way, the RBA lobbed off 70 percent of more of the pre-regulation interchange fee.
U.S. banks would expect to obtain a different result to the extent that the costs of authorizing, clearing, and settling transactions than Australian banks and to the extent the Federal Reserve Board adopts a different methodology.
Australia is a less useful place to look to see how banks could or should respond to the regulation. Debit cards were taking off in Australia around the same time that credit card interchange fees were sharply reduced. Australia has just a handful of large banks that issued both cards.. Debit cards became relatively more attractive as credit cards revenues were slashed. In the US we will see debit card interchange fees fall while credit interchange fees won’t for at least for the time being.
Nevertheless, Australia has provided a laboratory for the government price setting in the payments industry. It is the place to look for insights as I described in my 2006 article on the impact of credit-card interchange fee regulations in Australia.