Thursday, August 18, 2005

Australia Benefits from Lower Interchange Fees

Higher card fees aren't a turn-off - By Matt Wade - August 19, 2005 - The Sydney Morning Herald.

American Express and Diners Club have snatched a bigger share of the credit card market despite hidden fees and charges more than double those of competitors Visa, Mastercard and Bankcard, Reserve Bank figures reveal.

The Reserve Bank said changes it introduced in 2003 to cut the hidden credit card charges - called interchange fees - had reduced prices that all consumers pay for goods and services.
"As a result of the bank's reforms, merchants' cost of accepting credit and charge card payments were around $580 million lower over the past year than they would otherwise have been," a Reserve Bank report said.

"Given the competitive nature of Australian business, these cost savings are finding their way into lower prices for goods and services, or smaller price increases than would otherwise have taken place."

The changes have created greater competition in the credit card industry, with several new entrants challenging the banks' stranglehold on the market.

Figures released by the bank yesterday show American Express charged an average merchant
service fee of 2.36 per cent on each card purchase and Diners Club 2.31 per cent. The average merchant service fee charged by Visa, Mastercard and Bankcard has fallen to 0.92 per cent of each purchase, down from 1.4 per cent before the Reserve Bank's fee changes. Consumers pay for these fees indirectly as merchants pass them on in higher prices for goods and services.

The Reserve Bank said the average merchant service fee charged by American Express and Diners Club had fallen modestly since the overhaul of the credit card system and it expects these charges to fall further.

"The publication of average merchant service fees … should help to encourage competition in the card-acquiring market, as merchants will be better able to compare average merchant service fees both across schemes and with their own negotiated rate," the Reserve Bank said.
Despite charging much higher merchant service fees than their competitors, American Express and Diners have lifted their combined market share from 14.6 per cent of the value of all card transactions to 16.5 per cent over the past two years.

"This increase was largely concentrated in the second quarter of 2004 and was coincident with the issuance of American Express credit cards by two of the major Australian banks. Since that time their market share has shown relatively little change," the Reserve Bank said.

About 88 per cent of credit card purchases are made with Visa, Mastercard and Bankcard, accounting for 83 per cent of the value of all card spending.

Separate figures show total outstanding credit card debt reached an all-time high of $31.4 billion.