Bank fees. Has Chalmers the guts to take on the big banks?

The RBA’s Payments Systems Board’s decision will be made by the end of March. Will Chancellor of the Exchequer Jim Chalmers support bank fee reform? Michael Sainsbury with story.

The shadowy but powerful Reserve Bank of Australia Payments Systems Board (RBA PSB) convened on March 4 for its quarterly meeting to prepare for the biggest changes to Australia’s payments system in nine years, following last year. inquiry into merchant fees.

The main players targeted by the RBA PSB are Australia’s four major banking oligopoliesprinted $30 billion profit US-based card program giants Visa and Mastercard in Fiscal Year 2025 and operating with huge profits margins are around 50%.

Australia’s card payment system is a multibillion-dollar machine

— creates an estimated $6 billion annual merchant service fee pool; this is the total cost retailers pay to accept plastic (or wiretaps) and is passed on to consumers via a ticket clip on top.

Australian businesses paid nearly $2 billion in net plan fees to card system operators in 2024-25, according to the RBA; This represents an 11% increase compared to the previous year.

Although part of the RBA, the PSB is also a separate statutory authority created under the Reserve Bank of Australia Act 1959. It ultimately reports to the Federal Treasurer through the central bank. It is chaired by RBA Governor Michelle Bullock and its board includes RBA Deputy Governor Brad Jones, APRA chief John Lonsdale (deputy chairman) and ACCC chief Gina Cass-Gottlieb.

Other representatives from the industry are appointed to five-year terms by the Treasurer: Ross Buckley, Professor of International Financial Law at UNSW; Michelle Deaker, managing partner of venture capital firm OneVentures; Scott Farrell, partner at the law firm King & Wood Mallesons and former author of the government’s strategic pay plan, and Deborah Ralston, finance professor and banking policy expert.

Additional fee advantage

Wednesday’s meeting was the group’s last before it plans to finalize its decision on proposed bans or limits on surcharges on debit and credit cards, as well as a sharp cut in exchange rates.

Interchange fees are fees paid on every card transaction from the merchant’s bank (the buyer) to the Visa or Mastercard holder’s bank (the issuer).

The merchant pays a bundled “merchant service fee” to its buyer/PSP, which is split into three parts: (1) the clearing, usually the largest tranche, flows to the issuing bank to cover credit risk, fraud, funding costs, and rewards; (2) scheme (network) fees paid to Visa/Mastercard for operating the global rails, brand, rules, security standards and processing infrastructure; and (3) buyer/PSP margin for gateway, authorization, reconciliation, and merchant support.

According to the Central Bank of Australia advisory Taking into account business card payment costs and surcharges, interchange fees paid by buyers to card-issuing banks amounted to approximately $1.5B in 2023/24; credit card transactions.

Net program fees—fees paid by issuers and acquirers to networks such as Visa, Mastercard, and EFTPOS—were approximately $1.8 billion that same year, most of which were borne by acquirers and passed on to merchants.

The remainder (approximately $2.4 to $2.7 billion) reflects acquirer and payment service provider (PSP) margins, as well as other costs included in merchant plans. Therefore, the issuing banks receive the bulk of the interchange revenues, the schemes collect network fees for operating the tracks and providing the infrastructure, and the acquirers/PSPs retain the balance as processing and support margins.

Recommended changes

The RBA is now proposing a three-pronged overhaul of the payments system to tackle high costs and improve transparency.

Under draft reforms published last year, the RBA proposed lowering interchange fee caps (the domestic credit card cap to 0.3% of transaction value) from its current ‘cap’ of 0.8%, and the domestic debt benchmark and cap to be reduced to 6c (or 0.12%).

It also wants to clean up long-standing high-margin loopholes and cap interchange fees for foreign cards (e.g. 0.2% for in-person debits and 0.4% for in-person credits; higher caps for online transactions) and change net compensation rules so that all Australian issuers (including cards sponsored by overseas banks) are covered.

This will impact the revenues of banks, smaller PSPs and the card scheme duopoly.

Former LNP minister Simon Birmingham last year stepped into the role of chief of the Australian Banking Association, the major banks’ lobby group, left vacant by long-serving incumbent Anna Bligh.

“The RBA’s own data shows that interchange fees in Australia are already among the lowest in the world,” Birmingham said. Although this was disputed, he continued to threaten: “Cutting these down further would put further pressure on household budgets through higher card fees, shorter interest-free periods and reduced rewards.”

But Birmo was ready to throw card operators under the bus: “These companies are not yet building or maintaining the roads on which Australian business travels.

“They place their own toll booths at important intersections.”

Small business assistance

Small businesses are hoping for some relief from credit card surcharges, arguing that they will otherwise continue to provide subsidies to big retailers who get discounted deals on interchange from banks and special treatment from card operators.

Last week’s House Economics Committee investigation into the scheme and digital wallets heard all sorts of fanciful claims from the taxpayer-backed bank and Visa and Mastercard; Both banks pay nothing in Australia other than out-of-pocket taxes on Bs dollar income.

Independent Payments Forum (IPF), which represents a number of small business groups, told the RBA the draft options “fail small businesses” by ignoring fundamental imbalance.

Small traders pay 300-400% higher fees than big players.

IPF said a blanket ban on surcharges would “expose thousands more small businesses to these fees charged by banks, PSPs and card schemes, resulting in a reduced ability to compete with large businesses and higher prices for all consumers, including those who use cash.”

International regulations

International precedents show regulators intervening in plan pricing, imposing limits on swaps and demanding transparency.

The European Commission’s Clearing Fee Regulation limits clearing in consumer debit and credit transactions (usually around 0.2% for debit and 0.3% for credit) and prohibits excessive multilateral clearing; Australia is a model that the RBA looks to as an example.

Visa and Mastercard are voluntarily complying with post-Brexit EU restrictions in the UK, and regulators there have mandated greater transparency and competition measures, including requirements for disclosure of plan pricing, similar to transparency steps Australia has proposed.

The New Zealand Commerce Commission is moving towards different interchange limits for foreign cards and is considering least-cost routing and pricing transparency measures to help small merchants manage fees.

After its meeting on Wednesday, PSB the following advicee as part of the regular quarterly update:

‘The Board discussed the evidence and public interest case regarding the amendment of the card systems regulation. In particular, the Board discussed the relative merits of options regarding card payment surcharges, interchange fee regulation, and transparency of card payment fees. Members agreed to publish an Outcome Document and an implementation timeline for any regulatory action by the end of March.”

Finance Minister Jim Chalmers has the final say, and after the RBA’s draft decision promises that these reforms will save consumers $1.2 billion, will he finally have the courage to take on one of the Western world’s most successful and profitable oligopolies?

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Michael Sainsbury is a former China correspondent who has lived and worked in North, Southeast and South Asia for 11 years. Currently based in regional Australia, he has over 25 years of experience writing on business, policy and human rights issues in Australia and the Indo-Pacific. He has worked for News Corp, Fairfax, Nikkei and a number of independent media outlets and has won numerous awards for his reporting in Australia and Asia. He strongly believes in the importance of independent media.