An Interchange Tussle with a Twist: Retailers Against Zero Pricing

The Reserve Bank of Australia is likely to mandate zero interchange for debit card transactions at the point of sale linked to personal identification numbers in that country, according to a report in The Age, an Australian news service. This action if taken would follow the Australian central bank's decision earlier this week to examine the issue of PIN debit pricing in that country. It would also follow its action two years ago to slash credit card interchange by one-third, cutting banks out of about $311 million U.S. in income and sending a signal to U.S. industry observers regarding the kind of approach regulators can take to modify or reduce interchange pricing, a subject that is increasingly controversial in the U.S. A growing number of U.S. retailers have objected to interchange pricing for credit and debit cards, arguing it no longer reflects the true cost of electronic transaction processing. Some have gone to court to argue it stems from price fixing arrangements among the banks. But, ironically, if the RBA as expected sets PIN debit interchange at zero in Australia, the decision will come despite retailers' protests, not because of them. That's because acquirers and merchants in that country collect interchange fees from issuers on PIN debit, rather than pay them, as in the U.S., putting about $117 million U.S. at stake, according to the merchants. According to The Age, merchants stand to lose even more than acquirers if the RBA as expected sets interchange at par, since retailers get more than half of the interchange income either because they are the acquirer or because of rebates they get from acquiring banks. Typically, issuers pay between 12 and 17 cents U.S. per transaction in interchange, according to reports. The RBA's decision to take up the matter of debit interchange comes after a series of actions taken earlier this year by other Australian authorities. The Competition and Consumer Commission gave its authorization to an agreement among banks, credit unions, and building societies to set PIN debit interchange at zero, but when major merchants appealed against this authorization, the Competition Tribunal overturned it. Now the matter lies before the RBA, and, according to the news service, “it is now probable, indeed near certain, that the RBA will declare that the interchange fees for [PIN debit] transactions will be set at zero.” Merchants are expected to protest any such action by the RBA, according to the news account, but the central bank is expected to stand firm, as it did in 2002 in the matter of bank interchange on credit cards. Next on the regulator's agenda, says the news service, could well be ATM interchange, which the RBA says it is leaving alone for the time being, and fees paid by merchants for American Express Co. and Diners Club transactions, which were not affected by the 2002 interchange mandate.