hen the two largest credit card labels in the world don't like a rule in a country where they do business, they can really do something about it. MasterCard International, Ltd. followed Visa International's lead in taking legal action against The Reserve Bank of Australia. Both companies are concerned that the Bank's plans for major reforms in the Australian credit card industry will set a dangerous precedent in other countries.

As reported in The Green Sheet ("Not Going To Be a G'Day for Credit Cards Down Under," May 27, 2002, issue 02:05:02), the Reserve Bank of Australia has been preparing to make Visa and MasterCard both change their operating rules to be more consumer-friendly. The Bank believes the regulations established by the card companies, or "schemes" as they're called in Australia, as well as misleading pricing were detrimental to the public's best interests and needed revamping.

The changes to those operating rules, designed to reduce fees and increase competition, were unveiled by the Reserve Bank of Australia in August. The new regulations constitute the biggest changes to the industry since credit cards first gained a foothold there 30 years ago.

The major reforms were developed over a three-year period. They include a 40 percent reduction in interchange fees for credit card transactions and increased competition within the payments system, and they would allow merchants to pass on the costs of transactions to consumers.

Ian Macfarlane, Governor of the Reserve Bank, said in a statement, "The reforms leave the basic structure of the credit card product intact and acknowledge the importance of maintaining the safety of credit card schemes in Australia.

The Payments System Board has endorsed a balanced set of reforms which will ensure that normal market mechanisms work in a more transparent and effective way in the Australian payments system, to the benefit of the Australian community as a whole."

The reforms, scheduled to become policy next year, will cost 1.5 to two percent of the collective profits of Australia's five largest banks, estimated to be A$13 billion and A$14 billion.

Visa International was the first to announce its legal challenge in the Australian Federal Court, criticizing the reforms as "poorly constructed and potentially damaging." The following day, MasterCard International Ltd. announced it also was seeking a review of the new regulations.

The credit card companies assert that the Reserve Bank has overstepped its authority and is not meeting its obligations through the Payment Systems (Regulation) Act. MasterCard also said the reforms do not meet the public-interest test required under the act.

Visa claims its legal action is supported by Australian merchants and bankers, including the country's largest banks. However, none of those banks or the Australian Bankers Association, which originally argued against the credit card reforms, will join future litigation.

This is one of only a few times Australia's central bank has been challenged in court. The Reserve Bank of Australia operates in the same way as the Federal Reserve Bank in the United States: It sets monetary policy, supervises and regulates banking institutions, protects the credit rights of consumers and maintains the stability of the financial system.

The Reserve Bank said it was "disappointed" that Visa and MasterCard had chosen to take action and that it "will vigorously defend the reforms."