nyone in this business who thinks the bankcard interchange debate has been overblown would be well-served to look to Australia. That country's central bank just mandated steep cuts in the interchange fees assessed on Visa International and MasterCard Worldwide credit and debit card transactions.

That's right: The government, not the markets, dictates bankcard pricing in Australia. The country's latest pricing benchmarks will be effective for three years, beginning Nov. 1, 2006.

In a statement released in late September, the Reserve Bank of Australia announced an interchange benchmark of 0.50% for Visa and MasterCard credit card transactions. In other words, the weighted-average interchange rate across all categories of those transactions cannot exceed 0.50% for at least the next three years. Today, the fees average just under 0.55%.

The central bank also set a benchmark of AUD $0.12 for Visa debit card transactions, which is substantially less than the current average fee of AUD $0.44 (approximately AUD $1 = USD $0.744).

Visa has been supporting a branded debit card program in Australia, while MasterCard debit cards weren't introduced in that market until after the Reserve Bank embarked on its price-setting program in 2002.

MasterCard has since launched a branded debit card there, and the Reserve Bank said MasterCard has agreed to set debit card interchange at or below the central bank's announced benchmark beginning Nov. 1.

In Australia, debit card interchange flows differently, depending on which network is used. The card-issuing bank pays interchange to the merchant-acquiring bank when transactions clear through the nation's primary EFTPOS network. In the Visa debit system (and the soon-to-be launched MasterCard debit system) acquiring banks pay interchange to card-issuing banks.

Credit card interchange in Australia, like in the United States, flows from the merchant to the card-issuing bank.

The Reserve Bank's latest announcements come on the heels of a ruling this past spring in which the Aussie central bank struck down Visa and MasterCard "honor all cards" rules. Those rules require, for example, that merchants accepting Visa credit cards also accept Visa debit cards. A similar rule, imposed by Visa and MasterCard here in the United States, was struck down in federal court several years ago.

In a speech before an international banking conference, held in Sydney earlier this month, Philip Lowe, Assistant Governor at the Reserve Bank, justified the government's efforts to regulate card pricing. He suggested that free market forces were being hampered.

"These fees are not subject to the normal forces of competition and were set at levels that were distorting payment patterns in Australia," Lowe said, adding that "voluntary [industry] reform has not proved possible."

The Reserve Bank is Australia's version of the U.S. Federal Reserve. A key difference between them, though, is that the Fed doesn't concern itself with the nuts and bolts of bankcard system pricing and operations, as the Reserve Bank does.

In the United States, the courts have been called on to resolve contentious bankcard issues, such as pricing. And more recently, Congress has been pulled into the debate.

No one in Washington expects Congress to do much about interchange. In part, I suspect, that's because few folks working in Congress (lawmakers or staff) actually understand it. But pressure is building for changes to the way interchange is set in the United States - pressure from continued litigation and from the court of public opinion.

In a report released earlier this year Celent LLC, a bank research and advisory firm, counseled the industry to take a fresh look at interchange.

"What has often saved interchange in the past is the inability to prove that it is harming the market, that a better pricing alternative exists and that society would be better off [with] regulation," said Ariana-Michele Moore, a Celent Senior Analyst. "However, the markets are maturing, and the old arguments in support of interchange are losing ground."

The message hasn't been lost on Visa or MasterCard, both of which are establishing new corporate structures. MasterCard became a stock corporation earlier this year (MasterCard Inc.), with its board restructured to include just three members from card-issuing financial institutions. This is pertinent because the MasterCard board helps set interchange.

Just this month, Visa announced it, too, is considering a restructuring - scrapping its member-owned status in favor of the suffix "Inc." Officially, Visa said the move aims to increase "access to capital markets that will accelerate growth by facilitating greater investment in existing and future opportunities" (see "Visa charts new course," in this issue of The Green Sheet).

MasterCard explained its move in a similar fashion.

Fair enough. But there's an obvious corollary at play here. For at least the past 20 years, interchange has funded significant innovation in bankcards - high-speed authorization networks, new card products, etc.

But as interchange becomes more contentious, Visa, MasterCard and the financial institutions that issue credit and debit cards bearing those brand names have had to rethink business models. Going public and reducing the role of banks in interchange price setting is a huge step in that direction.

And it should fend off government intervention on card pricing here in the United States.

That should prove to be good news for merchants and for consumers too. The general feeling over the past several years in Australia has been that government caps on interchange have raised costs for bankcard-carrying consumers, as issuing banks began hiking annual fees and slashing rewards programs to compensate for dwindling interchange streams.

Merchants, meanwhile, should benefit from the greater transparency in pricing and rule setting that public ownership brings. Lack of transparency has been a key complaint from merchants, especially in the United States.

So, if one lesson is to be learned from the Australian experience with bankcards, it's that change is inevitable; it's just a matter of whether the change comes from within or is invoked by outside forces. Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com