Visa International Service Association v Reserve Bank of Australia - [2003] FCA 977

FEDERAL COURT OF AUSTRALIA
Visa International Service Association v Reserve Bank of Australia
[2003] FCA 977
ADMINISTRATIVE LAW – judicial review – credit card schemes – determination by Reserve Bank – access regime – no surcharge standard – interchange fee standard – designation of credit card systems for regulation – alleged uncertainty – alleged failure to take account of relevant considerations – failure to investigate – methodology – Wednesbury unreasonableness – lack of proportionality – wrongful delegation of power
STATUTORY INTERPRETATION – payment system – funds – funds transfer system – circulation of money – standards – access regime – relates to – means and includes – have regard to – competition – efficiency – market – legislative history – extrinsic materials
EVIDENCE – expert economic evidence – admissibility – use – discretion – relevance to judicial review – expert accounting evidence – uncertainty – alleged bias
BANKING – money – funds – transfer of funds – payment systems – Australian payments system – risk – clearing – settlement – payment instruments
Payment Systems (Regulation) Act 1998 (Cth) ss 7, 8, 11, 12, 18
Reserve Bank Act 1959 (Cth) ss 10, 10B, 87
Judiciary Act 1903 (Cth) s 39
Administrative Decisions (Judicial Review) Act 1977 (Cth) s 11
Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 (Cth)
Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 referred to
Attorney-General (NSW) v Quin (1990) 170 CLR 1 referred to
Corporation of the City of Enfield v Development Assessment Commission (2000) 199 CLR 135 referred to
Minister for Immigration & Multicultural Affairs v Jia Legeng (2001) 205 CLR 507 referred to
Browne v Dunn (1893) 6 R 67 referred to
Libyan Arab Foreign Bank v Bankers Trust Co [1989] 1 QB 728 discussed
A/S Awilco of Oslo v Fulvia SpA Di Navigazione of Cagliari [1981] 1 WLR 314 discussed
National Australia Bank Ltd v KDS Construction Services Pty Ltd (1987) 163 CLR 668 discussed
Re Charge Card Services Ltd [1987] 1 Ch. 150 discussed
Deputy Commissioner of Taxation v Conley (1998) 158 ALR 229 discussed
Zickar v MGH Plastic Industries Pty Ltd (1996) 187 CLR 310 referred to
O’Grady v Northern Queensland Co Ltd (1990) 169 CLR 356 cited
Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 cited
Helvering v Gregory (1934) 69 F.2d 809 referred to
Strathfield Municipal Council v Poynting (2001) 116 LGERA 319 referred to
Herald-Sun TV Pty Ltd v Australian Broadcasting Tribunal (1985) 156 CLR 1 discussed
Australian Broadcasting Tribunal v Saatchi & Saatchi Compton (Vic) Pty Ltd (1985) 10 FCR 1 discussed
R v Galvin; Ex parte Metal Trades Employers’ Association (1949) 77 CLR 432 referred to
Re Bolton; Ex parte Beane (1987) 162 CLR 514 discussed
Lowy v The Land and Environment Court of New South Wales (2002) 123 LGERA 179 referred to
Warringah Shire Council v KVM Investments Pty Ltd (1981) 45 LGERA 425 referred to
North Sydney Municipal Council v PD Mayoh Pty Ltd [No 2] (1990) 71 LGRA 222 cited
Conroy v Shire of Springvale and Noble Park [1959] VR 737 discussed
King Gee Clothing Co Pty Ltd v The Commonwealth (1945) 71 CLR 184 discussed
Television Corporation Ltd v The Commonwealth (1963) 109 CLR 59 referred to
Vardon v The Commonwealth (1943) 67 CLR 434 discussed
Bendixen v Coleman, Scott and Croft (1943) 68 CLR 401 discussed
Fraser Henleins Pty Ltd v Cody (1945) 70 CLR 100 referred to
Conley v Commissioner of Taxation (1998) 81 FCR 24 cited
Television Corporation Ltd v The Commonwealth (1963) 109 CLR 59 cited
Federal Commissioner of Taxation v F H Faulding & Co Pty Ltd (1950) 83 CLR 594 referred to
Warringah Shire Council v Pittwater Provisional Council (1992) 26 NSWLR 491 referred to
Dainford Ltd v Smith (1985) 155 CLR 342 referred to
Van Gorkom v Attorney-General (NZ) [1977] 1 NZLR 535 referred to
Racecourse Co-operative Sugar Association Ltd v Attorney-General of the State of Queensland (1979) 142 CLR 460 discussed
Telstra Corporation Ltd v Seven Cable Television Pty Ltd (2000) 102 FCR 517 followed
RG Capital Radio Ltd v Australian Broadcasting Authority (2001) 113 FCR 185 discussed
Buck v Bavone (1976) 135 CLR 110 referred to
Minister for Immigration and Ethnic Affairs v Teo (1995) 57 FCR 194 cited
Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 cited
Australian Heritage Commission v Mount Isa Mines Ltd (1997) 187 CLR 297 cited
Minister for Immigration and Multicultural Affairs v Eshetu (1999) 197 CLR 611 referred to
R v Connell; Ex parte Hetton Bellbird Collieries Ltd (1944) 69 CLR 407 applied
Sean Investments Pty Ltd v MacKellar (1981) 38 ALR 363 referred to
Elliott v Southwark London Borough Council [1976] 1 WLR 499 referred to
The Queen v Toohey; Ex parte Meneling Station Pty Ltd (1982) 158 CLR 327 referred to
Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24 referred to
Turner v Minister for Immigration and Ethnic Affairs (1987) 35 ALR 388 cited
Tobacco Institute of Australia v National Health and Medical Research Council (1996) 71 FCR 265 cited
NIB Health Funds Ltd v Private Health Insurance Administration Council (2002) 115 FCR 561 cited
The Council of the City of Parramatta v Pestell (1972) 128 CLR 305 referred to
Coal Miners’ Industrial Union of Workers of Western Australia v Amalgamated Collieries of Western Australia Ltd (1960) 104 CLR 437 cited
Western Stores Ltd v Orange City Council [1971] 2 NSWLR 36 cited
Minister for Natural Resources v New South Wales Aboriginal Land Council (1987) 9 NSWLR 154 cited
Prasad v Minister for Immigration and Ethnic Affairs (1985) 6 FCR 155 discussed
Tickner v Bropho (1993) 40 FCR 183 cited
Luu v Renevier (1989) 91 ALR 39 cited
Parramatta City Council v Hale (1982) 47 LGRA 319 distinguished
Currey v Sutherland Shire Council (1998) 100 LGERA 365 distinguished
Franklins Ltd v Penrith City Council [1999] NSWCA 134 distinguished
Jones v Dunkel (1959) 101 CLR 298 not applied
Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 referred to
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 cited
Evans Deakin Pty Ltd v Sebel Furniture Ltd [2003] FCA 171 cited
Ancher, Mortlock, Murray & Woolley Pty Ltd v Hooker Homes Pty Ltd [1971] 2 NSWLR 278 referred to
Re Dr Ken Michael AM; Ex parte Epic Energy (WA) Nominees Pty Ltd [2002] WASCA 231 referred to
Allstate Life Insurance Co v Australia and New Zealand Banking Group (No 6) (1996) 64 FCR 79 cited
South Australia v Tanner (1989) 166 CLR 161 referred to
Williams v Melbourne Corporation (1933) 49 CLR 142 referred to
Pearce and Geddes, “Statutory Interpretation in Australia” 5th ed. 2001
Mann, “The Legal Aspects of Money” 5th ed. 1992
Lave, “Benefit-Cost Analysis: Do the Benefits Exceed the Costs? in A. Ogus (ed), Regulation, Economics and the Law
Aaronson and Dyer, “Judicial Review of Administrative Action” 2^nd ed. 2000
VISA INTERNATIONAL SERVICE ASSOCIATION (ARBN 007 507 511)
v RESERVE BANK OF AUSTRALIA
N973 OF 2002
AND
MASTERCARD INTERNATIONAL INCORPORATED
v RESERVE BANK OF AUSTRALIA
N987 OF 2002
TAMBERLIN J
SYDNEY
19 SEPTEMBER 2003

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

N 973 OF 2002
N 987 OF 2002

BETWEEN:

VISA INTERNATIONAL SERVICE ASSOCIATION
(ARBN 007 507 511)
APPLICANT

AND:

RESERVE BANK OF AUSTRALIA
RESPONDENT

BETWEEN:

MASTERCARD INTERNATIONAL INCORPORATED
APPLICANT

AND:

RESERVE BANK OF AUSTRALIA
RESPONDENT

JUDGE:

TAMBERLIN J

DATE OF ORDER:

19 SEPTEMBER 2003

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:
1.An extension of time is granted to each of the applicants to file applications for review under the Administrative Decisions (Judicial Review) Act 1977 (Cth).

2. The applications for review are dismissed.
3.The question of costs is stood over to a date to be fixed with my associate.

Note:   Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

N 973 OF 2002
N 987 OF 2002

BETWEEN:

VISA INTERNATIONAL SERVICE ASSOCIATION
(ARBN 007 507 511)
APPLICANT

AND

RESERVE BANK OF AUSTRALIA
RESPONDENT

BETWEEN:

MASTERCARD INTERNATIONAL INCORPORATED
APPLICANT

AND:

RESERVE BANK OF AUSTRALIA
RESPONDENT

JUDGE:

TAMBERLIN J

DATE:

19 SEPTEMBER 2003

PLACE:

SYDNEY

TABLE OF CONTENTS   pars
INTRODUCTION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . 1
DECISIONS CHALLENGED........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 2
JUDICIAL REVIEW........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 8
PARTIES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... 13
1998 LEGISLATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. 19
APPLICANTS CASE IN OUTLINE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 34
RBA RESPONSE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . 50
THE HEARING........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... 64
TERMINOLOGY........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ 69
IMPORTANCE OF INTERCHANGE FEES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 79
VISA CARD SCHEME PROFILE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . 91
MASTERCARD SYSTEM - PROFILE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 103
RELATIONSHIPS IN CARD SCHEMES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . 113
BACKGROUND TO 1998 LEGISLATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 121
EVENTS AFTER 1998 LEGISLATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 154
DESIGNATION DECISION – APRIL 2001........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... 191
POST DESIGNATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 212
DECISION ON STANDARDS AND ACCESS REGIME IN AUGUST 2002........ ........ ........ ........ ........ ........ .. 226
FIRST QUESTION: IS EACH OF THE VISA AND MASTERCARD SYSTEMS A PAYMENT SYSTEM?    245
INTERPRETATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ 267
MEANS AND INCLUDES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 284
RELATES TO........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 296
LEGISLATIVE HISTORY AND EXTRINSIC MATERIALS........ ........ ........ ........ ........ ........ ........ ........ ........ .... 306
CREDIT CARD SYSTEM RULES AND PROCEDURES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 336
PAYMENT SYSTEM – OTHER CONSIDERATIONS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . 352
WAS THE DESIGNATION TOO EXTENSIVE – INTERNATIONAL EFFECT........ ........ ........ ........ ........ 373
WHAT IS A STANDARD? DO THE DECISIONS IMPOSE STANDARDS?........ ........ ........ ........ ........ ....... 374
ARE STANDARDS LIMITED TO TECHNICAL AND OPERATIONAL MATTERS........ ........ ........ ....... 394
CAN A PROHIBITION BE A STANDARD........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 412
ARE THE STANDARDS TOO UNCERTAIN?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... 423
THE CASE LAW ON UNCERTAINTY........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 426
THE COST ACCOUNTING EVIDENCE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . 462
INTERCHANGE - UNAUTHORISED DELEGATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ 506
ACCESS REGIME – INTERPRETATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 523
ACCESS – CONSULTATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 548
ACCESS – COMMERCIAL BASIS – FAIR AND REASONABLE TERMS........ ........ ........ ........ ........ ........ .. 555
RELATIONSHIP BETWEEN PAYMENT SERVICE REGULATION ACT AND THE RESERVE BANK ACT          560
INTERPRETATION – RB ACT – S 87........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 586
RELEVANT ADMINISTRATIVE LAW PRINCIPLES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... 588
ADMINISTRATIVE DECISION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . 589
REVIEW OF OPINIONS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... 597
THE ROLE OF THE RBA........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... 605
ALLEGED ERROR IN APPROACH – DETERMINATION OF INTERCHANGE STANDARD........ .. 608
HAVE REGARD TO........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ 612
DUTY TO INQUIRE AND INVESTIGATE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... 622
WHAT WAS CONSIDERED IN THE DECISION MAKING PROCESS........ ........ ........ ........ ........ ........ ....... 630
HASTY DECISION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. 642
EXPERT EVIDENCE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 649
THE ECONOMIC EVIDENCE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 670
CONCLUSIONS ON EXPERT ECONOMIC EVIDENCE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. 739
DESIGNATION – NO PRIOR OPINION – ALLEGATION OF FOUR FLAWED FINDINGS IN JOINT STUDY       748
TRANSPARENCY........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 777
VISA’S FOUR CENTRAL ISSUES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... 788
UNREASONABLENESS AND PROPORTIONALITY........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ 829
STANDARDS AND ACCESS – FIVE ALLEGED PATENT ERRORS........ ........ ........ ........ ........ ........ ........ ... 837
CONCLUSIONS ON CLAIMED PATENT ERRORS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... 860
CONCLUSIONS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ 861
REASONS FOR JUDGMENT
INTRODUCTION

The Court has before it applications by Visa International Service Association (“Visa”) and MasterCard International Incorporated (“MasterCard”) for judicial review. Both applications are brought against the Reserve Bank of Australia (“RBA”) to set aside five decisions of the Payment Systems Board (“the PSB”) of the RBA made under the Payment Systems (Regulation) Act 1998 (Cth) (“the PSR Act”). The decisions are part of a regulatory regime imposed by the RBA on what are known as four-party credit card schemes in Australia. The schemes, the subject of the regulations, include issuers (which are financial institutions such as banks that issue credit cards and extend credit to their customers), cardholders (who are purchasers of goods and services from merchants and customers of the issuers), merchants (who accept credit cards and claim on issuers for payment and satisfaction for transactions between merchants and customers, for example, stores, utilities and airlines) and acquirers (financial institutions such as banks that “acquire” merchants’ claims against issuers) which agree to pay the merchant under the credit card schemes.
decisions challenged
The first two decisions challenged were taken on 11 April 2001 and gazetted on 12 April. They designated each of the Visa and the MasterCard schemes as “a payment system”. The consequence of these designations was to bring each of the schemes within the reach of the RBA’s powers under the PSR Act as a designated system.
The second set of decisions challenged were made on 20 August 2002 and gazetted on 27 August 2002. Those decisions were to determine an “Interchange Standard”, which imposed a limit on “interchange fees”, sometimes described as wholesale fees, which are charged by issuers of four-party credit scheme cards to acquirers participating in the schemes and which are required by the Standard not to exceed a cost-based benchmark to be calculated with reference to eligible costs as defined by the Standard and set in accordance with the methodology prescribed in the Standard.
The third set of decisions challenged were also made on 20 August and gazetted on 27 August 2002. They established a “Surcharge Standard”, which permits merchants who use the schemes to impose a charge to customers who use a credit card for their transactions, notwithstanding the rules of the Visa and MasterCard schemes.
The fourth set of decisions challenged were also made on 20 August 2002, but had not yet been gazetted and were not operative at the time these two proceedings were heard. These involve the imposition on the applicants of an “Access Regime” which provides for access to the schemes to be available to a greater number of potential participants. These decisions were communicated to the applicants on 27 August 2002. The consequence of this Regime is that scheme operators are required to admit any “authorised deposit-taking institution” (“ADI”) as a participant in the schemes on the same basis as other financial participants. It is designed to prohibit differential treatment by participants in the schemes as between those who wish to become participants only as either issuers or acquirers. In practice participants are both issuers and acquirers.

The fifth decision challenged was the RBA’s decision not to revoke the designation of the applicants’ schemes. This challenge has not been pressed and is not an issue in this proceeding.
In this case it is particularly important from the outset to keep in mind the function of the Court on a judicial review application. This is because much of the subject matter includes controversial economic issues which, as the evidence demonstrates, are the subject of strong and sharp differences of opinion between economic experts. In such circumstances the danger of sliding into a consideration of the relative merits of economic theories is substantial, especially where, as is the case in these proceedings, claims of Wednesbury unreasonableness are raised: see Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223. It is therefore helpful to refer to those principles at this point.
judicial review
The nature of judicial review proceedings before the Court has a bearing on the approach and the matters for consideration by the Court and the limited scope of review. On judicial review the Court does not reconsider the merits of the RBA decisions, but is confined to examining decisions sought to be challenged in order to determine whether the decision-maker complied with the required legal process for decision-making. That is to say that it is not for the Court to perform the function assigned to the RBA by the legislation. The Court on review must not substitute its own conclusion for that of the decision-maker simply because it would have been minded to reach a different conclusion in circumstances where it was reasonably open to the decision-maker to reach that conclusion.
The function of the Court on an application for judicial review was described by Brennan J in Attorney-General (NSW) v Quin (1990) 170 CLR 1, at 35-36:
“The duty and jurisdiction of the court to review administrative action do not go beyond the declaration and enforcing of the law which determines the limits and governs the exercise of the repository’s power. If, in so doing, the court avoids administrative injustice or error, so be it; but the court has no jurisdiction simply to cure administrative injustice or error. The merits of administrative action, to the extent that they can be distinguished from legality, are for the repository of the relevant power and, subject to political control, for the repository alone.”
The focus by the Court is directed to the legality of the decision-making process taken by the RBA and that must be distinguished from a re-examination of the merits of the decisions made. At 37, his Honour sounded the following caution:
“If it be right to say that the court’s jurisdiction in judicial review goes no further than declaring and enforcing the law prescribing the limits and governing the exercise of power, the next question immediately arises: what is the law? And that question, of course, must be answered by the court itself. In giving its answer, the court needs to remember that the judicature is but one of the three co-ordinate branches of government and that the authority of the judicature is not derived from a superior capacity to balance the interests of the community against the interests of an individual. The repository of administrative power must often balance the interests of the public at large and the interests of minority groups or individuals. The courts are not equipped to evaluate the policy considerations which properly bear on such decisions, nor is the adversary system ideally suited to the doing of administrative justice: interests which are not represented as well as interests which are represented must often be considered. Moreover, if the courts were permitted to review the merits of administrative action whenever interested parties were prepared to risk the costs of litigation, the exercise of administrative power might be skewed in favour of the rich, the powerful, or the simply litigious.”
To similar effect are the observations of Gleeson CJ, Gummow, Kirby and Hayne JJ in Corporation of the City of Enfield v Development Assessment Commission (2000) 199 CLR 135, esp. at 152-153, which recently followed and applied the above remarks of Brennan J in Quin.
It is not a function of the Court on judicial review to form its own independent opinion in relation to issues on which reasonable minds may differ. That consideration is equally applicable when the ground of unreasonableness is relied on in the application for review, where the Court may be required to examine the decision-maker’s state of satisfaction in evaluating the opinions formed. To similar effect is the decision of the High Court in Minister for Immigration & Multicultural Affairs v Jia Legeng (2001) 205 CLR 507, at 532, where Gleeson CJ and Gummow J described the approach as follows:
“The question then on judicial review is whether the decision‑maker could have attained that satisfaction reasonably, in the sense explained in numerous authorities in this Court. In Foley v Padley, Brennan J emphasised that the question on judicial review is not whether the court would have formed the opinion in question, and that an allegation of unreasonableness in the formation of the opinion by the decision‑maker may prove to be no more than an impermissible attack on the merits of the decision.”
By way of illustration, diametrically opposed views have been expressed by economists as to the advantages and disadvantages of the interchange fee in credit card transactions. It is not the function of the Court in these proceedings to decide which of the two views is correct or preferable. That is a question for the RBA under the legislation.
parties
Visa is an incorporated association of members which operates throughout the world. Its business includes the administration and development of credit card services to members. The Visa credit card is one of the activities in Australia. Another is the Visa debit card which is also widely used. There are over 140 Australian members of Visa. Throughout the world there are many thousands. Visa members are issuers who issue Visa cards to cardholders and acquirers who acquire Visa credit card transactions form merchants who accept Visa credit cards. The members of Visa in Australia provide card services to cardholders and to merchants. The network of members that provide those services is administered pursuant to a series of by-laws, regulations and rules. These are referred to later in greater detail.
MasterCard is a subsidiary of MasterCard Incorporated and the shares in that company are held by the participants who are issuers and inquirers. It operates a number of payment cards. Its business is managed by a global Board of Directors and regional boards, including one in the Asia-Pacific region. The Australian subsidiary is called MasterCard Australia Limited. It provides administrative services to the scheme’s members. The MasterCard credit card system in Australia has thirteen principal Australian members and thirty-three affiliate members. The principal members are financial institutions which participate directly in card activities. Like Visa, they both issue and acquire. Affiliate members participate indirectly through a principal member under that member’s supervision. MasterCard is governed by a series of by-laws, regulations and rules which are discussed below. The four-party credit card scheme operated by MasterCard in Australia involve the cardholder, the merchant, the issuer and the acquirer. Eight of MasterCard’s principal members are acquirers and all principal members and affiliate members are issuers.
The RBA is a body corporate established under the Commonwealth Bank Act 1911 (Cth) and continues in existence under the Reserve Bank Act 1959 (Cth) (“RB Act”). It has two Boards, the Reserve Bank Board (“RBB”) and the Payments System Board (“PSB”). The RBB is responsible for the RBA’s monetary and banking policy and the Bank’s policy on all matters except for its payments system policy. The PSB is responsible for the Bank’s payments system Policy. This division of functions came into existence as a consequence of amendments made to the RB Act in 1998. The Bank is managed by a Governor and there is a Deputy-Governor. Membership of the RBB includes the Secretary of the Department of Treasury and six other members appointed by the Treasurer. The PSB consists of the Governor, one representative of the RBA appointed by the Governor, a representative of the Australian Prudential Regulation Authority (“APRA”) and five other members.
More specific powers with respect to payment systems are conferred on the RBA pursuant to the PSR Act which was also enacted at the time the amendments were made to the RB Act. The PSR Act is entitled “an Act to provide for the regulation of payment systems and purchased payment facilities and for related purposes”. These more specific powers provided for by the PSR Act, including those the subject of the present challenge, are conferred on the RBA.
Under the RB Act, ss 8A(3) and 10B(1), the PSB is assigned the functions of the RBA in respect of the formulation and implementation of RBA policy concerning the payments system. The payments system is the overall Australian system for the effecting of payments and comprises individual payment systems.
It is common ground that decisions of the PSB with respect to the payments system and payment systems are made by the RBA.
1998 legislation
Under the RB Act, s 10B, entitled “Functions of Payments System Board” describes the functions of, and empowers, the PSB to determine the RBA’s payments system policy and to take whatever action is necessary to ensure that it gives effect to the policy that it determines. Subsection (3) is of central importance to the present dispute. It provides:
“(3)It is the duty of the Payments System Board to ensure, within the limits of its powers, that:
(a)the Bank’s payments system policy is directed to the greatest advantage of the people of Australia; and
(b)the powers of the Bank under the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998 are exercised in a way that, in the Board’s opinion, will best contribute to:
(i) controlling risk in the financial system; and
(ii) promoting the efficiency of the payments system; and
(iii) promoting competition in the market for payment services,
consistent with the overall stability of the financial system; and
(c)the powers and functions of the Bank under Part 7.3 of the Corporations Act 2001 are exercised in a way that, in the Board’s opinion, will best contribute to the overall stability of the financial system.”
Section 5 of the RB Act unhelpfully defines payments system policy in these terms:
“payments system policy means policy for the purposes of the Bank’s functions or powers under:
(a)      the Payment Systems (Regulation) Act 1998; and
(b)      the Payment Systems and Netting Act 1998; and
(c)       Part 7.3 of the Corporations Act 2001”
The PSR Act does not define payments system policy, but in s 7, “payment system” is defined as:
“… a funds transfer system that facilitates the circulation of money, and includes any instruments and procedures that relate to the system.”
This definition gives rise to a central dispute, namely, whether the Visa and MasterCard credit card systems are payment systems which can be designated in their entirety as the RBA has done.
The power of the RBA to designate a payment system is conferred by s 11 of the PSR Act in these terms:
“11.Reserve Bank may designate payment systems
(1)The Reserve Bank may designate a payment system if it considers that designating the system is in the public interest. The designation is to be by notice in writing published in the Gazette.
(2) The designation has effect until it is revoked.
(3)The Reserve Bank may revoke the designation if it no longer considers that it is in the public interest that the system be designated. The revocation is to be by notice in writing published in the Gazette.”
The content of the expression public interest is set out in s 8 which provides that:
“8.      Meaning of public interest
In determining, for the purposes of this Act, if particular action is or would be in, or contrary to, the public interest, the Reserve Bank is to have regard to the desirability of payment systems:
(a)       being (in its opinion):
(i)        financially safe for use by participants; and
(ii)       efficient; and
(iii)      competitive; and
(b)not (in its opinion) materially causing or contributing to increased risk to the financial system.
The Reserve Bank may have regard to other matters that it considers are relevant, but is not required to do so.”
The expression “participant” is defined to mean:
“(a)a constitutional corporation that is a participant in the system in accordance with the rules governing the operation of the system; or
(b)a constitutional corporation that is an administrator of the system.”
The power to impose an access regime is conferred by s 12 of the PSR Act which provides:
“12.     Imposition of access regime
(1)The Reserve Bank may impose an access regime on the participants in a designated payment system.
(2)The access regime imposed must be one that the Reserve Bank considers appropriate, having regard to:
(a)whether imposing the access regime would be in the public interest; and
(b)       the interests of the current participants in the system;
(c)the interests of people who, in the future, may want access to the system; and
(d)       any other matters the Reserve Bank considers relevant.
(3)The Reserve Bank must not impose the access regime unless it has first consulted in accordance with section 28.
....”
Under subs (3) the RBA must not impose the access regime unless it is has first consulted in accordance with s 28. By subs (4) the decision must be in writing and must set out the access regime.
The word “access” is defined in s 7 in these terms:
“access, in relation to a payment system, means the entitlement or eligibility of a person to become a participant in the system, as a user of the system, on a commercial basis on terms that are fair and reasonable.”
The expression “access regime” in relation to a designated payment system is defined to mean an access regime:
“(a) that has been imposed by the Reserve Bank under section 12; and
(b) that is in force.”
This definition is circular, but specifies that it must be a regime that has come into force. Otherwise, the expression is quite open and extends beyond the concept of “access” which is specifically defined.
The power to determine “standards” for designated systems is conferred by s 18(1) of the PSR Act which provides that:
“(1)The Reserve Bank may, in writing, determine standards to be complied with by participants in a designated payment system if it considers that determining the standards is in the public interest.”
The expression “standard” is unhelpfully defined in s 7 to mean a standard in force under s 18.
In these reasons, where necessary, reference will be made to other parts of the legislation but the above provisions are those which are most pertinent for the purpose of the applications before the Court.
applicants case in OUTLINE
In broad outline the principal contentions of the applicants are as follows.
The applicants submit that each of the decisions made by the RBA is administrative in character and is thus susceptible to judicial review. It is further submitted that even if the RBA’s decisions are not administrative they are still open to challenge. The applications are brought for relief pursuant to s 39B(1A) of the Judiciary Act 1903 (Cth) (“Judiciary Act”) and s 5(1) of the Administrative Decisions (Judicial Review) Act 1977 (Cth) (“ADJR Act”).
The applicants first contend that the “designations” on 12 April 2001 were outside the RBA’s power to designate conferred by the PSR Act because their credit card schemes or systems and their governing rules and procedures cannot be described as a payment system, ie, a “funds transfer system that facilitates the circulation of money” or procedures that relate to such a system, within s 7 of the PSR Act. The power to designate is in respect of a “payment system” as defined by that section.
It is said that because the designation was not in respect of a payment system it was beyond the power to designate conferred by s 11(1) of the PSR Act, and was therefore invalid because the power provided under the PSR Act was only to designate a payment system and this is a jurisdictional fact.
The grounds of challenge to the Interchange and Surcharge Standards are as follows. First, it is said, that under s 18 of the PSR Act, the PSB is exercising the functions of the RBA and can only determine standards which are “technical or operational” in nature. This power does not extend to imposing price controls as the Interchange Standard purports to do. Nor does the power extend to the regulation of commercial relationships between scheme members and merchants as the Surcharge Standard purports to do. Second, there is said to be such a lack of clarity and precision as to the terms and operation of the Interchange Standards imposed that they are not within the description of a standard as provided for under the PSR Act. More specifically, it is said that the Interchange Standard, for example, does not provide any clear and certain measure to fix Interchange fees. It is also said that the power to determine a standard has been delegated to an independent expert. The applicants further submitted that the Standard requires the expert to engage in a vague and uncertain process of assessment and discretionary evaluation, to such a degree that different benchmarks can be determined in the same circumstances according to the approach adopted by the expert charged with that function. The process, so it is said, is inherently uncertain due to the lack of guidance on central matters such as “eligible costs” which are described in the Interchange Standards.
The applicants further contend that the proposed Access Regime, which had not yet been gazetted, is invalid because the RBA failed to have regard to preconditions to the exercise of the power under s 12 of the PSR Act. It is said that it failed to consider the interest of current participants in the system and failed to address other relevant considerations.
The applicants also submit that other conditions precedent to the decision to impose an access regime were not met, including a failure to consult as required, a failure to consider the impact on the applicants of the proposed Access Regime and a failure to provide sufficient information to participants to enable proper submissions to be made for consideration of such impact. There is a further contention that the terms of the Access Regime traverse the limits of a provision for access, entitlement, or eligibility to participate, by seeking to control conduct after admission as a participant by the imposition of conditions governing later conduct.
Additionally, there is a submission that certain paragraphs of the terms of the Access Regime prohibit the rules of participants imposing controls on the issuing and acquiring business of scheme participants. It is said that this goes beyond s 12 of the PSR Act. Further, it is said the broad, unqualified terms and blanket nature of the prohibition on differentiation results in the imposition of terms that are not fair and reasonable commercial conditions. It is submitted that the blanket prohibition does not have regard to the possibility that differences in value or number of a participant’s issuing and acquiring transactions have commercial significance, including the burden cast on other participants who have a higher proportion of issuing transactions. The commercial imperative requiring the avoidance of an imbalance is said to justify the scheme rules requiring participants to maintain a balance in meeting the relative costs as between issuing and acquiring businesses and the imposition of fair and reasonable fees from participants who conduct no issuing business. The latter is said to be necessitated in order to compensate for the additional burden cast on participants as a consequence of being an issuer.

A further line of attack is based on the manner in which the decision-making process was implemented and a claimed failure to take into account relevant considerations and acting in a manner that was grossly unreasonable and which breached principles of proportionality.
Under this line of attack, it is said that the RBA did not properly consult or consider submissions made to it with an open mind and thereby breached s 28(2) of the PSR Act, which requires consultation prior to the implementation of a proposed action, because the PSB had a fixed position by October 2000 and was not prepared to consider moving from this. This conduct on the part of the RBA is said to invalidate the Standards and the proposed Access Regime.
The applicants also contended that the RBA did not have regard to “the public interest” and to the economic concepts of “competition” and “efficiency” as it was bound to do under s 10B of the RB Act and s 8 of the PSR Act.
It is also submitted that the RBA did not form the required opinions in relation to the public interest criteria in accordance with the requirements of the PSR Act and the RB Act. Because the formation of such opinions were jurisdictional facts on which the exercise of power was conditioned, the decisions as to the Standards and the Access Regime were invalid.
It is submitted that the RBA did not have regard to the criteria in s 8 of the PSR Act and s 10B of the RB Act. Nor did it ask itself the essential preliminary questions required by those provisions in order to form such opinions.
Criticism is also levelled at the methodology used by the RBA because the approach adopted was such that it did not form the necessary opinion as to whether the exercise of its powers would best contribute to efficiency and operation where there was a duty to ensure that in the RBA’s opinion the exercise would so operate.
Further specific criticisms made are that the RBA:
·     did not define and analyse the market for payment services, which was essential to a consideration of the concepts of competition and efficiency;
·     did not consider the role which the four-party credit scheme played in the financial system, the payments system and the market for payment services;
·     did not consider the impact of its determinations;
·     did not form an opinion as to efficiency but was concerned with transaction costs;
·     did not form an opinion about whether its actions would promote competition in the market for payment services;
·     did not adopt a proper methodology to enable it to consider the promotion of efficiency and competition; and
·     did not consider the necessity for action nor the net benefit or detriment of the existing regimes compared with the proposed regimes.
The applicants also say that the decisions by the RBA are so unreasonable/or lacking in proportionality that no reasonable regulator could have made them. For these reasons, among others, the applicants say that the determinations were invalid.
RBA response
The RBA points to the broad, high level statutory functions with which it is entrusted and in particular, the management of national economic and financial policy, and to the composition and functions of the PSB and the RBA. It also points to the accepted principles relating to the limited nature of judicial review of administrative action, the core of which have been referred to above. It refers to the wide discretionary powers conferred on the RBA and to the extensive consultation process which it engaged in throughout the three year period before making its final decisions relating to standards and access. Furthermore, it refers to the principle that administrative decisions such as those made in this case should not be approached with any predisposition to seek out error, where a fair and reasonable examination would not disclose such error. Particular emphasis is placed on the well-settled principles that the role of the Court in a judicial review application is not to encroach upon the merits of the decision, but to decide purely on the basis of limited administrative review grounds. Furthermore, reference is made to the context of the legislative history and provenance of the 1998 legislative amendments pursuant to which the designations were made, access provided for and standards imposed.
As to designation, the RBA states that each of the Visa and MasterCard systems are within the description of “payment system” as defined in s 7 of the PSR Act. This is said to provide for a wide discretion. It submits that the definition of “funds transfer system” must be considered having regard to the whole card system in each case as set out in their governing rules and procedures and that there is no basis to segregate out particular parts of either system and contend that only those parts comprise such a system.
The RBA submits that the definition of payment system is and was intended to be broad and includes procedures that relate to the system and those that relate to any instruments and the transfer of funds and that this description is wide enough to include the entire Visa and MasterCard systems.
As to the power to make standards, the RBA says that the unqualified language of s 18 of the PSR Act does not confine the RBA power to technical or operational matters. The expression “determine standards” in s 18 in a practical sense is at large and is extensive enough to include a reference to a benchmark which provides for a price to be calculated.
With respect to the Access Regime it submits that the Regime provides for access on a commercial basis on terms, which are fair and reasonable. The Regime is within the concept of a standard. The RBA can have regard to the interests of applicants for future access.
With respect to the Surcharge Standard, the RBA submits that a “prohibition” can be a “standard” in the ordinary sense of that term and the fixing by an independent expert of an interchange fee ceiling is not an unauthorised delegation of power to the expert because the Standard is made by the RBA and it fixes the criteria and methodology in advance to determine the benchmark with which the participant must comply. The function of the expert is not to determine the Standard, because that is done by the RBA, but rather to apply those fixed specific criteria in order to set the benchmark in a particular case.
The criteria set out in the Standards are not uncertain having regard to the authorities. The meaning of the criteria is reasonably precise within current accepted accounting practice and the criteria satisfy that requirement so that the provisions are not invalid for uncertainty. In the present case, the requirement is not to fix a price but to determine a standard. Even if there is any uncertainty in the determination of “eligible costs” in the process, the only uncertainty is in the application of the Standard in a particular context and does not arise as a consequence of uncertainty in the Standard
The RBA submits that the power in s 18 has been exercised by the RBA so as to ensure that participants know with certainty the cost-based benchmark they must meet prior to being required to comply with the Standard. The benchmark, it is submitted, must be arrived at prior to any obligation being imposed to calculate the interchange fee.
Criteria for calculating the cost-based benchmark do not have to be totally non-subjective. The test to be applied is whether criteria in the Standards are sufficiently certain. It is not necessary that there should be unequivocal precision. The requirement is one of sufficiency namely, that there be sufficient clarity and reasonable precision and this will vary according to legislation and context. It is necessary to adopt a fair and reasonable approach to the construction of the Standard. The wartime decisions relied on by the applicants are based on the fixing of a price which is different from determining a standard. Even in such cases, it is accepted that terms such as substantially or principally can be used without making the process “uncertain” to such a degree that the determination is invalid.
In relation to the Access Regime, the RBA says it appreciated its obligations and points to material which was before it, which in its submission, takes account of the interests of current participants. Specifically, it refers to the chapter on Impact Analysis in the Final Reforms and Regulation Impact Statement (“RIS”). It points out that there was ample opportunity on interested parties to make submissions to the RBA. The RBA received more than ninety-five written submissions from October 2000 to August 2002 and held fifty-two meetings, fifteen of which were with the designated card schemes. There is no reason to doubt its statement that it considered the matters raised in these meetings and submissions. In response to the claim that the RBA did not comply with s 28 of the PSR Act because the relevant APRA prudential standards had not been finalised, the RBA says that it complied with s 28(2) by its notice in the Gazette of 14 December 2001. Draft APRA standards had been formulated and had been the subject of consultation. There was no obligation on it to summarise the content of those prudential standards or to have them in final form.
The RBA contends that the definition of “access” in s 7 of the PSR Act does not limit the definition of “access regime” in s 12 of that Act. Even if there were such a limitation, there is no basis to import a restriction that an access regime may not deal with matters other than entitlement or eligibility to participate in a scheme. On a proper construction of pars 10-12 of the Access Regime, they are concerned with access because they permit specialist acquirers to participate, they remove burdens on specialist acquirers and they allow merchants to participate as acquirers of their own transactions. The rules of the systems can be regulated to ensure that there is no discrimination after admission in order to prevent evasion of the access rules. The RBA says that the proposed Access Regime provides for access on terms that are fair and reasonable.
In relation to the applicants’ attack on its decision-making process, the RBA points to material before it which it says demonstrates that it complied with its obligations under s 10B(3), to have regard to “efficiency” and “competition” and where it considered three available options. The RBA referred specifically to its “mandate” under s 10B throughout various material exhibiting its decision-making process including the Consultation Document, published on 14 December 2001 (“Consultation Document”).
As to the RBA’s consideration of the provisions PSR Act, s 8, and the RB Act, s 10B, it is submitted that there is nothing in the legislation which requires the RBA to adopt any particular methodology as to the way in which to form its opinions. The legislation makes it clear in terms that this was solely for the RBA and also that the RBA has complete discretion as to the most appropriate methodology. The RBA says that the approach taken was within a range of reasonably appropriate and available methodologies. The allegations based on manifest unreasonableness and lack of proportionality, it says, are answered by the above submissions.
As to the alleged failure to revoke the designations there was no basis shown to warrant revocation on either of the designations. The revocation raises questions of public interest and these are matters for the RBA. It also contemplates that the RBA is to form its own opinion whether the designation is no longer in the public interest.
the hearing
The applications brought by Visa and MasterCard were heard together over a period of six weeks. There were three parties represented by thirteen counsel. The proceedings involved discovery and inspection of thousands of documents. Some of these documents exceeded hundreds of pages. There were approximately 1700 pages of transcript and over 1000 pages of written submissions and responses.
Much of the evidence focused on the decision-making process undertaken by the RBA over the period August 1998 to August 2002 when the decisions to designate were made and the Standards and Access Regime were determined. Documents in evidence were not limited to those directly relating to the parties to the litigation, but also included correspondence and material concerning submissions and information provided to the RBA by numerous institutions which were not party to the actions brought by Visa and MasterCard. A strict confidentiality regime was implemented by the Court based on agreement reached between the parties to the proceedings, following various consultations with the authors of third party material sought to be tendered.
The Court had before it affidavits sworn by bank officers and employees of the applicants. The RBA elected not to call any lay witnesses but tendered three expert reports. Two of the reports, by Professors Katz and Farrell, both eminent experts in their field of economics, provided evidence in relation to the economic theory and application underlying credit card networks. The RBA’s third expert was Associate Professor Briers, who was called to provide the Court with his expert opinion on accounting issues relating to the method of calculation of the interchange fee.
Expert reports pertaining to the economic principles underpinning the operation of credit card schemes were also tendered by the applicants. MasterCard called two expert witnesses, Professor von Weizsacker and Dr Veljanovski. Visa called one economic expert, Dr Pleatsikas, an economist with some experience in the field of network and regulatory economics. Two accounting experts were called by the applicants to give evidence in relation to the accounting issues, namely Mr Teer who was retained by MasterCard and Mr Bryant, who was called by Visa.
Having regard to the vast amount of material and the complexity of the matter the Court indicated to the parties, and they accepted, that the nature of the proceedings was such that the rule of practice in Browne v Dunn (1893) 6 R 67 would not be applied to require an express challenge to every statement made, provided that there was no unfairness in failing to do so. That approach was followed especially in relation to the expert evidence where a vast array of literature rendered it impracticable for counsel to put to the expert witness every issue that emerged from the literature. Counsel proceeded on that basis in advancing their final submissions to the Court and no Browne v Dunn point was taken.
terminology
To appreciate the issues raised on these applications it is necessary to understand the instruments and procedures by which the four-party credit card schemes operate in practice and also the relevant terminology in the context of the provision of payment services.
A credit card provides a payment service and a credit facility. The latter will usually provide for an interest-free period before the account needs to be settled by the cardholder and a pre-approved line of credit, often termed a ‘revolving’ line of credit, on which a rate of interest is payable by users. The cardholder pays their credit card account some time after the transaction, according to an established billing cycle. Approximately twenty-five per cent of those who use credit cards pay within the allocated interest-free period and do not incur interest payments. They are known as “transactors”. They derive maximum benefits from the schemes. The remaining portion of credit card users take advantage of the credit facility and as a consequence they incur relatively high interest rates. They are referred to as “revolvers” as users of the revolving line of credit.
Visa and MasterCard provide services in what is typically described as a “four-party card scheme” or an “open loop credit card network” because there are four main parties who are involved in the operation of the scheme: the cardholder, their financial institution (the issuer) which issues the card, the recipient of the funds (the merchant) and its financial institution (the acquirer). The cardholder uses the credit card issued by their financial institution to acquire goods and services. They agree to pay fees to the issuer of the credit card together with any interest when they take advantage of the revolving line of credit. In using their credit card, cardholders present their cards to merchants, to whom payment is ultimately made. The merchant’s financial institution, the acquirer, is reimbursed by the issuer for the value of goods or services and the acquirer in turn agrees to pay the issuer an interchange fee. The acquirer will pay to the merchant the full value of an authorised credit card transaction, less any relevant fee charged by the acquirer to the merchant. This amount, payable by the merchant, is known as the merchant service fee. It includes the interchange fee. The expression merchant services includes the acceptance of credit card transactions, collection of the value of transactions from the issuer and reimbursement of the merchant, the provision of electronic terminals, card imprinters, sales vouchers, signage and promotional material and the provision of a call processing centre for authorisation of transactions.
Four-party schemes are operated by system administrators. In the present case, Visa and MasterCard administer the credit card network and provide issuers and acquirers, who are members of the scheme, with network administration services, including, for example, the right to use intellectual property. In administering the credit card network, Visa and MasterCard also provide their members with authorisation and settlement services and facilitate the interchange transactions between those members. The payment process involves a flow of information and payment instructions between parties to ensure that payment is made by the cardholder to the merchant. In the case of the Visa scheme, payment processing is completed by using a system known as VisaNet. The MasterCard network uses a similar system knows as BankNet. In some instances in a four-party credit card transaction the issuer and the acquirer are the same entity. These are known as “on us” transactions and there is no interchange fee payable.
By contrast, closed loop card networks, which are also known as three-party card schemes, such as those provided by American Express and Diners Club, consist of a network under which a single entity performs all issuing and acquiring functions, in addition to administering the card network. These schemes involve three parties, namely cardholder, merchant and the scheme administrator, which issue cards to cardholders. Cardholders use the card to purchase goods and services, and will usually agree to pay their account in full by the end of the billing cycle if they are issued with a charge card, or interest and fees if they hold a credit card issued by three-party card schemes operators. A charge card does not usually provide for the extension of credit facilities. In a typical three-party card transaction, the merchant receives payment following authorisation of a transaction, with the acquiring function being completed by the same entity which issued the card, namely the scheme administrator, such as American Express or Diners Club. The merchant is bound to pay a service fee in return for the acquiring services provided. However, no interchange fee is paid as part of a three-party card network.
In addition to three and four-party schemes, several other card networks exist in Australia, including store cards which are issued by or on behalf of retailers for use by customers within their own store. Store cards, like credit cards, offer an interest-free period and a revolving line of credit. Examples of these include cards issued by large retailers such as Coles Myer and David Jones. The store card issuer issues the card to its customer who is able to use the card to make purchases of goods or services offered by the issuer. The cardholder receives a monthly account from, for example, the retailer, which must be paid in accordance with the billing cycle or incur fees and interest charges. Finance for store cards will either be provided by a third party or, in some instances, a company related to the store card issuer. Thus, GE Capital Finance Australia provides financial services to users of the Coles Myer store card while David Jones Financial Services Limited is the credit provider for store cards issued by David Jones.

Other types of payment cards do not extend credit facilities.A debit cardholder for example, has the amounts purchased using the card deducted from his or her designated deposit account by the card issuer on a transaction basis. Unlike credit cards, debit cards usually provide no credit facility to cardholders. Funds to cover debit card transactions are deducted directly from cardholder accounts with little, or no, delay. Debit card transactions that are processed via the Electronic Funds Transfer/Point of Sale (“EFTPOS”) network require the cardholder to verify the transaction by using a keypad to enter a PIN (personal identification number) and result in an interchange fee paid by the card issuer to the merchant’s acquiring institution. These costs are often (at least in part) recovered through transaction fees levied on cardholders.
Debit cards are usually combined with Automatic Teller Machine (“ATM”) functions in a single card, so that cardholders can be provided with access to cash and the ability to perform certain banking functions (such as balance inquiries and balance transfers between/among accounts) electronically through ATMs. Under current arrangements, holders of debit cards will typically face a transaction fee for using a debit card (usually after a number of fee-free transactions). As at June 2002, there were more than 16,000 ATMs in Australia as compared with fewer than 9,000 in 1997.
A smart card is a plastic payment card fitted with a microchip, as opposed to a magnetic strip, thus allowing for greater security by reducing the prospect of fraudulent use of the card. A smart card can be programmed so that stored monetary value in the form of digital information can be loaded onto the card. Conversely, the ‘electronic value’ can be deducted or transferred onto other cards using the appropriate hardware. The cardholder is then able to use the card to for the purchase of goods or services by the electronic transfer of the digital information from the microchip on the card to a merchant’s microchip. An example of a smart card is a prepaid telephone card.
One feature of four-party credit schemes in Australia is the interchange fee payable as part of payment processing by the acquirer to the issuer. In credit card payment networks, interchange fees are set collectively by members and are paid by the acquirer to the cardholder’s financial institution (the issuer). These fees are said to be justified on the basis that they allow the acquirer to recoup costs of the card infrastructure and processing. The interchange fee is passed by the acquirer to the merchant who can then bear it or pass it onto all customers, both cardholders and non-cardholders, by way of a general price increase.
IMPORTANCE OF INTERCHANGE FEES
There are currently in excess of ten million credit and charge cards on issue in Australia. According to the RBA, consumers use credit cards to finance thirty-six per cent of their spending. The debt on card transactions exceeded $24 billion as at June 2003. On a global comparison Australia ranks third after the United States and New Zealand in credit card usage. Credit card transactions have increased more than twenty-four per cent per annum over the past five years. In 2001, there were on average forty-three card transactions for every person in Australia.
Interchange fees generate substantial income for issuers and acquirers as a consequence of the use of credit cards. The Consultation Document states that:
“…. interchange fees currently generate revenues of around $775 million a year to issuing banks). Revenue from this source accounted for about one-third of total issuing revenues …. The other two-thirds of total issuing revenues is generated by cardholders who make use of the revolving line of credit (‘revolvers’), that is, who do not pay off their accounts by the end of the interest-free period. Preliminary data from the Reserve Bank’s new payments system collection indicate that about three-quarters of credit card outstandings are interest-bearing. Credit cardholders who use the credit card purely as a payment instrument (‘transactors’), that is, who pay off their balance by the end of the interest-free period, make only a very small contribution to total issuing revenues, mainly through annual fees.
The Joint Study found that interchange fees in Australia are not reviewed regularly by credit card scheme members on the basis of any formal methodologies. It also found that the fees are higher than the costs incurred by issuers in providing credit card payment services to merchants and that – because of barriers to entry to the schemes - competition does not seem to be bringing these fees into line with costs. The Joint Study concluded that credit card interchange fee arrangements in Australia are contributing to a structure of incentives that has encouraged the growth of the credit card network at the expense of more economical payment instruments.” (Emphasis added)
The RBA estimate is that its proposed reforms to credit card schemes will reduce credit card interchange fee amounts by approximately $350 million annually.
Interchange fees have been an integral part of the pricing structure in card schemes. They have a strong influence on (i) the revenue flows associated with card transactions, (ii) the costs ultimately borne by merchants and cardholders, (iii) the incentives to use and accept debit and credit cards and (iv) the terms on which financial institutions and other providers of payment services can gain access to some card networks.
Visa by far has the greatest share of the credit card market, which is then followed by MasterCard and Bankcard. The shares of the market by Diners Club and American Express schemes are substantially less than those of Visa and MasterCard.
The costs incurred by the issuer are said to be in the order of five times the costs that are incurred by the acquiring bank, in a credit card transaction. If all of the costs incurred by the issuing bank are met by the issuing bank’s customers, then the system may not function properly. This is therefore seen to be a justification for an interchange fee from the acquirer to the issuer in order to provide a balancing mechanism for the efficient operation of a credit card scheme.
In a typical credit card transaction, the payment of an interchange fee is acknowledged by the RBA to perform a useful function in meeting the discrepancy in costs as between issuer and acquirer. The problem, in the view of the RBA, resides in the lack of transparency arising from the absence of any specific transparent methodology, data input, or monitoring on a systematic basis, and the fact that the level of interchange fees are determined between close competitors in a tightly controlled market.
The remedial measures implemented by the RBA after designation of the card schemes, namely the Access Regime and the two Standards are closely inter-related and must be considered as part of a single regulatory scheme largely centred around monitoring and setting interchange fees. At the heart of the regulatory focus in the present reforms is the setting of the interchange fee by reference to specified costs, data and a methodology using review by an independent expert to arrive at a suitable benchmark, with the objective of introducing transparency to the process. This is said to enable interested parties to make more informed economic choices with respect to selection of payment mechanisms, including the use of credit cards.
In Australia interchange fees do not apply when customers make payments by cheque, direct credit or direct debit. In those cases, financial institutions seek to recover their costs directly from their customers. One rationale for interchange fees is that they encourage the growth of payment networks by redistributing revenues between participants to induce them to join. In this way the benefits of the payment network may be maximised. Despite the fact that the networks have reached a high level of maturity, pricing is still based on interchange fees set by financial institutions removed from the cardholders and merchants that ultimately bear these fees. The end users of card services do not have any direct influence on the price setting process. This is perceived by the RBA and its advisers to be a distortion of normal market discipline which has implications for efficiency and equity, both of which need to be weighed against potential network benefits.
In Australia over ninety per cent of debit and credit card transactions are processed by a relatively small group of financial institutions. The four major banks account for the processing of over ninety-three per cent of credit card transactions.
Total fees payable per annum by merchants to acquirers is in the order of $1.5 billion. The RBA estimates that transactors alone receive a benefit in the order of $90 million per annum, being the amount by which revenues received from transactors fall short of the costs of providing the interest-free period together with loyalty points. However, this estimation of $90 million only relates to transactor benefits and does not take account of the substantial benefits to revolvers which have not been quantified in the material. It appears that these total benefits to cardholders must fall somewhere within the range of between $90 million each year and the $1.5 billion in merchant fees, so that benefits are substantially in excess of the $90 million. Although in relative terms to the total revenue generated by credit card transactions these figures may not be a high proportion, nevertheless they are significant amounts in their own right. It is common ground that approximately only twenty-five percent of the credit card users are transactors and that the seventy-five percent majority of persons using four-party credit card schemes are revolvers who pay the relatively high interests rates attracted to these transactions.
The interchange fee is at present collectively set by the members of the schemes. Neither the applicants nor their members have provided any significant detail disclosing current procedures and data input explaining the way in which interchange fees in Australia are set. MasterCard asserts that competition among different payment mechanisms ensures that there cannot be a problem with the setting of interchange fees. Visa states that the setting of interchange fees is a complex matter that requires commercial judgment. It is said that this judgment is shaped by the realities of market place competition, which is then tested in the negotiating process over interchange between members and that this process elicits information about the likely outcomes with alternative fee levels.
visa card scheme PROFILE
Visa’s international operation includes a world-wide electronic financial processing authorisation clearing and settlement system or service known as VisaNet. This is comprised of a comprehensive network of computers and telecommunication systems that link Visa processing centres to issuers, acquirers and third party processors. VisaNet enables members of Visa to exchange information, both financial and non-financial, reliably, quickly and efficiently.
VisaNet provides services to participants which include the following:
(a)an authorisation service, which permits the issuer of a card to approve or decline a transaction before a transaction is completed (that is, before a sale is completed or cash disbursed). Visa also provides various kinds of authorisation services whereby it makes authorisation decisions on behalf of issuers – these are known as “stand in processing services”;
(b)a clearing service which involves the collection of financial information about a transaction form an acquirer and the delivery of that data to the relevant issuer. The issuer is able to use the information to post the transaction to the cardholder’s account; and
(c)a settlement service which involves the calculation of the net financial position of each member for all transactions that are cleared within a particular time period.
VisaNet systems provide services of online and offline transaction processing. One of these systems is know as the BASE I System which supports online authorisation processing for relevant transactions. There is also a BASE II System which clears and settles previously authorised transactions, that is to say, authorisation and subsequent clearing and settlement. BASE II processing occurs by way of “batches”, that is, it is not undertaken online, but data is compiled during a collection period and processed at specific settlement times. This system also calculates fees, charges and settlement totals and produces reports to help with reconciliation.
Set out below is a diagrammatic illustration of the Visa credit card procedures.
The process, in simplified terms, by which transactions are processed through VisaNet in relation to authorisation is generally as follows:
(a)The cardholder wishing to make a purchase or obtain a service presents the Visa credit or debit card to the merchant.
(b)The merchant swipes the card through a point-of-sale terminal and an authorisation request is sent from the terminal to the acquirer via the electronic link between the merchant and its acquirer.
(c)The acquirer’s processing system reads the Bank Identification Number (“BIN”) of the message sent from the merchant terminal. The BIN is the first six digits of the card number and is unique to the cardholder’s issuing bank. That number also indicates whether the transaction is a Visa card transaction or some other card brand. The acquirer’s processing system separates Visa card transactions from other transactions.
(d)The acquirer’s processing system identifies whether or not the acquirer is also the issuer of the card by comparing the BIN on the card to the acquirer’s BIN. If it is, (this transaction is called an “on-us” transaction) the acquirer’s own processing system determines whether the transaction should be authorised. An authorisation request does not go to the VisaNet service.
(e)If the transaction is not “on-us”, the acquirer’s processing system formulates an authorisation request.
(f)The authorisation request is transmitted to the issuer of the card. The issuer’s processing centre determines by reference to conditions set between the issuer and the cardholder whether authorisation for the transaction should be granted.
(g)A response to the authorisation request is formulated by the issuer’s processing centre and that is communicated via the issuer’s system and routed back to the acquirer.
(h)The acquirer forwards the response to the authorisation request to the merchant who is then able to proceed with or decline the transaction.
(i)The authorisation process occurs almost instantaneously over telecommunication lines. The process is “online”. The process described generally takes about six seconds.
(j)VisaNet sometimes provides “stand in” processing services to a participant on request, whereby VisaNet makes authorisation decisions of behalf of an issuer. This is based on parameters previously supplied to Visa by the relevant issuer.
The clearing process generally occurs as follows:
(a) At a time that is fixed between the merchant and the acquirer, the merchant delivers all of its Visa card transactions for a particular period to the acquirer. This usually occurs automatically at the end of each business day as part of the closing out procedure for the merchant’s terminal. Visa card transactions are generally delivered along with all transactions using any type of card.
(b) The acquirer pays to the merchant the amount reflected by the Visa transactions in accordance with the agreement between the merchant and the acquirer. Payment is usually made within twenty-four hours within Australia. The merchant service agreement usually provides for payment of a fee known as a “merchant service fee” which is deducted from the amount otherwise payable from the acquirer to the merchant on account of the Visa card transactions.
(c) The acquirer’s processing centre collects all of the information concerning Visa card transactions that have been acquired from each of the acquirer’s merchants (except for “on-us” transactions). That information is used by the acquirer to compile an interchange transaction file.
(d) At a pre-determined time, VisaNet sends a message to each acquirer’s interchange transaction file.
(e) VisaNet collects and sorts the information that is transmitted to VisaNet by all acquirers in Visa from around the world. An interchange file is compiled for each issuing BIN, which lists the transactions for that issuer’s cardholders.
(f) VisaNet delivers the second interchange transaction file to each issuer so that the issuer can post the transaction to the cardholder’s account.
(g) As part of the clearing process, VisaNet calculates the fees that are payable as between issuers and acquirers and fees that are payable to Visa for any processing services used by the members.
The process of settlement within Australia generally occurs as follows:
(a) VisaNet calculates the net position of each member of Visa in relation to cleared transactions. Some members will owe money and others will be owed money, depending on the amount the member has acquired from merchants compared with the amount debited to the account of the member’s cardholders. That is, members are owed money in respect of transactions that have been acquired but owe money where one of the member’s cardholders has used a Visa card to obtain goods or services.
(b) This information is consolidated and sent to members.
(c) A report is sent by the VisaNet system known as the VSS 451 Report daily to the ANZ Bank which has been appointed by Australian members of Visa to act as the “local settlement bank”. This report summarises the net settlement amounts due from and to all Australian members arising from Australian transactions. It corresponds to the information contained in the Australian members domestic settlement position reports.
The final steps in the procedure are as follows:
(a) ANZ has authority from members to debit and credit funds from and to the respective Australian members Exchange Settlement Accounts (“ESAs”) that are held with the RBA.
(b) ANZ undertakes a number of steps to process the debits and credits from and to the ESAs in accordance with the VSS 451 Report.
(c) Settlement then occurs on the same day that the VSS 451 Report is sent to ANZ or if the RBA is closed, on the next day that it is open.
It is helpful to elaborate on the final steps.
As a general description of the procedure at the ANZ, there is a record made daily in the books of ANZ, which is designed to enable the resolution of a multiplicity of debts arising from individual Visa credit card transactions involving members as issuers and acquirers, into a simple net movement of funds between each member and ANZ. This is expressed in ANZ records as a credit or debit between ANZ and each member. The process of calculating a net daily position between each Australian member and ANZ is effected pursuant to the rules of Visa. The calculation is made by the VisaNet system. The Visa rules contemplate that the credits or debits are aggregated with all other inter-bank indebtedness for the day, arising from a range of transactions. These include indebtedness and credits arising from transactions that include the use of cheques, direct debits and credits, ATMs, EFTPOS and credit cards. This aggregation finally results in a single overall debit or credit in each bank’s ESA at the RBA which leaves each member having a zero balance with ANZ each day with respect to domestic Visa credit card transactions.

This is a reference to s 8.
There are throughout the subsequent documents in evidence up to August 2002, extensive and numerous repeated references to public interest issues and to the public interest which must be taken into account, as well as express reference to the public interest as set out in s 8 of the PSR Act, bearing in mind that the public interest is in connection with the proposed exercise of the PSB’s power under that provision.
Another example is found in the PSB minutes of 21 August 2001 which refer to:
“Members endorsed, as being in the public interest, the general approach to reform of credit card schemes outlined in the paper…”
Reference to the relevant sections posing the questions are to be found throughout the Consultation Document of December 2001. By way of example, at pages 8 and 9, the specific powers of RBA under the PSR Act are set out together with the mandate under the RB Act. There are additional references to ss 7, 12, 18, and 28.
On page 42 of the Consultation Document it is stated:
“In the absence of a vigorous competitive environment, the Reserve Bank believes that the public interest requires a transparent and objective methodology for the setting of credit card interchange fees in Australia, and that the fee-setting process be open to public scrutiny. … In the Reserve Bank’s view, any methodology for determining an interchange fee should be consistent with a set of principles that would promote more efficient and transparent pricing of credit card services to both merchants and cardholders.”
The language of promoting more efficient pricing is to s 10B and the reference to public interest in s 8. Throughout this document there are references to the public interest in relation to the need for a standard and to the promotion of efficiency and transparency in fee setting. From the latter reference to transparency, in the light of the economic evidence, I would read that as referring indirectly to competitiveness.
In a PSB minute of 13 November 2001, prior to the publication of the Consultation Document, there is a reference to:
“Dr Veale then took the Board through the [draft] Consultation Document in detail, outlining the draft regulations of the credit card schemes relating to the collective setting of wholesale (interchange fees), restrictions on merchant pricing and restrictions on entry, the various arguments about whether these regulations were in the public interest, and how the Bank proposed to promote efficiency and competition in the payments system through use of its payments system powers.
[T]he focus was on the expected impact of reform and the efficiency and transparency of prices in the payments system, and on overall costs; …”
The references to payments system and to the public interest and to the promotion of efficiency and competition in the payments system is a reference to s 8 and also to s 10B.
It is important generally to bear in mind that s 10B of the RB Act is concerned with promoting the efficiency of the payments system and promoting competition in the market for payment services, consistent with overall stability of the financial system. This concern relates to a wider area of economic control than the PSR Act which is concerned with payment systems, which is a narrower range of activity. For example s 12 of the PSR Act is concerned with access regimes in a designated payment system. It is not concerned with the control of the payments system. Likewise, s 18 which confers power to make standards is a power with respect to a payment system and not the payments system. This distinction appears to be applied throughout the documents in evidence emanating from the RBA and the PSB.
Again, in the PSB minutes of 20 August 2002, shortly before the gazettal of the Access Regime and Standards, the minutes record:
“Overall, the staff advised that the additional material [submissions received after March 2002] did not lead them to change their view that reform of credit card schemes in Australia, along the lines proposed in the Consultation Document, were necessary in the public interest. …”
This again can be taken as a shorthand form of reference to s 8 of the PSR Act.
In the RIS, the objective of the implementation of the reforms is set out in the language of s 10B of the RB Act. It refers in substance to the promotion of efficiency and competition in the payments system.
In relation to the Access Regime, the PSB memorandum of August 2001 uses the language of s 12 of the PSR Act. It also refers to increasing competition in the provision of credit card services and increasing efficiency of the payments system without compromising safety. This is the language of s 10B. In the Consultation Document, the language of s 10B is used in relation to access with references to a regime of access to the credit card schemes that will promote competition and efficiency without compromising the safety of credit card schemes.
There is also discussion of the public interest viewpoint, which is a reference to s 8. There are also references to efficiency and to the RBA’s conclusion that a more liberal access regime imposed under its payments system powers is needed in the public interest to promote competition and efficiency in the provision of credit card services in Australia. There are numerous references to promoting competition and efficiency without comprising safety and in the public interest in the Consultation Document with respect to access.
In respect of access, the RIS refers to increasing competition and lowering costs and to the removal of barriers to entry to the designated credit card schemes for non-financial corporations, but without compromising the safety of the schemes. Safety is a concept used in the definition of public interest in s 8 of the PSR Act.
The objective of the Access Regime itself, as outlined in the RIS, is to promote efficiency and competition in the Australian payments system which is the language of s 10B. There is also reference to the public interest and to the language used in s 12 concerning interests of current participants, people who in the future may want access to the system and the financial stability of the designated credit card system.
In relation to the Surcharge Standards, there are references to the language of s 8 and s 10B in the PSB memorandum of May 2001 with respect to the “public interest issue”. In the PSB minutes of 13 November 2001, there is reference to the focus being on the expected impact of reform and the efficiency and transparency of prices in the payments system which is a reference to par 10B(3)(b)(ii). In the Consultation Document, where the no surcharge rule is discussed, there are numerous references to the language in s 10B and s 8. For example, at page 62 it is noted:
“In the Reserve Bank’s judgment, restrictions on merchant pricing are not consistent with the promotion of efficiency and competition in the Australian payments system.”
In the Consultation Document, at page 74, there is a reference to the fact that the RBA is required to act in the public interest to promote efficiency as well as competition, which is a reference to s 8 and s 10B. There are numerous other references to the language of those provisions in the remainder of the Consultation Document. In relation to the information paper of May 2002, there is reference to the language of s 8 and in a memorandum prepared for the PSB meeting on 20 August 2002, there is a reference to efficiency and competition issues with respect to the designated card schemes.
More generally, the documentary material indicates a lively awareness by the PSB of the requirements of the PSR Act. Specific examples include the Consultation Document at page 9 which sets out the task of the RBA. As noted earlier, there are references to ss 7, 12 and 18 of the PSR Act. At 10-12 there is reference to the public interest test as being critical. This incorporates s 8. There is specific quotation of that section on page 10 of the Consultation Document.
At page 116 it is stated that:
“In the Reserve Bank’s opinion, this package of measures will promote a more efficient and lower-cost payments system in Australia, from which the community as a whole will benefit. The reform measures have been endorsed by the Payments System Board of the Reserve Bank.” (Emphasis added)
This indicates that the RBA was conscious of the provisions of s 10B in its reference to the payments system.
The RIS addressed the requirements of s 8 of the PSR Act in its reference to the arguments being preferred, in the public interest, for the freeing up of normal market mechanisms to promote competition and efficiency in the Australian payments system.
In addition there are other references to s 10B in the RBA information paper of August 1998 which sets out the requirements and responsibilities of the PSB. The Annual Reports for 1999 and 2000 refer to the PSB’s mandate and responsibilities, including s 10B.
In evidence before the Court was a memorandum relating to the role of the PSB, which refers to controlling risks in the financial system and promoting efficiency of the payments system and promoting competition in the market for payment services. This express consideration of s 10B is again repeated in the Consultation Document, where there is specific reference to the language of s 10B, namely controlling risk in the financial system, promoting efficiency of the payments system and promoting competition in the market for payments services consistent with the overall stability of the financial system. At pages 37-39 of the Consultation Document, the RBA expressly analyses competition between payment instruments.
Having regard to the above, I do not accept that in the designation decisions or the determination of the Access Regime or either of the Standards, the RBA failed in substance to address and form an opinion on any of these four central questions said to be essential by Visa. Nor do I accept that there was insufficient material before the RBA on which it was open to it to form such opinions.
UNREASONABLENESS and proportionality
The applicants submit that each of the RBA measures is beyond power because each was so unreasonable, that no reasonable person could have made the decision and each decision goes beyond the limits of proportionality. This is said to be so particularly having regard to the approach taken by the RBA in relation to issues of efficiency and competition.
The principle of lack of proportionality was considered by the Court in South Australia v Tanner (1989) 166 CLR 161.
In that case, the question was whether a regulation was a valid exercise of power conferred by statute. In their joint judgment, Wilson, Dawson, Toohey and Gaudron JJ referred to the reasonable proportionality test as raising the question (at 165):
“… whether the regulation is capable of being considered to be reasonably proportionate to the pursuit of the enabling purpose. …”
The same test in relation to a power limited to regulation was expressed by Dixon J in Williams v Melbourne Corporation (1933) 49 CLR 142 at 156, as being in substance, whether the regulation goes beyond any control which could be reasonably adopted for the prescribed purpose.
At 167-168, their Honours continued:
“As we have said, the parties are agreed that the test of validity is whether the regulation is capable of being considered to be reasonably proportionate to the end to be achieved. … [a] court must exercise care not to impose its own untutored judgment on the legislator …. It is not enough that the court itself thinks the regulation inexpedient or misguided. It must be so lacking in reasonable proportionality as not to be a real exercise of the power. Nor is it enough to point … to other provisions in the Waterworks Regulations which impose only qualified prohibitions as a step leading to a conclusion that a total prohibition of the kind contained in reg. 37.2.1 is unjustified. To do that is again to substitute the judgment of the court for that of the legislator.
In our opinion the regulation is a valid exercise of the power. …” (Emphasis added)
The way in which the submission is framed is that the RBA has made errors as follows:
·The RBA did not define the market or did not make assessments of the cross-elasticities of demand;
·The RBA adopted a wrong measure of assessing efficiency and did not have regard to costs. Rather it only had regard to benefits;
·The RBA only had regard to some relevant costs and not all of them;
·The RBA adopted an arbitrary approach to eligible costs;
·The RBA erred in relation to the interest-free period;
·The RBA erred in considering debit cards were closer economic substitutes for credit cards than charge cards;
·The RBA has irrationally entrenched collective setting of interchange fees;
·The RBA’s approach was irrational in not taking action in respect of charge cards;
·The perception of a perceived problem by the RBA does not of itself justify intervention because further consideration needs to be given; and
·The Access Regime is perverse.
There is a further list of assertions which are said to cumulatively demonstrate the manifest unreasonableness and lack of proportionality. These contentions are largely based on assertions by Dr Pleatsikas which I do not accept in the face of countervailing evidence from experts called by the RBA and also in the light of the cross-examination of Dr Pleatsikas himself.
These assertions are not warranted on the evidence for reasons which I have given elsewhere. They largely go to the merits of the decisions rather than to judicial review grounds. They represent points of disagreement among economists and as between the RBA and some of the economists and predominantly concern issues on which reasonable minds could come to a different view. In respect of many of the assertions, there are contrary views expressed in the expert reports so that the applicants’ submissions are founded to a considerable extent on highly controversial economic views which cannot be said to mandate any specific result. When analysed, they amount to no more than the expression of a different opinion to that formed by the RBA and do not, even when taken cumulatively, provide a basis for asserting that either the process or the result was manifestly unreasonable or that the measures adopted lacked proportionality, in the sense that they were grossly excessive having regard to the mischief sought to be addressed. The assertions, when considered in the light of the evidence, and the more detailed discussion elsewhere in these reasons fall far short of providing any proper basis for the submissions advanced on behalf of the applicants in these proceedings.
standards and access – five ALLEGED patent errors
In its submissions, Visa claims that RBA made a series of fundamental and patent errors in its determination on standards and access.
First it says that the RBA did not undertake “a comprehensive study of production costs of payment services in Australia along the lines of the Norwegian studies”, as recommended in a memorandum of 11 November 1998. It is also said that two other matters referred to in that memorandum were not undertaken. The first is that the RBA did not obtain a further understanding of the pricing of payment services in Australia and overseas, and the responsiveness of demand to relative price signals as recommended in that memorandum. The second is that the RBA did not develop measures of the total resource costs of payment streams, including the costs for payees and payers as recommended in that memorandum.
The first point to note is the date of the memorandum, which was produced more than three years before the publication of the RIS in August 2002. During the ensuing period there was the Joint Study and extensive examination, investigation and consultation involving the publication of the proposals and discussion, together with consultation with expert advisers as to the appropriate course.
The input of the memorandum of 11 November 1998 is that at an early stage, the Board considered that certain specific investigations should be carried out. Subsequently, extensive examination and studies were engaged in and considered. The memorandum indicates that from the outset, the RBA, focused on relevant questions. The precise manner in which it obtained information concerning production costs of payment services in Australia and the pricing of payment services and the development of measures of total resource costs of payment streams are matters for the Board in the light of subsequent consideration.
Most importantly, following the November paper, a work programme was identified and pursued. The first important product of that programme was the publication of the Joint Study with the ACCC in October 2000. In that Study, there was consideration of the pricing process and conditions of entry to card payment networks, empirical data was gathered and network effects and benefits were noted. Costs and benefits were considered in detail from the viewpoint of cardholders merchants, acquirers and issuers, and these were analysed in assessing competition and efficiency. Empirical data was gathered in relation to the costs of issuing and acquiring credit cards and the conclusion drawn that credit card issuing and acquiring generates revenues well above costs.
It should be noted that this submission is narrowly framed to suggest not that the subject matter was not studied but rather that the precise manner “as recommended in the memorandum” was not adopted. In my view there is no substance in the submission that these matters were not considered as recommended in the memorandum. The subsequent studies and consultations indicate that the substance of the matters referred to were the subject of investigation and consideration.
It is contended that the RBA did not undertake a substantial portion of the studies and analysis set out in the terms of reference for the economic review of domestic credit card interchanges. Again, the RBA was not tied to its preliminary view as to the precise way and extent to which it ought investigate relevant matters. The terms of reference were dated 13 October 2000 and were clearly proposed terms of reference as at that point in time. They preceded the final reforms by more than eighteen months and in the meantime, the RBA had gathered information and carried out investigations over that period. The degree to which the studies and analyses set out in the terms of reference should be followed up are matters within the discretion and judgment of the RBA unless it can be shown that the RBA did not satisfy the statutory requirements. There is nothing in the legislative provisions to mandate this exercise. It is of no great significance that some particular investigations contemplated in the course of forming its ultimate opinions were not undertaken. Views as to what is appropriate can change from time to time as new material becomes available.
Another complaint made by Visa is that the RBA did not collect data or undertake a study of the cost of payment instruments to merchants of the kind described in the information paper of 9 May 2001, entitled “Payment Instrument Costs – the Merchant’s Perspective”. The suggestion is not that the RBA failed to study the cost of payment instruments to merchants but only those of a particular kind. Again, that memorandum was fifteen months before the final reforms were announced and there is evidence of detailed consideration of the merchants’ position in relation to the costs of payment both before and after May 2001.
When considering this issue it should be noted that the Australian Retailers Association made four detailed submissions on the merchant perspective. Woolworths made a confidential submission and Coles Myer also made four confidential submissions and sent a letter. The Shell Company also made a submission. Most of these submissions were made some time after 9 May 2001, although some were made before that date. There was therefore a substantial input to fill in the perceived gaps in information. The retailers themselves in submissions and responses could reasonably be expected to fully express the merchants’ perspective and the attaining of these submissions by way of consultation and discussions can be described as a substantial exercise in data gathering after the date of the memorandum. There is a chapter in the Consultation Document of December 2001, at 61-83, specifically on merchant pricing restrictions which considers these submissions on merchant pricing and the impact. These matters are also dealt with in the RIS of August 2002 in a number of sections.

In the light of the material considered by the RBA there is no substance in this first allegation of patent errors.
The second patent and fundamental error alleged is that the RBA did not identify substitutable products for credit cards whether by formal or informal market definition or by any other means. The submission is made that the RBA made no attempt to identify the products that compete in the payment services market.
This submission is quite contrary to the evidence. Substitutability of three-party schemes was analysed in the Consultation Document, for example, at pages 38 and 39. There is a heading specifically dealing with “Competition with other payment instruments”, pp 37-38. Debit cards were expressly considered as substitutes.
The third patent error alleged is that the RBA proceeded on the footing of erroneous facts or assumptions. Examples were given in the written submissions. The errors alleged cannot be said to be purely established errors.
For example it is said that the RBA assumed that credit cards had grown faster than debit cards when there was some data to the contrary. The data relied on hand written notes on a typed memorandum and it is by no means clearly established that there was such an error. In any event, it is not an error of any significance.
A second example given is that it was wrongly assumed that issuers and acquirers were deriving super profits or margins of around thirty-nine per cent and sixty-seven per cent respectively, when the data and the advice demonstrated that the assertion was fallacious. This difference arises as a consequence of the non-inclusion of loyalty points and capital costs. There is some debate as to whether loyalty points should be included. Even if loyalty points were to be included then the margins would still be significant in the order of fifteen per cent and nineteen per cent. There is no indication that this error would have made any difference.
A third example is the assumption that consumers subsidise credit cardholders and financial institutions by bearing the burden of the merchant service fee, when in fact the only subsidy is to transactors, and only to the extent of the excess of the merchants service fee over the convenience benefits to merchants. On the evidence, the underlying basis of the assumption is valid, that transactors are getting an advantage over other purchasers as a consequence of the system. Moreover, it is not established that the excess of the merchant’s service fee over convenience benefits to merchants is not substantial, particularly having regard to the absence of any transparency and the failure to reduce fees over many years in circumstances where technological advances have reduced costs considerably.
A fourth example is the inclusion of loyalty points in the interchange fees when they should not be. It is true that Professor Katz considered that loyalty points should be included. However, the inclusion of loyalty points is not shown to be likely to have had any material affect on the outcome.
The final example is said to be that the RBA assumed that efficiency was synonymous with costs when it is not. This is without foundation because the Consultation Document, for example, identifies three dimensions of economic efficiency including dynamic efficiency, which is the need to make timely changes to technology, productive efficiency, which is concerned with goods being produced at minimum costs and allocative efficiency, where resources are allocated to their highest valued user to achieve the greatest benefit relevant to costs. There is extensive discussion in the Consultation Document which makes it clear that efficiency is not equated with costs.
Accordingly, the third alleged patent error is not made out.
The fourth error claimed is that RBA conducted no cost-benefit analysis of its regulations. There is no requirement for a cost-benefit analysis to be conducted. The way in which the decision is to be made is expressly left to the RBA. Moreover, there is no consensus among the economists that a cost-benefit analysis is essential prior to forming a view about competition or efficiency. Nor is there any suggestion that there is any available evidence of costs or benefits which could have led the RBA to form an opinion different to the one it formed. No cost-benefit analysis was carried out by any of the economists who provided reports to the RBA during the consultation process. Dr Pleatsikas could not design such an experiment and was not aware that anyone had actually designed any reliable experiment to carry out a comprehensive cost-benefit analysis. Professor von Weizsacker agreed that in the real world, any cost-benefit analysis would be very difficult if not virtually impossible. In fact, evidence adduced before the Court pointed to the inherent difficulties pervading cost-benefit analysis in practice. Professor Lave makes the following observations in his paper, “Benefit-Cost Analysis: Do the Benefits Exceed the Costs?”, in A. Ogus (ed), Regulation, Economics and the Law, p 104, at 120:
“…
We economists lose our credibility and risk ridicule by requiring analyses we know will have major flaws and by insisting that the option with the greatest measured net benefit is the optimal choice.
Myriad other problems occur in practice. We assume that market prices reflect a purely competitive market, even in concentrated industries. We assume that tastes do not change over time. We assume that many ‘small’ externalities do not need to be included in the analysis because they are unimportant.
A benefit-cost analysis will reveal legions of uncertainties and gaps in knowledge. If they are displayed to the reader, they might create a bias toward concluding that the analysis is unworthy of confidence and would certainly lead to a long, unreadable report. If they are not highlighted, the public might have more confidence in the analysis than is warranted. In practice, what decision makers learn from benefit-cost analysis comes from the executive summary. But no one- or two-page summary can indicate the range of uncertainties and other qualifications that a decision maker must know to use the analysis intelligently. …”
Professor Farrell indicated that often, economists can conclude outcomes would be inefficient and can infer the direction in which incentives should be adjusted even without explicit cost- benefit analysis or a structured empirical investigation.
In the light of the expert evidence it cannot be said that an absence of a cost-benefit analysis was a fundamental or patent error. I have referred elsewhere in these reasons to material where the RBA dealt expressly with the issue of cost-benefit analysis.
The fifth patent error alleged is that the RBA failed to adopt a rational economic framework relevant to the situation of a network industry. It assumed it was in the first best world and not a second best world. The expert evidence indicates that there is no rigid methodology which can be imposed. The legislation does not require the adoption of any particular rational economic framework relating to network industries. I prefer the evidence of Professor Farrell in relation to the lack of any necessity for a rigid methodology of any specific kind. In my opinion, the approach taken by the RBA was rational; it had regard to the economic framework and took into account the position of a network industry. There is no substance in this ground. It is said that the RBA assumed it was in a first best world and failed to have a proper appreciation that competitiveness and efficiency in a second best world required departures from Pareto efficiency. It is said that it failed to consider that a partial solution is one that does not take into account the likely market reactions. The second best world is said to require a sophisticated analysis aimed at particular competitors. In fact, what the RBA has done in considering the issues of competition and efficiency in my view meets such a description.
CONCLUSIONS ON CLAIMED PATENT ERRORS
In my view none of the matters raised under this line of attack can be said to be patent errors or indeed errors of any material significance such that they could impact on the validity of the determinations made by the RBA in relation to access and standards.
conclusions
Both applicants were out of time for filing an application for review under s 11 of the Administrative Decisions (Judicial Review) Act 1977 (Cth). Applications were made by both applicants for an extension of time and these were supported by affidavits. There was no opposition to the grant of an application for extension of time. Accordingly, I grant the application by each party for an extension of time.
I note that no objection was taken to the standing of either of the applicants to bring the present proceedings. It is apparent that they each have sufficient interest in the proceedings to afford standing.
None of the grounds raised by the applicants as to invalidity have been made out.
Each of the applications are dismissed. I will hear the parties on costs at a suitable time to be arranged with my associate after they have had an opportunity to consider these reasons for judgment. If there is no dispute in relation to this matter, consent orders can be filed.

I certify that the preceding eight hundred and sixty-four (864) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin

Associate:
Dated: 19 September 2003

Counsel for the Applicant Visa:

J Karkar QC

A Robertson SC

J Halley

P Brereton

K Sainsbury

Solicitors for the Applicant Visa:

Freehills

Counsel for the Applicant MasterCard:

P Hanks QC

I E Davidson

J Jagot

Solicitors for the Applicant MasterCard:

Coudert Brothers

Counsel for the Respondent:

T F Bathurst QC

J E Griffiths SC

I M Jackman SC

A J Payne

K Barrett

Solicitors for the Respondent:

Clayton Utz

Dates of Hearing:

19-22 May, 26-29 May, 2-5 June, 10-13 June, 16-19 June, 23-27 June 2003

Date of Last Written Submissions:

22 July 2003

Date of Judgment:

19 September 2003

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 973 OF 2002 N 987 OF 2002
BETWEEN:	VISA INTERNATIONAL SERVICE ASSOCIATION (ARBN 007 507 511) APPLICANT
AND:	RESERVE BANK OF AUSTRALIA RESPONDENT
BETWEEN:	MASTERCARD INTERNATIONAL INCORPORATED APPLICANT
AND:	RESERVE BANK OF AUSTRALIA RESPONDENT
JUDGE:	TAMBERLIN J
DATE OF ORDER:	19 SEPTEMBER 2003
WHERE MADE:	SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 973 OF 2002 N 987 OF 2002

BETWEEN:	VISA INTERNATIONAL SERVICE ASSOCIATION (ARBN 007 507 511) APPLICANT
AND	RESERVE BANK OF AUSTRALIA RESPONDENT
BETWEEN:	MASTERCARD INTERNATIONAL INCORPORATED APPLICANT
AND:	RESERVE BANK OF AUSTRALIA RESPONDENT

JUDGE:	TAMBERLIN J
DATE:	19 SEPTEMBER 2003
PLACE:	SYDNEY

Counsel for the Applicant Visa:	J Karkar QC A Robertson SC J Halley P Brereton K Sainsbury
Solicitors for the Applicant Visa:	Freehills
Counsel for the Applicant MasterCard:	P Hanks QC I E Davidson J Jagot
Solicitors for the Applicant MasterCard:	Coudert Brothers
Counsel for the Respondent:	T F Bathurst QC J E Griffiths SC I M Jackman SC A J Payne K Barrett
Solicitors for the Respondent:	Clayton Utz
Dates of Hearing:	19-22 May, 26-29 May, 2-5 June, 10-13 June, 16-19 June, 23-27 June 2003
Date of Last Written Submissions:	22 July 2003
Date of Judgment:	19 September 2003