The Reserve Bank of Australia has been a world leader in interchange fee regulation. In this paper we suggest that this regulatory intervention has been based on wishful thinking at best and represents a failure to understand the actual working of the market economy.
In short, the Reserve Bank of Australia engaged in an extensive regulatory intervention based on poor theory, and no empirical evidence. Theory has not provided an unambiguous indication of market failure, and there is no empirical evidence to support the notion of monopoly pricing – other than a vague notion that interchange fees were “excessive”. What the Reserve Bank identified as being “externality” any fair minded observer would label “gains from trade”.