Review of Card Payments Regulation 1. Executive Summary
This document represents the conclusions of the Reserve Bank of Australia's Review of Card Payments Regulation. The Review commenced in March 2015 with publication of an Issues Paper that highlighted developments in the cards market and aspects of the regulatory framework that warranted review.[1] After extensive public consultation, the Bank released a Consultation Paper in December that outlined the Payments System Board's preliminary views on the major issues and presented a draft set of standards for consultation.[2] The Bank again consulted extensively with a wide range of stakeholders and is now releasing a final set of standards which, in the opinion of the Board, will contribute to a more efficient and competitive payments system.
The Review was a comprehensive examination of the regulatory framework, guided by the Board's mandate to promote competition and efficiency in the payments system. In assessing the case for changes the Board was mindful of the interrelationships between different aspects of the existing regulatory framework and considered how possible changes might best fit together as a cohesive package. The key issues for the Review fell into three broad but interrelated categories.
The first was efficiency issues related to interchange fees and the transparency of card payments that are discussed in Chapter 3. The major considerations were: whether the current average interchange fee levels are inefficiently high; the implications of the widening of the range of interchange fees for the transparency of payment costs to merchants; if the coverage of the interchange benchmarks was appropriate; and whether compliance with the current benchmarks could be made more effective. Overall, the Board has reaffirmed its view that there is little justification for significant interchange fees in mature card systems and that there is an ongoing role for regulatory intervention in the cards market because of the perverse ways in which competition between card schemes can play out.
The key decisions regarding the Bank's interchange standards are:
- The weighted-average interchange fee benchmark for debit cards has been reduced to 8 cents per transaction, which will apply jointly to debit and prepaid cards in each scheme.
- The weighted-average benchmark of 0.50 per cent for credit cards will be maintained.
- The weighted-average benchmarks will be supplemented by ceilings on individual interchange rates: 0.80 per cent for credit; and 15 cents, or 0.20 per cent if the interchange fee is specified in percentage terms, for debit and prepaid.
- To prevent interchange fees drifting upwards in the manner that they have previously, compliance with the benchmark will be observed quarterly rather than every three years.
- Commercial cards will continue to be included in the benchmark and will be subject to the ceilings above.
- Transactions on foreign-issued cards acquired in Australia will for the present remain outside the benchmark, in light of commitments from schemes to ensure that the Bank's standards are not circumvented. The Board will take careful note of developments in this area.
- The new interchange benchmarks will take effect from 1 July 2017.
The second set of issues pertained to the implications of regulation applying to some payment systems but not to others. This had given rise to concerns that the regulatory framework was not fully competitively neutral, which was significantly influencing market developments. A particular focus was on the American Express companion card system. This raised the question of whether interchange-like payments from three-party schemes to issuers (notably in the American Express companion card system) should be regulated in the same way as interchange fees in standard four-party business models; this issue is addressed in Chapter 4.
The key decisions regarding competitive neutrality are:
- In October, the Board designated the American Express companion card system after concluding that it would be in the public interest to do so.
- Interchange-like payments to issuers in the American Express companion card system will be subject to equivalent regulation as applies to the MasterCard and Visa credit card systems.
- To prevent possible circumvention of the debit and credit card interchange standards there will now be limits on any scheme payments to issuers that are not captured with the interchange benchmarks.
The third set of issues related to surcharging practices; these are addressed in Chapter 5. The right of merchants to surcharge for expensive payment methods is important for payments system efficiency and helps to hold down the cost of goods and services to consumers generally. However, there have been concerns in recent years that merchants in some industries have been surcharging above the cost of acceptance for some transactions, particularly in the case of some fixed-dollar surcharges. The Government recently legislated to give the Australian Competition and Consumer Commission (ACCC) enforcement power over excessive surcharges. The Bank is now modifying its surcharging standards to respond to the issues raised in the Review, with the new standard also specifying a ‘permitted surcharge’ for the purposes of the new legislation.
The key decisions regarding surcharging are:
- The Bank's standard now defines the ‘permitted surcharge’ on a card transaction in terms of the merchant's average cost of acceptance for each scheme.
- The breadth of costs included in the permitted surcharge is somewhat narrower than under the Bank's current guidance note.
- The average cost of acceptance is defined in percentage terms implying that merchants will not be able to levy high fixed-amount surcharges on low-value transactions.
- Acquirers and payment facilitators will be required to provide merchants with easy-to-understand information on the cost of acceptance for each scheme from 1 June 2017.
- The new framework for surcharging will take effect for large merchants on 1 September 2016 and on 1 September 2017 for other merchants.