Review of Card Payments Regulation 6. Final Standards and Implementation

6.1 New cards regulation standards

The approach to cards regulation outlined in this paper will be implemented through the revocation of several existing standards and the imposition of three new standards:

Standard No 1 of 2016: The Setting of Interchange Fees in the Designated Credit Card Schemes and Net Payments to Issuers
Standard No 2 of 2016: The Setting of Interchange Fees in the Designated Debit and Prepaid Card Schemes and Net Payments to Issuers
Standard No 3 of 2016: Scheme Rules Relating to Merchant Pricing for Credit, Debit and Prepaid Card Transactions

The key elements of these standards are described below.

6.1.1 Standard No.1 of 2016: The Setting of Interchange Fees in the Designated Credit Card Schemes and Net Payments to Issuers

This standard applies to the American Express Companion Card System, the MasterCard Credit Card System and the Visa Credit Card System. It caps the weighted average of interchange fees from 1 July 2017 at 0.500 per cent of transaction value and sets a maximum interchange fee of 0.800 per cent, which cannot be exceeded at any time after 1 July 2017 by any interchange fee in those systems. Fees in the American Express Companion Card System that are functionally equivalent to interchange fees fall within the definition of interchange fees and are subject to these caps. The restrictions do not apply to transactions on foreign-issued cards acquired under these schemes in Australia. Interchange fee rates on a category of card transactions cannot be specified as a range.

The methodology for compliance with the cap for weighted-average interchange fees will change from the current compliance points each third year to a quarterly test of compliance based on rolling annual interchange fee and transaction data. If average interchange fees payable over a period of four quarters exceed 0.500 per cent of transaction value, interchange rates must be reset within 60 days of the end of the quarter to a level that would have prevented fees exceeding the benchmark during the period had they applied. If a scheme changes any interchange rates or categories at any other time, its rates must also be set to a level that would have prevented fees exceeding the benchmark during the preceding four quarters had they applied. The first four quarter period will be the period ending 30 June 2017.

The standard also seeks to prevent circumvention of interchange caps by restricting ‘net compensation’. Under these provisions, benefits received by an issuer (excluding interchange fees and some other payments) that have a purpose or effect of promoting the issuance and use of credit cards cannot exceed the payment of benefits by the issuer to the scheme or acquirer in a reporting period. The first reporting period will be from the registration date of the Standard until 30 June 2018. Subsequent reporting periods will be financial years. Benefits that relate to more than one system must be suitably apportioned and those relating to multiple years may be allocated across those years, up to a limit of 10 years.

Multilateral interchange fee rates must be published and bilaterally negotiated interchange fees must be reported to the Bank. Schemes must certify to the Bank each year that they have been in compliance with the Standard and are required to report information on interchange fees and transactions to the Bank each quarter.

6.1.2 Standard No.2 of 2016: The Setting of Interchange Fees in the Designated Debit and Prepaid Card Schemes and Net Payments to Issuers

This standard applies to the eftpos, MasterCard and Visa debit card and prepaid card systems. It operates in a similar fashion to the credit card standard described above, to cap interchange fees in the debit and prepaid card systems. In this case, weighted-average interchange fees are capped at 8.0 cents per transaction and fees for individual interchange categories cannot exceed 15.0 cents (if levied as a fixed amount) or 0.200 per cent (if levied in percentage terms). The caps on weighted-average interchange fees apply jointly across debit and prepaid cards (referred to as ‘scheme pairs’). If the average interchange fee for a scheme pair over four quarters, expressed in cents, exceeds the 8.0 cents benchmark, a reduction in interchange rates would be required within 60 days of the end of the quarter. This methodology implies that weighted-average prepaid interchange fees could exceed the benchmark, provided that weighted-average debit card interchange fees were sufficiently below the benchmark, and vice versa. The other provisions of the standard are similar to those described above for credit cards, including ‘net compensation’ provisions.

6.1.3 Standard No.3 of 2016: Scheme Rules Relating to Merchant Pricing for Credit, Debit and Prepaid Card Transactions

This standard applies to the MasterCard and Visa credit card systems, the American Express companion card system and the eftpos, MasterCard and Visa debit card and prepaid card systems. Each will be treated as a separate scheme for surcharging purposes, except that debit and prepaid cards will be treated as a ‘scheme pair’, subject to a single surcharge. The standard prevents the card schemes from imposing no-surcharge rules, but allows them to cap merchant surcharges at the ‘permitted surcharge’, which is defined in terms of a merchant's cost of acceptance for a particular scheme. The permitted surcharge is also used to determine excessive surcharges under the Competition and Consumer Act.

The ‘cost of acceptance’ embodied in the ‘permitted surcharge’ is narrower than the ‘reasonable cost of acceptance’ measure used in the previous standard (and the associated guidance note). It includes fees paid to the merchant's acquirer or payment facilitator plus fees paid to any other payment services provider for (i) fraud-related chargeback fees paid to the merchant's acquirer or payment facilitator; fees paid to any other payment services provider for (ii) terminal rental and servicing, (iii) gateway services and (iv) fraud prevention services; as well as (v) any cost of insurance for forward delivery risk on accepting cards. Any discounts or rebates received by the merchant are to be taken into account. Costs internal to the merchant are not included.

The permitted surcharge for an individual merchant will be based on an average of its costs over a recent 12-month period as evidenced by contracts, statements or invoices (or, if these are not available for a 12-month period, good faith estimates can be used). A merchant can surcharge each card scheme separately or, if it chooses to apply the same surcharge to more than one scheme, the permitted surcharge must reflect only the cost of the lowest-cost scheme. Surcharges must be percentage-based or, if expressed as a fixed amount, must not be excessive for any relevant transaction amount.

In order to facilitate greater transparency of permitted surcharges, acquirers (and payment facilitators) will be required to provide to merchants in their regular statements details of the average cost to the merchant of accepting each scheme or scheme pair, along with some component data. The final statement for a financial year must provide the average cost for each scheme over the preceding year. A merchant wishing to rely on a simple statement of acceptance costs will be able to rely on this statement for around a year after it is issued. A merchant wishing to include additional eligible costs would need to be able to provide invoices, contracts or statements to verify them.

Given that many smaller merchants are likely to be reliant on simple acquirer statements to determine acceptance costs, the ‘permitted surcharge’ measure will not apply to merchants below a size threshold until 1 September 2017, after the new statements have become available. Until that time, card schemes may use their rules to limit surcharges for smaller merchants to the existing ‘reasonable cost of acceptance’ measure. The permitted surcharge measure will apply to large merchants from 1 September 2016. The threshold for determining whether a merchant is a large merchant will reflect a combination of consolidated gross turnover (above $25 m), consolidated gross assets (above $12.5 m) and employees (above 50).

Other measures in the standard include an obligation for acquirers to notify merchants as soon as practicable of the provisions of the new standard; an obligation for debit cards and prepaid cards to be physically identifiable as such (from 1 July 2017 in the case of prepaid cards); and for schemes and acquirers to make available BIN lists that will allow credit, debit and prepaid cards to be electronically identifiable. Card schemes rules will be prevented from making the availability of acquiring services conditional on the merchant's decision to surcharge.

6.2 Implementation

As outlined in chapters 3 and 5, a number of dates are relevant for the implementation of the new standards:

26 May 2016: With registration of the standards on the Federal Register of Legislation, net payments to issuers become potentially included in the calculations regarding net scheme compensation in the Standards on interchange fees. Any payments to issuers that relate to transactions from 1 July 2017 will need to be included in the calculation of ‘Net Scheme Compensation’.
1 September 2016: the definition of ‘permitted surcharge’ for large merchants takes effect. Large merchants will need to ensure that they comply with the requirements of the Competition and Consumer Act from this date.
1 June 2017: the obligation for acquirers and payment facilitators to provide specific information about the cost of acceptance comes into force. Any statement issued after this date, including annual statements covering the 2016/17 financial year will need to contain cost of acceptance information for merchants.
1 July 2017: the new arrangements for interchange fee setting become effective, with the first reference period being 1 July 2016 to 30 June 2017. A scheme whose weighted average of interchange rates is above the benchmark will need to reset rates on or before the day 60 days after the end of that reference period (29 August 2017).
1 September 2017: the definition of ‘permitted surcharge’ takes effect for all other merchants.
31 July 2018: the first reporting date for the new regime. Schemes will have to certify to the Bank that their interchange fees were in compliance with the standard for the year ending 30 June 2018.