The Operation of the Interchange Standards: Conclusions Paper 8. Aggregator arrangements

8.1 Issues for consultation and proposed options

In the Consultation Paper, the Bank proposed clarifying how the net compensation requirement in the Standards should operate in relation to arrangements where there are two entities involved in issuing a scheme's cards. The typical case is one where an aggregator, also known as a sponsor, has a direct relationship and contract with a scheme and handles particular scheme-related services and obligations on behalf of a number of (typically) smaller financial institutions. The latter have the direct contractual relationship with their cardholders (and from the perspective of the cardholder, it is one of these financial institutions whose brand is on the card and from whom the cardholder considers they are receiving card payment services). In these cases most, if not all, contractual arrangements regarding scheme fees, benefits and incentives are managed by the aggregator or sponsor.

Ahead of certification for the first reporting period, some stakeholders sought guidance from the Bank on which entity – the aggregator/sponsor or the ‘downstream’ sponsored issuer – should be treated as the Issuer for the purposes of compliance with the net compensation requirement. In informal engagement with stakeholders, there was significant support for the proposition that for net compensation purposes the aggregator/sponsor should be considered to be the entity with the direct relationship with the scheme, on the basis that this entity has the greatest visibility over the value flows to and from the scheme.

Consistent with this, the Bank proposed to modify the operation of the Standards, such that the obligation to comply with the net compensation requirements falls on the entity that has the status within a scheme to issue cards itself and/or sponsor another entity into the scheme (Proposal 7). The draft variations to the Standards implement this by introducing the defined terms ‘Direct Issuer Participant’, ‘Indirect Issuer Participant’ and ‘Sponsor’.^[32]

8.2 Stakeholder views

There was broad support for this proposal (Proposal 7). No stakeholders objected to the change. ePAL suggested a minor technical modification to the proposed definition of ‘Sponsor’. This was to improve the clarity of the definition as it relates to its debit and prepaid payment card systems by clarifying that a Sponsor ‘additionally represents the transaction for the purposes of the EFTPOS System or EFTPOS prepaid’, directly or indirectly, on behalf of one or more other entities. At the request of the Bank, additional information on relationships within the EFTPOS System and EFTPOS Prepaid was provided by both ePAL and aggregators.

Stakeholders did not object to the Bank's description of aggregator/sponsor arrangements – namely that in these arrangements: downstream sponsored entities currently issue a relatively low volume of cards and account for a small percentage of total card issuance; Benefits from schemes are nearly always provided to the aggregator/sponsor; the downstream issuer has no visibility of Benefits provided by the scheme to the aggregator/sponsor, or of how these Benefits may be allocated (if at all) to any of the sponsor's other downstream issuers; and, similarly, the scheme does not have visibility over the extent to which an aggregator/sponsor passes on the Benefits it receives.

8.3 Assessment and Conclusion

The Bank will adopt Proposal 7, incorporating a revision to the definitions of ‘Sponsor’, ‘Direct Issuer Participant’ and ‘Indirect Issuer Participant’ as those terms relate to the EFTPOS System and EFTPOS Prepaid. Specifically, based on the EFTPOS scheme rules and on information provided by stakeholders, the Bank has determined that for the EFTPOS System and EFTPOS Prepaid it is appropriate to define these terms in relation to the entity that settles (rather than clears) EFTPOS transitions.

There was broad support for Proposal 7 and, as discussed in the Consultation Paper, requiring small downstream issuers to comply, and certify compliance, on an annual basis would materially increase the overall regulatory burden on the industry. However, as noted in the Consultation Paper, the Bank would look to reinstate net compensation obligations on downstream issuers if arrangements emerged that sought to take advantage of this change in compliance requirements.

Endnote

These changes are also reflected in new definitions of Direct Issuer Participant Payments and Direct Issuer Participant Receipts, but for ease of reference this Conclusions Paper retains usage of the terms ‘Issuer Payments’ and ‘Issuer Receipts’. [32]