The Operation of the Interchange Standards: Conclusions Paper 6. Entities Providing Issuer Receipts

6.1 Issues for consultation and proposed options

The Standards currently do not limit the types of entities from which an issuer can receive an Issuer Receipt. This was intended to ensure that any benefits provided by entities separate from, but related to, a scheme were appropriately captured. In practice, the broad scope of the definition is unlikely to be a major complication as issuers are unlikely to receive benefits related to card issuance or use from entities unrelated to a scheme. However, some feedback has been received suggesting that clarification of the possible sources of Issuer Receipts would be useful. Accordingly, the Bank proposed to narrow the definition of Issuer Receipts to include only benefits provided directly or indirectly from a Scheme Administrator or any of its associated entities (Proposal 6), with the definition of associated entity drawn from the Corporations Act 2001.^{[24] [25]} The alternative was to leave this aspect of the definition of Issuer Receipts unchanged.

6.2 Stakeholder views

There was broad support for this proposal. No submissions objected to this change. One respondent suggested that the Bank should additionally require schemes and issuers to disclose in their Net Compensation compliance certification a list of all scheme-associated entities relevant to their certification. This respondent also suggested that the Standards be further modified to allow an issuer to offset receipts and payments to and from a scheme and its associated entities. Another respondent suggested that the Bank consider an alternative framework where the net compensation rules are broadened to additionally capture payments paid or received to or from acquirers, merchants and others; this is discussed in sections 4.2 and 4.3.

Other submissions requested the Bank provide additional guidance on whether certain payments between a scheme, issuer and brand or affinity partner^[26] (hereafter brand/affinity partner) are intended to be captured as Issuer Receipts under the varied Standard. Similarly, several entities sought further guidance in relation to merchant-funded rewards facilitated by an associated entity of a scheme. Many were of the view that payments associated with merchant-funded rewards should not be captured in Issuer Receipts. Some stakeholders provided additional information on how one type of merchant-funded rewards program currently operates; they explained that the rewards are provided directly, and individually, to cardholders via a process similar to a chargeback or refund.

6.3 Assessment and Conclusion

This proposal was widely supported. The Bank will vary the Standards to clarify that the types of entity that an issuer can receive an Issuer Receipt from include associated entities of scheme administrators, drawing on the definition of Associated Entity in the Corporations Act. At this juncture, the Bank is not minded to increase the reporting burden on regulated entities by requiring they disclose which associated entities of a scheme are relevant to determining their net compensation position. Schemes and issuers would be able to voluntarily include this information in their annual compliance certifications.

In relation to payments involving brand/affinity partners, the Bank notes that (i) a scheme may provide Benefits to a brand/affinity partner of one of its issuers; (ii) an issuer may receive Benefits from this brand/affinity partner; and (iii) a scheme may not have visibility over the Benefits exchanged between the issuer and brand/affinity partner. In the context of determining net compensation, a relevant question is whether the Benefits provided by the brand/affinity partner to an issuer are, in fact, Benefits provided by the scheme to the issuer indirectly. The Bank's view is that a Benefit provided by a brand/affinity partner to an issuer is unlikely to be an Issuer Receipt, unless the Benefit provided arises from an obligation or understanding between the scheme and the brand/affinity partner that the brand/affinity partner will pass on to the issuer some or all of the Benefits it receives from the scheme. If there is such an obligation or understanding, then that Benefit could be viewed as being indirectly provided by the scheme. We also note that in determining whether a Benefit is an Issuer Receipt, the Incentive Test applies. Scheme and issuer relationships with brand/affinity partners may be considered in detail in the Bank's next review of card payments regulation.

Merchant-funded reward programs appear to be growing, potentially in response to changes to interchange regulation that took effect in 2016. The consultation process suggested that it was possible to have materially different types of merchant-funded rewards programs. In view of this, the Bank will not provide a blanket exemption for all payments, or other benefits, made to or from issuers in relation to this form of rewards program. In relation to the specific case where an associated entity of a scheme facilitates a merchant-funded rewards program for an issuer, and those rewards are provided to cardholders directly, and individually, in a manner similar to a charge-back or refund, it is unlikely that the transaction that provides the reward to the cardholder would meet the definition of an Issuer Receipt (under the current or varied version of the Standards). It is likely that the Bank will consider merchant-funded rewards programs in detail in its next review of card payments regulation.

Endnotes

As noted in section 4 the Bank proposes to modify the definition of Issuer Payments to include payments to an associated entity of a scheme, to enhance the consistency across the set of entities from whom Issuer Receipts could arise and the entities to whom Issuer Payment could be made. [24]

If this change is made it is no longer necessary to exclude from Issuer Receipts cardholder payments and reversals and chargebacks, so it was proposed that those exclusions be deleted. [25]

The term brand partner or affinity partner in this context refers to an entity (for example, an airline) that has a contractual agreement with an issuer for cards of the issuer to bear the entity's trade name or mark. [26]