The Operation of the Interchange Standards: Conclusions Paper 1. Executive Summary

On 28 February the Bank published a Consultation Paper on the operation of its interchange standards (the Standards).[1] The Consultation Paper described areas where the operation of the Standards in relation to the ‘net compensation’ requirement could be improved without changing the purpose or intent of the Standards, and set out seven proposals to address these. The Paper also included a proposal on transitional arrangements, were the Standards to be varied as proposed. Appendix A to the Consultation Paper set out draft variations to the Standards to illustrate how the Bank would implement the proposals.

The Bank consulted on these eight proposals:

Proposal 1: The Bank's Standards No. 1 and No. 2 of 2016 would be modified to require an accrual approach to be used to allocate Issuer Receipts and Issuer Payments to, or between, reporting periods in a manner consistent with the purpose and intent of the Standards, such that in determining net compensation certifying entities have more scope to draw on information from financial accounts prepared in line with generally accepted Australian accounting principles. Compliance would not be permitted on a cash or quasi-cash basis.

Proposal 2: Clarify that ‘Issuer Payments’ are those payments made by issuers in relation to core services of a scheme.

Proposal 3: Remove references to ‘Acquirer’ from the definition of ‘Issuer Payments’ in the Standards.

Proposal 4: Clarify the Standards with the effect that where there is a price at which the supplier is regularly supplying relevant property or services, any discount or deduction from that price that meets the incentive test is a benefit to be included in Issuer Receipts.

Proposal 5: Clarify the Standards with the effect that where property or services are supplied and there is not a price at which the supplier is regularly supplying the relevant property or services, the benefit to be included in Issuer Receipts, subject to the incentive test, is the amount by which the fair value of the property or services exceeds what is paid for the property or services (and if nothing is paid, then the full fair value is to be included).

Proposal 6: 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 2001.

Proposal 7: The Bank's Standards No. 1 and No. 2 of 2016 would be modified, such that for scheme-issuer arrangements where one entity sponsors another for a card-issuing arrangement, it is only the sponsoring issuer that is required to comply with the net compensation provisions.[2]

Proposal 8: Provide transition arrangements that allow, for the reporting period ending 30 June 2019 only, an issuer to choose whether to comply fully with the current Standard or fully with the revised Standard. The issuer must notify the scheme of their choice, and the scheme must report on the same basis as the issuer for each scheme-issuer agreement. In the event that an issuer fails to notify the scheme of its choice by the date specified in the varied Standard, the issuer will be deemed to have elected to comply with the current Standard and a scheme must report compliance with the current Standard for that scheme-issuer arrangement for the reporting period ending 30 June 2019. Thereafter, issuers and schemes must comply with the revised Standard only. Alternative: For the reporting period ending 30 June 2019, schemes and issuers must comply fully with the current Standards. Thereafter, schemes and issuers must comply with the revised Standards.

Stakeholders were generally supportive of the proposed changes, and appreciated the Bank's efforts to clarify the operation of the Standards. A small number of respondents objected to a few of the proposals in their entirety. Some respondents queried how some aspects of the proposed variations – such as the use of fair value – would operate in practice. Most respondents made suggestions on how the implementation of the proposals could be improved. Of particular note, many respondents commented on the drafting of the definition of ‘Core Services’ (a definition that is required to give effect to Proposal 2). Many considered it too restrictive, although there was no consensus on what services were considered core across respondents. The Bank actively engaged with stakeholders on the definition throughout the consultation period, and circulated a revised definition in late April for further comment. The definition the Bank has adopted reflects the considerable input provided by schemes, issuers and aggregators on this issue. To assess the operation of the definition of Core Service and the varied definition of Issue Payments, the Bank may request, from time to time, that an entity provide the Bank with a list of the fees it has included in its calculation of Issuer Payments and the services provided for those fees. The Bank expects to make this request to schemes and to a sample of issuers when they certify their compliance in relation to the varied standard for the first time.

The Bank has decided to adopt the seven proposals to vary the Standards and the first option for transitional arrangements. A summary of the Bank's conclusions is provided in Section 11. In response to stakeholder feedback and to improve the clarity and operation of the variations, some changes have been made to the draft variations published in the Consultation Paper. Appendix A sets out how the Standards will read once they have been amended to incorporate the final variations. Documents setting out (i) the changes relative to the variations proposed in the Consultation Paper and (ii) the changes relative to the current Standards, have been published on the Bank's website.[3] Appendix B contains commentary on the application of accruals accounting to the calculation of net compensation.

In reaching these conclusions regarding variations to the Standards, the Bank notes it will be commencing a comprehensive review of its card payments regulation in 2020. Based on engagement with stakeholders, that review is likely to include consideration of:

  • the level and transparency of scheme and processing fees
  • brand and affinity partner arrangements

and the conduct of payment system participants in relation to these issues.

Endnotes

Standard No. 1 of 2016 and Standard No. 2 of 2016. [1]

To give effect to Proposal 6, the draft variations of the standards introduced the terms Direct Issuer Participant, Indirect Issuer Participant, and Sponsor, and revised the definition of Issuer. Correspondingly, the terms Issuer Receipts and Issuer Payments were replaced by the terms Direct Issuer Participant Payment and Direct Issuer Participant Receipt. For ease of reference, this Conclusions Paper retains usage of the terms Issuer Payments and Issuer Receipts. It also refers to Direct Issuer Participants as issuers, except where using the defined term would aid clarity. [2]

See Comparison of the Standards (as amended) to the version proposed in the Consultation Paper (https://www.rba.gov.au/payments-and-infrastructure/review-of-card-payments-regulation/pdf/comparison-of-standards-to-version-in-consultation-papers-2019-05-31.pdf) and Variations to Standards No. 1 and No. 2 of 2016 (https://www.rba.gov.au/payments-and-infrastructure/review-of-card-payments-regulation/pdf/variations-to-standards-no-1-and-2-of-2016-2019-05-31.pdf). [3]