The Operation of the Interchange Standards: Conclusions Paper 7. Issuer Receipts: Discounts and Non-Financial Benefits

7.1 Issues for consultation and proposed options

Discounts and Non-Financial Benefits

The majority of incentives provided to issuers by schemes are in the nature of financial flows (payments, rebates, discounts and similar). However, some incentives that are provided have more of a non-financial nature – for example, goods or services provided for free to the issuer. Ahead of certifying for the first reporting period, some stakeholders sought clarification on the treatment of incentives with non-financial elements.

In the Bank's view, the inclusion of the value of these types of incentives in Issuer Receipts is consistent with the purpose and intent of the Standards. Providing a good or service for free is economically equivalent to providing it at a 100 per cent discount. Discounts are captured as a Benefit under the Standards, and are Issuer Receipts if they have the purpose or likely effect of incentivising the issuance or use of cards of the scheme (and under Proposal 6 are provided directly or indirectly from the scheme administrator or its associated entities).

While valuation of cash and cash-like flows is generally straightforward, valuation of benefits related to the provision of goods or services can present some challenges. Two broad scenarios are relevant for treatment under the Standards:

• where goods or services are provided to an issuer at a discount; and
• where goods or services are provided for no financial consideration.

The Bank proposed to provide additional clarity on how to calculate Issuer Receipts by specifying that:

1. 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 4)
2. 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 5)

where the determination of regular price and fair value must be carried out in a manner consistent with the purpose and intent of the Standards.^[27]

The alternative option was not to make these changes to the Standards.

The Bank's preliminary expectation was that Fair Value (as defined in the draft variations) could be arrived at by following the principles of the ‘fair value measurement’ approach under relevant accounting standards (i.e. AASB 13 Fair Value Measurement or equivalent).

In the draft variations the Bank consulted on, the term ‘Supplementary Service’ was introduced as part of a set of changes to give effect to Proposals 4 and 5. This drafting sought to provide additional clarity to stakeholders that a service provided for free in a bundle should be considered to be a service provided at a discount, except where the service is bundled in this way to all entities participating in the Scheme globally. This sought to make clear that a 100 per cent discount on a service could not be ignored when calculating net compensation simply because it is labelled as being part of a bundle of services.

Definition of ‘Incentive Test’

For a Benefit to be classified as an Issuer Receipt under the existing Standards, it must have the purpose or likely effect of promoting or incentivising the issuance or use of cards of the scheme, or providing or funding incentives for holders of cards of the scheme to use those cards. The Bank received enquiries from stakeholders about whether this test would cover Benefits that are intended to incentivise an issuer to enter into a contract to issue a scheme's cards. In the Bank's view, this aspect of incentivising card issuance was implicit in the wording of the Standards. Nonetheless, the enquiries indicated that some further clarification would be useful. Accordingly, the Bank proposed to explicitly set out in the Standards that Benefits that incentivise the entry into a contract relating to the issuance of cards of the scheme meet the Incentive Test to be included as an Issuer Receipt. The Bank also sought to clarify the operation of the Incentive Test by expanding the (non-limiting) list of examples of the types of Benefits that meet the Incentive Test. To streamline the structure of each Standard, the Bank proposed adding ‘Incentive Test’ as a defined term (in Clause 2), and referring to this in the definition of Issuer Receipts and elsewhere.

7.2 Stakeholder views

Discounts and Non-Financial Benefits

Stakeholders were generally supportive of the clarifications proposed. However, several respondents queried how the use of a regular price and Fair Value would operate in practice. A small number of entities considered that the proposals would expand the scope of the Standards, and objected to this.

In relation to determining the regular price and/or the determination of Fair Value, a number of stakeholders queried whether these measures could take into consideration the characteristics of the parties to a contract (such as their size or an existing relationship between the parties). Some queried whether the list, standard or usual price should be considered to be the price from which a discount is measured, and several noted that scheme-issuer agreements can be bespoke. Some entities raised concerns that it may be difficult to ascertain the Fair Value of Benefits in practice due to the nature of negotiations. Several asserted that negotiated prices should be considered the Fair Value price. Many stakeholders requested further guidance in relation to these matters, including in relation to the valuation of non-Core Services that could have been provided by a third party rather than the scheme.

A small number of entities commented on the timing of when fair-value measurement should be made. Views here were mixed. There was some support for the Bank's approach to specify that fair value should only be calculated once, at the earlier of:

1. the date the Property or service was first provided; and
2. the date the Property or service was committed to be provided to the Issuer;

However, an alternative view put forward was that the Standards should be aligned to the standard accounting approach which permits reassessments of fair value. More generally, there was broad support for the Standards to allow as much scope as possible to draw directly from entities’ financial accounts.

A few respondents suggested that Proposals 4 and 5 would expand the scope of the Standards. They disputed that discounts provided on non-card related services would have qualified as an Issuer Receipt under the current version of the Standards. Others held the opposite view, noting that the clarifications the Bank proposed were consistent with how they had already been determining their compliance with the Standards.

Related to the view that the scope of the Standards had been expanded, a small number of respondents suggested that under Proposals 4 and 5, and in conjunction with the proposal in relation to core services (Proposal 2), the Standards would become asymmetrical in their calculation of Net Compensation. The reasoning being that a discount on a service could potentially be counted as an Issuer Receipt, even if the fee paid for the service is not counted as an Issuer Payment.

A small number of responses indicated that the term ‘Supplementary Service’ may not be well understood by stakeholders.

Definition of ‘Incentive Test’

There was broad support for the proposed clarification of the Incentive Test. Several stakeholders noted that the clarification was consistent with their interpretation of the test. One stakeholder suggested further additions to the (non-limiting) list of examples of the types of Benefits that meet the Incentive Test, including (for example) rebates linked to the number of issued cards.

7.3 Assessment and Conclusion

Reflecting that most stakeholders agreed with the proposals in principle, but sought greater clarity on their operation, the Bank will adopt Proposals 4 and 5. Some minor modifications will be made to the drafting of the variations that give effect to these proposals, to improve clarity and their operation (as set out below). In addition, this section includes discussion of how the Bank expects the Incentive Test and the calculation of discounts should operate in practice. Box B provides commentary on the use of AASB 13 Fair Value Measurement in relation to determining Net Compensation.

In relation to the calculation of a regular price, the draft variation referred to a regular price at which the supplier is regularly supplying property or services of the same description to entities of a class, group or type that include the issuer. Accordingly, some characteristics common to that class, group or type would implicitly be taken into consideration. If no such regular price exists, say because the property or service provided is sufficiently bespoke that it cannot be said to be provided at a common price to a particular class, group or type that includes the issuer, then the Fair Value should be used. To aid clarity, the reference to ‘the list, standard or usual price’ in part (ii)(B) of the proposed Incentive Test, has been replace with ‘Regular Price’. A definition of Regular Price has been added to the variations, to streamline drafting of the ‘Incentive Test’ and ‘Benefit’ definitions in clause 2.

In relation to Fair Value, the Australian Accounting Standards (and particularly AASB 13 Fair Value Measurement) provide considerable guidance on how fair value should be arrived at for financial reporting. In the context of determining net compensation, entities should refer to these accounting standards in considering how to determine the Fair Value of property or service provided, and thereby deciding if a discount has been provided (including a 100 per cent discount) and, if so, the value of the discount.^[28] From an economic perspective, key considerations in determining Fair Value are: would the service have been provided by the scheme (or the scheme's associated entity) at that price if the issuer had not been an issuer of the scheme? Or would it have been provided at that price if the scheme had not been seeking to win an issuing contract with the issuer? If the answer is no, then this is unlikely to be the Fair Value for the purpose of the Standards. If the scheme or a related entity of the scheme has provided a discount to an issuer, it will be an Issuer Receipt if it meets the Incentive Test. The Bank may require schemes and issuers to substantiate their estimates of Fair Value and provide justification for a decision in relation to the Incentive Test.

In relation to the timing of when Fair Value is measured, the Bank's intention when drafting the variations was to ensure that the value of benefits that incentivise the entering into of an issuing contract are initially measured at the time of the decision to enter into that contract is made. In subsequent reporting periods, new information may become available to a scheme and/or an issuer that indicates that the value of a benefit (based on a –Fair Value assessment of a property or service) is likely to have changed materially. Such information could, for example, lead to a reassessment of the likelihood that a variable incentive is likely to become payable or be clawed back.

Allowing updates to Fair Value (by allowing the possibility of multiple measurement dates) may therefore enable better estimates to be used in the calculation of Benefits payable or receivable, and thereby reduce the magnitude of ‘true-ups’ in subsequent periods.^[29] In addition, as noted by stakeholders, AAS allow for some updating of fair-value measures over time. Therefore, enabling updates to Fair Value could reduce compliance costs by more closely aligning the interchange standards to AAS. However, it may also introduce greater scope for circumvention of the Standards. For example, entities may seek to cherry-pick the timing of when they update Fair Value specifically to generate a compliant net compensation position for a particular reporting period. Similarly, they may seek to update Fair Value only when the anticipated change in value is favourable for compliance purposes.

Taking this into account, the Bank has decided to adjust the drafting of the Fair Value definition to allow for subsequent measurement dates, and additionally place some parameters around when updates to Fair Value^[30] may occur for the purposes of calculating net compensation. Specifically, the variation specifies that the first measurement date for Fair Value should be at the earlier of: (a) the date the Property or service was first provided; and (b) the date the Property or service was committed to be provided, to the Direct Issuer Participant. In subsequent reporting periods, entities may re-measure Fair Value when it is likely to have materially changed from the value used in the previous reporting period, and when doing so is fair and reasonable and consistent with objective of the Standards. In relation to when during a reporting period such an update should be made, the Bank's preliminary view is that it would be reasonable to align the measurement date to that used for financial reporting purposes (so long as it falls within the reporting period for the Standards).^[31]

In the Bank's view, discounts provided to issuers on non-card related services qualified as an Issuer Receipt under the current version of the Standards if they met the Incentive Test. Accordingly, the proposed variations do not change the scope of the Standards in this regard.

In relation to concerns that the net compensation requirement would become asymmetrical as a result of the Proposals, the Bank notes that the Incentive Test provides an important link between Issuer Receipts and Issuer Payments. Issuer Payments (as proposed) are payments an issuer makes to a scheme or its associated entities for Core Services. Core Services, broadly speaking, are those services that relate to (and only to) one or more of the functions that are in practice the necessary functions for an issuer to participate effectively in a scheme. In contrast, Issuer Receipts can arise from discounts provided on a Core Service or a non-Core Service. Importantly, not every discount is an Issuer Receipt. Rather a discount must meet the Incentive Test to be included in Issuer Receipts. And this means, broadly speaking, that Issuer Receipts capture only those Benefits that incentivise use of the schemes Core Services.

In relation to the Incentive Test itself, the Bank will implement the changes it proposed to clarify its operation. The Bank has decided not to expand the list of examples contained in the definition to include rebates linked to the number of issued cards. However, the Bank notes that such rebates are highly likely to meet the test of being given for the purpose of, or has or will have the likely effect of, incentivising the issuance of cards of the scheme.

Finally, the Bank has decided that is it not necessary to introduce the defined term ‘Supplementary Service’. The term is not strictly required to make it clear that schemes and issuers should consider the existence of discounts (including 100 per cent discounts) when services are provided in a bundle. In addition, excluding the term reduces the complexity of the variations. Of note, under the definition of Benefits to be adopted, services provided in a bundle must be assessed for the presence of a discount or deduction from the Regular Price (or Fair Value if there is no Regular Price) of the services. This assessment could be carried out for each service in the bundle individually or considered for the bundle of services as a whole.

Endnotes

For example, it would not be consistent with the purpose and intent of the Standards to use an artificially low price for a service and argue that there is no discount or subsidy to be included as an Issuer Receipt. Similarly, choosing to not record an incentive in Issuer Receipts due to difficulty determining its Fair Value would not be consistent with the purpose and intent of the Standards. [27]

This notwithstanding, we remind entities that they should satisfy themselves that any approach they take to determining Fair Value for the purposes of calculating net compensation must be consistent with the interchange standards, including the purpose and intent of the Standards. [28]

A true-up is an accounting entry that reconciles a recorded estimate to the actual, once the actual is known. [29]

And hence updates to any associate Benefit recorded as an Issuer Receipt. [30]

This revision, versus the draft variation consulted on, is marked up in 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. [31]