Following its consultation on an Issues Paper released in March 2015, the Reserve Bank of Australia (RBA) has recently published a Consultation Paper proposing changes to the regulatory framework for the card payments system in Australia. Both the RBA’s Issues and Consultation Papers follow the release of the Financial System Inquiry’s (FSI) Final Report in December 2014, which recommended that the Payments System Board (PBS) of the RBA give further consideration to the card payments regulatory framework.1
Suggestions that the RBA has proposed in its Consultation Paper include:
- interchange fee regulation of companion card arrangements to enhance competitive neutrality with four-party schemes;
- amendments to interchange fee standards to improve competition and efficiency in the card payments market and in the broader payments system; and
- amendments to the surcharging standard to enhance transparency and improve enforcement in cases where merchants are surcharging excessively.
Drawing on its preliminary conclusions on the future of card payments regulation in Australia, the RBA has also presented three draft standards for consultation.2
Submissions on these draft standards are sought by 3 February 2015.
The Government has also introduced the Competition and Consumer Amendment (Payment Surcharges) Bill 2015 to amend the Competition and Consumer Act 2010 (Cth) (CCA) by inserting a regulatory framework to ban card payment surcharges that are in excess of merchant costs. The proposed amendments will also provide the Australian Competition and Consumer Commission (ACCC) monitoring and enforcement powers to ensure that any cases of excessive surcharging can be readily addressed.
Under the CCA as it currently stands, there is no specific prohibition against excessive card payment surcharging. However, there are existing provisions that prohibit false and misleading representations. The proposed amendments will complement these existing provisions of the CCA by allowing the ACCC to issue surcharge information notices and infringement notices for alleged contraventions of the excessive surcharging ban.
Why is the review timely?
The RBA noted in its Issues Paper that it is timely to conduct a review of card payments systems in Australia, given continued innovation and the increased use of debit and credit cards since the RBA’s review in 2007-08 of its payments system reforms. The 2007-08 review confirmed that the reforms had met their main objectives of improving price signals in the payments system, increasing transparency, improving access and creating a more soundly based competitive environment. The RBA also considers that further evidence since the time of the 2007-08 review supports the view that the RBA’s reforms have been in the public interest and have helped contribute to a more efficient and competitive payments system.
What are some of the key developments since the RBA's last review?
One key development since the RBA’s last review in 2007-08 has been the change in the use of payment methods, and in particular, the marked increase in the use of debit and credit / charge cards. This increased use has been accompanied by continued card-related innovation, including the introduction of EMV chipcards and contactless (tap/wave) authentication for lower-value transactions.
In addition, the introduction of digital wallets (systems allowing multiple payment methods to be presented simply and securely though a single interface, most often for online payments) has created new questions about access and competitive neutrality. Furthermore, the increasing presence of near-field communication (NFC) chips in smartphones and new approaches to using this technology is likely to result in digital wallets being increasingly enabled for point-of-sale mobile phone use, in a manner similar to contactless card payment.
We consider that this increased innovation in relation to card payment technology and payment methods is likely to be a key underlying theme of the RBA’s ongoing review in this area. As previously discussed in our update regarding Near Field Communication (NFC) in Australia,3 Australian consumers have a very high uptake of contactless payments. We also foreshadowed in our June 2013 update, NFC – developers beware (the regulators are watching), that we thought it likely the RBA (as well as the ACCC) would watch closely to see whether developments through NFC technology would create opportunities for new entry and increased competition, particularly in respect of the delivery of payment products and services.
Other key developments since the RBA's 2007-08 review include:
- changes in market shares of credit and charge card providers (particularly in light of American Express cards being frequently offered as part of “companion” card arrangements);
- ongoing strong competition in relation to the range of card products that have become available over the last decade, particularly in relation to credit cards;
- significant increases in the number of categories of interchange fees for credit and debit cards;
- a reduction in average merchant service fees (leading to the assumption that these lower merchant costs have mostly flowed through to lower retail prices for consumers); and
- studies conducted by the RBA which show that Australia has a relatively low cost payments system by international standards.
What is the focus of the RBA?
In its Issues Paper and Consultation Paper, the RBA focuses on how changes in the regulatory framework – specifically with respect to interchange and surcharge fees – could be used to address the current concerns surrounding efficiency and competitiveness in Australia’s card payment system. The main issues addressed by the RBA in the Consultation Paper include:
- the decline in transparency for some end users of card systems, in part due to the increased complexity and the wider range of interchange fee categories;
- whether there is scope for interchange fees to fall further, consistent with falls in overall resource costs and as was contemplated in the conclusions to the RBA’s earlier 2007-08 review;
- widespread perceptions that card surcharges remain excessive in some industries;
- perceptions that the growth of companion card arrangements may indicate that the current regulatory system is not fully competitively neutral;
- some uncertainty in the regulatory treatment of prepaid cards; and
- clarifying arrangements for cards offering access to more than one payment network (whether presented physically or virtually via a wallet application) and more broadly for competing payment options in a single device or application.
The Consultation Paper confirms the RBA’s ongoing commitment to review of Australia’s evolving card payments system to ensure its regulation continues to promote efficient and competitive outcomes.
What are the key proposals of the RBA's Consultation Paper?
The proposed amendments predominately relate to three areas – interchange fees, surcharging and ‘competitive neutrality’ between card products.
The RBA has recommended that payments to issuers of American Express companion credit cards be subject to regulation. Under this proposal, interchange-like issuer fees would be subject to a cap that is equivalent to the interchange fee cap for four-party schemes.
To ensure competitive neutrality between three- and four-party cards, other payments made to issuers (such as marketing fees, incentive fees and rebates) would also be subject to rules to avoid circumvention of the issuer fees cap.
The RBA considers that the regulation of payments to issuers of companion cards will lower card acceptance costs to merchants and improve price signals and resource allocation in the payments system. However, the proposed regulation is also likely to result in a reduction in benefits to holders of companion cards.
Interchange fees and scheme payments to issuers
The RBA is proposing amendments to its interchange standards to improve competition and efficiency in the card payments market and in the broader payments system.
It is the preliminary view of the PSB that these objectives can be achieved by the following measures:
- extending interchange fee regulation to American Express companion card system, the Debit MasterCard System and the prepaid card systems operated by ePal, MasterCard and Visa;
- reducing the weighted average interchange fee cap for debit cards from 12 cents to 8 cents per transaction (applying jointly across debit and prepaid cards of each scheme);
- requiring the schemes to complete quarterly compliance reporting of weighted-average interchange fees (and if a scheme’s average interchange fee in a given quarter, exceeds the benchmark, the scheme would be obliged to reset its interchange schedule to, or below, the benchmark within 45 days of the end of the quarter); and
- preventing circumvention of interchange fee caps by defining interchange fees more broadly to include fees paid by schemes to card-issuing banks as incentives to issue cards to customers.
Merchants’ ability to impose card surcharges on more expensive payment methods is an important element of an efficient payment system as the fees provide price signals to consumers and encourage less use of expensive payment methods. However, the RBA has had concerns that certain card surcharges imposed on consumers are in excess of the cost to the merchant.
The RBA proposes to change the surcharging standard with the aim of ensuring that customers cannot be surcharged any more than the cost of accepting the card. The meaning of card acceptance costs will also be defined more narrowly to only include the merchant service fee and other fees paid to the merchant’s bank.
Banks will be required to provide statements to their merchants that contain information on the average cost of acceptance for each payment method, which will constitute the maximum permissible surcharge if the merchant chooses to surcharge its customers.
Reflecting the PSB’s preliminary views, draft standards have been prepared for public consultation that include changes to the regulation of surcharges on card payments and interchange payments in card systems.
- Draft Standard No 1: 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.
- Draft Standard No 2: 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.
- Draft Standard No 3: Merchant Pricing for Credit, Debit and Prepaid Card Transactions
- This standard applies to the American Express companion card system, the MasterCard and Visa credit card systems, eftpos, MasterCard and Visa debit card and prepaid card systems.
Where to from here?
The RBA is now seeking written input from stakeholders on its draft surcharging and interchange standards, in addition to other issues discussed in the Consultation Paper.
Submissions are sought by 3 February 2015.
Following the consultation process and receipt of submissions, the PSB will consider taking formal action on the proposed changes to the regulatory framework. Given the complexity of issues involving interchange fees and companion cards, the PSB has advised that it is unlikely to make any official decision on changes to the interchange standards prior to its May 2016 meeting. However, an earlier decision on changes to surcharge standards remains a possibility.
The Government has also been active in reply to the FSI outcomes, releasing its response to the FSI’s Final Report in October 2015. On the same day the RBA released its Consultation Paper, the Government also announced its intention to introduce a new legislative ban on excessive card surcharging and to give enforcement powers to the Australian Competition and Consumer Commission in relation to excessive surcharge practice. To allow sufficient time for the RBA consultation process to take place and to provide a reasonable period for merchants to prepare for the legislative changes, the ban is scheduled to take effect from mid-2016.
1 Gilbert + Tobin’s update in relation to the Financial System Inquiry can be viewed online here: http://www.gtlaw.com.au/wp-content/uploads/FSIReport.pdf.
2 See Annex to RBA’s Consultation Paper.
3 See http://www.gtlaw.com.au/sites/default/files/NFCInAustralia.pdf