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Australia is to alter its rules governing dual-network debit cards and least-cost routing of transactions, but has decided not to regulate scheme fees yet, the Reserve Bank of Australia (RBA) said after concluding a review of the country’s retail payments regulation.
In the Review of Retail Payments Regulation, the RBA introduces a series of amendments to its dual-network debit cards and least-cost routing regulations to enhance efficiency and competitiveness in the payments market.
Dual-network debit cards and least-cost routing are features that allow merchants to choose between competing networks when processing a card transaction at the point of sale. Interchange rates on the domestic debit card scheme, eftpos, are lower than those processed by international networks.
To further promote the domestic card scheme, the RBA is now proposing various measures, including a new expectation that debit card issuers with more than $4bn in debit transactions will continue to issue dual-network debit cards. In practice, it means that the RBA has extended the requirement beyond the major banks to add four more issuers. The requirement will now apply to issuers that account for the equivalent of 90 percent of all debit card transactions.
The central bank expects these issuers to provision all form factors that the card networks support, including mobile wallets.
Regulators have long attempted to intervene in the market by restricting the interchange charged to merchants on Visa- and Mastercard-branded cards in order to lower costs and improve the competitiveness of eftpos. The RBA first brought in interchange regulation back in 2003. Despite attempts to improve the standing of eftpos, its market share has declined significantly in the intervening period. Part of the problem is that the domestic network lacks some of the functionality and reach of the international card schemes.
As part of its latest tweaking for debit card rules, the RBA will also require acquirers, payment facilitators and gateways to offer least-cost routing to merchants for online transactions by the end of 2022.
The latter is particularly significant as it is one of the areas that has held back eftpos compared with the international card schemes. Until recently eftpos has lacked a strong online presence, which has been become an essential requirement in the post COVID-19 world.
In August 2020, eftpos announced the rollout of a new digital service that allowed online retailers to accept eftpos card payments. A year later, eftpos CEO Stephen Benton announced: “Eftpos would expect e-commerce to be enabled by all of its financial institution members by May 2022, in line with mandates that were issued earlier this year. Most of the enablement work has already been done.”
The RBA’s deadline for the least-cost routing requirement for online payments, therefore, coincides with the full rollout of online enablement by eftpos issuing banks.
The RBA also noted that international card schemes have in the past introduced measures to hinder the spread of least-cost routing by making preferential "strategic" interchange rates on credit card transactions conditional on the value or volume of a merchant's debit card transactions. To discourage the potentially anti-competitive “tying” of one product to another, the RBA now seeks voluntary undertakings from the international card schemes that they will not engage in tying conduct, or else it will consider the introduction of a new standard to explicitly prohibit such behaviour.
Back in September, the Australian Competition and Consumer Commission (ACCC) agreed to allow the merger between eftpos and the bank-owned bill payment service BPAY and instant payments scheme NPP Australia (NPPA). Parties involved in the merger had claimed that it will help improve the viability of eftpos and help it secure further investment. A condition of the ACCC’s acceptance of the merger is that the eftpos payments scheme be extended until at least 2025.
A concern for the ACCC was the continued support for least-cost routing: “The ACCC recognises that rapid change is taking place in the sector, but ultimately it was satisfied that, with the undertaking, the amalgamation will not have a significant adverse impact on eftpos’ services or the availability of least-cost routing,” said ACCC chair Rod Sims, speaking at the time of the announcement.
“The Reserve Bank of Australia, the regulator of payment systems in Australia, will also continue to take action to safeguard the availability of least cost routing.”
Small change to interchange
Although the central bank has said it does not see “a strong case for significant reforms to the interchange regulations”, it found that interchange fees on certain debit transactions are increasingly being set at the cents-based cap, that is 15 cents, rather than using the percentage cap, which is set at 0.20 percent.
Concerned that this can result in smaller merchants facing unreasonably high costs for some low-value transactions, the RBA has decided to reduce the cap on debit and prepaid interchange fees from 15 cents to 10 cents. The amendment will take effect from January 1, 2022.
The RBA also noted that it does not propose any regulatory actions in the mobile-wallet market “at this stage” because its power to regulate mobile-wallet providers is currently being considered in a Treasury review.
“Until then, the bank will continue to monitor developments in Australia and overseas closely, and will cooperate with the ACCC where needed to address any policy issues relevant to its mandate,” the RBA stated.
Scheme fees not on the agenda, yet
One area rumoured to be on the agenda was the regulation of schemes fees, the part of the overall merchant fee that goes to the card scheme. However, the RBA is not proposing a regulation in the document, as yet.
Nonetheless, the central bank has taken account of “the opacity of scheme fee arrangements” and is taking steps to make the fees schemes charge more transparent.
The RBA will require card schemes to provide the bank with access to their scheme fee schedules and scheme rules, and to notify the central bank of any changes to these.
Schemes will also be required to provide quarterly data on scheme fee revenue and rebates to the RBA, which will be cross-checked with annual data provided by larger issuers and acquirers on scheme fee payments.
The question of scheme fees has been raised in several jurisdictions, albeit as more coded threats than concrete proposals. For example, the UK’s Payment Systems Regulator (PSR) chief, Chris Hemsley, recently said in a speech that the PSR “might still intervene, including if scheme fees and interchange fees continue to rise unchecked”.
Australia's decision not to intervene here will be seen as especially good news for both Visa and Mastercard, given the country's interchange regulations nearly two decades ago was in many ways the template for many other jurisdictions.
