No More Hiding Scheme Fees From Us, RBA Tells Card Networks

June 24, 2024
Card networks could soon be forced to reveal their scheme fees to the regulator, as the Reserve Bank of Australia (RBA) calls for greater transparency across the payments market.

Card networks could soon be forced to reveal their scheme fees to the regulator, as the Reserve Bank of Australia (RBA) calls for greater transparency across the payments market.

Ellis Connolly, head of payments policy at the RBA, said last week that scheme fees are rising and are increasing costs for merchants.

"These fees can be very complex and opaque, and unlike interchange fees, there are no regulations restricting their growth," said Connolly.

Scheme fees are charges that issuers and acquirers pay to the operators of card networks.

The RBA has been collecting aggregate data on scheme fees in an effort to improve transparency and promote competition since 2021-22.

In 2022-23, issuers and acquirers spent $1.9bn in net scheme fees — an increase of 43 percent compared with 2021-22.

The increase in net scheme fees was “significantly higher” than the 16 percent increase in card transactions over the same period, the RBA noted.

Some of the growth in scheme fees can be attributed to international card transactions, which bounced back following the removal of COVID-related travel restrictions.

However, one finding that concerned the RBA was the discrepancy between the scheme fees paid by acquirers and those paid by issuers.

“Net scheme fees were much lower for issuers, since the networks offer generous rebates on scheme fees to issuers when they compete for their card issuing business,” said Connolly.

“As a result, most of the burden of scheme fees falls on acquirers, which then gets passed on as higher costs for merchants.”

Connolly went on to say that, beneath the aggregates, there is “a lot” of variation in scheme fees but little transparency around them.

“We are unable to publish data on the fees charged by each network, because the international card networks did not grant permission when it was requested,” he said.

“Greater transparency of the scheme fees being charged by each card network could help merchants better understand these fees and make better informed decisions, such as to which network they route debit transactions.”

An issue for review

In June 2023, Australia’s Treasury opened a consultation on potential reforms to the Payment Systems (Regulation) Act 1998 (PSRA).

This legislation, which grants many of the RBA’s regulatory powers, was designed in the late 1990s, when the payments ecosystem was much smaller and simpler than it is today.

In October last year, as covered by Vixio, the Treasury put forward exposure draft legislation outlining its proposed reforms of the PSRA.

Among the key reforms will be updates to the definitions of “payment system” and “participant” so that newer players, such as digital wallets like Apple Pay and Google Pay, can be regulated.

Connolly noted that once the reforms to the PSRA are adopted, the RBA will launch a “holistic review” of retail payments regulation.

“It is good practice to review and reflect on current regulations,” he said. “This review will help us to set our regulatory priorities for the next few years.”

Scheme fee regulation incoming?

Many jurisdictions have imposed caps on interchange fees — those charged by issuers to acquirers — yet scheme fees have so far managed to avoid the same fate.

This could be set to change, however, as regulators become increasingly concerned by upward trends in scheme fees.

Last month, the UK’s Payment Systems Regulator (PSR) published a market review looking at trends in scheme fees over the past five years.

After taking account of changes in transaction volume, the review found that Visa and Mastercard scheme fees have risen 30 percent in real terms over five years.

The PSR also found that Visa and Mastercard's margins on earning before interest and taxes (EBIT) were 64 percent and 53 percent respectively, whereas other payment firms typically have margins of 12 to 18 percent.

Steve Glover, head of payments at Bankhawk, told Vixio that the “next logical step” is for regulators to impose controls on scheme fees similar to those imposed on interchange fees.

“It's well documented in the UK and EU that, when interchange was regulated, most of the benefit was realised by acquirers and card schemes.

“Acquirers didn't pass on the savings to small merchants on blended rates, and card schemes were free to increase their own fees.

“Until scheme fees are addressed, merchant fees will continue to creep upwards towards where they were pre-regulation, and then we're back where we started.”

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