A Variation to the Surcharging Standards:
Final Reforms and Regulation Impact Statement – June 2012 5. The Consultation Process

Under section 28(2) of the Payment Systems (Regulation) Act, the Bank must invite submissions on a proposed variation and consider those submissions in making a variation. Accordingly, the review of card surcharging has involved extensive consultation with interested parties. As noted above, the Bank invited submissions on two consultation documents: the first seeking views on the case to vary the surcharging Standards; and the second seeking views on the draft variation to the Standards. The views expressed on the first consultation paper have been summarised in detail in the December 2011 Consultation Document. Hence, this Section focuses on the views expressed in the recent round of consultation on the draft variation.

Views Expressed in Consultation

The December 2011 Consultation Document requested submissions from interested parties by 10 February. The Bank received 17 submissions in total from financial institutions, a merchant, merchant bodies, card schemes, a consumer group, an online payment system, a payment service provider and a private citizen. Bank staff met with the majority of those making submissions.

A number of submissions reiterated previously stated positions. This included submissions that questioned the quality of some of the surcharging data cited by the Bank. A few submissions argued that merchants' surcharging behaviour should not be restricted, while the schemes reiterated their view that they should be permitted to have ‘no-surcharging’ provisions in their rules. However, if there were to be a variation to the Standards, the majority of submissions were supportive of the Bank's preferred option for doing so – allowing a limit based on the reasonable cost of card acceptance. A notable exception to this view was that one of the four-party card schemes expressed support for allowing a limit based on what it called the actual cost of card acceptance. It argued that the actual cost should be defined to be a proportion of the merchant service fee to account for benefits the merchant attains by accepting card payments.

Despite general support for the Bank's proposed approach to varying the Standards, three broad concerns were raised in submissions from a number of parties. These concerns related to: the definition of the reasonable cost of acceptance, the treatment of blended and differential surcharging, and compliance and monitoring. These are discussed in turn below.

Reasonable cost of acceptance

There were mixed views about whether the reasonable cost of acceptance should be defined more prescriptively in the Standards. One merchant association and a card scheme supported the wording of the draft variation of the Standards; that is, leaving reasonable cost loosely defined, including specific reference only to the merchant service fee. These two submissions suggested that cost structures and commercial negotiations should determine what elements could be included.

By contrast, the majority of submissions suggested that the Bank should provide clarification as to the types of costs that constitute the reasonable cost of acceptance. These submissions argued that a loosely defined definition may lead to frequent disputes about reasonable surcharge levels, which may impose high administrative and compliance costs on the parties involved. For example, one financial institution suggested that the Bank develop a list of acceptable cost headings that are broad enough to encompass differing merchant circumstances. Likewise, two other submissions recommended that the Bank publish a ‘guidance note&Rsquo;, giving parties involved in negotiations, as well as consumers, a guide as to what costs might be considered by merchants as part of the reasonable cost of card acceptance.

One of the four-party card schemes suggested that the draft Standards were unnecessarily complex in terms of the options for the merchant's cost of acceptance. Given that a large proportion of merchants pay a blended merchant service fee, the scheme proposed that a merchant's cost of card acceptance should be solely tied to the average cost to the merchant of acceptance of all credit cards of all types issued under a particular card scheme. For definitional clarity, the scheme argued that the reasonable cost of acceptance should be the merchant service fee.

Blended surcharging

There was a range of views regarding the issue of blended surcharging across card schemes.

A number of parties indicated that merchants should be able to apply a blended surcharge across schemes. Several submissions expressed concern that, because the draft variations of the Standards allowed each card scheme to impose a limit on surcharges, applying a blended surcharge across card schemes would imply limiting the surcharge to the level of the lowest cost card. That is, for a merchant to comply with scheme rules for all the cards it accepted (as set out in its acquirer-merchant agreements) it would need to set any blended surcharge equal to, or less than, the lowest surcharge limit under the different card schemes. This would be the card with the lowest cost of acceptance to the merchant, which would mean that the merchant was not covering all of its costs of card acceptance. One financial institution and one three-party scheme suggested that blended surcharges across card schemes should be weighted by the scheme transaction mix incurred by the merchant. These parties argued that this would be more reflective of actual merchant costs in total.

However, the four-party card schemes reiterated their opposition to the practice of blended surcharging across card schemes. One recommended that the Bank specify in the Standards that it would not be reasonable for merchants to apply the same credit card surcharge across schemes where a price differential exists between those schemes' products. One also called on the Bank to prohibit blending of surcharges across credit and debit cards – or to ban surcharging on debit cards entirely – due to the differential in costs across credit and debit cards.

There was little discussion related to differential surcharging within a card scheme during this consultation round. In the first consultation round, some parties had commented that the terminal software of many merchants does not have the capability to distinguish card types within a card scheme. In addition, these submissions had noted the potential confusion to cardholders of displaying several different surcharges depending on the card type within a card scheme. The Bank had recognised these practical constraints in its December 2011 Consultation Document on the draft variations to the Standards, but nonetheless viewed it as important to clarify that merchants should not be prevented by schemes or acquirers from differentially surcharging within a scheme, should they choose to do so.

Compliance and monitoring

A number of submissions from merchants, merchant associations and acquirers raised concerns about the compliance and monitoring of any changes that are made to the Standards. Many of these submissions were concerned that a significant amount of power would reside in the card schemes' rules, and that the schemes may take a heavy-handed approach to implementation that would be costly for merchants and acquirers. During the consultation process, many participants referred to the proposed process for implementation outlined by the four-party card schemes in their submissions. Specifically, both the four-party card schemes indicated that a limit on surcharging could be implemented through scheme rules and that these changes would be implemented and enforced through acquiring institutions, which have the merchant relationship in a four-party card scheme. Under this framework, acquirers would be responsible for ensuring their merchants are compliant with card scheme rules, with the schemes imposing escalating sanctions on the acquirer (which could be passed on in some form to the merchant) if the schemes perceived that surcharging was excessive. Both schemes suggested that in the event of continued non-compliance with scheme rules, the merchant agreement could potentially be cancelled. MasterCard further indicated in its submission that it intended to require financial institution acquirers to report surcharge levels for each merchant and to certify that the surcharge was reflective of the merchant service fee paid by that merchant to the acquirer. It clarified in consultation that it is considering only imposing this kind of monitoring for merchants it suspects are surcharging excessively.

A number of submissions from merchants and merchant bodies raised concerns about the process for determining reasonable surcharge levels, and what recourse merchants would have if negotiations could not reach a satisfactory outcome. These merchants expressed concern that the draft Standards were silent as to the appeals mechanism. A number of submissions recommended that an independent body – such as the Bank, the ACCC or ASIC – be tasked with hearing appeals and determining merchant and scheme compliance with the Standards.

The Australian Payments Clearing Association (APCA) and several acquirers expressed concern about the potential costs of implementation of the variation to the Standards and ongoing compliance. One submission argued that merchant monitoring should be on an exceptions basis; that is, only those merchants suspected of surcharging in excess of reasonable costs should be required to demonstrate that they are compliant with their merchant agreement.

In addition to cost, a number of acquirers suggested that there would need to be reasonable time allowed for implementation. One three-party scheme noted that merchant acquirers, including itself, would have to renegotiate and amend contracts with merchants, and notify their merchant base of any changes to the Standards. It suggested that the Bank should give acquirers and merchants sufficient time to comply with any contractual changes that may be needed. APCA likewise suggested that large acquirers would need an appropriate amount of time to communicate any changes to their merchant base.^[19]

Footnote

A separate issue raised concerning implementation related to the types of transactions the Standards are intended to cover. In particular, it was suggested that the varied Standards should modify the definition of ‘credit card transaction’, ‘MasterCard transaction’, ‘Visa credit card transaction’ and ‘Visa Debit card transaction’ to ensure that the Standards are limited to transactions processed as MasterCard and Visa transactions, rather than all transactions made on a MasterCard- or Visa-branded card. The Bank acknowledges the views expressed in this regard, and notes, in particular, that there is no intention to capture programs that are not payments related. Issues related to the definition of card transactions will be considered separately by the Bank. [19]