Review of Card Payments Regulation 1. Introduction

Following the 1996–97 Wallis Inquiry, the Reserve Bank was given new powers with respect to the payments system and a new Board, the Payments System Board (the Board), to oversee the exercise of those powers. The Inquiry recommended that the Bank and the Australian Competition and Consumer Commission undertake a review of interchange fee arrangements for credit and debit cards and other aspects of Australia's payments system. Over the early 2000s, the Bank undertook further work and extensive consultation, culminating in a series of reforms. These reforms included measures that changed the prices cardholders faced when using debit and credit cards, reducing the incentives to use higher-cost payment methods. The Bank's reforms also required changes to certain rules in card systems, including enabling merchants to apply surcharges on card transactions so that cardholders were more likely to face prices that reflected the cost of the card they were using. It also took steps that reduced the barriers to entry for entities wishing to issue cards or provide card payment services to merchants.

In 2007–08, the Board conducted a review of the Bank's reforms. The review concluded that the reforms had improved access, increased transparency and had led to more appropriate price signals to consumers. This review also explored a number of options for possible changes to the regulatory framework, including stepping back from formal regulation and relying on industry undertakings. However, the industry was unable to arrive at suitable undertakings so in August 2009 the Board decided against stepping back from interchange regulation and noted that the regulatory framework would remain under review.

A range of factors suggest that it may be timely for the Board to again review the regulatory arrangements applying to the payment card systems:

• Aspects of the interchange fee system and merchant surcharging practices have raised concerns, some of which were noted in the Board's 2013 Annual Report and the Bank's two submissions to the Financial System Inquiry (FSI).
• There have been some significant changes to the regulation of card payments in other jurisdictions.
• The completion in 2014 of the Bank's third Consumer Use Survey and second Payment Costs Study have provided a useful evidence base for considering possible changes to policy.
• The continuing growth in the role of cards in the payments system since the initial reforms underscores the need for an appropriate regulatory framework for such payments.
• Interchange arrangements in the card systems will also affect the nature of new payment arrangements that are adopted by the payments industry. In particular, a more efficient and lower-cost new payment system might be hampered in its development to the extent that it had to match existing interchange payments to card issuing institutions to ensure the participation of banks in the new system.
• Finally, the FSI has made recommendations directed at the Bank and its regulation of card payments, with particular focus on interchange fee regulation and surcharging.^[1]

In conducting a review, given the linkages between the different issues, it will be important to take a holistic view of the issues in the cards system and the broader payments system. Such a review will be an opportunity to think very carefully about the issues, to assess the experience since the Board's reforms were implemented in 2003, and to consider whether to make incremental or more significant changes to the existing framework.

This paper presents some background information on the Bank's reforms and the operation of the cards system in Australia. It also notes some developments that have raised concerns for various stakeholders and also for the Bank given its mandate to promote competition and efficiency in the payments system. It then outlines a range of policy options that might be considered to address these concerns. The Bank is seeking the views of stakeholders, including both participants in the payments system and end users, on the potential policy responses and will also consider any submissions on card payments regulation made in response to the current Government consultation on the FSI recommendations. The Bank would welcome written submissions and will then meet with interested parties to further discuss the options. Following this consultation process, the Board will consider whether to consult on some specific changes to the regulatory framework.

Footnote

The FSI has also made recommendations in other areas relevant to the Payments System Board, in particular concerning digital currencies and the regulation of purchased payment facilities. The Board proposes to address these issues separately. [1]