Review of Retail Payments Regulation – Conclusions Paper
October 2021 2. Introduction

This paper is the final document in the Reserve Bank's review of retail payments regulation (the Review). It presents the Payments System Board's conclusions on the matters discussed in the Issues Paper and Consultation Paper, reached following an extensive public consultation process. It also includes a copy of the Bank's standards incorporating the variations which the Bank intends to determine and lodge for registration on the Federal Register of Legislation shortly after the publication of this Conclusions Paper. This chapter outlines the background and process for the Review, in the context of the Board's mandate and competition and efficiency considerations.

Chapters 3–7 cover the key issues for the review: dual-network debit cards and least-cost routing; interchange fees; the transparency of scheme fees; no-surcharge rules imposed by some BNPL providers; and several other issues examined in the review. Each chapter describes the key issues, the options presented in consultation, stakeholders' views and the Board's assessment and conclusions. Chapter 8 describes the varied standards in more detail and implementation timelines.

2.1 Background to the Review

Following the 1996–97 Wallis Inquiry, the Reserve Bank was given new regulatory powers in respect to the payments system and the Payments System Board was created to oversee the exercise of these powers.^[4] The Bank's powers are to be directed towards controlling risk in the financial system, promoting the efficiency of the payments system and promoting competition in the market for payment services, consistent with the overall stability of the financial system.

In the early 2000s, the Bank began implementing a series of reforms to card payments systems. These reforms included measures that changed the relative 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 restrictive rules in card systems, including to allow 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. The Bank 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 initial 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.

Over 2015–16, the Bank conducted a comprehensive review of the regulatory framework for card payments. This review concluded in May 2016 with the release of a conclusions paper, and the publication of new surcharging and interchange standards.^[5] The revised surcharging standard sought to address issues around excessive surcharging, while preserving the right of merchants to surcharge. Acquirers and payment facilitators were also required to provide merchants with easy-to-understand information on the cost of acceptance for each designated scheme that would help them in decisions regarding surcharging. The revised interchange standards reduced the weighted-average interchange fee benchmark for debit cards from 12 cents to 8 cents, while the benchmark for credit cards was maintained at 0.50 per cent, and compliance with the benchmarks was made more frequent (quarterly rather than every three years). The benchmarks were also supplemented by ceilings on individual interchange rates: 0.80 per cent for credit; and 15 cents, or 0.20 per cent if the interchange fee was specified in percentage terms, for debit and prepaid. The standard also included new provisions in relation to ‘net compensation’ to prevent circumvention of interchange fee caps and benchmarks. In 2018–19, the Bank conducted a consultation on the operation of the net compensation provisions and made some changes aimed at clarifying and improving their operation.

Several developments informed the timing and direction of this Review. Two reports – one by the Productivity Commission, another by the Black Economy Taskforce – made some recommendations relevant to the Bank's payments regulations. In addition, the retail payments landscape has changed appreciably in recent years, reflecting technological change, payments innovation, the entry of new providers and changing payment preferences of end users. Given this, it was timely to consider whether the current regulatory settings remained fit-for-purpose to achieve the Bank's mandate.

More broadly, the growing complexity of the payments ecosystem and the emergence of new entities in the payments chain are raising a range of policy issues in the payments system. These relate to the implications of newer entities – like payment gateways, providers of mobile wallets and buy now, pay later (BNPL) services – for competition, efficiency and risk in the payments system, as well as the regulatory treatment of crypto-assets and so called ‘stable coins’. While the Bank has investigated some aspects of these issues in the Review, the broader question of whether the regulatory architecture remains appropriate for the changing payments system has been considered separately and concurrently in the Treasury's Review of the Australian Payments System (the Treasury Review). The Treasurer released the final report of this review in late August, and the Treasury is currently consulting on the recommendations ahead of the Government finalising a response.

2.2 The Review process

The Review formally started in November 2019, when the Board approved the publication of an Issues Paper. That paper sought the views of industry stakeholders and other interested parties on a wide range of payments issues. While some of the issues were directly related to the Bank's existing card payments regulation, the paper also asked whether there were any gaps in the payments system or regulatory issues that needed to be addressed outside the narrower topic of card payments. The Bank received over 50 written submissions from financial institutions, merchants, card schemes, consumer groups and individuals. Around 25 parties accepted the invitation to discuss their submissions with the Bank.

While the Bank originally expected to publish a follow-up paper in mid 2020, the Review was temporarily suspended in March 2020 in response to the COVID-19 pandemic. The Bank recommenced work on the Review in late 2020, and conducted a large number of follow-up meetings with stakeholders about the key issues being considered as part of the Review. The Board approved the publication of a Consultation Paper in May 2021. The Consultation Paper outlined numerous options for regulatory reform to address the policy problems identified in the Issues Paper, as well as the Board's preliminary conclusions on these issues. It also presented some draft variations to the Bank's standards for card payment systems that would implement the preliminary conclusions. The Bank received 35 written submissions to the Consultation Paper; these were published on the Bank's website with the exception of those that were submitted in confidence. The Bank subsequently held additional meetings with over 15 interested parties. The Bank also received estimates of the regulatory compliance costs that would arise under each of the potential policy options from a broad range of stakeholders. The conclusions presented in this document draw on extensive analysis of the costs and benefits of each option proposed in the Consultation Paper, informed by the stakeholder feedback received throughout the Review.

2.3 The Payments System Board's mandate and approach to regulation

The responsibilities of the Payments System Board of the Reserve Bank are set out in the Reserve Bank Act 1959, which requires the Board to determine the Bank's payments system policy so as to best contribute to: controlling risk in the financial system; promoting the efficiency of the payments system; and promoting competition in the market for payment services, consistent with the overall stability of the financial system. The Bank's broad approach to payments system regulation has sought to encourage industry to undertake reform, using its powers only when a self- or co-regulatory solution has been unlikely to emerge to address public interest concerns.

The most relevant powers for the current review are those provided to the Reserve Bank under the Payment Systems (Regulation) Act 1998 (the PSRA). Under the PSRA, the Bank has the power to designate payment systems, and to set standards and access regimes in designated systems. The PSRA also sets out the matters that the Bank must take into account when using these powers.

Under section 18 of the PSRA, the Reserve Bank may impose standards to be complied with by participants in a designated payment system if it considers it to be in the public interest. Section 8 states that in determining whether a particular action is in the public interest, the Bank is to have regard to the desirability of payment systems:

1. being (in its opinion):
   1. financially safe to use by participants; and
   2. efficient; and
   3. competitive; and
2. not (in its opinion) materially causing or contributing to increased risk to the financial system.

The Bank may have regard to other matters that it considers are relevant, but is not required to do so.

2.4 The effects of the Bank's previous reforms

In line with its mandate, the Board has implemented a number of reforms over the past two decades that have contributed to a decline in merchant fees for card payments, as well as enhancing competition and efficiency more broadly. These reforms included imposing caps on interchange fees (which are a key component of merchant service fees), improving the information available to merchants about their payment costs, and generally promoting competition between card schemes.

There has been a significant decrease in merchant fees for most payment systems since the early 2000s (Graph 1). A large decline in average fees for Visa and Mastercard followed the Bank's initial card payment reforms in the early 2000s, which included the imposition of interchange fee benchmarks and removal of no-surcharge rules. A reduction in the Bank's interchange fee benchmark for debit cards in 2017 has contributed to a further decline in average fees in the Visa and Mastercard debit schemes in recent years. Despite there being no direct regulation of the ‘three-party’ schemes, the cost to merchants of the American Express and Diners Club systems have also declined, as these schemes significantly reduced their merchant service fees in response to the removal of their no-surcharge rules and to stay competitive with other schemes. Australia has a relatively low-cost payment system by international standards, most notably compared with the United States (Graph 2).