Review of Retail Payments Regulation – Conclusions Paper
October 2021 7. Other issues

7.1 Competition in card acquiring

7.1.1 Issues for the Review

The Board's view is that there are some ongoing impediments to competition in the acquiring market, particularly in respect of services provided to smaller merchants. Merchant service fees charged to smaller merchants tend to be significantly higher and much more widely dispersed than those faced by larger merchants (Graph 7). In 2019/20, the average cost of acceptance for four-party scheme cards was around 1.5 per cent for merchants with less than $100,000 in annual card transactions, and 0.9 per cent for merchants with $100,000 to $1 million in card transactions. In contrast, merchants with more than $10 million in card transactions had an average cost of acceptance of less than 0.6 per cent. Some of this difference in merchant service fees could be explained by cost-related factors, such as economies of scale for acquirers in providing payment services to merchants with larger transaction volumes, and the ability of larger merchants to negotiate ‘strategic’ interchange rates with the card schemes. In some cases, larger merchants may also be charged lower fees due to a relatively lower risk profile. However, impediments to competition in the acquiring market also appear to be an important factor.

The Bank has received mixed views on this issue. On one hand, competition and innovation in the broader acquiring market is strong. A range of new technology-focused and/or global firms have entered the market in recent years, acquirer margins appear to have declined, and there are reports of reasonably high rates of switching among some types of smaller merchants. The reforms implemented by the Bank as part of the 2015–16 Review – which sought to improve the information available to merchants about their payments costs – have also made it easier for merchants to seek quotes from alternative providers.^[28]

However, various factors in the market present ongoing impediments to competition. One issue is that switching to a new acquirer can be costly. This may be due to one-off transitional costs, such as those associated with replacing card terminals and re-integrating back-office systems. Also, given that payment services are often ‘bundled’ with other banking services, merchants may lose access to preferential rates on business banking services such as credit facilities if they source their payments services from another acquirer.

Another issue is that price transparency is still relatively limited. Most acquirers only publicly advertise their fixed-rate or ‘simple merchant plans’, where merchants pay either the same rate per transaction or a fixed dollar amount per month, irrespective of the type of cards used by their customers.^[29] More competitively priced plans are usually negotiated on a bespoke basis between the acquirer and the merchant. In some cases, acquirers require detailed card transaction information from merchants (such as the shares of standard and premium, and domestic and international card transactions) to determine the most competitive plan and pricing. While this information is available to the incumbent acquirer, it is not typically included in the standard cost of acceptance statements provided by that acquirer, and can be difficult for a merchant to source. This opacity in acquirers' pricing models and lack of access to transaction data makes it difficult for merchants to compare different plans and acquirers and shop around for a better deal.

There also appear to be some frictions in the market related to behavioural factors. The complexity of payments concepts and the difficulty that merchants face in understanding and comparing acquirers' offerings generate considerable inertia in merchants' choice of payment plans and acquirers.^[30] This can cause merchants to remain with their existing provider even if they could achieve significant net benefits from switching. This, in turn, seems to limit the competitive pressures in the acquiring market, particularly for smaller merchants, which would result from merchants more regularly switching providers.

7.1.2 Stakeholder views

Many stakeholders noted that competition in the acquiring market is strong, pointing to a range of new entrants in recent years and asserted that acquirer margins had been declining. Innovation has increased the breadth of services available to merchants, and some stakeholders noted that technology-focused new entrants have been increasingly capturing market share from traditional (bank) acquirers. Nonetheless, several stakeholders noted that the acquiring market is still very concentrated, and that large bank acquirers have some key competitive advantages over smaller providers. These include the ability to ‘bundle’ acquiring services with broader business banking services, process ‘on-us’ transactions (where they are both the issuer and acquirer) which reduces their costs, and provide same-day settlement to merchants.

The Bank heard concerns from many stakeholders that issues regarding complexity and transparency can impede competition in the acquiring market. Many merchants struggle to understand the various cost components that make up their merchant service fees, while others who seek more information about these components may not be provided with the requested information. These issues tend to be exacerbated for smaller merchants, which often do not have the time or resources to investigate whether their pricing plan is competitive and to search for a better deal. Although some large acquirers reported relatively high rates of switching in some market segments, the bulk of stakeholder feedback suggested that there is considerable inertia in merchants' choice of acquirers and pricing plans.

There was significant support from stakeholders for the proposals outlined in the Consultation Paper to improve the transparency of merchants' payments costs. Merchant groups felt that the proposals would help merchants more easily navigate the acquiring market, and compare and switch plans.

Regarding the proposed initiative to publish detailed merchant-level data and provide more educational information for merchants, one major acquirer argued that reporting of merchant-level fee data should apply to all providers regardless of size, rather than just large acquirers. Another acquirer suggested that the Bank should not focus solely on price when designing educational material for merchants, given the range of value-added services offered in the acquiring market.

There were mixed responses to the Bank's proposal to explore extending the Consumer Data Right (CDR) to acquiring services. A number of stakeholders argued that the CDR would help merchants to more easily compare acquirers' offerings and shop around, which could help reduce inertia in the market. However, some larger acquirers expressed concerns about the cost and resourcing requirements involved. One major bank noted that the work agenda for the CDR is already extensive and any plans to broaden it would need to be prioritised appropriately.

Some submissions argued that the Bank should go further to promote transparency in the acquiring market. In particular, one submission argued that acquirers should be required to break down merchant service fees into scheme fees, interchange fees and the acquirer margin on all merchant statements.

7.1.3 The Board's assessment and conclusions

The Bank's reforms following the 2015–16 Review have significantly improved the information available to merchants about their payment costs. However, the Board's assessment is that further policy action is warranted to help reduce some of the remaining impediments to competition in the acquiring market for smaller merchants. Accordingly, the Bank is proposing two initiatives.

First, the Bank will regularly publish summary information on merchant service fees for merchants of different sizes. This will be based on merchant-level data on payment costs collected annually from all acquirers above a certain size; the Bank's current expectation is that this will apply to all acquirers that process more than $4 billion in card payments annually, which corresponds to a little over ½ per cent of overall market share.^[31] The published pricing information will be accompanied by educational material about key concepts in card payments and acquiring services. The aim is to increase merchants' awareness of the pricing available in the market, improve their understanding of different types of merchant plans and payments services, and make it a little easier for merchants to search for a cheaper plan or negotiate a better deal with their existing acquirer. To ensure this information is easily accessible to merchants, acquirers and other entities that provide card acceptance services will be expected to notify their merchant customers about where to find the information at least once a year, likely at the same time as they provide the annual cost of acceptance statement.^[32] This will act as a periodic prompt or ‘nudge’ for merchants to review their payments services, which could reduce some of the inertia in the market.

The Bank will also continue to explore with Treasury and the ACCC the possibility of extending the CDR to acquiring services provided to small businesses, subject to any constraints around the broader CDR rollout. The CDR is currently being rolled out for consumer banking services, where it is known as Open Banking, and was specifically designed to address the types of market inefficiencies that are evident in the acquiring market. The CDR could make it easier for merchants to seek quotes from alternative payments service providers by allowing them to easily source and share their detailed card transaction data. Over the longer term, third-party providers offering comparison (and possibly switching) services could also emerge, further reducing merchants' search and switching costs.

7.2 Net compensation

7.2.1 Issues for the Review

The Issues Paper noted that the revised net compensation provisions in the interchange standards have been working effectively. The Board, however, was aware of several potential issues relating to the operation of these provisions, based on feedback from the 2019/20 annual certification process for net compensation as well as broader engagement with schemes and issuers. The first issue was that the standards do not expressly state when a new issuer must begin certifying its compliance with the net compensation provisions, and certifications for the year to June 2020 indicated that interpretation of the standards on this point varied across different schemes and issuers. Accordingly, the Bank provided guidance in January to clarify its expectation that:

• a new issuer should begin certifying once it has had a full financial year of operation following the public launch of its card product (with the scheme certifying at the same time as the issuer)
• the new issuer (and scheme) will include in its first certification all issuer receipts and payments relevant to the net compensation calculation that have accrued prior to the first certification.

In reaching this view, the Bank recognised that new issuers are likely to experience low transaction volumes in the early stages of developing and launching a product to the public. This could result in issuer payments to the scheme being insufficient to offset the benefits that schemes often provide to support the entry of new issuers into the market, even after allowing for the amortisation of such benefits over a number of reporting periods that is already provided for in the standards.

The second issue was whether card migration benefits should be excluded from issuer receipts in the net compensation provisions. Migration benefits are payments by a scheme intended to compensate an issuer for all or part of the cost of switching schemes (such as the cost of re-issuing cards). They meet the current definition of an issuer receipt, because they can incentivise entry into a contract for issuing cards of a scheme. However, some stakeholders expressed a concern that including migration benefits in net compensation calculations may create a disincentive for issuers to switch schemes, as it makes it more difficult for the new scheme to match the total value of other benefits offered by the incumbent scheme; this potentially reduces competition between card schemes for issuing arrangements.

Finally, the Bank identified a couple of issues relating to the definition in the standards of a ‘Core Service’ – the fee for which can be included as an issuer payment in net compensation calculations. The first was that part (a) of the definition in Standard No.2 of 2016, which pertains to both debit and prepaid cards, suggests that only payments for services related to debit cards are issuer payments. The Bank's intent however, is that payments related to prepaid cards should also be treated as issuer payments (provided they meet the other elements of the definition). In their net compensation certifications, schemes and issuers have interpreted ‘Core Service’ in line with this intent. Second, the Bank was concerned that, as schemes become involved in more parts of the payments value-chain, ‘Core Service’ (under both Standard No.1 and Standard No. 2 of 2016) could in some cases be interpreted widely to include services that are provided by the schemes but that would traditionally have been performed by issuers themselves, or by third parties (for example, account maintenance, or the transaction authorisation usually performed by the issuer). This would inflate issuer payments, allowing schemes to provide additional benefits to issuers.

The Issues Paper also considered what actions the Bank should take, or should have the power to take, following any breach of the net compensation provisions, particularly given that some potential enforcement actions could have the effect of rewarding a scheme for a breach. For example, requiring an issuer to ‘undo’ a breach by repayment or adjustment to an accrued entitlement would result in the scheme recouping some of the cost of the excessive up-front incentives it offered to secure the issuing contract. The appropriateness of the Bank's enforcement powers under the PSRA was also raised more generally: see the section on ‘Regulation and enforcement’ below. A related question was whether greater obligation should be placed on schemes to comply with the net compensation provisions (currently the substantive obligations rest with the issuers).

7.2.2 Stakeholder views

Schemes and issuers generally indicated that the current net compensation provisions were working effectively, although some suggested they were complex and difficult to interpret. Some noted small changes that might be beneficial. For example, some stakeholders suggested that aspects of the provisions may hinder competition between schemes (e.g. requiring payments for card portfolio conversions to be included as issuer receipts may give incumbent schemes an advantage, and the move from cash to accruals may favour international schemes that pay large upfront incentives). Others felt that the burden of monitoring compliance primarily fell on issuers, not schemes, and recommended that substantive obligations should also apply to schemes. While parties generally agreed that there needed to be close monitoring to dissuade and detect potential circumvention, few saw a case to develop new enforcement mechanisms to strengthen observance of the provisions.

Feedback from schemes and issuers was supportive of the Board's proposal to amend the standards to include the Bank's recent guidance for new issuers, and of the other minor revisions to the net compensation provisions set out in the Consultation Paper.

7.2.3 The Board's assessment and conclusions

The Board's view is that compliance with the net compensation provisions has been satisfactory overall and breaches have been dealt with effectively, despite the Bank's limited enforcement powers under the PSRA. Accordingly, the Board has decided not to make changes to the net compensation framework or to extend the substantive obligations.

On the issue of when a new issuer must begin certifying its compliance with the net compensation provisions, the Board's view is that the graduated approach set out in the Bank's recent guidance supports new entry and competition in the issuing market.^[33] The Bank will therefore amend the standards to formalise these certification requirements for new issuers. Their inclusion in the interchange standards will bring greater regulatory clarity for issuers entering the market.

The Board does not see a strong case for excluding card migration benefits from net compensation calculations. The Board acknowledged the concerns raised by some stakeholders that the inclusion of migration benefits could create a disincentive for issuers to switch schemes, potentially reducing competition between the card schemes. However, this was weighed up against the fact that the exclusion of such benefits would be inconsistent with the broader intent of the standards to limit interchange-like payments to issuers, and would introduce additional complexity and potential loopholes into the regulation.

In relation to the definition of ‘Core Service’ in Standard No.2, a minor technical revision will be made to part (a) to include prepaid cards, to bring the drafting into line with the Bank's intent. The Board would also like to reiterate that ‘Core Service’ under both standards should be interpreted narrowly, to exclude services that are provided by a scheme, but that would traditionally have been performed by the issuer or a third party.^[34] A wide interpretation is inconsistent with the intent of the standards, as it increases the scope for schemes to provide interchange-like benefits to issuers. This would translate to higher costs for acquirers and merchants, and may provide an advantage to schemes over third-party suppliers (as schemes would be able to reimburse service fees to the issuer).

7.3 Mobile wallets

7.3.1 Issues for the Review

In recent years, large multinational technology companies such as Apple, Google and Samsung have launched mobile wallets in Australia for use in their respective mobile platforms. These wallets enable consumers to make contactless (and in some cases online) payments with a smartphone or other consumer device^[35] using a digital representation of their debit and/or credit cards. The contactless functionality of mobile wallets is typically facilitated by near-field communication (NFC) technology in mobile devices. All of Australia's major banks and many smaller issuers now support each of the three largest wallets (Apple Pay, Google Pay and Samsung Pay). The use of these wallets by consumers has grown strongly over the past few years. This is evident in the Bank's most recent Consumer Payments Survey, which showed that mobile-wallet transactions made up 8 per cent of in-person card transactions in 2019 (compared with 2 per cent in 2016). Use of mobile wallets has picked up further since the onset of the COVID-19 pandemic; data released by one large card issuer showed that the value of monthly transactions made using mobile wallets more than doubled over the year to March 2021.

Mobile platforms take different approaches regarding access to NFC technology for contactless payments. On Android devices, third parties are able to directly leverage NFC functionality to develop their own mobile payment applications that compete with Google Pay or Samsung Pay. In contrast, on the iPhone, direct access to NFC technology for payments is restricted to Apple's ‘Wallet’ application, which means that third parties are unable to develop their own mobile payments applications for iOS without transactions going via Apple Pay.

Apple's restriction on access to NFC technology for contactless payments on the iPhone is attracting growing international regulatory scrutiny. The European Commission is currently conducting a formal antitrust investigation into this issue, and is also considering legislation that would ensure third parties can access technologies used for payments (such as NFC) on fair and reasonable terms. German, Swiss and Dutch national authorities have also considered, or are considering, NFC access issues. In Australia, the ACCC has recently commenced an investigation into Apple's restriction on direct access to the iPhone's NFC chip. Several stakeholders have also raised concerns about the restriction in the current Parliamentary Joint Committee inquiry into mobile payment and digital wallet financial services;^[36] this inquiry is considering some of the potential competition issues noted above and is yet to issue an interim or final report.

7.3.2 Stakeholder views

A number of stakeholders noted that the entry of large multinational technology companies could pose challenges for the local market. Providers of mobile wallets and other mobile payments services are often very large, and even the largest domestic participants in the Australian payments system (such as the major banks) may find themselves in a weak negotiating position when partnering with them.

Some stakeholders argued that certain practices of mobile-wallet providers may be detrimental for competition and introduce new costs into the payments system. In particular, some issuers expressed concerns about the ability of mobile-wallet providers to restrict access to the underlying technology used for contactless mobile payments (such as NFC) and prohibit issuers from passing on mobile-wallet fees to customers. One issuer also noted that issuers may be required to share some aspects of consumers' card transaction data with one of the mobile-wallet providers.

Some stakeholders also highlighted the lack of transparency related to mobile-wallet fees, which represent a new cost in the payments ecosystem that could be passed through indirectly to end users of the payments system. One submission argued that there was a need for greater transparency of wallet providers' fees and rules. Similarly, another submission noted that the Bank does not currently collect data on mobile-wallet transactions in its Retail Payments Statistics, and suggested that the Bank could start to collect these data to monitor trends in the market.

Other stakeholders noted the benefits of mobile wallets, including their convenience and potential to improve security through technologies such as tokenisation and biometric authentication. One stakeholder argued that broadening third-party access to NFC infrastructure in mobile devices could compromise the security and privacy of mobile-wallet transactions.

Overall, a number of submissions argued in favour of regulatory action in the mobile-wallet market to address perceived competition issues. One major bank suggested that the Bank should work with the ACCC to address any competition issues in this part of the payments system. Other submissions were also supportive of a regulatory response, although it was noted that the Bank currently may not have the power to regulate mobile-wallet providers under the PSRA.

7.3.3 The Board's assessment and conclusions

The Board considers that there is a growing case for regulatory authorities to have powers to address potential competition and efficiency issues in the mobile-wallet market. The market is currently dominated by three large multinational providers, and there has been very strong growth in the use of these services in recent years. Some of the potential issues in the mobile-wallet market have been highlighted during the current Parliamentary Joint Committee inquiry, and as noted above, the ACCC has commenced an investigation into Apple Pay. While any regulatory intervention would need to also consider any implications for the safety and security of the payments system, it seems likely that regulatory action (or the prospect of such action) could promote greater competition in the mobile-wallet market and improve the ability of issuers to bargain with mobile-wallet providers.

However, regulating in this area would be complex and the Bank's power to do so currently under the PSRA is not entirely clear. Accordingly, for the time being, the Bank will continue to monitor developments in Australia and overseas closely, and will cooperate with the ACCC where needed (including on its current investigation into Apple Pay) to address any policy issues relevant to its mandate. However, the recently released final report of the Treasury Review suggests that a new designation power for the Treasurer, or an expanded scope for the designation power of the Bank under the PSRA, could be relied upon where oversight of a particular mobile wallet would be in the national interest or the public interest. If an expanded designation power for the Bank was implemented by Parliament, this would give the Bank the power to regulate a broader group of payment service providers, including mobile-wallet providers and other new entities in the payments ecosystem, thus ensuring that the Bank was able to address any competition and efficiency issues that arose.

7.4 Other

7.4.1 Access regimes

Stakeholders have noted that they believe the Bank's revised access regimes for the Visa and Mastercard credit card schemes are working well to support competition from new participants in this market. A range of new issuers and acquirers have entered the Australian market over recent years, many of which are smaller technology-focused firms. As noted in the Issues Paper, the processing of applications for scheme membership occasionally falls outside of the timeframes published on schemes' websites, but this has been attributed to applicants taking additional time to supply the requisite information (for example to demonstrate compliance with anti-money laundering regulation). The Bank has received very few complaints from would-be participants regarding delays in access applications. Accordingly, the Board will leave the existing access regimes for credit cards unchanged.

Access issues related to the NPP were considered in a public consultation conducted by the Bank with input from the ACCC in 2018/19. During this consultation, stakeholders raised a number of concerns about access for new participants, and the Bank made a number of recommendations aimed at addressing some of these concerns in its final report; these were addressed by NPP Australia Ltd. Recently, the Treasury Review has made recommendations, particularly around a new licensing regime for payment service providers, which could have implications for payment systems' access rules (including those of the NPP). The Bank and the ACCC will decide on the scope and timing of any follow-up review of NPP functionality and access following the Government's response to the recommendations of the Treasury Review.

7.4.2 Enforcement

The Issues Paper noted that there are some limitations to the Bank's enforcement powers under the PSRA. For example, the penalty for failing to comply with a direction under section 21 of the Act is substantially lower than penalties for offences under other legislation related to the financial sector. However, there have not been any significant issues regarding compliance with the Bank's standards and access regimes, and stakeholders have noted that good outcomes have been achieved under the existing regulatory framework and enforcement mechanisms. Accordingly, the Board has concluded that major changes to its enforcement powers are not necessary at this stage. Nonetheless, in any revision of the PSRA following the recommendations of the Treasury Review, the Government may consider whether the Bank's current enforcement powers remain appropriate.

7.4.3 American Express companion card system

The American Express Companion Card system was designated in October 2015, and Standards No. 1 and No. 3 apply to this system. As noted in the Issues Paper, the major banks have stopped issuing companion cards as a result of the net compensation provisions. Accordingly, the Bank will revoke the designation.