Review of Retail Payments Regulation – Conclusions Paper
October 2021 5. Scheme fees

5.1 Issues for the Review

The Issues Paper noted that there was very little transparency around scheme fees. Scheme fees are an important component of the costs faced by merchants to accept card payments, as well as the costs borne by issuers for providing card services to their customers. A number of stakeholders have commented to the Bank that scheme fees have been growing over recent years and represent an increasing proportion of merchant service fees. This has raised concerns that the opacity of scheme fee arrangements may be limiting competitive tension between the card schemes, as well as between acquirers (by obscuring their margins). It could also, in principle, make it easier for schemes to implement fees or rules that may be anti-competitive or have the effect of offsetting or circumventing the Bank's interchange fee regulation. For example, the Consultation Paper noted that one scheme recently introduced a new fixed scheme fee, levied on acquirers for each physical merchant outlet that they service, regardless of the volume of transactions processed at each location. In principle, fees such as this could reduce competition in the market for debit card payments, because they could be used to incentivise acquirers and merchants to route DNDC transactions to that card scheme (in ways that schemes with less market power cannot match). The Bank previously considered some possible mechanisms for scheme fee transparency as part of the 2007-08 Review, but did not proceed with specific regulatory action. However, in light of recent developments the Board felt it was timely to review scheme fee disclosure requirements, particularly with card payments continuing to increase as a share of retail transactions in Australia.

5.2 Options presented in consultation

The Bank consulted on three broad options in relation to scheme fee transparency:

Option 1: No additional disclosure requirements

This option retains the status quo, where the Bank would only seek disclosure of scheme fees to assess compliance with net compensation rules.

Option 2: Schemes to publicly disclose all scheme fee rates and rules

Under this option, the Bank would introduce a requirement in the standards for designated card schemes to publish all multilateral scheme fee rates, as well as all scheme rules relating to scheme fees, that apply to Australian scheme participants.

Option 3: Schemes to disclose to the Bank all scheme fee rates and rules, as well as aggregate data on scheme fees paid by Australian scheme participants, with publication of some aggregate data

Under this option, the Bank would – using its information-gathering powers under s26 of the PSRA – require designated card schemes to provide access to all of their multilateral scheme fees, and scheme rules relating to scheme fees, that apply to Australian scheme participants, and to promptly notify the Bank of any changes to these. The Bank would also use its information-gathering powers to collect quarterly data from the card schemes on the aggregate value of scheme fees charged and rebates provided to Australian scheme participants (with the data split into categories based on various characteristics, including at a minimum: issuing and acquiring fees, debit and credit transactions, and domestic and international transactions). Schemes would also be required to provide a list of the top 20 fees by value and the share of total scheme fee revenue that each of these fees account for.

The Bank would consider publishing some of the aggregate data provided by the schemes, allowing the industry to compare the average levels and growth rates of these fees across card schemes. Larger scheme participants would also be required to report annually to the Bank the total of scheme fees paid to, and rebates received from, each card scheme they participate in. This information would act as a cross-check on the data reported by the card schemes, and is not intended for publication.

5.3 Stakeholder views

There was widespread support among stakeholders for greater transparency of scheme fees. Several submissions noted that scheme fees are representing an increasing proportion of card payment costs, and that greater transparency could improve merchants' understanding of these costs and promote competition between the schemes. Some stakeholders suggested that smaller acquirers – which may pay higher scheme fees – could also benefit if greater competitive tension led to downward pressure on scheme fees. One stakeholder suggested that the lack of transparency of scheme fees made it impossible for merchants to compare fees under different pricing plans.

Some submissions discussed the form greater transparency should take; suggestions included requiring acquirers to publish the average total scheme fees paid to each scheme or requiring schemes to publish their full fee schedules. One respondent suggested that disclosure would need to be sufficiently detailed to help merchants make more informed decisions on transaction routing for different transaction types.

The international schemes argued against scheme fee disclosure, primarily due to the commercial sensitivity of scheme fee schedules. One scheme suggested that even aggregate scheme fee data are sensitive commercial information, due to the potential for competing schemes to back-out specific price points and their pricing strategy, and for issuers and acquirers to back-out the level of rebates received by their competitors. The other international scheme argued that scheme fee transparency would have little benefit while the lack of transparency of acquirer margins remained. Both schemes questioned the usefulness of scheme fee transparency for smaller merchants (who preferred simplicity and were largely focused on the overall cost of their payments). Another concern raised by the international schemes was that the publication of scheme fee data could have unintended, adverse impacts on competition. For example, one scheme argued that such disclosure might generate a market price point or focal point for services, which could result in implicit price collusion.

Regardless of whether they supported scheme fee transparency, most respondents noted the complexity of these fees and the difficulty of ensuring that disclosures would be meaningful to merchants. Several issuers and acquirers said that it would be difficult for them to report accurate information on scheme fees for specific types of card transactions. One major bank suggested that the collection of annual scheme fee data from large issuers and acquirers under Option 3 would create an unnecessary compliance burden, although others did not raise any issues with this proposal. Many respondents also noted that the Bank would need to ensure that any assumptions and methodologies used for reporting scheme fee data were consistent across reporting institutions.

5.4 The Board's assessment and conclusions

The Board views transparency as an important mechanism for improving efficiency and competition in the payments system. Scheme fee transparency specifically could lead to a number of benefits. Disclosure requirements could discourage any changes to fee schedules or related rules that may be anti-competitive or could have the effect of circumventing the interchange fee regulations.^[22],[23] This could also allow greater visibility over any developments in scheme fees that could push up payment costs. Greater transparency could also help merchants to better understand the composition of their card payment costs, including the size of acquirer margins. This could increase competitive tension in the acquiring market and allow merchants to make more informed decisions about the payment methods they accept, including regarding transaction routing. Increased visibility of scheme fees could also benefit smaller issuers and acquirers, which generally have less bargaining power with schemes than their larger counterparts. The overwhelming feedback from stakeholders was also that greater scheme fee transparency would enhance competition and efficiency in the payments system. However, greater transparency is unlikely to materialise without policy action.

Requiring card schemes to publish all of their multilateral scheme fees and fee-related rules would be a low-cost way of increasing the transparency of these fees. However, the usefulness to stakeholders of detailed scheme fee schedules is questionable, given their complexity. If schemes were to publish their entire fee schedules, it is likely that even payment specialists – let alone non-specialists such as smaller merchants – would find it difficult to understand and effectively make use of the information. Further, the schedules would not capture rebates, which are needed to fully quantify the net flows from issuers and acquirers to card schemes. The international schemes also raised concerns about the commercial confidentiality of scheme fee schedules, which the Board acknowledged during its 2007-08 review. The Board remains of the view that commercial considerations should be appropriately factored into any requirements for transparency.

The Board is not persuaded that even aggregate scheme fee data are commercially sensitive information. The potential for reverse engineering of specific scheme fee price points and rebates received by individual issuers and acquirers will be limited by the fact that each scheme has tens of different participants and fee schedules are typically very complex, often with hundreds of individual line items; any data published by the Bank would be aggregated at a high level. For similar reasons, the Board considers that the publication of aggregate scheme fee data is unlikely to create a focal point for the level of scheme fees. Given the complexity of scheme fee arrangements, users of the payment system would find it difficult – if not impossible – to pinpoint specific price points from the aggregate data that may be published. Further, if average scheme fees did increase and merge to a focal point, the Bank and the ACCC would be more able to identify it and respond. Overall, the Board expects that the increase in competitive tension generated by publishing aggregate scheme fees would outweigh any adverse consequences, as card schemes compete for issuing and acquiring services and merchant routing.

Based on these considerations, the Board favours Option 3 as the most appropriate way to provide greater scheme fee transparency. Schemes will be required to share all scheme fees and scheme rules with the Bank, as well as quarterly aggregate data on the value of scheme fees charged and rebates provided to Australian scheme participants; this will ensure that disclosures to the Bank are both meaningful and comprehensive. The Bank will also consider publishing some of the aggregated scheme fee data. The Board's view is that aggregate data will be more useful to participants of the payment system, including those without payments expertise, than schedules of individual fees. Larger scheme participants will also be required to report annually to the Bank the total scheme fees paid to, and rebates received from, each card scheme they participate in.^[24] The Board considers it important to obtain data directly from issuers and acquirers as a cross-check on the data provided by the schemes, given the complexity of scheme fee data and the associated potential for misreporting.

The Board understands that providing data to the Bank will add somewhat to regulatory compliance costs. Schemes will need to establish and maintain reporting processes for the quarterly scheme fee data. Larger scheme participants will also incur at least some initial costs to set up data collection and reporting processes for the annual scheme fee data. However, the Board's assessment is that these costs will be outweighed by the benefits of meaningful disclosure to both the Bank and industry participants. If scheme fee transparency leads to even slight downward pressure on fees, this will result in a substantial cost saving for the industry relative to the regulatory cost.

5.4.1 Conclusions