Review of Retail Payments Regulation – Conclusions Paper
October 2021 8. Varied standards and implementation

8.1 Summary of varied standards

The Board's conclusions will be implemented, as necessary, through variations to the Bank's standards. Appendix A presents the proposed variations to the following existing standards:

  • Standard No. 1 of 2016: The Setting of Interchange Fees in the Designated Credit Card Schemes and Net Payments to Issuers
  • Standard No. 2 of 2016: The Setting of Interchange Fees in the Designated Debit and Prepaid Card Schemes and Net Payments to Issuers
  • Standard No. 3 of 2016: Scheme Rules Relating to Merchant Pricing for Credit, Debit and Prepaid Card Transactions

Standard No. 1: The Setting of Interchange Fees in the Designated Credit Card Schemes and Net Payments to Issuers

This standard applies to the MasterCard Credit Card System and the Visa Credit Card System. The variations:

  1. remove references to the American Express Companion Card system
  2. require schemes to publish the interchange fees for domestic transactions on foreign-issued cards on their websites
  3. formalise recent guidance about when and how new issuers should begin certifying compliance with the net compensation provisions.

Standard No. 2: The Setting of Interchange Fees in the Designated Debit and Prepaid Card Schemes and Net Payments to Issuers

This standard applies to the eftpos, MasterCard and Visa debit card and prepaid card systems. The variations:

  1. implement the second and third changes described above for credit cards (as well as a minor technical revision to the definition of ‘Core Service’)
  2. lower the cap on debit (and prepaid) interchange fees that are set in cents-based terms from 15 cents to 10 cents per transaction
  3. introduce a ‘sub-benchmark’ for SNDCs, such that the weighted-average interchange fee on SNDCs from a given scheme must be no more than 8 cents. The methodology for compliance is the same as that for the current weighted-average interchange fee benchmark for all debit (and prepaid) transactions.

Standard No. 3: Scheme Rules Relating to Merchant Pricing for Credit, Debit and Prepaid Card Transactions

This standard applies to the MasterCard and Visa credit card systems, and the eftpos, MasterCard and Visa debit card and prepaid card systems. The proposed variations remove references to the American Express Companion Card system.

Box G: Likely implications of the reforms

In forming its views on a set of reforms to card payments regulation which, in its opinion, are in the public interest, the Board considered the implications for participants in, and end users of, the payments system. This Box summarises the likely effects of the regulatory reforms on various stakeholders.

Industry participants

  • While there are a range of measures to increase competitive tension between the debit schemes and maintain downward pressure on interchange fees, the debit interchange benchmark will be unchanged so there should be limited effects on the overall interchange revenues of issuers. Within the issuing market, the competitiveness of smaller financial institutions should be enhanced by the ability of small entities to issue SNDCs if they wish to do so, combined with the relaxed net compensation rules for new issuers. Some larger issuers that had been considering issuing SNDCs will see a modest increase in their costs from the requirement to continue issuing DNDCs with support for both networks in all form factors (where they are supported by the relevant scheme and mobile-wallet provider).
  • Acquirers, payment facilitators and gateways will have to incur some costs to implement LCR for online transactions. Competition in the acquiring market should increase, particularly if the CDR is expanded to include acquiring services provided to small businesses, possibly resulting in smaller acquirer margins and lower merchant service fees.
  • Schemes, along with large issuers and acquirers, will incur some compliance costs associated with providing scheme fee data to the Bank. However, the publication of scheme fees may allow smaller acquirers and issuers greater scope for negotiation of rebates or discounts from schemes, enhancing competition in those markets.
  • A range of measures – including actions to prevent tying conduct involving credit card interchange fees – should ensure that ePAL is able to complete on a more level playing field in the debit market. Both ePAL and the international card schemes will be free to support and incentivise new SNDC issuance by smaller issuers, and all SNDCs, including eftpos proprietary cards, will be subject to the same interchange fee regulation.
  • Mobile-wallet providers that do not currently support DNDCs will incur some costs in ensuring that both networks on DNDCs can be provisioned.

Consumers

  • The various measures designed to increase competitive tension between the debit schemes (and acquirers) should maintain downward pressure on merchant payment costs, which will help keep downward pressure on the level of prices for final goods and services.
  • The lower cap on debit interchange fees that are set in cents-based terms should result in higher card acceptance (and reduced surcharging) for low-value transactions.
  • Where small issuers switch from DNDCs to SNDCs, their customers will lose access to functionality that is currently only provided by eftpos, such as the ability to withdraw cash at most point-of-sale outlets or receive immediate Medicare rebates at many medical practitioners. However, those customers that place a high value on such functionality will be free to switch to other issuers that still offer DNDCs.

Businesses

  • The various reforms designed to increase competitive tension between the debit schemes will result in lower payment costs for businesses. The increase in pricing information available to merchants, particularly if the CDR is expanded to include acquiring services provided to small businesses, is expected to make it easier for merchants to compare prices from different acquirers and negotiate better deals, putting downward pressure on merchant service fees.
  • The expansion of LCR to online transactions will allow merchants to reduce their payment costs by increasing the pool of debit transactions that can be routed to the cheapest network. The expectation that larger issuers will continue to issue DNDCs will limit any possible shift to SNDCs which do not allow for LCR.
  • The lower cap on debit interchange fees that are expressed in cents terms will reduce the cost of some debit transactions, particularly for smaller merchants that do not benefit from strategic interchange rates. This will result in less cross-subsidisation and price discrimination between large and small merchants. The lower cap will also increase the net benefits of LCR for large merchants that are eligible for strategic rates, by reducing the penalty associated with losing these strategic rates if they adopt LCR.

8.2 Implementation

The revised standards will take effect from 1 January 2022. Accordingly:

  • Interchange fees on foreign-issued card transactions must be published on schemes' websites from 1 January 2022.
  • The new lower cap on debit interchange fees that are expressed in cents terms must be complied with from 1 January 2022 onwards. In schemes' annual certification, they will certify compliance with the old standard (15c) for the first half of the financial year and certify compliance with the new standard (10c) for the second half of the financial year.
  • Schemes must report quarterly SNDC data for the March quarter 2022 onwards, but the first Reference Period for which the schemes have to comply with the SNDC benchmark will be the four quarters ending 31 December 2022. While not legally required, the Bank expects schemes to comply with the benchmark on a quarterly basis for each quarter in 2022.

The Board's expectations regarding DNDC issuance will be effective immediately. However, as noted in the main text, for those issuers that are expected to issue DNDCs, the Board does not expect them to replace any existing SNDCs on issue with DNDCs; these cards, and the accounts they relate to, will be entirely grandfathered. By contrast, new SNDCs and accounts issued by such issuers from 1 January 2022 will be expected to be replaced with DNDCs as soon as practicable. Similarly, for issuers that are expected to issue DNDCs, the Board expects them to support the provisioning of both debit networks in all form factors that they offer – where the functionality is supported by the relevant scheme and/or mobile-wallet provider – as soon as practicable.

The Board's expectations regarding device-present LCR will also be effective immediately. Acquirers that have not yet developed LCR functionality will be allowed an appropriate transition period. Acquirers and payment facilitators will have to report to the Bank on their device-present LCR offering and on merchant take-up every six months, with the first reports due in January 2022.

The Board expects all acquirers, payment facilitators and gateways to offer and promote LCR functionality to merchants in the online environment by the end of 2022. In line with the expectation for the device-present environment, acquirers, payment facilitators and gateways will be expected to report to the Bank on their online LCR capabilities and offerings, and on merchant take-up of online LCR, every six months, with the first reports due in January 2023.

The Bank will issue a formal notice detailing scheme fee disclosure requirements soon after the publication of the Conclusions Paper, with the expectation that the card schemes will provide the Bank with access to their scheme fee schedules and scheme rules from 1 January 2022. The card schemes will be required to report aggregate data on scheme fees and rebates to the Bank on a quarterly basis beginning in August 2022, relating to the quarter ending 30 June 2022. Large scheme participants will be required to report aggregate data on scheme fees and rebates to the Bank on an annual basis beginning in August 2022, relating to the 2021/22 financial year. The Bank will also collect merchant-level data on payment costs each year in September, relating to the previous financial year, from all acquirers that process more than $4 billion in card payments annually.