The RBA undertakes reviews approximately every four years. Each review contains some strategic, longer-term topics, but also areas relevant to trends currently happening in the industry. As part of this review the industry trends that the RBA is looking for feedback on include:
- The emerging growth of Single Network Debit Cards and how they could change the economics of previous regulatory steps. With debit card usage now significantly outstripping credit card usage, issuers have been looking for new ways to increase their interchange income and they have been using single network card products to do this.
- The gradual rise in scheme fees in recent years and the impact it is having on overall merchant fees. As interchange fees have been reducing due to increased transparency, the opaque scheme fees seem to have been increasing, thus negating cost benefits for merchants.
- The rise of Buy Now Pay Later (BNPL) services and how they should be regulated in the payments market. With increasing media commentary on BNPL and the rising share prices of the providers, any potential regulation would have a significant impact on the industry.
The RBA issued their initial consultation paper in November 2019. They sought feedback from the industry and interested stakeholders and have now collated that information and developed their proposed positions for the next round of regulatory changes. The key areas and proposed outcomes are as follows:
Single Network Debit Cards
Most debit cards issued in Australia for the last few decades have been dual network cards. This means that they have either a MasterCard or Visa capability, as well as, domestic eftpos capability. This dual network system allows for merchants to select which network they want the card transaction processed by. This is called least cost routing (LCR).
Recently a number of small and medium sized issuers have commenced issuing Single Network Debit card (SNDC) products that often only have MasterCard capability associated with them. Single network card products mean that least cost routing is not possible as there is only one network to choose from to route the transaction. The changes that the RBA is proposing are:
1. The major banks will be compelled to issue dual network cards, but a significant portion of the market will be able to issue Single Network Debit Cards thus removing merchant ability to control their costs through least cost routing;
2. Interchange fees for Single Network Debit Cards will be lowered by regulation to reduce issuer revenues;
3. All acquirers and payment facilitators to offer and promote least cost routing to merchants for card present (pin pad) transactions;
4. Requiring the industry to develop least cost routing principles for card not present (online) transactions, and;
5. The schemes to be prohibited from tying credit rate discounts for merchants to debit behaviours by merchants.
Whilst reducing the commercial benefit from Single Network Debit Cards, the RBA could have gone further by mandating least cost routing or opt-out default basis at merchant check outs, including in the high growth online and mobile channels. The RBA has chosen to leave the option of enabling least cost routing up to merchants rather than mandating acquirers to enable this capability, thus leaving the more vulnerable small and medium sized merchants exposed to higher costs. In the USA, politicians through legislation (the Durbin Ammendment 2010), and in Canada the Ministry of Finance, exerted their powers to reduce the costs of debit cards to SMEs and protect their domestic debit networks.
In relation to the increasingly popular global digital wallets, “the Pays”, i.e. Apple, Google and Samsung, merchants expected dual tokenisation (with eftpos) to be mandated to be able to support eftpos and lowest cost of payments.
These are fees set by schemes, charged by acquirers, and passed to card issuers. They have for a number of years been regulated by the RBA. The changes they have proposed as a result of this review are:
1. No significant change to current average and cap settings. (Credit average remains at 0.50% with a cap of 0.80%. Debit average remains at 0.20%).
2. Debit cap to be lowered from $0.15 to $0.10. This will reduce fees to merchants, most likely to smaller merchants who have low average transaction sizes.
3. Single Network Debit Card cap to be set at $0.06. This is lower than the dual network debit cards and will make the business case for issuing single network cards difficult to justify.
4. Interchange fees for foreign cards to be published by schemes on their websites in the same way that domestic rates are currently published. International rates are currently not published so this will increase transparency.
Whilst merchants had hoped that the RBA might further reduce both the weighted averages and the caps in line with the EU (0.2% and 0.3% respectively for debit and credit cards) they have not done so during this review. The setting of low interchange rates for Single Network Debit Cards means it will be difficult to develop a strong business case for debit products for card issuers. We are also pleased to see some additional visibility around international card interchange fees. Again, in some markets like the EU, international interchange rates have been regulated but the RBA seems unwilling to take that step as yet.
The three types of fees that make up a merchants overall merchant service fee are subject to different pricing forces. Interchange fees which are set by card schemes, collected by acquirers and passed through to card issuers, are regulated by the RBA under a regime that caps prices and enforces transparency. Acquiring fees are charged by banks and are competitively priced to win or maintain merchant business. The third fees, Scheme fees, are the fees collected by acquirers and retained by the card schemes. Scheme fees are traditionally very closely guarded and they have been rising in recent years as interchange fees reduce making up a larger and larger share of a merchants overall costs. The RBA is taking a measured approach to regulating scheme fees and is looking to increase its own understanding of them by;
1. Requiring schemes to report scheme fees to the RBA; and,
2. Requiring schemes to report to the RBA quarterly on scheme fee revenues and rebates.
Buy Now Pay Later
The RBA considered a surcharging regime for Buy Now Pay Later (BNPL) payments. Most BNPL providers have specific “no surcharging” clauses in their contracts which prevents merchants from recovering the costs they pay for these transactions. The RBA has specifically permitted surcharging for card based payment types, so they were asked to consider allowing the same for BNPL providers. For context, card based payments, according to the RBA, on average cost less than 1% and BNPL transaction cost more than 4.5%, so they represent a significant cost to merchants.
The RBA has decided not to implement any surcharging regime on BNPL players mainly because they are too small to have a material impact on overall costs. According to the RBA, BNPL transactions account for approximately 1.7% of the value of all debit and credit card transactions. The RBA will maintain a watching brief on this topic and it will no doubt be discussed in future reviews.
Competition assessment of the acquiring market
The RBA sought feedback as to the general level of competition in the acquiring market. Grant Thornton provided extensive commentary on this.. The RBA found that there are a number of factors that reduce competition in the market and they are taking the following steps to address those concerns:
1. The RBA will regularly publish more detailed information on merchant fees. This will be broken down into merchants of different sizes and would be accompanied by detailed merchant information about payments and how it works. The RBA expects that all acquirers will at least annually point their merchants to this information in an effort to build awareness amongst the merchant community.
2. The RBA is also reviewing an “open banking” style regime that would significantly improve portability between acquirers for merchants. The process needs input from Treasury and the ACCC so a final outcome may take some time to be realised.
Overall, we see limited direct benefit for merchants as a result of this consultation process. There are awareness programs around least cost routing and overall acquiring costs for merchants, there are few constraints on card issuers to ensure that least cost routing remains a viable market force or that eftpos gets a foothold in the digital retail world, and there are some increased transparency measures regarding international interchange fees and scheme fees. The RBA didn’t further reduce interchange rates or caps and there was no movement on the ability to surcharge BNPL transactions, both of which would have delivered real cost benefits to merchants.
In terms of next steps, the RBA is seeking feedback by 9 July 2021 regarding their proposals and any associated implementation timeframes.
If you have any questions about the RBA’s proposal and how it might affect you, or about payments in general, please feel free to reach out and we can discuss.
Read the RBA’s full Consultation Paper.