Tony Richards
Head of Payments Policy Department
Reserve Bank of Australia
GPO Box 3947
Sydney NSW 2001
Via email to: pysubmissions@rba.gov.au
20 April 2015
Dear Tony
Review of Card Payments Regulation
We refer to your media release dated 4 March 2015 announcing the Reserve Bank of Australia’s
(RBA) Review of Card Payments Regulation and the invitation to make a submission outlining our
feedback on the proposed changes.
In response, we have focused our submission on five areas:
1. Interchange fees
2. Excessive surcharging
3. Honour all cards
4. Merchant routing
5. Prepaid cards
Interchange fees
In responding to the issues raised in the consultation document we will focus our discussion on the
following items:
a. Broadening interchange fee caps to include other payments between schemes and issuers
b.
Making changes to the interchange benchmark recalculation to reduce the upward ‘drift’ in
average interchange rates in the current three-year reset cycle
c.
Lowering interchange caps
d. Applying caps as the lesser of a fixed amount and a fixed percentage of transaction value
e. Including prepaid cards within the caps for debit cards
a. Broadening interchange fees caps to account for other payments such as incentives.
We would not support a change to the current interchange fee cap that would include other
payments made between schemes and issuers. Typically interchange is a mechanism that seeks
to recompense the issuer for the eligible costs they incur in making available to their customers
card based payment products. Since reforms commenced in 2002, interchange fees have
reduced, as the definition of what constitutes eligible costs has been refined so that these are
limited to those costs that are actually incurred as a direct result of the payment instrument itself.
PO Box 523, Toowong QLD 4066
phone +61 7 3258 4222 fax +61 7 3258 4211
email indue@indue.com.au web indue.com.au
ABN 97 087 822 464
In essence interchange fees are merely a mechanism through which issuers receive a payment to
recover the costs of making a card based payment product available to a consumer.
In contrast, incentive payments paid by a scheme to an issuer serve a different purpose. These
payments provide assistance to enable an issuer to compete against other payment products
available to the consumer, for a greater share of a consumers’ total payment business. In order
for the issuer to be successful, they must develop effective usage strategies that will influence the
consumer’s choice. This attracts additional costs not included in the list of eligible costs as these
are defined today. Also, the incentive is only paid where there is a demonstrated increase in the
level of payment volume for the particular product concerned. If the issuer fails to attract a
sufficient swing in volume in favour of the product of focus, then the issuer’s reward is significantly
reduced or potentially forfeited.
These types of incentives fall outside of the intent of interchange fees as their purpose is to
provide a commercial reward in exchange for additional volume. Interchange fees in contrast
seek not to reward the issuer as much as they seek to recompense the issuer for those eligible
costs of making a product available to a consumer.
b. Making changes to the interchange benchmark recalculation to reduce the upward ‘drift’ in
average interchange fees.
Making changes to the interchange benchmark to reduce the upward ‘drift’ is something we have
some sympathy for. We acknowledge that where these changes look to stop the natural arbitrage
that can occur in swapping a standard product for a premium product, the majority of the 'drift’
would be stopped. However, if we were to take such action, our concern would be on the impact
this would have on product innovation that inevitably favours the consumer. At present premium
cards have benefited from the so called ‘drift’ factor and as a consequence consumers have
benefited from the ancillary features attributed to these products. In this regard it is hard to argue
that the public interest has not been served purely on the basis that more product innovation has
occurred.
While it is generally expected that a higher interchange fee will result in higher merchant fees, the
merchant has the ability to pass these higher costs to the consumer through surcharging. In this
way the higher cost structure of a premium product is neutralised by the surcharge. For this
reason we would not support a change as proposed by the RBA as we believe product innovation
should be encouraged and fostered in the payment system and while this may result in additional
costs to a merchant, surcharging provides a means through which the impact can be neutralised.
c.
Lowering interchange caps.
The consultation paper states that one of the benefits of lowering interchange caps is the
expected lower product prices for all consumers as a result of lower merchant fees. We do not
agree with this assertion. Throughout the reforms process where interchange fees have been
reduced and these have resulted in lower merchant fees, the merchants have failed to pass on
these saving to consumers. While the RBA has argued in the past that the reduction in
interchange fees have resulted in lower product prices overall as it has reduced the rate of growth
in the price of a product, the practical experience is that prices in the main have remained
relatively unaffected by changes in interchange fees. We believe that the only way a consumer
will receive any benefit from a reduction in interchange fees that should lead to a reduced level of
merchant fees, is for the RBA to regulate to achieve this outcome. Unless regulation forces
merchants to pass on the savings, it is questionable that any public benefit will flow to consumers
for this reason alone.
PO Box 523, Toowong QLD 4066
phone +61 7 3258 4222 fax +61 7 3258 4211
email indue@indue.com.au web indue.com.au
ABN 97 087 822 464
d. Applying caps as the lesser of a fixed amount or a fixed percentage of the transaction value.
While there is always benefit to be gained by improving the structure of how interchange fees are
applied, in this case we cannot see a rational argument that would warrant such a change,
particularly where the benefit cited is that this would promote merchant acceptance. We believe
that core to this argument is the perception that fees may be higher under one methodology than
another. While this may be true, for so long as surcharging is available to merchants there is
practically no reason why the cost of accepting one product over another ought to be a significant
driver of acceptance as these costs can be passed on by the merchant to the consumer.
e. Lastly looking at whether prepaid cards should be included within the caps for debit cards.
While we understand why parallels are drawn between prepaid cards and debit cards, the most
obvious being that both use the consumers own money, the structure of the products are
fundamentally different. For this reason, prepaid products should not be included in the caps for
debit cards but rather the calculation of eligible costs to determine an appropriate interchange cap
for prepaid, should be done in isolation.
Debit cards of themselves are merely a means of accessing the transactional account of a
consumer. Importantly they are only one way of gaining access and the transactional account
itself can survive the cancelation of the debit card itself should the consumer chose to cancel the
debit card. In this way largely the cost of the transactional account are separate to the cost
associated with the provision of the debit card.
Unlike a debit card, a prepaid card product includes a separate transactional account which can
only be accessed by the card product itself. In this way, a prepaid card is functionally the same as
the structure of a credit card product albeit one is offering a credit facility and the other is drawing
on preloaded money.
In the event the consumer cancels the card, as they would also be able to do with a debit card, the
prepaid account would also close and the residual money in the account returned to the card
holder. The reason for this being that without the card the money in the account cannot be
accessed. This is not the case for a debit card.
In calculating a suitable interchange fee structure, these differences must be taken into account as
they are fundamental to the structure of the product which in turn drives the applicable costs that
ought to be captured within an interchange fee for prepaid products. To ignore these differences,
would misrepresent the cost of the product resulting in an incorrect interchange fee.
Indue is a significant processor of prepaid products in Australia and would be happy to assist the
Bank in understanding the applicable cost base of a typical prepaid product.
Excessive Surcharging
As a matter of principle, Indue supports surcharging where the reason for applying a surcharge is to
allow a merchant to recover the reasonable cost of accepting a particular product which may have a
significant cost attached to it and where an alternative method of payment is readily available. In this
regard two elements concerns us, namely how we determine the reasonable cost of acceptance and
the practical availability of payment substitutes.
Looking firstly at how we determine the reasonable cost of acceptance, we note that in 2013, the RBA
amended the Surcharging Standard and published guidelines for merchants. Whilst these changes
attempted to deal with this issue, since then, no discernible change is obvious in the broader market
and consumers in practical terms are no better informed about what constitutes a reasonable
surcharge than they were before the 2013 changes.
PO Box 523, Toowong QLD 4066
phone +61 7 3258 4222 fax +61 7 3258 4211
email indue@indue.com.au web indue.com.au
ABN 97 087 822 464
To date the reforms that have led to the current position, have centred in the main on the surcharging
of Visa and MasterCard products only. The rationale for this being that the costs attributed to these
payment instruments were excessive and there were other less expensive payment alternatives that a
consumer could use to avoid the surcharge and in this way a clear price signal was given to the
consumer regarding the cost associated with the payment choices they made. In the instances where
a surcharge was levied by a merchant, the full cost of acceptance was passed on to the consumer. At
this point it is important to note that all payment instruments available to a consumer at the point of
sale, have an acceptance cost. The RBA’s own 2014 cost study lists the total direct costs of a
transaction for various payment instruments at $0.48 for cash, $0.45 for eftpos debit, $0.70 for
MasterCard and Visa debit and $0.94 for credit cards. If we use eftpos as the lowest cost payment
instrument, then the additional cost of accepting an alternative over eftpos is $0.03 for cash, $0.25 for
MasterCard and Visa debit and $0.49c for credit cards.
When seen in this light, we question whether the cost of acceptance is excessive when compared to
eftpos and whether it is reasonable to charge a surcharge at the full cost of acceptance or whether we
should only apply a surcharge for the amount in excess of the cost associated with the lowest cost
product available. In principle, we believe that there is greater integrity if a surcharge is applied at a
level that recognises the amount above that applicable to the lowest cost product. This recognises the
cost associated with every payment instrument and seeks only to recover for the merchant the cost in
excess of the lowest cost option (i.e. the excessive cost of acceptance) rather than the full cost which
practically assumes all other payment options result in no cost to the merchant which is untrue.
This view more closely aligns with the tiered approach suggested in the FSI recommendations and as
such we would support that a more structured way with which to apply surcharging with integrity
should be based on a prescribed definition of what constitutes a low cost, medium cost and high cost
payment option. While the FSI recommendations speak to the debit system as being descriptive of a
low cost product, we would favour using the RBA’s own cost study and relating the surcharge to that
cost above the cost of cash, and that being applied across the full spectrum of non-cash payment
instruments available to consumers at point of sale. This is simple, it can be easily defined and
surcharging caps can be given to merchants who can display these prominently in their shops for
consumers to see and make informed choices as to which payment instrument to use.
While this would be our preferred way to apply surcharging for point of sale purchases, we would not
support this method for online purchases. In this case we do not believe that at this time there is a
viable alternative to card based products for online purchases. As such, if a merchant elects to make
their products and services available online, then they and not the consumer should bear the cost of
acceptance. This is equitable for both parties and we highlight that online purchases typically result in
operational efficiencies for merchants which usually are seldom passed on to consumers. As such,
some of the additional margin that would be gained from online sales would more than compensate for
the associated costs of accepting a card for payment. Until such time as merchants can offer an
alternative low cost payment option to consumers for online purchasing, surcharging of online
purchases should not be allowed.
Honour all cards
While we understand why it may be desirable for merchants to be able to refuse acceptance of certain
high cost card products, we see no practical reason why this should be allowed. Given that
surcharging is allowed within the Visa and MasterCard systems, any cost associated with the
acceptance of the high cost payment card can be recovered by the merchant through a surcharge. On
this basis, we fail to see what practical value would exist in allowing the merchant to refuse accepting
one card over another.
PO Box 523, Toowong QLD 4066
phone +61 7 3258 4222 fax +61 7 3258 4211
email indue@indue.com.au web indue.com.au
ABN 97 087 822 464
Beyond this the selective acceptance of one product over another product within the family of products
available from a scheme is likely to lead to consumer confusion at point of sale. Today there is
integrity in our payment system that gives confidence to consumers that they can make a successful
payment using either a Visa or MasterCard product with no fear of rejection, because of the choice of
payment instrument they make, provided they are willing to pay the surcharge the merchant levies. If
we remove this acceptance certainty then we risk compromising the integrity of the payment system in
the eyes of the consumer.
This is further complicated when we consider that increasingly we expect that these payment cards
are likely to be available to consumers for use through their mobile device. Under these
circumstances, it is likely the merchant would be unable to discriminate between the various products
unless their acquirer can make changes that would enable electronic recognition of the various
product types by the merchant without a visible descriptors on the physical product as is the case
today with Visa and MasterCard Debit Cards.
Beyond this allowing the merchant to discriminate at this level may lead to the rejection of one issuer
over another and while this may not be a deliberate act, it would impact the issuers concerned and
ultimately place them at a competitive disadvantage to another issuer.
Merchant Routing
In principle allowing a merchant to choose their network of choice would seem rationale particularly
where the choice can recognise domestic transactions separately from international transactions. At a
practical level however, we see achieving this based solely on cost savings alone difficult to achieve.
It is likely that in order to enable individual merchants to select a network of choice to route for
example, their domestic transactions, will require significant changes at the acquirer’s end to enable
choice at the merchant level. This change we anticipate would require a significant investment and on
this basis, it is likely that any saving achieved by the merchant from a change in routing will be largely
neutralised by the cost the acquirer is likely to levy at the merchant to account for the significant
investment to build this functionality.
Ordinarily we would expect that acquirers rather than merchants would be better placed to make
routing decisions given that it would be easier to make routing changes at the aggregate level rather
than at the merchant specific level. On this basis, it is likely that schemes would compensate for this
volume and in doing so, provide incentives to attract this volume to their Network. Under these
circumstances, we would question the likelihood that savings generated by a change in routing alone
to successfully find their way to the merchants themselves.
Prepaid Cards
In the Issues Paper, the RBA has formed the view that “a review that dealt with credit and debit card
regulation should also consider bringing prepaid cards into formal regulatory arrangements”. The bank
also notes that “in many respects, prepaid cards are similar to debit cards”.
We support the RBA’s view that in considering payment reform, prepaid cards should be included.
The prepaid market has grown out of a need to provide a product that neither credit nor debit cards
were fulfilling and we submit that prepaid cards do not operate with the same purpose as a credit or
debit card.
Credit cards provide a convenient revolving credit facility to a consumer which is underpinned by a
credit contract. The card is the mechanism for an individual to draw down the loan making the card’s
use limited to a specific credit account and a specific person.
PO Box 523, Toowong QLD 4066
phone +61 7 3258 4222 fax +61 7 3258 4211
email indue@indue.com.au web indue.com.au
ABN 97 087 822 464
Debit cards provide a consumer with a convenient mechanism to access funds from a savings account
(typically held with an ADI). The card is available to a specific individual to access their funds.
Importantly however, the debit card is not the only way the account holder can access the account and
the existence of the account is independent of the debit card itself.
Prepaid cards have evolved to fill various gaps that arise because of the limitations that credit and
debit cards have, being tied to an individual and that individual’s account. Typically prepaid cards fall
into the following types of program:
1. Gift cards (usually replacing old paper based voucher systems): These represent a
prepayment of a future purchase with a merchant(s);
2. Travel Cards which allow consumers to have favourable exchange rate conversions and avoid
carrying currency when travelling. These are a prepayment of currencies;
3. Loyalty Programs that allow merchant(s) to drive sales by providing value to a customer that
can be redeemed via the card;
4. Specialised closed loop programs to remove cash. An example is a card based system used
by Schools for students to purchase items without cash;
5. Corporate Expense programs allowing companies to provide employee’s with a means to pay
expenses;
6. Gambling Products that facilitate access to winnings via an- ATM enabled scheme card
(particularly for internet based wagering companies in order to give instant availability of
funds);
7. Specialised programs such as the Commonwealth’s Emergency Benefits card that enables
the immediate provision of funds to be provided from one party to another without carrying
cash or other bank transfer delays or requirements; and
8. Remittance programs where funds can be loaded onto a card by one person where the card is
held by another.
Whilst some of these programs, such as the corporate expense card, have similar credit or debit
equivalents, we submit most prepaid programs do not operate as a debit or credit card as the card is
not limited to one person accessing their own account as part of a banking relationship. With prepaid
cards typically the relationship between the funder and cardholder is not the provision of a banking
service as is the case for debit and credit. It is more likely to be that of a relative /friend (Gift, travel,
remittance), merchant/customer (loyalty, wagering, specialised) or employer/employee (corporate
expense, travel).
Any regulation being considered for prepaid cards will need to consider these relationships to ensure
the intent and outcomes of the regulations are appropriate for the products the regulations may cover.
Prepaid cards are regulated and the regulation has largely grown out of the purpose for which the
cards are designed to be used. The regulation includes:
1. Card Scheme requirements where typically the Card issuer is an ADI who holds the funds and
underwrites the program;
2. The RBA’s Purchased Payment Facility Regulations to the Payment Systems (Regulation Act)
1998;
3. Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (“AML Act”);
4. Australian Financial Services Licencing requirements contained in the Corporations Law and
associated ASIC Class Order documents; and
5. Epayments Code and various banking codes where the issuer is a subscriber to those codes.
A feature that is common in this regulatory regime is an acknowledgement by regulators that many
prepaid products are seeking to be a method of cash replacement, often have low value and that to be
PO Box 523, Toowong QLD 4066
phone +61 7 3258 4222 fax +61 7 3258 4211
email indue@indue.com.au web indue.com.au
ABN 97 087 822 464
relevant in the market must operate under a low cost model. Programs are typically structured to be
within the regulatory limits that result in the product having lower regulatory requirements to ensure
the cost of regulation does not make the product unviable. For example, the AML Act removes many
of the regulatory burdens of programs where cards are restricted to being loaded with amounts of less
than $1,000 (or $5,000 if no cash out is available). This has resulted in many products evolving to
incorporate those limits as “Know Your Customer” requirements of the AML Act would otherwise
impose a cost that could not be recovered or sustained by the card promoter.
Indue acknowledge the work of these regulators to put in place sensible regimes that enable
consumers to benefit from these programs being available under “light touch” models whilst ensuring
the integrity of the payment system by imposing a similar regime as applies to debit and credit cards
for those prepaid programs where such requirements are appropriate. We submit that if the RBA is
contemplating more regulation for prepaid cards it should continue to adopt a view that is consistent
with the other system regulators and ensure the regulatory burden is only applied to appropriate types
of products to ensure the ongoing viability of prepaid card products that have been embraced by
consumers.
Conclusion
In conclusion, we thank you for the opportunity to comment on your consultation document and look
forward to the opportunity to discuss our submission with the Bank. In the meantime, if you have any
questions, feel free to give me a call on 07 3258 4248.
Yours sincerely
Michael Swannell
Executive Manager - Payments
PO Box 523, Toowong QLD 4066
phone +61 7 3258 4222 fax +61 7 3258 4211
email indue@indue.com.au web indue.com.au
ABN 97 087 822 464