Review of Card Payments Regulation Box A: Financial System Inquiry (FSI) Recommendations

The FSI Final Report made two recommendations with respect to payments regulation.

Recommendation 16: Clearer graduated payments regulation

  • Enhance graduation of retail payments regulation by clarifying thresholds for regulation by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.
  • Strengthen consumer protection by mandating the ePayments Code. Introduce a separate prudential regime with two tiers for purchased payment facilities.

Recommendation 17: Interchange fees and customer surcharging

  • Improve interchange fee regulation by clarifying thresholds for when they apply, broadening the range of fees and payments they apply to, and lowering interchange fees.
  • Improve surcharging regulation by expanding its application and ensuring customers using lower-cost payment methods cannot be over-surcharged by allowing more prescriptive limits on surcharging.

The Government's response to the FSI Report endorsed both these recommendations.

The Review has largely focused on issues relating to recommendation 17. While the Bank's decisions have reflected its obligations under the Payment Systems (Regulation) Act, changes to the standards are all also consistent with the recommendation's objectives. These were to (i) clarify regulation and enhance competitive neutrality between system providers and (ii) improve the efficiency and effectiveness of price signals, and reduce the potential for cross-subsidisation between customer groups and merchant groups.

Consistent with the FSI's recommendation, the Bank's new interchange standards have broadened interchange fee regulation to capture all fees paid to card issuers, including in companion card arrangements. While the new standards have not replaced the weighted-average benchmarks with hard caps, nor expressed the caps as the lesser of a fixed amount and a fixed percentage of transaction values, they include some elements of the recommendations with respect to the level and nature of interchange fee caps. In particular, the debit benchmark has been lowered, and the weighted-average caps have been supplemented by ceilings on individual interchange categories. The Board has chosen not to publish fixed thresholds for when system providers will be regulated, but has signalled some of the factors that would be relevant for decisions to designate additional systems.

Regarding surcharging, the new standard has not incorporated the three-tier model recommended in the FSI Report. However, consistent with the recommendation's aims, the new standard – together with the ACCC's new enforcement powers – will ensure that consumers using a particular payment method are not surcharged an amount greater than the merchant's cost of acceptance for that method.

The first recommendation relates mostly to graduation of regulation, which ‘involves providing lower-intensity regulation for new entrants that pose smaller risks to the system — that is, it targets regulation to where it is most needed in the system’ (FSI Report, pp 144–5). It also relates mostly to consumer protection and prudential issues that are the responsibility of other regulators, namely ASIC and APRA. In the case of the Bank's competition and efficiency and risk responsibilities, the Bank already has the ability to apply graduated regulation in that the decision to designate and regulate a payment system is not automatic but requires a judgement that it is in the public interest to do so. However, consistent with the Government's response to the FSI and its more recent policies with respect to the ‘fintech’ industry, the Bank will work with ASIC and APRA to ensure that the regulatory framework is appropriately graduated and encourages innovation. The Bank will also work with the Treasury and ASIC with respect to any regulatory issues involving new payment systems, including digital currencies.