Review of Retail Payments Regulation Summary of Submissions to the Review of Merchant Card Payment Costs and Surcharging Consultation Paper

Interchange

Domestic interchange (excluding commercial cards)

Many stakeholders supported either maintaining the status quo on domestic interchange caps or reducing the domestic debit benchmark and cap.

Retain the current benchmarks and caps on both debit and credit (status quo)

Most issuers and schemes were in favour of retaining current interchange caps. These submissions stated that reductions in interchange caps would result in:

• Higher costs for cardholders, reduced access to credit and a shift to higher-cost products such as payday loans and buy-now-pay-later (BNPL) products. Large issuers reported that issuers might increase interest rates, cardholder fees and reduce interest-free periods. These institutions stated that higher costs would reduce access to credit for low-income individuals and families and small businesses that rely on credit cards, and shift cardholders to more expensive forms of credit such as payday loans and BNPL products.
  • Issuers noted that credit card interest rates are significantly lower in Australia than in the United Kingdom.
  • A few large issuers stated that they would tighten their credit assessments if revenue from credit interchange fell. Modelling commissioned by an issuer indicates that BNPL providers would benefit substantially from customers switching.
• A reduction in rewards points received by credit card holders and lead to a shift to higher cost products such as American Express. A banking industry group and several large issuers noted reductions in the generosity of credit card reward programs in Europe and the United Kingdom following reductions in credit interchange caps:
  • Many submissions stated that American Express would gain market share because they would be able to offer more benefits for consumers by virtue of not being subject to the RBA’s interchange regulations. An expert report commissioned by a scheme calculated that the credit interchange savings would be fully offset if American Express significantly increased its market share. Modelling commissioned by an issuer indicates that American Express would benefit substantially from consumers switching.
  • Many submissions suggested expanding the scope of the Review to incorporate three-party schemes following the passage of the reforms to the Payment Systems (Regulation) Act 1998.
• Lower fraud protection for cardholders. A scheme and a banking industry group stated that issuers might choose not to invest in technologies that would offer fraud protections to their cardholders. By contrast, a bank indicated that issuers are incentivised to invest in fraud prevention regardless of the level of interchange to attract cardholders and depositors (in the case of authorised deposit-taking institutions).
• Less competition in the issuing market. Lower interchange revenue could threaten the viability of small issuers that are heavily reliant on interchange, deter new entrants and risk entrenching large issuers. A scheme stated they were aware that some small issuers were delaying or reconsidering launching new products because of the RBA’s interchange proposals. A large issuer and smaller issuers also stated that the proposed interchange levels would be insufficient to cover their issuing costs, which are said to be higher than the averages reported in the Issuer Cost Study.² Smaller issuers also stated that larger issuers were more able to cross-subsidise their issuing business with other revenue streams, which puts smaller issuers at a competitive disadvantage.
• Less flexibility for schemes to offer strategic rates to large merchants by capping the range of interchange rates that schemes can set. A large retailer and a group representing large merchants were of the view that current differences in interchange rates paid by small and large merchants are justified and should be maintained. They stated that large merchants face higher regulatory costs, are less risky for issuers and make significant investments in, and drive adoption of, new payments technology.
• Lower investment in new technologies such as agentic commerce by reducing issuer revenue and the ability for the card schemes to set differential interchange rates to incentivise take-up of new innovations. A scheme stated interchange is required to fund fraud protection as well as other business productivity features.
• Lower productivity. A PSP stated that the RBA’s proposal would threaten the viability of B2B commerce platforms.
• Unnecessary intervention in the dual-network debit card market given interchange rates are already below the benchmark due to strong competition between schemes.
  • An issuer stated that reducing caps on debit would go beyond locking in recent declines in debit interchange rates because large merchants have sufficient bargaining power to continue negotiating strategic rates at proposed levels (due to least-cost routing (LCR) driving competition among schemes to offer low interchange to strategic merchants).
  • An issuer noted that there are fewer levers for issuers to adjust revenues in the debit card market to offset reductions in interchange. Unlike credit cards, debit cards do not generate interest revenue for issuers, and most do not have annual or account fees. In addition, the Banking Code of Practice prevents the introduction of account fees for basic transaction accounts for low-income customers.
  • A scheme proposed that debit caps should be lowered for single-network debit cards only because merchants cannot least-cost route those transactions.
  • An issuer stated that smaller financial institutions may currently receive interchange that is above the weighted average. The proposed caps would therefore reduce the interchange revenue for these institutions.
  • Another issuer stated that the cents-based benchmark results in interchange revenue remaining fixed, while some costs rise with the general price level, resulting in the real interchange received falling even as interchange settings remain the same.
• Interchange that is too low relative to peer jurisdictions. Interchange caps on debit cards are already lower than in Europe, New Zealand and the United Kingdom. Unlike in Australia, commercial credit card interchange is not capped in these jurisdictions. A banking industry group and a scheme were also of the view that comparisons to Europe and the United Kingdom were inappropriate because Australia has smaller transactions volumes. A banking industry group also opposed comparing the jurisdictions on the basis that Australian issuers incur higher cash distribution costs due to the country’s vast and dispersed geography.
• Mobile wallet providers such as Apple Pay receiving a large share of credit interchange revenue. Several stakeholders referred to public reports that Apple Pay charge issuers up to 15 basis point per transaction on credit.

Reduce the debit and credit interchange caps

Many submissions supported the interchange caps outlined in Options 2 and 4 (i.e. reducing the credit cap to 0.3 per cent and reducing the cent-based debit benchmark and cap to 6 cents and the ad-valorem cap to 0.12 per cent). Some submissions advocated for interchange caps lower than those proposed in these options. Lower interchange caps were broadly supported by consumers, merchants, industry groups, PSPs and government agencies. These submissions stated that lowering interchange caps would be justified because:

• Interchange fees might no longer be necessary or justifiable in a mature card market. Some submissions noted that issuers no longer need to be incentivised to issue cards nor do consumers need encouragement to use cards.
• It would reduce the cross-subsidisation of large merchants by small merchants. An issuer noted that large merchants on strategic rates pay interchange of around 1.5 cents per transaction, which is significantly below issuer costs and well below the proposed caps.
  • Several submissions suggested alternative measures to restrain merchant cross-subsidisation including banning strategic rates or volume-based discounts. A large issuer stated strategic rates should be capped at a fixed discount of 30 per cent to the rate available to small merchants (as opposed to 60–80 per cent currently).
  • A PSP stated that the disparity in interchange fees between large and small merchants would reduce if interchange benchmarks and caps are lowered.
  • A few submissions supported a floor on interchange to narrow the range between interchange paid by small and large merchants.
• There would be less cross-subsidisation of credit cardholders by debit cardholders if the difference in interchange between those cards was narrowed. An issuer stated that interchange on debit and credit should be capped at the same rate to fully remove this cross-subsidisation. A small merchant group advocated for caps set at close to zero.
• Issuers have demonstrated they can raise revenue in ways that align more closely with a ‘user pays’ framework.
• Fraud rates are low by global standards and have been falling according to data published by AusPayNet. Several submissions proposed that interchange caps should be reduced as a result. A few submissions suggested that higher caps could be maintained for transactions that have higher fraud risks (e.g. card-not-present and/or non-tokenised transactions).
• There is no evidence that lowering interchange would result in higher incidence of fraud. Some global PSPs provided evidence that fraud rates are not correlated with the levels of interchange caps. This finding held across jurisdictions that cap interchange at or around the levels proposed in the Consultation Paper.
• It would bring Australia in line with some peer jurisdictions on consumer credit, with several noting that the current caps of 0.8 per cent are significantly above the caps of 0.3 per cent on consumer credit that apply in the European Economic Area (EEA) and the United Kingdom.
• Lowering interchange has not reduced availability of consumer credit in other jurisdictions.
• Current interchange levels have allowed issuers to ‘double dip’ by compensating issuers for services for which they separately charge merchants. For example, some merchants noted that they pay for fraud and chargeback protection through interchange (which accrues to issuers) but are also separately charged by issuers for dispute management.

Many submissions stated that merchants would not receive the full benefits of any interchange reductions. Several noted that European merchants did not receive the full benefit of interchange savings from the Interchange Fee Regulation because acquirers and schemes increased their fees.

Other options

A few large merchants supported Option 3 (reduce credit benchmark to 0.3 per cent and cap to 0.5 per cent). They stated this option would reduce overall costs but retain sufficient flexibility for strategic rates.

Some submissions stated that the RBA should consider the following policies that were not covered in the Consultation Paper:

• Introduce differential interchange caps for card present and card-not-present transactions to account for differences in fraud rates and future product developments that are more prominent in card-not-present transactions such as agentic commerce. This was raised by a few issuers and a large merchant.
• Lower interchange on debit and credit to close to zero. This option was supported by a small merchant group, which noted that interchange caps could be lowered further because the proposed caps remain well above issuer costs. The small merchant group indicated that higher interchange caps could be set in segments with higher fraud risks and for overseas transactions.
• Introduce targeted programs aimed at lowering the interchange fees paid by small businesses. This was raised by a group representing banks, three large issuers and the international schemes.
• Limit ad valorem fees to card-not-present transactions for debit because there is no justification for charging ad valorem fees on in-person transactions with tokenised wallets. A small merchant group stated that all ad valorem fees should be expressed as the lowest of an ad valorem or cent-based fee.
• Pause interchange reforms until the impact of the proposed measures on surcharging and transparency can be measured.

Commercial cards

Most submissions that supported interchange reductions did not differentiate between consumer and commercial cards.

A few submissions specifically supported capping interchange on commercial cards at the same rate as consumer cards because:

• Eligible issuer costs are similar on both commercial cards and consumer cards. On this basis, it is difficult to justify charging differential interchange rates across those card types.
• Issuers commonly pass on a portion of their commercial card interchange revenue to cardholders in the form of cash rebates. This practice was confirmed by several issuers. Some submissions viewed this as an indication that interchange on commercial cards was too high and questioned whether merchants should be funding this practice through interchange.

Apply separate interchange regulation to commercial credit cards

Some issuers, a group representing payments industry participants, some schemes and some large travel merchants advocated for interchange on commercial cards to be either uncapped or capped at a higher level than consumer cards on the basis that:

• Commercial cards provide significant value to cardholders, including:
  • reconciliation information, expense and tax management capabilities
  • providing a source of working capital for small businesses
  • removing the need to raise invoices and allowing merchants to receive payments earlier. However, this view was disputed by some merchants who noted that they issued invoices and offered similar payment terms regardless of payment methods.
• American Express would gain an unfair competitive advantage over four-party schemes. Many submissions stated that American Express would grow its share of the corporate card market significantly from an already dominant position, which could raise merchant payment costs.
• Some issuers could stop issuing commercial card products:
  • Some submissions reported that some new issuers rely on commercial cards to cover costs due to their high interchange rates.
  • A small issuer stated they would consider withdrawing from this segment.
  • According to a submission, Citibank and HSBC exited the Chinese commercial card market due to reductions in commercial card interchange to 0.45 per cent.

• Issuers are less able to recoup costs via other means because many commercial cards are charge cards that are paid off in full every month and therefore do not incur interest.
• Commercial cards have fewer viable substitutes than consumer cards. An issuer stated that cash is less available for B2B transactions. However, several submissions noted the higher prevalence of A2A payment methods for B2B transactions.
• Commercial cards are more expensive to issue than consumer cards according to a group representing the payments industry. They stated that increasing the number of small issuers surveyed in the issuer cost study could have resulted in higher aggregate costs. An issuer also claimed that their costs of issuing commercial cards are larger than their costs of issuing consumer cards.
• Peer jurisdictions do not regulate interchange on commercial cards. Interchange on commercial cards is currently uncapped in the EEA, the United Kingdom and New Zealand. Interchange on commercial credit cards generally exceeds 1.5 per cent in those jurisdictions.

Small issuers

A few submissions commented on whether small issuers should be treated differentially under the RBA’s interchange framework.

A few issuers and a large merchant proposed that all issuers should be subject to the same interchange regulation on the basis that:

• Small issuers already receive regulatory relief by being exempt from the RBA’s expectation on dual-network debit cards.³
• Participants in the payments system should not have to subsidise others that are inefficient or have high cost bases.
• Smaller issuers might be more incentivised to invest in lower-cost payment methods if they are not reliant on artificially high interchange revenue. This would drive system efficiency.
• Exemptions could have distortionary effects or offer opportunities for regulatory arbitrage.

Applying differential treatment to small issuers

Small issuers and some fintechs were in favour of having a higher interchange cap for small issuers or exempting them from interchange regulation altogether because:

• The proposed debit interchange cap would be below small issuer costs:
  • An issuer stated its debit card issuing business was already loss-making.
  • According to an issuer, small issuers lack the scale to break even because most issuer costs are fixed.
• Interchange revenue would fall by a disproportionally larger amount for small issuers than larger issuers. The single-network debit interchange rate, which is the average interchange rate earned by small issuers, is around 8 cents. By contrast, the debit interchange rate on dual-network debit card is below 6 cents due to greater competition between schemes.⁴
• Small issuers rely heavily on interchange revenue to cover their issuing costs because they have fewer alternative sources of revenue than larger, more diversified institutions. Several smaller issuers stated that large banks used their lending business to cross-subsidise their issuing business. Other small issuers stated that they would be unable to raise cardholder fees because their customers would switch to larger competitors, particularly if larger institutions did not raise their fees.
• Some schemes charge small issuers significantly higher net scheme fees than the fees charged to larger issuers.
• Competition in the card issuing market would decline if lower interchange forced small issuers to exit and/or deterred new entrants.
  • A small issuer would consider exiting the Australian market if interchange were reduced to the levels proposed in the Consultation Paper.
  • The number of active card issuers declined by 23 per cent following the introduction of the Interchange Fee Regulation in the EEA.
  • Interchange caps should be set sufficiently high to sustain new entrants.
• A small issuer exemption would only slightly increase total costs because small issuers make up a small part of transaction volumes.

Several submissions suggested that interchange reforms could come into effect at a later date for small issuers to give these institutions more time to prepare for the changes.

Issuer Cost Study

The RBA received the following feedback on the Issuer Cost Study from several stakeholders:

• Submissions proposed that the definition of eligible costs should be widened to include:
  • Exchange rate risk.
  • Cost of interest-free periods. A scheme cited research that found that credit cards generate higher sales volumes. A few issuers stated that it was not appropriate to use the cash rate in the calculation of the cost of interest-free periods because market funding costs were higher.
  • Disputes and chargebacks. However, some merchants stated they are already being charged by issuers for chargebacks and that compensating issuers via interchange for those costs amounted to double dipping.
  • System and IT costs.
  • Product development costs.
  • Costs that could arise in coming years.
  • A portion of the cost of account overheads, set up and maintenance, card production and delivery, and the cost of capital.
• A few submissions argued that the Issuer Cost Study underestimated issuing costs:
  • An expert report stated that interchange should compensate issuers for costs that provide benefits to merchants.
  • A few issuers stated that the Issuer Cost Study did not capture all costs associated with issuing and processing transactions incurred by issuers.
  • Some smaller issuers stated that larger issuers bring average costs down, and the cost study underestimates costs for small issuers, which have a higher cost base.
• A scheme proposed that the RBA conduct a merchant indifference test to inform the calibration of interchange caps. This test uses the merchant payment costs of an alternative payment method to help determine the interchange merchants should pay on cards. The scheme stated that merchant indifference tests can identify the efficient level of interchange that balances benefits across merchants, consumers, issuers and acquirers. The scheme also stated that this approach would capture the risk of consumers switching to American Express or BNPL products.

Foreign interchange

Some submissions commented on interchange caps for foreign-issued card transactions acquired in Australia.

Continue to exclude foreign card transactions from the RBA’s interchange regulation (status quo)

Some schemes, foreign issuers and a group representing the payments industry proposed that cross-border interchange should remain uncapped for reasons including:

• The proposal is not informed by foreign issuer costs on inbound transactions because the RBA has not collected these data. Several submissions stated that using domestic issuer costs on outbound transactions is not an adequate proxy because issuing costs could differ across jurisdictions and institutions.
• The RBA should conduct a merchant indifference test to calibrate potential interchange caps on foreign caps rather than be informed by a cost study. A foreign issuer stated that a merchant indifference test would capture the full benefits derived by merchants from accepting foreign cards.
• American Express would gain an unfair advantage because they would be able to offer more generous rewards and benefits compared with four-party card schemes.
• High interchange rates are required to compensate issuers for higher fraud rates on cross-border transactions:
  • A scheme stated that fraud rates on cross-border transactions were higher than on domestic transactions.
  • Conversely, one foreign issuer suggested that they should receive higher interchange because they had achieved near-zero fraud rates by issuing tokenised virtual credit cards.
• Reducing cross-border interchange rates would hurt economic growth because foreign tourists would reduce their spending in Australia.

In addition, a scheme stated that the EEA and United Kingdom are not appropriate benchmarks when considering caps on cross-border interchange:

• The equivalent caps in the EEA were originally based on average issuing costs calculated across the 10 largest payment services markets and applied uniformly across all EU member states.
• The scheme stated that the EEA benchmarks are not appropriate even in the EEA context because of deficiencies in the original methodology. For example, the scheme stated that online transactions were inadequately captured and that the sample size was too small in the merchant indifference test conducted by the European Commission. The scheme noted that its preferred methodology suggests cross-border interchange in the EEA should be above 2 per cent for both debit and credit.

Cap interchange on foreign card transactions differentially for card-present and card-not-present transactions

Several large retailers, merchant groups and PSPs supported capping interchange on foreign card transactions on the basis that:

• There is little justification for the current very high levels of interchange fees charged to Australian merchants for these transactions. Cross-border fraud rates at Australian merchants are low by global standards and, while they are higher than on domestic transactions, do not justify interchange rates that are up to 100–150 basis points higher than on equivalent domestic transactions.
• Lower cross-border interchange could facilitate cross-border transactions, digital exports and processing onshore in Australia by reducing the cost of inbound transactions. The RBA received evidence that the volume of cross-border transactions rose after the introduction of interchange caps on those transactions.

Several submissions raised concerns regarding the circumvention of domestic interchange caps using foreign-issued virtual cards:

• A typical example involves an online platform for hotel bookings accepting a domestic card transaction from the booking customer in Australia for an Australian hotel, and then paying the Australian hotel using a foreign-issued virtual card, instead of making a domestic payment, resulting in the Australian hotel paying much higher international interchange and scheme fees.