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

The level and growth of scheme fees

Maintain the status quo

Some schemes opposed the proposed expectation that scheme fees should not rise further without justification and stated that the RBA had not shown that intervention was warranted. They stated that the current regulatory framework was appropriate because:

• The international schemes already face competitive pressure on the pricing of scheme fees via alternative payment methods (such as real-time payments, BNPL and digital wallets).
• Scheme fees are set through competitive negotiations with each issuer and acquirer and there is strong competition among the four-party schemes, particularly on debit transactions.
• The RBA’s proposed expectations are unclear, including its expectations for the schemes to engage with PSPs and issuers on the reasons for new fees or fee increases beyond existing fee disclosure measures already in place from schemes. A scheme stated that innovation was not a discrete activity that can be mapped to specific fee changes but tended to be a continuous development process.
• Applying expectations only to designated schemes to justify fee changes would provide an unfair competitive advantage to unregulated schemes, which are not required to justify fee changes.
• Transparency measures should be focused on end-user prices that merchants ultimately pay rather than on wholesale fees. A scheme supported the RBA maintaining its current approach to transparency by continuing to publish merchant service fees (MSF) data. They noted that MSFs are disclosed and monitored and pointed to stable or declining average MSFs as evidence that competition is functioning effectively.
• Limiting the way scheme fees are set would reduce innovation and investment in the Australian payments system.

Some schemes opposed direct regulation of scheme fees, such as fee caps. In addition to the reasons outlined above regarding the competitive nature of card payments, they stated that:

• Scheme fees fund critical investments in areas such as security, fraud prevention, and infrastructure resilience. Capping or restricting these fees could undermine innovation, reduce system safety, and degrade service quality. Schemes stated that flexibility in setting scheme fees is essential to maintain resilience against evolving cyber threats and fraud risks, which could otherwise increase systemic risk.
• There was no evidence that measures such as scheme fee caps would increase competition and efficiency. There was no evidence of harm in relation to scheme fees and competition.
• Cost-based pricing (as a potential benchmark for a cap on scheme fees) is not suitable for payment markets that are driven by innovation and competition. One scheme outlined that this would be impractical to implement across a global network and many costs are not attributable to specific locations or service lines.
• Regulatory uncertainty and increased compliance burdens could deter long-term investment in Australia, potentially delaying the introduction of new technologies.
• Scheme fees are only a small component of overall merchant service fees such that a substantial fee reduction would only marginally affect merchants’ costs.

Set an expectation that any further increases in scheme fees require adequate explanation by schemes

A subset of stakeholders expressed qualified support for the RBA’s expectation-based approach but stated that expectations alone are unlikely to be effective without the credible threat of further regulatory intervention, such as fee caps. Some stakeholders recommended a staged approach, where expectations are implemented first, with direct regulation remaining a necessary backstop.

A few submissions expressed support for the expectation and argued that no further regulatory action is needed at this stage, stating that:

• Least-cost routing provides sufficient competitive discipline.
• Understanding the drivers of scheme fees is essential before considering further regulatory measures, as it risks unintended consequences, such as increased complexity or operational costs.

Some stakeholders raised concerns about the enforceability of the expectation, noting that without binding obligations or oversight, schemes may not change their behaviour:

• A stakeholder cited the ACCC’s Foreign Currency Conversion Services Inquiry, stating that voluntary transparency measures failed to address complex and opaque pricing structures.
• Some stakeholders called for standardised disclosure formats and clear benchmarks for what constitutes an ‘adequate’ justification to ensure that justifications for fee increases can be meaningfully assessed.

Set a cap on scheme fees

Many stakeholders advocated for direct regulation, including a cap on scheme fees:

• Many submissions expressed concerns about the current level and growth of scheme fees and stated that caps were critical to address this growth and control costs.
• Some stakeholders stated that removing surcharging reduces competitive pressure on scheme fees, increasing the risk of cost migration from capped interchange fees to uncapped scheme fees, as merchants lose a key mechanism to signal payment costs. Stakeholders cited the UK experience, where surcharge bans coincided with a 25 per cent rise in scheme fees between 2017 and 2023, contributing to merchant services fees not declining over this period,⁵ and EU evidence showing significant scheme fee growth post-interchange caps.⁶
• Some stakeholders stated that the international card schemes leverage their market position to charge opaque and excessive fees, and to regularly adjust those fees, allowing for supra-competitive outcomes and inflated baseline costs.
• A bank suggested that the RBA should conduct a cost study on scheme fees with international comparisons.

Alternative options

Several stakeholders proposed alternatives not considered in the Consultation Paper, which can be grouped into two broad categories:⁷

• Oversight and transparency measures
  • Regulatory oversight of fee increases: A form of this proposal was a ‘comply-or-explain’ framework, where if fee increases outpace a benchmark (e.g. transaction growth or inflation), the increase must be justified to the regulator, with power to reject unsubstantiated increases.
  • Industry standards: Some submissions called for enforceable standards on fee increases, notice periods, and transparency obligations, proposing that stronger measures were necessary to improve scrutiny of scheme fees and prevent scheme fees from offsetting proposed reductions in interchange.
• Structural competition measures
  • Some stakeholders proposed mandating dual-network credit cards together with extending LCR to credit transactions.
  • Some stakeholders advocated for mandatory LCR (including for mobile wallets).