Review of Retail Payments Regulation – Issues Paper –
November 2019
2. Developments in Retail Payments

2.1 The Payments Landscape

Over the past two decades, the Australian retail payments system has moved from one where the dominant payment methods were cash and cheques to one where electronic payment methods are near-ubiquitous. In particular, there has been strong growth in the use of card payments, as well as in the use of the direct entry system and BPAY (Graph 1). The use of the New Payments Platform (NPP) has also increased markedly since its launch in February 2018 (Graph 2).

Graph 1
Graph 1: Transactions per Capita
Graph 2
Graph 2: New Payments Platform

Over recent years, new technologies have had a significant impact on the payments market. The widespread adoption of mobile phones has seen the launch of digital wallets like Apple Pay, Samsung Pay and Android Pay, and a consortium of banks in Australia have established a real-time payments application called ‘Beem It’. ‘Buy now, pay later’ (BNPL) services have also emerged, with very strong recent growth in their use. These innovations have all generally relied on existing payment rails for clearing and settlement of transactions – i.e. supplementing existing card payment methods with new features, channels or business models.

While they have not been widely used to make payments, the emergence of crypto-tokens has caused policymakers to review their potential implications. These include recent proposals for so-called ‘global stablecoins’, which are currently being assessed by policymakers in many countries and in international groups such as the Financial Stability Board and the Financial Action Task Force. A number of central banks have also been considering policy issues relating to the possible issuance of central bank digital currencies (CBDC). Among these have been the People's Bank of China, which has periodically indicated that it is considering CBDC issues, and Sweden's Riksbank, which has been assessing the case for an ‘e-krona’ in light of a rapid reduction in the use and holding of cash.

The role of cash in Australia has not declined to the extent observed in Sweden. Unlike in Sweden where cash outstanding is declining, in Australia it has continued to rise and as a share of GDP is as high as it has been in many decades. But the 2016 iteration of the Bank's triennial Consumer Payments Survey (CPS) showed that cash was used in 37 per cent of the number of transactions, down from around 70 per cent in the 2007 survey (Graph 1). The Bank conducted another CPS during October 2019 and expects to publish the results in the first half of 2020. This will provide an update on the day-to-day use of cash and of how the use of other payment methods is changing. A number of jurisdictions have given some consideration to the impacts of declines in the use of cash and whether there are any policy issues that arise in relation to access to cash, in particular for groups in society that rely on it more heavily. The Bank will continue to monitor issues relating to access to cash.

As part of a longer-term trend, more payments are taking place online or remotely compared with face-to-face. In part, this reflects the way that purchasing habits have changed, with more shopping taking place online. Another contributing factor is the growth of online subscription services and in-app payments (e.g. where payment details are provided once and then stored – typically in tokenised form – for future use).

Other countries have seen a rise in mobile payments using quick-response (QR) code technology. To date, the most prominent use case for QR code payments in Australia has been a growing number of retailers using them to facilitate payments from tourists from China, where take-up of QR-code based mobile payments has been extensive. While the number of use cases is growing, the limited use of QR code payments in Australia to date largely reflects the very wide use of card payments and near-ubiquity of payment terminals that accept contactless payments using near-field communication (NFC) technology.

2.2 The Bank's Regulations and the 2015–16 Review

Under the Payment Systems (Regulation) Act 1998 (PSRA), the Bank can designate payment systems, and establish standards and access regimes for designated systems. To date, the Bank has designated nine card payment systems:

  • the Mastercard and Visa credit card systems and the American Express companion card system
  • the eftpos, Debit Mastercard and Visa Debit systems
  • the eftpos, Mastercard and Visa prepaid card systems.

The Bank has determined three standards under the PSRA. Two of these regulate interchange fees and net payments to card issuers (one relating to credit card systems, the other relating to debit and prepaid card systems). A third standard applies to all nine designated systems and regulates certain aspects relating to merchant pricing, precluding card schemes from applying ‘no-surcharge’ rules. Some background on interchange fees and surcharging is set out in ‘Box A: Interchange Fees and Surcharging: Key Concepts’.

The Bank has also established access regimes under the PSRA applying to the designated Mastercard and Visa credit card systems. These require those systems to have in place transparent eligibility and assessment criteria for scheme membership and to report information about membership and applications to the Bank. These criteria should not discriminate between entities or classes of entity, except to the extent reasonably required to assess and address the risks arising to the scheme or its participants, merchants or cardholders.[1]

Over 2015–16, the Bank conducted a comprehensive review of the regulatory framework for card payments, guided by the Board's mandate to promote competition and efficiency in the payments system. This Review concluded in May 2016 with the release of a conclusions paper and the publication of new surcharging and interchange standards.[2]

The revised surcharging standard, which sought to address issues around excessive surcharging, took effect for large merchants in September 2016 and for small merchants in September 2017. The standard preserves the right of merchants to surcharge but ensures that consumers using payment cards from designated systems cannot be surcharged in excess of a merchant's cost of acceptance for that card system. Additionally, from June 2017, acquirers and payment facilitators have been required to provide merchants with easy-to-understand information on the cost of acceptance for each designated scheme that would help them in decisions regarding surcharging. These reforms work in conjunction with legislation passed by the Government in 2016 that banned excessive surcharges and provided the Australian Competition and Consumer Commission (ACCC) with enforcement powers.

Following discussions with the Bank, several schemes that were not formally captured by the Bank's new standard modified their surcharging rules in line with the Bank's standard. American Express and Diners Club updated their undertakings to the Bank in relation to ‘no-surcharge’ rules, while UnionPay International provided new undertakings to the Bank. PayPal removed its ‘no-surcharge’ rule in Australia and introduced provisions in its merchant terms and conditions aimed at preventing merchants from surcharging above their costs of acceptance.

The revised interchange standards came into effect in July 2017. Under these standards, the weighted-average interchange fee benchmark for debit cards was reduced from 12 cents to 8 cents, and applies jointly to debit and prepaid cards in each designated scheme. The weighted-average benchmark for credit cards was maintained at 0.50 per cent. These weighted-average benchmarks are now supplemented by ceilings on individual interchange rates: 0.80 per cent for credit; and 15 cents, or 0.20 per cent if the interchange fee is specified in percentage terms, for debit and prepaid. To prevent interchange fees drifting upwards in the manner that they have previously, compliance with the benchmark is now assessed quarterly, based on transactions in the preceding four quarters, rather than every three years.

The interchange standards also included new provisions relating to ‘net compensation’. To prevent circumvention of the interchange fee caps and benchmarks, the standards contain a requirement that issuers may not receive ‘net compensation’ from a scheme in relation to card transactions. This requirement is intended to limit the possibility that schemes may use payments and other incentives to issuers (funded by higher scheme fees on acquirers) to effectively replicate interchange fee payments. In 2018–19, the Bank conducted a consultation on the operation of the net compensation provisions and made some changes aimed at clarifying and improving their operation.

Box A: Interchange Fees and Surcharging: Key Concepts

Interchange fees

An interchange fee is a fee charged by the financial institution on one side of a payment transaction to the financial institution on the other side of the transaction. They are most commonly seen in card transactions, although can arise in other payment methods.

A typical card transaction (Figure 1) involves four parties – the cardholder, the cardholder's financial institution (the issuer), the merchant and the merchant's financial institution (the acquirer). For most card transactions, the interchange fee is paid by the acquirer to the issuer. Interchange fees can have important implications for the prevalence and acceptance of different cards as well as the relative costs faced by consumers and merchants. In contrast to normal markets for goods and services, competition in payment card networks can actually drive fees higher.

Figure 1
Figure 1: Stylised Flows in a Card Transaction

Financial institutions typically charge fees to their customers for payment services. Cardholders are charged by their financial institution in a variety of ways. This typically includes monthly account-keeping fees for debit cards and annual fees for credit cards plus interest on borrowings that are not repaid by a specified due date.

Merchants receiving payments are also typically charged by their financial institutions. The fees paid by merchants usually depend on the payment method. For card payments, merchants are usually charged a ‘merchant service fee’ for every card payment they accept. Some merchants are also charged a fee by their financial institution to rent a terminal to accept cards.

In contrast, interchange fees are paid between financial institutions and are present in many, but not all, card systems. Interchange fees are often not transparent; cardholders and merchants do not typically see them. But they have an impact on the fees that cardholders and merchants pay.

When a card payment is made, interchange fees are paid by the merchant's financial institution to the cardholder's financial institution. This has two effects. First, the merchant's financial institution will charge the merchant for the cost of providing it with the acceptance service plus the fee that it must pay to the card issuer (the interchange fee). The higher the interchange fee the merchant's financial institution must pay, the more the merchant will have to pay to accept a card payment. Second, since the card issuer is receiving a fee from the merchant's financial institution every time its card is used, it does not need to charge its customer – the cardholder – as much. The higher the interchange fee, therefore, the less the cardholder has to pay. In effect, the merchant is meeting some of the card issuer's costs which can then be used to subsidise the cardholder. Indeed, with rewards programs, the cardholder may actually be paid to use his/her card for transactions and competition tends to involve offering incentives for a consumer to hold and use a particular network's cards. A network that increases the interchange fee paid by the merchant's financial institution to the cardholder's financial institution enables the latter to pay more generous incentives, and can increase use of its cards.

However, the competitive response from other networks is typically to increase interchange rates.

That is, competition in well-established payment card networks can lead to the counterintuitive result of increasing the price of payment services to merchants (and thereby leading to higher retail prices for consumers). This phenomenon has been most clearly observed in the US credit card market, which has not been subject to any regulation. Prior to the Bank's reforms this had also occurred to an extent in the Australian credit card market, with average interchange rates in the MasterCard and Visa systems tending to rise.

When one compares the incentives for cardholders and merchants and for their financial institutions the implications of the interchange flows described above are clear. Other things equal – in particular assuming no regulatory intervention and no surcharging by merchants to offset the differences in their costs – cardholders will have a preference to use a card from a network where larger interchange payments flow to the card-issuing financial institution, while merchants will prefer to receive cards from a network with lower interchange fees (or fees flowing in the opposite direction). In circumstances where multiple card networks are widely accepted by merchants (as in Australia and many other developed countries), the consumer typically decides which means of payment is tendered and used in a transaction. Given this, financial institutions will have an incentive to issue cards from networks where interchange fees flow from the merchant's financial institution to the cardholder's financial institution, and competition may lead networks to increase the size of such fees. The generosity of cardholder rewards programs will rise, as will the cost of payments to merchants.

Interchange fees may be appropriate in some circumstances, particularly in the establishment of new systems where they may be necessary to rebalance costs between the sides of the market and ensure that both sides of a market have an incentive to participate. However, the major card schemes are mature systems, and regulators in many countries have reached the judgement that their cards are ‘must take’ methods of payments – that is, that merchants have little choice but to accept their cards. In practice, with interchange fees being used to incentivise issuers to issue cards from a particular scheme and cardholders to use that card, the tendency has been for competition between mature card schemes to drive up interchange fees and costs to merchants, with adverse effects on the efficiency of the payments system.

Since the early 2000s, the Bank has had in place weighted-average interchange fee benchmarks to constrain the potential for interchange fees to distort efficient payment choices and to underpin a fall in the overall resource cost of payments. Further reforms following the 2015–16 Review imposed maximum caps on interchange fees, as a way of addressing some large differences that had emerged between interchange fees that were being paid by small merchants and the lower ‘strategic’ rates applying to larger merchants


Merchants face a range of costs when they accept payments. In some cases, merchants might wish to charge a different price to a consumer depending on what type of payment method they use. A surcharge on a particular payment type or types helps the merchant send a signal to a customer that some payment methods are more or less costly for them. Card schemes in the 1990s in Australia had in place ‘no-surcharge’ rules that prevented merchants from doing this. The effect of this was that customers using low-cost payment methods were effectively cross-subsidising the payment choices of customers who elected to pay with high-cost cards.

The Bank's initial reforms required card schemes to remove these ‘no-surcharge’ rules, enabling merchants to pass on the cost of card transactions if they wished, resulting in improvements in price signals to cardholders. The right of merchants to surcharge for expensive payment methods is important for payments system efficiency and helps to hold down the cost of goods and services to consumers generally.

While most merchants tended to either not take up the option of surcharging, or applied surcharges at percentage rates that reflected their acceptance costs, some concerns emerged about possible cases of excessive surcharging by some merchants, and a tendency towards the ‘blending’ of surcharges for higher- and lower-cost schemes. In response, new powers were given to the ACCC in 2016 to investigate and take action against excessive surcharges, and this was supported by the Bank defining the concept of a ‘permitted cost of acceptance’ in its surcharging standard, in terms of the merchant's average cost of acceptance for each scheme. Merchants are provided with annual and monthly information by their financial institutions so that they are readily able to calculate their cost of acceptance.

The effects of reform in Australia

Card payments have continued to grow strongly in Australia since the initial implementation of the Bank's reforms in 2003 (Graph 3). Furthermore, data on merchant service fees indicate that interchange fee regulation and surcharging have led to overall lower costs for merchants in accepting card payments (Graph 4). Australia now has a relatively low-cost payments system by international standards, most notably compared with the United States (Graph 5).[3]

Graph 3
Graph 3: Payment Card Transactions
Graph 4
Graph 4: Total Merchant Fees
Graph 5
Graph 5: Merchant Service Fees

2.3 Other Recent Regulatory Developments

Since the 2015–16 Review, the Bank has been involved in a number of other regulatory activities in relation to retail payments systems:

  • In late 2016, the Bank undertook a public consultation in response to concerns about possible restrictions on the ability of card issuers and mobile wallet providers to provision both networks on dual-network debit cards (DNDCs) for use by cardholders. Such restrictions could have the effect of reducing competition and efficiency in the payments system. Following discussion with industry participants through the consultation process, the Bank received commitments from relevant participants addressing its concerns (see Section 3.2.1).
  • In 2018–19, the Bank, with input and assistance from the ACCC, consulted on the functionality of, and access to, the NPP, concluding with a report in June 2019. The report found that the NPP was enabling payments functionality consistent with its aims of addressing key gaps in the payments system. However, the report noted the slow and uneven roll-out of NPP services by some of the major banks, and identified that this had likely affected the development of new functionality and contributed to stakeholder concerns about access to the NPP. The report made a number of recommendations aimed at promoting the timely roll-out of NPP services and development of new functionality, as well as some recommendations on access issues, balancing the potential competition benefits from more open access against the need to maintain safety and security in a real-time payments platform. NPP Australia has responded to the recommendations arising from the report and has published a roadmap of plans to extend the NPP's capabilities, including the development of messaging to support third-party payment initiation and a ‘mandated payments service’ to support recurring and debit-like payments.
  • The Bank has chaired a working group of the Council of Financial Regulators (CFR) that has been reviewing Australia's regulatory framework for stored-value facilities (SVFs). SVFs encompass a range of facilities in which prepaid funds can be used to make payments. In October 2019, the CFR provided a report to the Treasurer, recommending the streamlining of regulatory responsibilities and providing greater flexibility in the regime.

In the past five years, a range of other jurisdictions have undertaken reforms to aspects of their retail payments regulation; these are summarised in ‘Box B: Retail Payments Reforms in Other Jurisdictions’.

Box B: Retail Payments Reforms in Other Jurisdictions

Since the 2015–16 Review, a range of developments in retail payments regulation have occurred in other jurisdictions. These included some new reforms as well as changes to existing regulations. Much of the regulatory focus has been on interchange fees and surcharging rules in card payment systems, although some countries have also begun to consider issues such as competition in acquiring and mobile wallets.

In the case of interchange fees and merchant service fees, tables compiled by the Federal Reserve Bank of Kansas City list 44 jurisdictions as having undertaken action or initiated investigations to date (Hayashi and Maniff 2019). Of these, 18 jurisdictions have taken regulatory action within the past four years.

Where countries have initiated retail payments regulation, this has mostly been to establish rules for interchange fees in credit and/or debit card systems. Some have taken an approach similar to the Bank's reforms that were introduced in the early 2000s and which aimed to promote competition and efficiency in the payments system. A number of jurisdictions have referenced the Australian reforms as influencing their approach.

The European Union (EU) brought a comprehensive package of regulatory reforms for retail payments into effect in December 2015, aiming to create a single EU market for card payments. Under these reforms, interchange fees have been capped at 0.3 per cent for credit card transactions and 0.2 per cent for debit cards. The EC argued that these caps were consistent with the ‘merchant indifference test’ and would promote competition by giving consumers greater choice of payment methods and service providers.[4] Three-party schemes and commercial cards are exempted from the regulation, on the basis that they do not compete directly with retail payment instruments.[5] A review by the European Commission (EC) of the impact and appropriateness of the interchange fee regulation is expected to conclude in mid-2020.

The EU interchange fee rules apply in all countries within the European Economic Area (EEA). However, member states are provided with some scope for national discretion. For example, the United Kingdom decided to apply a weighted-average fee cap of 0.2 per cent for domestic debit card transactions, rather than the 0.2 per cent per-transaction cap. The UK government considered that percentage-based caps would result in higher interchange fees for many UK merchants, since the majority of fees for debit card payments in the UK are capped at a fixed value amount.

A 2018 amendment to the EU interchange fee regulation requires the structural and legal separation of payment card schemes and processing entities. This is intended to enhance competition by reducing the disadvantage faced by independent payment processing entities. Following the new legislation, Visa Europe has split its scheme and processing entities into separate business units.

More recently, the EC has obtained legally binding commitments from Mastercard and Visa regarding inter-regional interchange fees. Under these commitments, the interchange fees on card-present transactions made in the EEA using consumer debit and credit cards issued outside the EEA will also be capped at 0.2 and 0.3 per cent of transaction value, respectively. Caps of 1.15 per cent for debit and 1.50 per cent for credit card payments will apply for online transactions. The commitments, which will come into effect in December 2019, were intended to avoid ‘anti-competitively increased prices for European retailers accepting payments from cards issued outside the EEA’, which ‘in turn lead to higher prices for consumer goods and services’.[6]

In Canada, Mastercard and Visa voluntarily reduced their weighted-average interchange fees for all credit and debit cards in 2015 under the Code of Conduct for the Credit and Debit Card Industry in Canada. Following further discussions with the Department of Finance, the major card networks have committed to reduce the average annual interchange rates by an additional 10 basis points to 1.4 per cent on all cards. This will take effect in 2020 for a period of five years. American Express has separately also agreed to support the objectives of the Code of Conduct through bilateral rate agreements with third-party issuers and transparent merchant service fees.

In recent years, ‘no-surcharge’ and ‘honour-all-cards’ rules have also come under increased scrutiny by central banks and other authorities. The Federal Reserve Bank of Kansas City lists 37 jurisdictions as having taken action in relation to surcharges and discounts. Surcharging is permitted in some countries, including Canada and the United States, though it is generally subject to caps associated with consumer protection rights. In contrast, some jurisdictions have prohibited surcharging, either with a policy aim of increasing price certainty and comparability for consumers (such as in the EU and the UK) or to promote the use of card payments (as in India).

The EU banned surcharging on payment methods whose interchange fees are capped under regulation as part of the revised Payment Services Directive (PSD2), which came into force in 2018. According to the EC, regulated interchange fees are capped at a sufficiently low level that surcharging is no longer justified. The UK has extended the ban on surcharging to all non-commercial payment methods, including cards issued by three-party schemes, PayPal and digital wallets. This was intended to level the playing field between payment instruments and increase price transparency for consumers.

In contrast, Visa and Mastercard modified their no-surcharge rules in Canada following a class action settlement with Canadian merchants. Merchants are now allowed to levy surcharges under certain circumstances, although maximum surcharge caps and disclosure requirements apply.

In addition, some regulators have considered policy issues arising from mobile wallets. While, the PSD2 in Europe and the Canadian Code of Conduct have to date mainly focused on consumer privacy and data protection aspects of mobile wallets, the UK has begun to also consider competition issues. The UK Payment Systems Regulator (PSR) conducted an industry consultation to better understand the contactless mobile payments sector and examine the impact of Apple's restriction on access to the NFC chip in Apple devices, which impinges on the ability of other providers to install their own applications for contactless mobile payments. In 2018, the PSR concluded that there had not yet been any damage to innovation that required regulatory action, but said it intended to keep the mobile payment sector under observation.[7] In September 2019, the EC initiated an informal investigation into Apple's NFC restriction, seeking information from market participants about any potential anti-competitive behaviour and abusive conduct. Competition issues involving Apple Pay have also arisen in Switzerland.

The PSR is also undertaking a review of card-acquiring services, and in particular whether the changes in interchange and scheme fees in the UK have flowed through to the payment costs faced by merchants. A report on the interim conclusions is expected to be published in Q1 2020.


The Board has also determined an access regime applying to the ATM system and most recently reviewed this at its August 2019 meeting. Members agreed that while the policy case for an access regime may not be as strong as when it was introduced a decade ago, it could still serve a useful purpose in promoting fair access to the ATM industry. In particular, it could help promote the evolution of the industry in a way that supports the efficient and sustainable provision of ATM services across the country. Having taken account of the views of stakeholders, the Board agreed to retain the ATM access regime in its current form, with another review to take place in 2–3 years. [1]

See Reserve Bank of Australia (2016a). [2]

See also Stewart et al (2014). [3]

The merchant indifference test is the proposition that interchange fees be set at a level that results in a cost of card acceptance that makes the typical merchant indifferent between accepting a card payment and other widely used forms of payment. For further details, see Rochet and Tirole (2011) and European Commission (2013). [4]

Three-party scheme cards issued through a licensee, agent or co-branding partner are not exempt from the regulation. [5]

See European Commission (2019). [6]

See Payment Systems Regulator (2018). [7]