RESERVE BANK OF AUSTRALIA
Payment Systems (Regulation) Act 1998
Draft Standard relating to the Setting of Interchange Fees in the Designated Credit Card Schemes and Net Payments to Issuers
This notice is published in accordance with the requirements set out in Section 28(2)(a) of the Payment Systems (Regulation) Act 1998 (the Act).
The Reserve Bank of Australia proposes to determine a standard to apply to designated card payment systems in Australia. The standard would replace the standard The Setting of Wholesale (‘Interchange’) Fees in the Designated Credit Card Schemes.
The standard would apply to:
- the American Express companion card system
- the MasterCard credit card system
- the Visa credit card system.
Summary of purpose and effect of the draft Standard
The purpose of the proposed standard is to improve efficiency and competition in the Australian payments system by modifying some existing requirements and introducing some new requirements into the regulatory framework for interchange fees. The proposed standard would apply to interchange fees and other payments to issuers in the MasterCard and Visa credit card systems and the American Express companion card system.
Interchange fees are fees set by card schemes that require payments between the merchant’s financial institution and the cardholder’s financial institution on every transaction. Where merchants do not feel able to decline to accept cards from schemes, the incentive is for schemes to raise interchange rates to induce financial institutions to issue their cards and for issuers to then use these fees to pay rewards to consumers to take and use the cards. Evidence from a range of countries suggests that competition between well-established payment card networks can lead to the perverse result of increasing the price of payment services to merchants (and higher retail prices for consumers). In addition, differences in interchange fees between payment systems can distort payment choices and reduce the efficiency of the payments system overall.
The Bank proposes that American Express companion cards will be subject to the same interchange fee regulation that applies to the MasterCard and Visa systems. In particular, interchange fees will be defined to also include fees paid by schemes to card-issuing banks as incentives to issue cards. In addition, companion card issuance and traditional ‘four-party’ issuance will both be subject to rules on ‘other net payments’ to issuers, so as to prevent circumvention of the interchange standards.
The Bank proposes that the benchmark limiting weighted average interchange fees for credit cards will remain at 0.500 per cent. The weighted-average benchmark will be supplemented by caps on any individual interchange fee. No credit card interchange fee will be able to exceed 0.800 per cent. These changes are expected to significantly reduce the extent to which small and medium-sized merchants are significantly disadvantaged relative to a group of preferred merchants in the card systems.
Some other changes to the system of benchmarks are proposed, including a shift from three-yearly compliance to quarterly compliance. In addition, all transactions at Australian merchants will be included in calculations for observance of the benchmark, with transactions on foreign-issued cards treated equivalently to transactions on domestic cards.
Submissions
Interested parties are invited to make submissions on the proposed Standard and the Reserve Bank’s consultation document, Review of Card Payments Regulation: Consultation Paper, available on the Reserve Bank’s website www.rba.gov.au.
Submissions should be made by 3 February 2016 to:
PYSubmissions@rba.gov.au
or
Head of Payments Policy
Reserve Bank of Australia
GPO Box 3947
Sydney NSW 2001
Signed
Glenn Stevens
Governor
Reserve Bank of Australia
Date: 8 December 2015
DRAFT Standard No. 1 of [ ]
The Setting of Interchange Fees in the Designated Credit Card Schemes and Net Payments to Issuers
- Objective
The objective of this Standard is to ensure that the setting of interchange fees and payments and other transfers of valuable consideration having an equivalent object or effect to interchange fees in each designated credit card scheme is transparent and promotes:
- efficiency; and
- competition
in the Australian payments system.
2. Application
2.1 This Standard is determined under Section 18 of the Payment Systems (Regulation) Act 1998 (the Act).
2.2 This Standard applies to:
(a) the payment system operated within Australia known as the MasterCard system which was designated under the Act as a payment system on 12 April 2001 and which is referred to in this Standard as the MasterCard System;
(b) the payment system operated within Australia known as the VISA system, which was designated under the Act as a payment system on 12 April 2001 and which is referred to in this Standard as the VISA System;
(c) the American Express Companion Card payment system operated within Australia, which was designated under the Act as a payment system on 15 October 2015 and which is referred to in this Standard as the American Express Companion Card Scheme,
each of which is referred to in this Standard as a Scheme.
2.3 In this Standard:
Above Benchmark Quarter has the meaning given to it in clause 4.2 of this Standard;
Acquired includes accepted;
Acquirer means a participant in a Scheme in Australia that:
(a) provides services, directly or indirectly, to a Merchant to allow that Merchant to accept a Credit Card of that Scheme; or
(b) is a Merchant that accepts, or is a Related Body Corporate of a Merchant that accepts, a Credit Card of that Scheme and bears the risk as principal in relation to the payment obligations of the Issuer of that Credit Card in relation to that acceptance;
Credit Card of a Scheme or Credit Card of that Scheme means, in relation to a Scheme, a Device that can, under the Rules of the Scheme, be used in Australia for purchasing goods or services on credit (irrespective of whether the Device is issued in or outside Australia);
Credit Card Transaction means, in relation to a Scheme, a transaction in that Scheme between a holder of a Credit Card of that Scheme and a Merchant involving the purchase of goods or services using a Credit Card of that Scheme that is Acquired by an Acquirer (but does not include any transaction to reverse such a transaction or provide a credit or make a chargeback in relation to such a transaction);
Device means any card, plate or other payment code or device, including a code or device where no physical card is issued and a code or device used or to be used for only one transaction;
Interchange Fee Category has the meaning given to it in clause 4.1(b) of this Standard.
Interchange Fees means:
(a) for each of the VISA System and the MasterCard System, wholesale fees, known as interchange fees, which are payable by an Acquirer, directly or indirectly, to an Issuer in relation to Credit Card Transactions in the Scheme; and
(b) for the American Express Companion Card Scheme, Credit Card Transaction based payments which are payable, directly or indirectly, to Issuers which are participants in the Scheme in Australia by the Acquirer or the administrator of the Scheme in Australia, or any Related Body Corporate of either of them, which are functionally equivalent to the fees described in paragraph (a) above, including issuer fees;
Issuer means an entity that issues Credit Cards of a Scheme to its customers;
Merchant means, in relation to a Scheme, a merchant in Australia that accepts a Credit Card of that Scheme for payment for goods or services;
Quarter means a 3 month period ending on 30 June, 30 September, 31 December or 31 March;
Related Body Corporate has the meaning given in the Corporations Act 2001;
Reporting Period means a 12 month period ending 30 September;
Rules of a Scheme or Rules of the Scheme means the constitution, rules, by-laws, procedures and instruments of the relevant Scheme, and any other arrangement relating to the Scheme by which participants in that Scheme consider themselves bound;
include or including or such as when introducing an example do not limit the meaning of the words to which the example relates to that example or examples of a similar kind; and
terms defined in the Act have the same meaning in this Standard.
2.4 For the purposes of this Standard:
(a) a provision of a plan, arrangement or agreement shall be deemed to have a particular purpose if the provision was included in the plan, arrangement or agreement by a party or parties for purposes that include that purpose and that purpose was a substantial purpose; and
(b) conduct including the payment or receipt of a fee or other valuable consideration shall be deemed to have been made for a particular purpose if the person undertaking the conduct, payment or receipt did so for purposes that include that purpose and that purpose was a substantial purpose.
2.5 Each participant in a Scheme must do all things necessary on its part to ensure compliance with this Standard.
2.6 If any part of this Standard is invalid, it is ineffective only to the extent of such part without invalidating the remaining parts of this Standard.
2.7 This Standard is to be interpreted:
(a) in accordance with its objective; and
(b) by looking beyond form to substance.
2.8 This Standard comes into force on [ ] (the Commencement Date).
2.9 On the Commencement Date this Standard replaces Standard No. 1, The Setting of Wholesale (Interchange) Fees in the Designated Credit Card Schemes which applied to each of the VISA System and MasterCard System.
3. Transition Provision
3.1 If, after the Commencement Date and prior to [ ], any Interchange Fee is introduced, varied, or removed in the MasterCard System or the VISA System, the average of Interchange Fees implemented in the relevant Scheme in Australia on the date of that change, calculated in accordance with paragraph 20 of Standard No. 1, The Setting of Wholesale (Interchange) Fees in the Designated Credit Card Schemes in place as at the day before the Commencement Date, must not exceed the common cost-based benchmark for that Scheme calculated in accordance with paragraphs 13–17 of that standard.
4. Interchange Fees
4.1 From [ ]:
(a) an Interchange Fee (exclusive of goods and services tax) in relation to a Credit Card Transaction must not exceed 0.800 per cent of the value of the Credit Card Transaction to which it relates; and
(b) if an Interchange Fee applies in relation to a category of Credit Card Transactions (whether that category is determined by reference to the nature of the holder, or type, of the Credit Card of the Scheme, the identity or nature of the Merchant, the means of effecting the transaction, the security or authentication that applies or any other matter, or is a residual category covering transactions not in any other category) (Interchange Fee Category), that Interchange Fee must be a percentage rate applying to all Credit Card Transactions in the category or a fixed amount applying to all Credit Card Transactions in the category, and cannot be expressed as a range of rates or amounts.
4.2 From [ ], if the total value of Interchange Fees (exclusive of goods and services tax) payable in relation to Credit Card Transactions undertaken in a Scheme during a Quarter exceeds 0.500 per cent of the total value of those Credit Card Transactions:
(a) that Quarter will be an Above Benchmark Quarter; and
(b) the participants in that Scheme must take all necessary steps to vary the rates or amounts of Interchange Fees applicable under that Scheme, with effect no later than [45] days after the end of the Above Benchmark Quarter, to rates or amounts such that, had those varied rates or amounts applied under the Scheme during that Above Benchmark Quarter, that Quarter would not have been an Above Benchmark Quarter.
4.3 From [ ], if at any time any Interchange Fee applicable under a Scheme is introduced or removed, or the rate or amount of any Interchange Fee under a Scheme is varied, the Interchange Fees applicable under that Scheme following that change must be such that, had they applied for the whole of the most recent Quarter prior to the date of the change, that Quarter would not have been an Above Benchmark Quarter. Nothing in this clause 4.3 limits clause 4.2.
5. Net Payments to Issuers
5.1 From [ ];
(a) no Issuer which is a participant in a Scheme in Australia may receive, directly or indirectly, Net Compensation in relation to Credit Card Transactions undertaken in that Scheme. Net Compensation is received by such an Issuer if the Issuer Receipts of the Issuer over a Reporting Period exceed the Issuer Payments of the Issuer over that Reporting Period; and
(b) the administrator of a Scheme in Australia must not pay or facilitate payment or enter into an agreement or arrangement that provides for payment or facilitates payment, directly or indirectly, of Net Scheme Compensation to an Issuer which is a participant in a Scheme in Australia. Net Scheme Compensation is paid, or payment of it is facilitated, if, for one or more such Issuers, the Issuer Receipts of the Issuer that are paid, given or allowed, directly or indirectly, by the administrator of the Scheme in Australia to the Issuer over a Reporting Period exceed the Issuer Payments of the Issuer that are paid, given or allowed, directly or indirectly, by that Issuer to that administrator of the Scheme in Australia over that Reporting Period.
5.2 For the purpose of clause 5.1:
(a) subject to paragraphs (c), (d) and (e), Issuer Receipts of the Issuer is the total of the payments or rebates received, directly or indirectly, by the Issuer in relation to Credit Cards of the Scheme or Credit Card Transactions undertaken in the Scheme that have a purpose or likely effect of promoting or incentivising the issuance or use of Credit Cards of the Scheme or of providing or funding incentives to holders of Credit Cards of the Scheme to use those cards (but excluding Interchange Fees and payments made by or on behalf of holders of Credit Cards of the Scheme to discharge a liability to the Issuer as a result of holding or using such a card). These payments and rebates include volume based and transaction specific payments, incentives, fees or rebates such as:
(i) marketing incentives;
(ii) payments or rebates for meeting or exceeding a specific transaction volume, percentage share or dollar amount of transactions processed; and
(iii) signing bonuses;
(b) subject to paragraphs (c), (d) and (e), Issuer Payments of the Issuer is the total amount of all amounts paid or rebates paid, given or allowed, directly or indirectly, by the Issuer to the administrator of the Scheme in Australia or an Acquirer in relation to Credit Cards of the Scheme or Credit Card Transactions undertaken in the Scheme (excluding the amount of the Credit Card Transactions paid by the Issuer to the Acquirer to settle obligations arising from the clearing of Credit Card Transactions). These payments include:
(i) Scheme branding fees;
(ii) processing fees; and
(iii) assessment fees;
(c) if an amount referred to in paragraph (a) or (b) paid to or by, or a rebate referred to in paragraph (a) or (b) given, allowed or received, directly or indirectly, by an Issuer does not relate solely to Credit Cards of the Scheme or Credit Card Transactions undertaken in the Scheme and also relates to other Devices or other transactions, the amount or rebate must be apportioned between the Credit Cards of the Scheme and Credit Card Transactions on the one hand (the Relevant Portion) and the other Devices and other transactions on the other fairly and reasonably, having regard to, where relevant, the transaction history on Devices used in the payments systems to which the amount or rebate relates and the proportion of the Devices to which the amount or rebate relates that are Credit Cards of the Scheme issued by the Issuer, and the Relevant Portion included in the determination of Issuer Receipts or Issuer Payments, as applicable;
(d) one method of apportionment that will be fair and reasonable for the purpose of clause 5.2(c) is an apportionment on a pro-rata basis, based on the value of Credit Card Transactions undertaken in the Scheme using Credit Cards of the Scheme issued by that Issuer over the Reporting Period as a proportion of the total value of the transactions undertaken in any payment system to which the amount or rebate relates over the Reporting Period using Devices issued by that Issuer. This does not preclude an apportionment in another way that meets the requirements of clause 5.2(c);
(e) where a payment or rebate referred to in paragraph (a), (b) or (c) relates to a period that spans more than one Reporting Period, the payment or rebate or, in the case of a payment or rebate referred to in paragraph (c), the proportion calculated in accordance with paragraph (c), may be allocated among Reporting Periods on a pro-rata basis based on the number of months in each relevant Reporting Period to which the payment or rebate relates provided that:
(i) no part of it is allocated to any Reporting Period the whole of which occurs before the term of the contract or arrangement to which the payment or rebate applies has commenced;
(ii) no part of it is allocated to any Reporting Period the whole of which occurs after the term of the contract or arrangement to which the payment or rebate applies has ended; and
(iii) it may not be allocated among more than 5 consecutive Reporting Periods.
6. Reporting and Transparency
6.1 The administrator of a Scheme or a representative of the participants in the Scheme in Australia must publish the Interchange Fee rates or amounts (whichever is applicable) of the Scheme in Australia on the Scheme’s website, including the rates or amounts for each Interchange Fee Category.
6.2 The administrator of a Scheme or a representative of the participants in the Scheme in Australia must on or before 31 October each year certify in writing to the Reserve Bank of Australia in respect of the most recent Reporting Period, that Interchange Fees of the Scheme in Australia were over that Reporting Period in compliance with this Standard.
6.3 Each of the administrator of a Scheme in Australia and each Issuer who is a participant in the Scheme in Australia must on or before 31 October each year certify in writing to the Reserve Bank of Australia that it was, over the most recent Reporting Period, in compliance with clause 5 of this Standard.
6.4 The administrator of a Scheme or a representative of the participants of the Scheme in Australia must, not later than 30 days after the end of each Quarter, certify in writing to the Reserve Bank of Australia each of the following for that Quarter for the Scheme:
(a) the total value of Credit Card Transactions undertaken in the Scheme in that Quarter;
(b) the number of Credit Card Transactions undertaken in the Scheme in that Quarter;
(c) the total value of all Interchange Fees (exclusive of goods and services tax) payable in respect of the Credit Card Transactions undertaken in the Scheme during that Quarter;
(d) the total value of Interchange Fees (exclusive of goods and services tax) payable in respect of Credit Card Transactions undertaken in the Scheme during the Quarter divided by the total value of the Credit Card Transactions undertaken in the Scheme during the Quarter;
(e) each Interchange Fee Category that applied for some or all of the Quarter and, for each of those categories:
(i) the Interchange Fee rates or amounts that applied during the Quarter (expressed as a percentage or an amount, not as a range); and
(ii) the total value of Interchange Fees (exclusive of goods and services tax) payable in respect of that Quarter that are referrable to Credit Card Transactions undertaken in the Scheme in that Quarter in that category.
7. Anti-Avoidance
7.1 A participant in a Scheme must not, either alone or together with one or more other persons, enter into, begin to carry out or carry out a plan or arrangement or otherwise be knowingly involved in a plan or arrangement if it would be concluded that the person did so for a purpose of avoiding the application of this Standard, and the plan or arrangement or part of the plan or arrangement has achieved or could reasonably be considered to have achieved that purpose.