Explanatory Statement

Standard No. 1 of 2016 The Setting of Interchange Fees in the Designated Credit Card Schemes and Net Payments to Issuers Variation 2019

Payment Systems (Regulation) Act 1998

This Explanatory Statement relates to Standard No. 1 of 2016 The Setting of Interchange Fees in the Designated Credit Card Schemes and Net Payments to Issuers Variation 2019 (the Instrument).

Background

In May 2016, the Reserve Bank of Australia (the Bank) determined a standard, Standard No. 1 of 2016 The Setting of Interchange Fees in the Designated Credit Card Schemes and Net Payments to Issuers (the Standard). The Standard came into force on 1 July 2017. A minor technical variation came into effect on 20 November 2017.

The Standard sets a benchmark for average interchange fees in the designated credit card systems of 0.50 per cent and also a maximum level of any individual interchange rate of 0.80 per cent. The Standard requires designated credit card schemes to ensure that their weighted-average interchange rates are below the benchmark on a quarterly basis.

The Standard also seeks to prevent the circumvention of the interchange benchmark and cap by arrangements involving non-interchange payments or other incentives being provided by schemes to card issuers. The Standard does this through its ‘net compensation’ provision in clause 5 (the Net Compensation Provision) which established two defined concepts: Issuer Receipts and Issuer Payments, and stipulated that the former cannot be larger than the latter. In broad terms, this means that in each reporting period, the benefits received by an issuer that have a purpose or likely effect of promoting or incentivising the issuance or use of cards of the scheme, or of providing or funding incentives to holders of cards of the scheme to use those cards, (that is ‘Issuer Receipts’), may not exceed the ‘Issuer Payments’ made by the issuer to the scheme. Benefits that relate to more than one system must be suitably apportioned and those relating to multiple years may be allocated across those years, up to a limit of 10 years. The Standard requires schemes and issuers in designated credit card systems to certify annually that they have complied with the Net Compensation Provision.

Authority

The Standard was made under section 18(1) of the Payment Systems (Regulation) Act 1998 (the Act). Under section 18(3) of the Act the Bank may vary any standard made by it under section 18(1). The Instrument was made under section 18(3) of the Act.

Purpose and operation

The objective of the Instrument is to vary the Standard to improve the operation of the Net Compensation Provision in a manner consistent with its original purpose and intent.

The initial certifications made under the Standard relating to the Net Compensation Provision were provided to the Bank in August 2018. Informal views sought from regulated entities indicated that the Standard was working as intended from a broad policy perspective, but also suggested that the Net Compensation Provision would benefit from variations to clarify its interpretation, minimise compliance burden, or otherwise improve its operation.

In view of this, the Bank consulted on eight proposals to vary the Standard (see the section headed Consultation below). The Bank has determined that it is in the public interest to adopt all eight proposals. The Instrument gives effect to these eight proposals. These proposals, and a summary of the modifications made to the Standard to give effect to each proposal, are set out below. The consultation related to both the Standard and the Bank’s Standard No 2 of 2016. The proposals stated below are the proposals consulted on as they related to the Standard:

Proposal 1: Modify the Standard to require an accrual approach to be used to allocate Issuer Receipts and Issuer Payments to, or between, reporting periods in a manner consistent with the purpose and intent of the Standard, such that in determining net compensation certifying entities have more scope to draw on information from financial accounts prepared in line with generally accepted Australian accounting principles. Compliance on a cash or quasi-cash basis will not be permitted.

To implement Proposal 1 the text of clause 5.2 of the Standard has been amended to include terms such as ‘earned’, ‘accrued’, receivable’, and ‘payable’ to indicate that an accrual approach is to be used for the purposes of determining net compensation. Clause 5.2 has also been amended to allow, under specified circumstances, the use of alternative methods for apportioning Benefits over more than one reporting period.

Proposal 2: Clarify that ‘Issuer Payments’ are those payments made by issuers in relation to core services of a scheme.

To implement Proposal 2 ‘Core Service’ has been introduced as a defined term in clause 2.3, and the definition of ‘Direct Issuer Participant Payments’ (formerly ‘Issuer Payments’) in clause 5.2(b) has been amended to clarify that only payments for Core Services are capable of inclusion.

Proposal 3: Remove references to ‘Acquirer’ from the definition of ‘Issuer Payments’ in the Standards.

To implement Proposal 3 references to ‘Acquirer’ have been removed from the definition of ‘Direct Issuer Participant Payments’ (formerly ‘Issuer Payments’) in clause 5.2(b).

Proposal 4: Clarify the Standard with the effect that where there is a price at which the supplier is regularly supplying relevant property or services, any discount or deduction from that price that meets the Incentive Test is a benefit to be included in Issuer Receipts.

To implement Proposal 4 ‘Regular Price’ and ‘Incentive Test’ have been introduced as defined terms in clause 2.3. The definition of ‘Benefit’ in clause 2.3 has been varied to give effect to this proposal.

Proposal 5: Clarify the Standard with the effect that where property or services are supplied and there is not a price at which the supplier is regularly supplying the relevant property or services, the benefit to be included in Issuer Receipts, subject to the incentive test, is the amount by which the fair value of the property or services exceeds what is paid for the property or services (and if nothing is paid, then the full fair value is to be included).

To implement Proposal 5 ‘Fair Value’ and ‘Incentive Test’ have been introduced as defined terms in clause 2.3. The definition of ‘Benefit’ in clause 2.3 has been varied to give effect to this proposal.

Proposal 6: Clarify that the types of entity that an issuer can receive an Issuer Receipt from include associated entities of scheme administrators, drawing on the definition of Associated Entity in the Corporations Act 2001.

To implement Proposal 6 ‘Associated Entity’ has been introduced as a defined term in clause 2.3, and has the meaning given by section 50AAA of the Corporations Act 2001. The definition of ‘Direct Issuer Participant Receipts’ (formerly ‘Issuer Receipts’) in clause 5.2(a) has been varied to provide that it will capture only Benefits received, directly or indirectly, from the administrator of the Scheme in Australia or its Associated Entities that meet the Incentive Test (previously Benefits that met the Incentive Test were captured irrespective of their origin). Given this variation, previous exclusions from the definition of ‘Direct Issuer Participant Receipts’ (formerly ‘Issuer Receipts’) cease to be necessary and have been removed.

Consistent with this implementation of Proposal 6, the amended Standard also clarifies through an amendment to the definition of ‘Direct Issuer Participant Payments’ (formerly ‘Issuer Payments’) that payments made to Associated Entities of scheme administrators can be Issuer Payments.

Proposal 7: Modify the Standard such that for scheme-issuer arrangements where one entity sponsors another for a card-issuing arrangement, it is only the sponsoring issuer that is required to comply with the net compensation provisions.

To implement Proposal 7 the terms ‘Direct Issuer Participant’, ‘Indirect Issuer Participant’ and ‘Sponsor’ have been introduced as defined terms in clause 2.3. Clause 5.1 has been amended so that the Net Compensation Provision in that clause applies only to Direct Issuer Participants and, in clause 5.2, ‘Issuer Receipts’ and ‘Issuer Payments’ have been varied to ‘Direct Issuer Participant Receipts’ and ‘Direct Issuer Participant Payments’ respectively.

Proposal 8: Provide transition arrangements that allow, for the reporting period ending 30 June 2019 only, an issuer to choose whether to comply fully with current Standard or fully with the revised Standard. The issuer must notify the scheme of its choice, and the scheme must report on the same basis as the issuer for each scheme-issuer agreement. In the event that an issuer fails to notify the scheme of its choice by the date specified in the varied Standard, the issuer will be deemed to have elected to comply with the current Standard and a scheme must report compliance with the current Standard for that scheme-issuer arrangement for the reporting period ending 30 June 2019. Thereafter, issuers and schemes must comply with the revised Standard only.

To implement Proposal 8 clause 7 has been varied to set out the transition arrangements for the reporting period ending 30 June 2019.

The Instrument gives effect to these eight proposals. The way these proposals have been implemented is further explained in The Operation of the Interchange Standards: Conclusions Paper (Conclusions Paper) published by the Bank on 31 May 2019 and available on the Bank’s website. The Conclusions Paper sets out the conclusions reached by the Bank on the issues raised in consultation, and provides an explanation of the purpose and intended operation of the Standard as varied by the Instrument in greater detail. It also contains a link to a mark-up showing all the differences between the Standard as in effect before the Instrument commences on 1 July 2019 and the Standard as it will operate from 1 July 2019.

The proposals adopted by the Bank provide regulatory certainty, reduce compliance burden and improve the operation of the Standard in the ways referred to in the Conclusions Paper.

Consultation

Section 18(4) of the Act provides that the Bank is required to consult in accordance with section 28 of the Act before it may vary a standard made under section 18(1) of the Act. In February 2019, the Bank published on its website (and announced by media release) The Operation of the Interchange Standards: Consultation Paper which set out proposed variations to the Standard. The Bank received ten written submissions in response to the Consultation Paper from schemes, banks, and one aggregator. The Bank met with nine of these stakeholders to discuss their submissions. In response to stakeholder feedback, the Bank circulated a revised definition of ‘Core Service’ in April, and consulted with stakeholders on this revised definition.

The Payments System Board approved the variations to the Standard made by the Instrument at its May 2019 meeting.

Documents

Reserve Bank of Australia (2019) The Operation of the Interchange Standards: Consultation Paper, February

Reserve Bank of Australia (2019) The Operation of the Interchange Standards: Conclusions Paper, May

The Office of Best Practice Regulation considered that the amendments effected by the Instrument are likely to have minor impacts on businesses, community organisations or individuals, and advised that a Regulation Impact Statement was not required.

Approved by the Reserve Bank of Australia
31 May 2019