The Australian payments system is evolving, both in terms of some innovative new payment instruments that are on their way and the declining use of some of our older or legacy payment instruments. Tony Richards RBA Head of Payments Policy Department RBA, spoke at the Payments Innovation 2016 Conference on this evolution.
There is a lot happening in the payments industry at present, so my sense is that it would be premature to have a serious discussion about possibly phasing out cheques before the implementation of the New Payments Platform (NPP), which is scheduled to begin operations in late 2017. But if this conference was to revisit this issue in early 2018 with the NPP up and running, it should find significant new payments functionality in place. This will include the ability for end-users to make real-time transfers with immediate availability of funds, to make such transfers on a 24/7 basis, to attach data or documents with payments or payment requests, and to send funds without knowing the recipient’s BSB and account number. These are all aspects that match or exceed particular attributes of cheques.
In addition, by early 2018 another two years will have passed and there will no doubt have been a significant further decline – based on current trends, a further 30 per cent or so – in cheque usage.
By that point, more organisations and individuals will have further reduced their cheque usage. The Bank has recently been doing some liaison with payment system end-users in our Payments Consultation Group and has heard some impressive accounts about how some of the major Commonwealth government departments and some large corporates have largely moved away from the use of cheques. Cheque usage in the superannuation industry has also fallen very significantly as part of the SuperStream reforms.
A shift away from the use of bank cheques is also underway in property settlements. On average, there are around 40 000 property transactions in Australia each month, plus a significant number of refinancings, with most of these requiring at least a couple of cheques for settlement. However, starting in late 2014 and after much preparatory work, electronic conveyancing and settlement is now feasible. This is being arranged by Property Exchange Australia Ltd (an initiative that includes several state governments and a number of financial institutions), with interbank settlement occurring in RITS, the Reserve Bank’s real-time gross settlement system. Volumes have risen steadily and by late 2015 the number of property batches settled in RITS – each batch typically corresponds to a single transaction or refinancing – had reached nearly 4 000 per month. This trend is expected to continue.
In addition, the Bank’s Consumer Use Survey indicates that usage of cheques is falling rapidly for households of all ages. Our survey from late 2013 confirmed that older households continue to use cheques more than younger ones. However, older households are also reducing their use of cheques significantly. And with more and more older households now using the internet, their use of cheques is likely to continue falling. Indeed, I’m sure we all have a story about an older family member or friend who has recently bought or received a tablet or notebook and discovered the benefits of being online.
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We will get a further reading on households’ use of cheques and other payment instruments in the Bank’s next Consumer Use Survey, which – if we follow the timetable of recent surveys – will be published in the first half of next year based on data collected late this year.
More broadly, as the industry starts to think about options for the cheque system, it will be important to make sure that those parts of the community that still use cheques are fully consulted so that we can be sure that their payment needs are met by other instruments. This is likely to involve consultations with organisations representing older age groups, the non-profit sector and those in rural Australia.
Cash
Discussions about the declining use of cheques sometimes also touch upon the declining use of cash.
Because transactions involving cash typically do not involve a financial institution, data for the use of cash are actually quite limited. However, one good source of data on the use of cash by individuals is the Bank’s Consumer Use Study. Our most recent study, in late 2013, showed that cash remained the most important payment method for low-value transactions (around 70 per cent of payments under $20). However, it confirmed that the use of cash had declined significantly, with the proportion of all transactions involving cash falling from 70 per cent in the 2007 survey to 47 per cent in 2013.
More recent data on the transactions use of cash are not available, though the ongoing fall in cash withdrawals from ATMs and at the point of sale suggest that it has continued. In addition, the continuing strong growth of contactless transactions and the growing acceptance of cards for low-value transactions are also suggestive of a further decline in the use of cash.
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However, that is where the parallels with cheque usage end. While the use of cash in transactions has been declining, the demand to hold cash has continued to grow. This is the case for low denomination banknotes as well as high denomination ones. Indeed, in recent years there has been a modest increase in the rate of growth of banknotes on issue, to an annual rate of around 7 per cent over the past couple of years. More broadly, over the longer term, growth in banknote holdings has been largely in line with nominal growth in the overall economy.
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The growing demand for holdings of cash suggest that it continues to have an important role as a store of value and there is some evidence – from demand for larger denomination notes – that this increased following the global financial crisis. So, despite the decline in use in transactions, cash is likely to remain an important part of both the payments system and the economy more broadly for the foreseeable future. In particular, significant parts of the population appear to remain more comfortable with cash than with other payment methods in terms of ease of use for transactions or transfers, as a backup when electronic payment methods may not be available, or as an aide for household budgeting.
Given the important ongoing role of cash in the payments system, the Bank is currently undertaking a major project to upgrade the existing stock of notes. Counterfeiting rates of the current series of banknotes remain low by international standards but have been rising and there are some signs that the counterfeiters are getting a bit better with new and cheaper scanning, printing and image manipulation technology. Accordingly, the program for the next generation of banknotes includes major security upgrades that should ensure that Australia’s banknotes remain some of the world’s most secure. The first release of the new banknotes will occur in September this year, with the release of the new five dollar note.
Australia is not alone in continuing to invest to ensure that the public can continue to have confidence in its banknotes. The United States has also done so recently, and Sweden – which is often cited as being furthest along the path to a cashless or less-cash society – is also in midst of introducing a new series of notes.
Digital currencies and distributed ledgers
As the use of cash and cheques continues to fall, the Bank will – subject to there not being any overriding concerns about risk – be agnostic as to what payment methods replace the legacy systems, consistent with its mandate to promote competition and efficiency.
In the short run, it is likely that we will see further growth in the existing electronic payment methods, including payment cards in their various form factors. In the medium term, it is likely that we will see growth in new payment methods and systems, including those that will be enabled by the NPP.
Let me stress that the Bank has not reached a stage where it is actively considering this, but in the more distant future it is even possible that we may we see a digital version of the Australian dollar. As the Bank has noted in the past, it seems improbable that privately-established virtual currencies like Bitcoin, with its significant price volatility, could ever displace well-established, low-inflation national currencies in terms of usage within individual economies. Bitcoin has, however, served to stimulate interest in the potential offered by distributed ledgers, extending to the possibility of central-bank-issued digital currencies. A plausible model would be that issuance would be by the central bank, with distribution and transaction verification by authorised entities (which might or might not include existing financial institutions). The digital currency would presumably circulate in parallel (and at par) with banknotes and other existing forms of the national currency.
A few countries have explicitly discussed the possibility of digital versions of their existing currency. Both the Bank of England and Bank of Canada have indicated that they are undertaking research in this area. And a recent announcement from the People’s Bank of China indicated that it has plans for digital currency issuance, though few specifics were provided.
The Bank will be interested to see what proves to be possible and what proves to be problematic, as countries consider going down the path of digital currency issuance. Given the various cybersecurity and cryptography risks involved, my personal expectation is that full-scale issuance of digital currency in any country, as opposed to limited trials, is still some time away. And I think it remains to be seen if there is real demand for a digital equivalent of cash and what it might offer end-users relative to what will be offered by the various forms of real-time payments that are being developed in many countries through projects like the NPP.
I should also touch briefly on another potential application of blockchain or distributed ledger technologies, namely in the settlement of equity market transactions. As the overseer of clearing and settlement facilities licensed to operate in Australia, the Bank obviously has a keen interest in the plans of the ASX Group to explore the use of distributed ledgers. Along with the Australian Securities and Investments Commission and other relevant public sector organisations, we will be working closely with ASX as it considers whether a distributed ledger solution might be the best way to replace its existing CHESS infrastructure.
Review of Card Payments Regulation
I will conclude with a few comments on the ongoing Review of Card Payments Regulation.
The Bank issued a consultation paper containing some draft changes to standards in late 2015. It has received substantive submissions from 43 different stakeholders, with a number of parties providing both a public submission and additional confidential information. 33 non-confidential submissions have been published on the Bank’s website.
The submissions indicate that most end-users of the payments system are broadly supportive of the Bank’s reforms over the past decade or more. Some submissions have indeed suggested that the Bank could have gone further in its proposed regulatory changes. Financial institutions and payment schemes have expressed a range of views. For the most part they have recognised the policy concerns that the Bank is responding to. In some cases there is a fair bit of common ground in areas where they have made suggestions for changes to the draft standards, but in others there are conflicting positions that correspond to the different business models of the entities that have responded to consultation.
The Payments System Board discussed the Review at its meeting last Friday, focusing on issues that stakeholders have highlighted in submissions. As we always do when regulatory changes are proposed, Bank staff will be meeting with a wide range of stakeholders to discuss submissions. Indeed, we have already had a significant number of meetings, sometimes multiple meetings with particular firms as they were preparing their submissions.
Some of the issues to be explored in consultation meetings include: the treatment of commercial cards and domestic transactions on foreign-issued cards in the interchange benchmarks; the proposed shift to more frequent compliance to ensure that average interchange rates remain consistent with benchmarks; and the calculation of permissible surcharges for merchants (such as travel agents or ticketing agencies) that are subject to significant chargeback risk when they accept credit or debit cards.
One other issue that I would like to flag ahead of our consultation meetings relates to the proposed reforms to surcharging arrangements. The Bank’s proposed new surcharging standard has been drafted to be consistent with amendments to the Competition and Consumer Act 2010 which were passed by the House of Representatives on 3 February and by the Senate yesterday.
The proposed framework envisages that merchants will retain the right to surcharge for expensive payment methods. However, the permitted surcharge will be defined more narrowly as covering only the merchant service fee and other fees paid to the merchant’s bank or other payments service provider. Acquirers would be required to provide merchants with easy-to-understand information on their cost of acceptance for each payment method, with debit/prepaid and credit cards separately identified. The draft standard would require that merchants would receive an annual statement on their payment costs which they could use in setting any surcharge for the following year. The information in these statements should allow the Australian Competition and Consumer Commission (ACCC) to easily investigate whether a merchant is surcharging excessively.
The objectives of the proposed changes to the regulation of surcharging received widespread support in submissions. However, a number of financial institutions have argued that it would be difficult to provide statements to merchants on their average acceptance costs for each payment system. Some have said that their billing process draws on multiple systems within their organisations (and sometimes from third parties), so that it is not straightforward to provide the average cost information proposed by the Bank. Some have indicated that they do not currently provide annual statements to merchants, so this would be a significant change. Accordingly, a number have suggested that they would prefer a significant implementation delay before they are required to provide merchants with the desired transparency of payment costs. Bank staff will be testing these points in our consultation meetings with acquirers. In doing so, we will be looking to see what might be done to ensure that the standards can take effect as soon as possible, in order to meet community expectations about the elimination of instances of excessive surcharging.
More broadly, the Board also discussed a possible timeline for concluding the Review. The Bank’s expectation is that a final decision on any regulatory changes should be possible at the May meeting. It is too soon to give much guidance on the date when any changes to the Bank’s standards might take effect, but the Board recognises that an implementation period will be necessary for the industry.
Currently known within the NPP project as the “Initial Convenience Service” (ICS), this payment service will let consumers immediately transfer funds to and from their bank accounts via their mobile phone, tablet, or via the internet.
“The introduction of ICS will accelerate the move away from cheques and cash towards digital payments,” said BPAY Group Chief Executive John Banfield.
The ICS will be launched in 2017 and will allow consumers to easily send payments in real-time to someone’s mobile phone number or email address, include more information with payments and allow Government departments and businesses to include documentation with payments.
The ICS is the first service to use the NPP which is being developed by NPP Australia Limited (NPPA) and its 12 Participant Financial Institutions and is the industry response to the Reserve Bank of Australia’s strategic objectives on payments innovation.
“The ICS will act as a catalyst for further innovation in electronic payments from all Australian financial institutions. This will benefit consumers and businesses alike,” Mr Banfield said.
“The ICS has the full support of the industry and will be critical in the success of the NPP,” added Mr Banfield.
Earlier today, NPPA announced that BPAY had won a competitive process to build the ICS. The ICS is the first of many expected overlay services to use NPP.
NPP is new infrastructure for Australia’s low-value payments. It will provide Australian businesses and consumers with a fast, versatile, data-rich payments system for making their everyday payments. The NPP is being developed collaboratively by authorised deposit-taking institutions.
BPAY is owned by Australia’s four major banks, with more than 150 financial institutions now offering the BPAY bill payments service. In FY2014/15, BPAY handled over 368 million payments worth approximately $325 billion.
Tony Richards, Head of Payments Policy, RBA, spoke at the APCA Australian Payments 2015 Conference today. He gave an update on current payment initiatives in Australia, including NPP, payments coordination, and the interchange regime. He also mentioned the outcomes from the FSI.
The first is the initiatives that came out of the 2012 conclusions of the Reserve Bank’s Strategic Review of Innovation in the Payments System. The background to the Review was a growing amount of evidence that the services provided to end-users of the Australian payments system were falling behind the services available to end-users in some other countries.
The most prominent outcome of the Review was that the Bank asked the payments industry to consider ways of filling the gaps in the payments system that had been identified in the Review. As you know, the industry – coordinated by APCA – proposed a project, which has been developed over the past three years, to build some new industry infrastructure which will be called the New Payments Platform (NPP). The NPP will deliver real-time, data-rich payments to end-users on a 24/7 basis. It will also be a platform for all sorts of other innovative services, many of which we cannot yet imagine.
The Bank has been heavily involved in this project. It is one of the 12 financial institutions that have agreed to fund the build of the NPP and to connect to it when it goes live. The Bank is also developing a new service, the Fast Settlement Service (FSS), which will provide real-time settlement of NPP transactions. My colleagues in Payments Settlements Department are making good progress on the FSS.
Paul Lahiff, the Chair of NPP Australia Ltd, will be speaking to you in more detail about the status of the NPP, but I can tell you that the Payments System Board (the Board), having encouraged this project, has been taking a close interest in it and has been pleased by the excellent collaboration in the industry.
Another initiative coming out of the Strategic Review of Innovation was that the Bank called for the establishment of an enhanced industry coordination body. The intention was that this should take a more strategic view than existing industry governance bodies and have membership from a wider range of institutions than had traditionally been the case for APCA. It was also to have high-level representation, with individuals who are more able to commit their organisations to courses of action agreed by the group.
The rationale for this focus on industry governance was that the identified gaps in the services offered to end-users partly reflected difficulties in getting the industry to work together to develop the cooperative elements of payment systems. The development of common rules, standards, communications networks and other infrastructure sometimes requires collaborative innovation, where institutions have to work together. There was a concern that this had previously proved difficult in Australia.
I’m happy to say that there has been good progress here. The Australian Payments Council held its first meeting in late 2014 and – as you will have heard in the first session today – has recently been consulting on an Australian Payments Plan, seeking views on long-term trends, systemic challenges and desirable characteristics for the payments system.
The first meeting between the Board and the Council occurred in August. The Board is looking forward to seeing the progress that the Council makes on its payments plan. The Council may be a useful vehicle for the payments industry, including the Bank, to think about some of our legacy payment systems, in particular the future of the cheque system.
Fraud, digital identity and cyber security are other areas where there could be real benefits to industry collaboration. Of course, they are not just issues for the payments system. Cyber security and digital identity were referred to in the Government’s response to the Financial System Inquiry (FSI) Report and are issues that touch the entire financial system and, indeed, the broader economy.
The second issue I would like to cover is the Bank’s ongoing Review of Card Payments Regulation.
In its March 2014 submission to the FSI, the Bank indicated that it would be reviewing some aspects of the regulatory framework for card payments. The Final Report of the FSI, which was released in December 2014, endorsed the broad nature of the Bank’s reforms over the past decade or more but noted a few areas where the Inquiry believed the existing framework could be improved. The Bank released an Issues Paper in March 2015, inviting submissions on a broad range of issues in card payments regulation, including those raised in the FSI Report. I will touch on four of these issues.
The first is the growing lack of transparency of payment costs to many merchants. While interchange fees on credit and debit cards are currently subject to benchmarks that must be observed every three years, there has been a tendency for the two large international four-party schemes to promote new, high-interchange, high-rewards cards. At the same time, they have introduced lower interchange rates for ‘strategic’ or other preferred merchants. These merchants get the same low interchange rate – for credit cards, as low as 20 basis points – on all their transactions, even if a super-premium, high-rewards card is presented. But smaller merchants and others who do not benefit from strategic rates pay interchange rates of up to 200 basis points on their transactions. Furthermore, when presented with a card, such merchants may have no way of knowing if it is a card with a 30 basis point interchange rate or a 200 basis point rate. So the issues that we have raised are the growing lack of transparency of payment costs for many merchants and the growing wedge in average payment costs between preferred and nonpreferred merchants.
Second, the Bank is consulting on whether it would be desirable to lower the interchange benchmarks or to make other changes to the system, such as to have more frequent compliance. One issue here is that the behaviour of schemes and issuers under the current three-yearly compliance system is seeing average interchange rates rising significantly above the benchmark in between compliance dates.
The third issue is whether it would be desirable to extend the coverage of the regulatory framework for interchange payments. This is especially relevant in the case of companion cards – in particular, bank-issued American Express cards, which have issuer fees and other payments that are equivalent in many respects to interchange payments.
The final major issue for the Review is concerns over excessive surcharging in some industries. There is a balance to be struck here between ensuring that merchants have the right to surcharge for expensive payment methods, including some cards, and ensuring that they do not surcharge excessively. Excessive surcharging is not a widespread problem, but I think we can all point to a few cases where there are genuine concerns. The Board is keen to take action here.
The Board discussed the Review in its August meeting and will be discussing it again at its November meeting. In preparation for discussions about possible changes in the regulatory framework, the Board has recently taken a decision to designate five payment systems: the American Express companion card system, the Debit MasterCard system and the eftpos, MasterCard and Visa prepaid card systems. Designation does not impose regulation nor does it commit the Bank to a regulatory course of action; rather it is the first of a number of steps the Bank must take to exercise any of its regulatory powers.
Any proposals to apply regulation to designated systems through standards or access regimes are subject to requirements for detailed consultation. Designation of these five systems will allow a more holistic consideration of the issues – including issues such as the regulatory treatment of companion cards and prepaid cards – as the Bank continues with review of the regulatory framework and considers the case for changes to the framework.
As you know, there has been a lot of discussion of the issues that the Review is focusing on. Banks, payment schemes, consumer organisations and merchants have been able to express views in four different contexts: the original FSI call for submissions, submissions on the FSI’s interim report, the Government’s call for comments on the FSI Final Report, and responses to the Bank’s Issues Paper. And in turn, the industry will have seen the Bank’s views in at least three different vehicles: the Bank’s two submissions to the FSI in 2014 and its Issues Paper from March this year.
We have received over 40 submissions in response to the Issues Paper, with all non-confidential submissions published on our website. The Bank also hosted an industry roundtable in June and has held around 40 meetings with stakeholders.
Overall, there appear to be some areas where there is common ground across most stakeholders. For example, there is fairly wide acceptance that the widening of the international schemes’ interchange fee schedules has created issues in terms of the rising cost of card payments to nonpreferred merchants and the declining transparency of the cost of card payments to them. There is also general agreement that it would be good to deal with instances of excessive surcharging.
However, there are other areas where there are real differences in the views expressed by different stakeholders. These include issues such as whether companion card arrangements should be subject to regulation and whether there might be a case for a reduction in the interchange fee benchmarks.
It will be up to the Board to weigh up the arguments on some of these contentious issues, balancing the interests of consumers, businesses, financial institutions and card schemes. As always, its consideration will be based on its mandate to promote competition and efficiency in the payments system. And let me stress again that if the Board decides to propose changes to the regulatory framework, the Bank will, as usual, undertake a thorough consultation process on any draft standards.
Finally, as you will know, the Government released its response to the FSI yesterday. Its response referred to the Bank’s review and noted that it was looking forward to the Board completing its work on the issues of interchange fees and surcharging. The Government also indicated that it will ban excessive surcharging and give the ACCC enforcement power in this area. I would expect that once the Board has provided greater clarity on what constitutes excessive surcharging, we will work closely with Treasury and the ACCC on legislation. I expect that we will end up with a framework where the Board has decided on a narrower definition of costs of acceptance and allowable surcharges and where the Bank will be able to count on help from the ACCC in the enforcement of the new framework.
A speech was delivered today by Malcolm Edey, at the Cards & Payments Conference in Melbourne following on from the Murray Inquiry and the Reserve Bank Payments System Board (the PSB) own review following on from the Murray recommendations. As the PSB’s review process is still underway, Edey did not pre-empt any conclusions that might come from that. Instead he over viewed the PSB’s general approach to retail payments since it first entered the field. His comments on more recent developments does give some clues to issues ahead however, with specific reference to NPP, interchange arrangements and surcharging.
The PSB more recently undertook its Strategic Review of Innovation in the Payments System, the results of which were published in 2012. That review was conducted over a two year period and involved extensive consultations with both the payments industry and with users of payments services. It found a number of areas where there was scope for system improvements that could be achieved through coordinated action.
The key areas were:
same-day settlement of direct entry transactions;
faster payments and out-of-hours payments to be made generally available;
capacity for richer information with payments; and
an easy addressing solution for electronic payments.
The first one of these was delivered at the end of 2013 and essentially involved an acceleration of existing direct entry processes. The remaining three form a more ambitious agenda and are together being taken up as part of the industry’s New Payments Platform (the NPP project).
The NPP is a successful example of what can be done through collaboration between the industry and its regulator. It is also a good example of the catalyst role for the PSB in promoting system innovation that was envisaged by Wallis. While it is an industry-led project, it is strongly supported by the PSB, and the Board continues to encourage commitment to the project and to its timely completion.
The project was launched in early 2013 and is now well advanced. On current scheduling the NPP will deliver a fast payments service with rich information and addressing capabilities in the second half of 2017. It will be linked to a fast settlement service provided by the Reserve Bank, which will allow transactions to be cleared and settled 24/7 in close to real time. All of this will amount to a world-class payments infrastructure.
It will also be a platform for further innovation. One of the key decisions made at an early stage of the project was to separate the basic clearing and settlement infrastructure from the commercially based overlay services that would use it. The industry is committed to an initial overlay that is intended to provide an attractive service and drive early volume growth. But it is important to note that access to the overlay space has always been intended to be open and competitive. Over time, this structure will allow new and specialist providers to make use of the rich capabilities provided by the core infrastructure.
Before moving on to some more detailed regulatory matters, I will mention one more initiative to have come out the 2012 Strategic Review, and that is the establishment of new industry coordination and consultation arrangements. In line with a recommendation from the 2012 Review, a new industry coordination body, the Australian Payments Council, was launched last year. The Council is a high-level body representing a diverse range of industry participants including banks, payment schemes and other service providers. It will have the capacity to give strategic direction to the industry as well as engaging in dialogue with the PSB. At the same time, it is important that the policy process engages with users and not just suppliers of payment services. To facilitate that, the Reserve Bank has also set up a Payments User Consultation Group which began meeting late last year.
In summary then, the policy work of the PSB has been very much consistent with the philosophy and objectives of the original Wallis reforms. A good deal of that work has been what might be termed ‘co-regulatory’ in nature, in the sense that it involved promoting industry-led solutions rather than using formal regulatory powers.
But of course the PSB does have a regulatory mandate, and it has used its powers to regulate a number of aspects of card payments where it judged that there was a public interest case to do so. Probably the aspects of this regulation that have attracted the most attention have been those related to interchange and surcharging, and I would like to make some general comments about each of these.
First, interchange. The commercial function of interchange fees is a very interesting one. They serve as a device for shifting the benefit-cost balance between issuers and acquirers in a four-party scheme and therefore, indirectly, between cardholders and merchants. Payment schemes argue that this can be an important competitive device that can promote innovation, for example by being structured to encourage network growth or the take-up of new products. Typically, interchange flows from the acquirer to the issuer, and hence the fee structure tends to encourage issuance and use of a card, but may discourage acceptance by merchants if the fee is too high. For mature schemes, however, the capacity of merchants to refuse acceptance may be quite limited. As a result, it has been frequently observed that competition between schemes can have the effect of pushing fees up rather than down, in order to maximise incentives to issuers and cardholders.
The reason that this kind of outcome is possible is that there is a misalignment between the incidence of these fees and the structure of decision-making power in a typical transaction. In a nutshell, the cardholder chooses the payment instrument but the merchant pays the fee.
In designing its card payment reforms, both for credit and debit, the PSB concluded that competition of this nature was distorting price signals in a way that inefficiently encouraged the use of high cost cards and added to merchant costs. Hence, it judged that there was a case for interchange fees to be capped by regulation. A number of other jurisdictions have since taken a similar view.
The second aspect that I want to talk about is surcharging. The PSB has consistently taken the view that merchants should not be prevented from surcharging for higher-cost payment methods. Scheme rules that prohibited surcharging had the effect of reinforcing the distortive effects of interchange fees by preventing costs from being passed on to cardholders. They also reduced the flexibility of merchants in deciding how to respond to high-cost payment instruments. The ability to surcharge improves merchants’ bargaining position by allowing them a greater range of responses, rather than just being faced with a binary decision to accept or reject a particular card.
Efficient surcharging should of course reflect the underlying payment cost. The PSB’s initial reforms to credit and debit gave merchants the right to surcharge, while effectively relying on competition to ensure that surcharging would not be excessive. This regulation was revised in 2013 in response to concerns about practices that had developed since the initial reforms, particularly about surcharging that appeared excessive or unrelated to costs. The amended regulation still prevents schemes from imposing no-surcharge rules, but it allows them to limit surcharging to the reasonable cost of acceptance. In doing so it strikes a balance, at least in principle, between the rights of merchants and schemes. Merchants cannot be prevented from recovering reasonable acceptance costs, but they can be prevented by scheme rules from going beyond that. More on that in a moment.
The PSB’s reforms to surcharging and interchange have formed part of a broader package that also included rules relating to access and transparency. I don’t have time to cover all of that today. But taken together, the effects have been beneficial. The system has continued to innovate, and merchants’ card payment costs have fallen.[3] It is also notable that these costs are significantly lower in Australia than in a jurisdiction like the United States, where reforms to card systems have been much more limited.
The Murray Report last year broadly endorsed the PSB’s reform approach while flagging a number of areas for further consideration, particularly in relation to surcharging and interchange. These have now been taken up as part of the PSB’s card payments review.
The issue of surcharging remains contentious. Instances of apparently excessive surcharging have persisted. While they acknowledge arguments for what might be called a ‘no excessive surcharge’ regime, the schemes have argued that the current formulation is too complicated and difficult for them to enforce.
The card payments review is looking at several possible mechanisms for addressing this. One option proposed by Murray is a tiered approach that would allow tougher surcharging constraints to be placed on low-cost cards. A number of other options are available to strengthen enforcement and disclosure practices, for example allowing schemes to cap surcharges that are not percentage based at some low fixed amount.
On interchange fee regulation there are a number of issues to consider. These include the overall level of the interchange cap, the complexity and proliferation of interchange categories, the phenomenon of interchange ‘drift’ with the three-year compliance cycle, and the wide disparity between interchange rates for preferred merchants and those applying to others.
While it broadly endorsed the PSB’s regulatory approach to date, the Murray Report recommended that consideration be given to tightening existing interchange regulations in some significant respects. These included lowering the overall interchange cap, and broadening its coverage to include other incentive payments that serve a similar function. It argued that this would help to prevent circumvention and, in the case of companion card arrangements, would improve competitive neutrality.
