The Productivity Commission recently unveiled a long-awaited report on competition in the financial sector, which targeted card acceptance costs paid by merchants as an area of concern.

Although the recommendation to ban interchange fees was supported by some retail organisations, experts doubt that the central bank — which has the power to bring in pricing controls if it wishes — will put the suggestion into action.

“Given that interchange regulation was last reviewed in 2015, conclusions announced in May 2016 and the changes implemented largely in mid 2017, I expect the RBA would be hesitant in going through a further review and consultation process so soon after this,” said Michael Swannell, an associate within Australia’s Payments Consulting Network.

“It’s a lengthy and time consuming process that involves a draft paper, consultation phase, conclusions then implementation phase — all of which can take up to two years from start to finish. Then there is the monitoring over time to see what the effects are.”

The current weighted average benchmarks imposed by the central bank are 0.5 percent for credit cards and 8 cents for debit cards, but those limits are supplemented by caps on any individual interchange fee within a scheme.

Ultimate price ceilings apply at 0.8 percent for credit cards, while no debit interchange fee is permitted to exceed 15 cents if levied as a fixed amount or 0.2 percent if levied as a percentage.

In response to the Productivity Commission’s draft report, which first suggested the interchange ban, the RBA agreed that there was “little justification for significant interchange fees”.

However, it added that more time was needed before conducting a further review of the regulatory framework.

“It is like trying to change course on an oil tanker - you have to wait to see what the outcome is for a reasonable amount of time before any further changes are made,” said Michael Swannell of the Payments Consulting Network. “If you knee-jerk and make further changes, you don’t have the opportunity to see what the longer term effect of the first changes are.”

The Australian Retail Association (ARA) also rejected the proposal for an outright ban on interchange on the grounds that it would “simply trigger cost-shifting”.

A second concern was that reducing revenue from interchange could trigger a shift from four-party schemes to non-regulated three-party schemes classified as “foreign-issued”, which are not subject to the price controls.

That view was also put forward by the central bank in arguing against lowering interchange caps to the same levels as in the EU.

“The ARA does not believe that interchange fees have stifled payment innovation but we still remain cautious as costs associated with payments have the potential to rise in other areas if the interchange is banned,” the association said.

To prevent payment service providers from recouping losses from interchange elsewhere, the commission recommended that authorities look to regulate the merchant service charge directly.

However, that is also likely to be a tough sell to the RBA, which has pointed out that the overall average merchant service fee in Australia is “significantly lower” than in many other jurisdictions.

“What we have seen in this market is that there has been downward pressure on merchant service fees,” said payments consultant Swannell. “The RBA has acknowledged this and looks upon the trend quite favourably.”

It is becoming increasingly common for merchants to operate on an “interchange plus” model, he added, which separates the interchange fee and the additional cost charged by the acquirer. The latter category typically covers scheme fees, processing costs and overheads.

“That is at least giving greater transparency to the interchange component versus other fees, but certainly there has been no move at this stage to go interchange fees, plus scheme fees, and an acquirer margin on top of that,” he said.

“The Australian Retail Association does not believe that interchange fees have stifled payment innovation but we still remain cautious as costs associated with payments have the potential to rise in other areas if the interchange is banned,” a spokesperson for the association said.

The recommendation has found little support among issuing banks.

The boss of the Commonwealth Bank of Australia, which is struggling to overcome reputational turmoil after multiple regulatory scandals of which one resulted in a record breaking fine for anti-money laundering failings, recently spoke out against the recommendation.

Speaking at a press conference last week Matt Comyn, who took over as chief executive in April, argued that banning interchange would have negative financial consequences.

He said that revenue gained from interchange was “used to provide fraud protection for example and continued investment in the payments industry”.

Visa and Mastercard declined to comment when contacted by Payments Compliance. However, the two companies’ responses to the first draft report ardently argued against abolishing interchange fees.

Mastercard pointed out the scheme itself did not profit from the fee, and argued it was a “critical component of the payment system” by funding investments in the safety and security of networks and delivering benefits to merchants and consumers.

The Productivity Commission described such arguments as “feeble”, but it has itself been criticised for failing to detail sufficient evidence supporting its claim that banning interchange fees would increase competition in the payments market.

Another commission recommendation was for the RBA’s Payment System Board to mandate low-cost routing for dual network contactless cards, allowing retailers to choose which scheme to direct a payment through for cards branded with either Visa or Mastercard and eftpos.

The central bank again showed reluctant to impose regulatory obligation, however, determining that the market was demonstrating sufficient progress in implementing such capabilities without its interference.

Paula Gilardoni, a partner at Gilbert + Tobin law firm, said there are a lot of proposed reforms currently on the agenda for the financial services industry, and given the perceived need for change it seems likely that some recommendations would be implemented.

However, she added that nothing will happen until the Royal Commission, which is in the midst of a separate and extensive inquiry into the financial sector, finishes that work and publishes its findings.


Full article published with permission from the author: Fran Warburton, Payments Journalist for Payments Compliance.  

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