APCA RBA Card Review Submission 24 April FINAL

APCASubmissiontotheRBAReviewofCardPayments

Regulation

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Aboutthisdocument

ThisdocumenthasbeenpreparedbytheAustralianPaymentsClearingAssociationLimited(APCA).

Contact

DrBradPragnell

HeadofIndustryPolicyAPCA

Email:vel6,14MartinPlace

SydneyNSW2000

Tel:+61292164888

Fax:+61292218057

Note

APCAistheindustryassociationandself-regulatorybodyforAustralianpaymentsandhasabout100members.TheviewsexpressedhereinrepresentthepolicypositionoftheAPCABoardasappointedandelectedbyitsmembers.Theviewsdonotnecessarilyrepresenttheindividualviewsofmembers.

Publication

Informationinthisdocumentissubjecttochangewithoutnotice.Nopartofitmaybecopied,reproduced,translated,orreducedtoanyelectronicmediumormachine-readableformwithoutpriorwrittenpermissionfromtheAustralianPaymentsClearingAssociationLimited.

WrittenandpublishedinSydney,AustraliabytheAustralianPaymentsClearingAssociationLimited.

Copyright©2015AustralianPaymentsClearingAssociationLimitedAllRightsReserved.

TableofContents

About thisdocument...... ii

Table ofContents...... iii

Executive Summary...... 1

Recommendations...... 3

1.Overall Views on CardSystemRegulation...... 4

1.1.InterchangeFeeRegulation...... 4

1.2.Changes intheMarket...... 4

1.3.ExaminingCompetitionandLong-termSustainabilityofRegulation....5

1.4.Cost/BenefitImplicationsof a Dynamic Marketplace...... 6

2.InterchangeFeeDevelopments...... 7

2.1.AddressingTransparencyforMerchants...... 7

2.2.AddressingInterchange FeeRates...... 8

2.2.1.WeightedAverageversus HardCap...... 8

2.2.2.Cap onHighestIndividual InterchangeRate...... 8

2.3.Overall LevelofInterchange Fees...... 9

3.Surcharging...... 10

3.1.ExcessiveSurcharging...... 10

4.OtherIssues...... 11

4.1.CompetitiveNeutrality...... 11

4.2.Routing...... 11

5.Process...... 13

6.Conclusion...... 14

TheAustralianPaymentsClearingAssociation(APCA),astheindustryassociationandself-regulatorybodyforAustralianpayments,ispleasedtomakethissubmissiontotheReserveBankofAustralia’sReviewofCardPaymentsRegulationIssuesPaper(“IssuesPaper”).

Formanyyears,APCAhasbeenanactiveparticipantindebatesontheregulationofcardpayments,andwelcomesthisfurtheropportunitytomakeacontributiontoanimportantelementofpaymentspolicyinAustralia.Throughoutthisdebate,ourpreferencehasbeen tomaximisetheopportunityforcompetitionandtransparencytodrivegoodoutcomessuchasefficiencyandchoice,sothatanyregulatoryinterventionshouldbetargetedtocomplementmarket-drivenoutcomesratherthantoreplaceorcompensateforthem.Thisremainsourobjective.

TheIssuesPaperfirmlypositionsthecurrentreviewasafurtherevolutiononpastreforms(page25).Assuch,thefocusisonmodifyingthecurrentregimeof interchange feeregulationto address particularconcerns, rather than revisitingtheunderlying rationale inanyholisticway.Critical tothispremiseistheexplicitassumptionthatthemarketwillcontinuetobelargelycomposed ofmature major card schemes thatareviewedasa“must take”methodofpaymentformerchants(seepage8).Webelievethatthischaracterisationsignificantlyunderstatesthedegreeofchangeinthecompetitivedynamicsofthemarketplace,andthattherateofchange,innovationandcompetitionisinfactincreasing.

This hastwo major implications.First, thesubstantial changesin competitivedynamicssincetheimplementationofregulationwillwarrantathoroughreviewoftheunderlyingbasisforregulationwithinthenextthreetofiveyears.Inlightofsignificanttechnologychange,itishighlylikelythatthecompetitivedynamicsofretailpaymentswill,bythen,bemarkedlydifferent.

Second,anychangesmadenowtoaddressspecificconcernsmayhaveashortlifeexpectancy.Industry-widechangedrivenbyanextensivenew complianceregimeisunlikelytomeetanyreasonableindustrycost/benefittest,if,aswesubmit,themarketdynamicsareevolvingrapidly.Thereisariskthatindustryandregulatoryeffortandcostisexpendedonincrementalchangethatneedsfrequentrevisionasmarketdynamicschange.Thisdoesnotdenythepotentialvalueoftargetedchangestoaddressspecificconcerns.

Wedonotbelievethereisanyclearcaseforreducingtheoveralllevelofinterchangefees.Australiaalreadyhasamongstthelowestratesintheworld.Onthecontrary,whateverlevelinterchangefeesrestrictionsaresetat,themarketwilladjustaroundthenewregulatoryimpostwiththesupposedbenefitsforconsumersremainingunmeasurable.Wealsobelievethe Australianindustryis exhibitinghighlevelsofcompetitionandinnovation.Drastic changetotheeconomicsofretailpaymentsrunstheriskofunintendedconsequencesintermsofexistingmarketdynamics.

Thatsaid,wedobelievesomeofthemattersraisedintheIssuesPaperwouldbenefitfromattentionintheshort term,providedthisdoesnotimposeindustry-widestructuralchange.Animportantcomponentof effectivecompetitionistransparency.We recognise thatthe numberandrangeofinterchangefeeratescreatesalackoftransparencyformerchantsofthecoststhey willincur.Theeffectoftheupperratesalsocreatesaperceivedunfairnessofoutcomesbetweensmallandlargemerchants.

Therefore changesto the frequencyoftheweighted average calculationand anupper caponthehighestsingleinterchangefeeratemaybewarrantedtoenablebettermanagementofcostsforindividualmerchants.Wedonotsupportamandatedtechnologicalorregulatorysolutionto providemerchantswith“real-time”informationonthe costsofan individualtransactionasitwouldbeunlikelytomeetthecost/benefittest.Wewouldhoweversupportfurtherexplorationofdisclosure-basedmeasurestoimprovethetransparencyofcoststomerchants.

Regulatorysupportforsurcharging,thoughintendedtoprovideanavenueforrecoupingmerchantcostsandconveyingpricesignals,hasinpracticeopenedanavenuefortheexerciseofmerchantpowerinparticularmarkets.Thisisnotfundamentallyapaymentsystemissue,butacompetitionissueinthosemarkets.APCA doesnotsupporttherecommendationintheFinancialSystemInquiryFinalReporttocreateasystem-widethree-tieredapproach,sinceitrepresentsanexpensivesystem-widecompliancesolutionforspecificproblemsinparticularmarkets.Consumersexperienceexcessivesurcharginginparticularindustriesandassuchthesolutiontoexcessivesurchargingshouldbetotargetthoseindustrieswherethispracticeismostcommon.

Further,APCAbelievesthatAmericanExpresscurrentlyoperatesasaneasilydistinguishedcompetitor,andonethatisinnowaya“musttake”foranymerchant.Givenourconcerntoavoidlarge-scaleandcostly structuralchangeforrelatively narrow benefit,weseenoregulatoryrationaleforandwouldnotrecommendthattheregulatoryperimeterbeextendedtoincludefinancialinstitution-issuedAmericanExpresscards.

APCAbelievesthatcardholdersshouldbeabletodecidewhichaccountandschemeshouldbeusedforatransaction.Enablingmerchantstodecideonroutingwillonlybenefitlargermerchants(whowouldhavethecapabilitytointroducethetechnologicalchangesandthemarketpowerneededtobenefitfromthis)and,assuch,exacerbatethegapbetweenthecostsexperiencedbylargeandsmallmerchants.

Lastly,APCAwouldrecommendthatattheconclusionofthisreviewthePaymentsSystemBoardfocusesonhigh-levelobjectivesand, if required, thatindustryassistin workingtowardsefficientandworkablesolutionsandimplementationpaths.

Recommendations

Recommendation1:APCArecommendsthatthenextreviewofretailpaymentsregulationshouldoccurwithinthenextthreetofiveyears,shouldholisticallyreviewdevelopmentsbothwithinandbeyondcardpayments,andfocusonregulatoryapproachesthatharnessandimprovethecompetitivemarketplace.Inparticular,theongoingutilityofinterchangefeeregulationshouldbereviewed.

Recommendation2:APCArecommendsthatchangestointerchangefeeregulationarisingfromspecificconcernsraisedinthecurrentReviewshouldbesubjectedtocarefulcost-benefitimplementationanalysis,so asto ensure thattransitionaland compliancecostsdonotoutweighperceivedbenefits.

Recommendation3:APCArecommendsthatcompetitiveanddisclosure-basedsolutionstoenhancedmerchantinformationbesoughtratherthanaregulatoryandmandatorytechnicalsolution.

Recommendation4:APCArecommendsretainingtheweightedaveragewithannualrecalculation.

Recommendation5:APCArecommendsanexplorationofacaponthehighestindividualinterchangefeeratethataregulatedschemecouldoffer,aswellasapossiblelimitonthenumberofdifferentinterchangefeerates.

Recommendation6:APCArecommendsthattheFSIrecommendationforthree-tieredsurchargingnotbepursuedbutrathertargetedmeasuresbeexplored.

Recommendation7:APCArecommendsthatclaritybeprovidedontheabilitytosurchargenon-cardpaymentsinstruments.

Recommendation8:APCA doesnotsupport furtherextendinginterchangefeeregulationtoadditionalschemes.

Recommendation9:Inresponding totheReview,thePaymentsSystemBoard shouldfocusonarticulatinghigh-levelpolicyobjectivesandseekengagementwithindustryonidentifyingsolutionsandimplementationpaths.

1.1.InterchangeFeeRegulation

Interchangefeesareaformofwholesalepricingandtheirregulationrepresentsasignificantinterventionintotheoperationofthemarket.PricesshouldideallybesetbythemarketandAPCAbelievespromotingcompetitionisgenerallypreferredtopriceregulation.

Since2000,paymentcardscheme regulationandeconomicshavebeensubject to extensivetheoreticalandempiricalstudyaswellasmarkedlydifferentregulatoryapproachesinmanyjurisdictions.Thereisnothingapproachingaclearconsensusontheoptimalregulatoryapproach.Asalwaysinmattersofcompetitionpolicy,APCAsubmitsthattheneedforregulationremainscontingentontheevidence,andinparticularonwhetherthereiseffectivecompetitionineachofthemarketsinthevaluechain.

TheIssuesPapersuggeststhatincreasedschemecompetitionmightperverselyhavetheeffectofdrivingupwardinterchangefeesandothercostsforacquirersandmerchants(page4).Thisassertionisonlytruewherecompetitivepressuresontheacquiringsideofthetwo-sidedmarketrepresentedbythepaymentnetwork arelessthanontheissuingside.Criticaltothis premise istheexplicitassumption thatthe market willcontinue tobelargelycomposed ofmaturemajorcardschemesthatareviewedasa“musttake” methodofpaymentformerchants(seepage8).

Contrarytothisassumption,thereisstrongevidencethatincreasedcompetitivepressurethroughmoreintenseschemecompetitionandgreatercommercialfreedomformerchantsthroughrelaxedhonour-all-cardsrestrictions,andtheabilityto surcharge,have increased themarketpoweroflargemerchantstothepointwheretheycannegotiatelowerinterchangefeesthanthecap–thestrategicmerchantratesdiscussedonpages26-28oftheIssuesPaper.TheIssuesPaperdoesnotrecognisethisoutcomeasbeingdrivenbygreatercompetitivepressureon schemes,butitdoesidentify the consequentialissue thatmerchantswithlessmarketpowerbearrelativelyhigherrates.

Thisevidencehighlightsthatcompetitivepressuresareworkingincardpaymentsandpotentiallycanbemadetoworkbetter.

1.2.ChangesintheMarket

Inpreviousreviewssuchastheoneundertakenin2007/08,thePaymentsSystemBoard(PSB)linkedcompetitionwithinterchangefeeregulation.Ifthecompetitivedynamicswereappropriateandcertain innovations (such as newonlinepayments)wereintroduced,thenthePSBindicateditwouldconsidersteppingbackfrominterchangefee regulation. Morerecently,theFinancialSystemInquiry(FSI)FinalReportrecommendedthatthePSBconsiderextendingandstrengtheninginterchangefeeregulation.

Conversely,APCAhas,inforumssuchastheFSI,questionedthelongtermsustainabilityofsuch regulation.APCA’sconcernis that the FSIreport seems toregard low interchange feesasaninherentgood,whereastheoriginalregulatoryrationalewastoaddressaperceivedmarket failurewherebymerchantswereunabletoexertmarketpowerinrelation to schemes.TheRBAhasacknowledgedthatinterchangefeesmayhavealegitimateroletoplayinbalancingincentiveswithinatwo-sidedmarketandtohelpitgrow.Thiscouldapplyintheestablishmentofanewsystem(suchasanNPPoverlayservice).Wesubmitthatthispolicyapproachispreferred.

Thecompetitiondynamicsfacingpaymentschemesandsystemshavefundamentallychangedsinceinterchangefeeregulationwasfirstintroduced.MasterCardandVisahavebecomeindependentcommercialorganisations in2006and2008respectively; in2009eftposPaymentsAustraliaLtdwasestablishedasa separatecommercial organisationenablingittocompete withthecardschemesandin2014,NPPAustraliaLtd wasestablishedtoimplementafasterpaymentsinfrastructurethatislikelytofacilitatenon-cardmobilepayments.Cardsareincreasinglyusedin theonlineworldwherethereareanumberofcompetingalternativessuchasPayPal andothernewentrantshaveenteredthismarket,suchasPOLi andPaymate.Further,digitalcurrenciesofferevennewerwaysofpayingonline.

Technologyislikelytofurtherchangecompetitivedynamicsinthenextfewyears.Asphysicalcardsgivewaytomobileappsandwallets,withnewofferingssuchasApplePay,schemesarelikelytocomeunderincreasingcompetitivepressure,sothatregulationofschemeinterchangefeeswillbeaffectinganarrowingsegmentofthetotalvaluechainthatdeterminescosttoendusermerchantsandconsumers.Theregulatoryframeworkmustremainrobustandresponsivetotheneedsofprovidersandenduserswithinthischangingenvironment.

1.3.ExaminingCompetitionandLong-termSustainabilityofRegulation

InAPCA’ssubmissiontotheFSI,westatedthattherehasbeenlittleconsiderationofthelong-termsustainabilityofregulatoryinterventionininterchangefees,particularlyastechnologyandcompetition inpaymentservicesevolve.Further,westatedthatwe believedthattheFSIFinalReportappearstoprimarilycreditinterchangefeecapsforcreatingandmaintainingefficientpaymentsinAustralia–whileotherfactorssuchastechnologicalinnovationandindustryinitiativessurprisinglyreceivenomention.

Webelieveanunderstandingofthisintensifyingcompetitionwillhelpinformanappropriatelong-termpolicyresponse.ThoughthecurrentIssuesPaperappearstobefocussedonimmediateissues,webelievethatthechangesinthemarketsincetheimplementationofregulation,togetherwithtechnology-drivenchangeslikelyinthenextfewyears,warrantathoroughreview oftheregulatoryrationale.Giventhe acceleratingpaceofchange,thenext,more fundamental,reviewshouldbewithinthenextthreetofiveyears,ratherthanthefivetosevenyearperiodswehaveseenbetweenpreviousinterchangefeeregulationreviews.

Recommendation1:APCArecommendsthatthenextreviewofretailpaymentsregulationshouldoccurwithinthenextthreetofiveyears,shouldholisticallyreviewdevelopmentsbothwithinandbeyondcardpayments,andfocusonregulatoryapproachesthatharnessandimprovethecompetitivemarketplace.Inparticular,theongoingutilityofinterchangefeeregulationshouldbereviewed.

1.4.Cost/BenefitImplicationsofaDynamicMarketplace

Theobservationsmadeaboverelatingtochangesincompetitivedynamicsinthelastfewyears,andthelikelihoodoffurthertechnology-drivenchangesinthefuture,alsosuggestacautiousandtargetedapproachtoaddressinganyspecificregulatoryconcernsintheshortterm.Makinganysignificantchangeto theoverallstructureofinterchangefeeregulationwillimposesignificanttransitionalcostsonissuers,acquirersandschemes.Thesecostswillultimatelybebornebycardholdersandmerchants.Tounwindexistingcommercialarrangementswouldalsobecomplex,costlyanddifficult.

Inachangingenvironment,regulatorychangeswithhightransitionalcosts,andchangesthatcreateindustry-widecompliancecosts,areunlikelytobeofnetvalueiftheyrequirefurtherchangewithinafewyears,eveniftherearematerialpolicybenefits.Suchanenvironmentalsocreatesahighriskoffurtherunintendedconsequences,andtheneedforyetmoreregulatoryadjustment.

Recommendation2:APCArecommendsthatchangestointerchangefeeregulationarisingfromspecificconcernsraisedinthecurrentReviewshouldbesubjectedtocarefulcost-benefitimplementationanalysis,so asto ensure thattransitionaland compliancecostsdonotoutweighperceivedbenefits.

Notwithstandingourpreviouslystatedpositiononthelong-termsustainabilityofinterchangefeeregulation,belowAPCAoffersitsviewsonhowtheidentifiedissuesconfrontingsmallmerchantsmaybeaddressedthroughmodificationstotheexistingregime,withafocusonenhancingcompetitionandtransparency.

2.1.AddressingTransparencyforMerchants

TheIssuesPapernotesthatthenumberofinterchangefeesrateshasincreased,leadingtocomplexity.The wideningof therangeandlowerratesfor“strategic merchants”canbeseenasevidenceofincreasedmarketpowerforlargemerchantsrelativetoschemes.However,ithasalsomeantthatsmallermerchants,particularlythosethathaveagreedto“interchangefeeplus”pricing,areoftensubjecttohigherpertransactioncosts,especiallyiftheircustomersusepremiumcards.TheIssuesPaperalsonotesthatthemovetowards“account-basedprocessing”similarlyobscuresthelinkbetweenthecardbeingacceptedandtheassociatedcosttothemerchant.

Whilewewouldassumethedevelopmentsnotedabovehavecausedsomelevelofdissatisfactionamongstsmallmerchants,furtherclarityonthe scaleandnatureoftheproblemwouldassistindetermininganappropriateresponse.Further,inmaking anychanges,thepublicpolicyobjectives shouldbe clear. Iftheunderlyingpublic policyobjectiveisoneofachievingfairnessbetweensmallandlargemerchants,thenthisshouldbeclearlyspeltout.

TheIssuesPapersuggeststhattheremaybemeans,bothvisuallyandelectronically,tomaketheinterchangefeeassociatedwithaparticularcardidentifiabletothemerchantatthepointofacceptance.Thecostsandbenefitsassociatedwithenhancedtransparencyneedtobe carefullyconsidered.Forexample,merchantsknowingthe costofacceptinga cardat thetimeofthetransactionmaybedesirable.However,itisdifficulttoimagineasituation whereasignificantnumberofmerchantswillmakediscretedecisionsforeachtypeofcardbasedon“colour”,giventhatmostmerchantsareseekingtoprovideagoodcustomerexperienceandwillrelyonsimpleacceptanceandsurchargingrules.

Asitisdifficulttoimaginediscretemerchantdecision-makingoneachtransaction,wewouldnotendorseanyregulatoryrequirementfora“real-time”technologicalsolution,particularlygiventhelackofclarityonthescaleandnatureoftheproblem.Ratherwewouldsupportacquirersbeingabletocompeteandinnovate.

We believethatthe marketplacefor merchantacquiringiscompetitive.Giventhecontractualrelationshipbetweenthemerchantandthemerchantacquirer,itisprobablymoreimportantforthemerchanttounderstandthearrangementtheyareenteringintothantoreceive“real-time”information.Onthisbasis,wewouldsupportanexplorationon enhancingtransparency

formerchantsthroughimprovementstotheup-frontandongoinginformationtheyreceivefromacquirers.

Recommendation3:APCArecommendsthatcompetitiveanddisclosure-basedsolutionstoenhancedmerchantinformationbesoughtratherthanaregulatoryandmandatorytechnicalsolution.

2.2.AddressingInterchangeFeeRates

ThewideningrangeofinterchangefeeratesandtheupwarddriftinthehighestrateareoutlinedasmattersforconcernintheIssuesPaper,particularlytheirimpactonsmallermerchants,whichisidentifiedbutnotquantified.Whilethesedevelopmentscouldbeperceivedasgoingbeyondthe“intent”oftheearlierreforms,theycanalsobeseenasareasonableandcompetitiveresponsebyVisaandMasterCardtotheissuanceofAmericanExpresscards.

TheIssuesPaperidentifiesthetransparencyofcostsforsmallmerchantsasanimportantissue,thoughasnotedabovethecostsandbenefitsofinterventionremainunclear.Onthisbasis,wewouldrecommendthatthePSBfocusitsresponseonensuringthefuturemanagementofcurrenttrends.

2.2.1.WeightedAverageversusHardCap

TheIssuesPaperraisesconcernsabouttheweightedaverageandexplorestheuseofa“hardcap”.Theweightedaverageprovidesflexibilityininterchangeratesandensuressomelevelofcompetitivenessbetweenschemes.Ahardcap couldseethemaximumbecometheminimumandcertaingroups,suchascharities,couldlosetheirzerointerchangestatus.Amorefrequentcalculationoftheweightedaveragemayhelpmanageoutcomes,thoughthebenefitofthisshouldbeweighedupagainstthecostofmorefrequentcalculation.

Recommendation4:APCArecommendsretainingtheweightedaveragewithannualrecalculation.

2.2.2.CaponHighest IndividualInterchangeRate

Asnotedabove,theimpactonsmallmerchantsofthewideningrangeofinterchangefeeratesandtheupwarddriftinthehighestrateappearstobeoneofthemajorconcernsoutlinedintheIssuesPaper.Graph9oftheIssues Paperillustratesthetrend(seepage21).

Ifthe PSB is concerned about thetrendidentifiedinGraph 9becoming more pronounced, forexamplethehighestraterisingto250or300basispoints,thenconsiderationcouldbegiventoacaponthehighestrate.This couldbedonein awaythat does notoverlydisruptexistingarrangements,preventsacontinuationoftheexistingtrendsandstillprovidesanopportunityforcompetition.

Giventheconcernsaboutthenumberofrates(asnotedinTable1onpage27oftheIssuesPaper),considerationcouldbegiventoanupperlimitonthenumberofrates.Thissimilarlyplacesabrakeoncurrenttrendsandshoulddampenincreasingcomplexitybutalsolimitscompetitionandinnovation.Anyupperlimitonthenumber of rates cannotbe“setandforget”butmustbeflexibletoaccommodateinnovation.

Recommendation5:APCArecommendsanexplorationofacaponthehighestindividualinterchangefeeratethataregulatedschemecouldoffer,aswellasapossiblelimitonthenumberofinterchangefeerates.

2.3.OverallLevelofInterchangeFees

TheIssuesPaperhighlightscertainoverseasinitiatives,suchastheEuropeanUnionmovingto30and20basispointcapsoncreditanddebitcardsrespectively,asabasisformovingtoahardcapandreconsideringtheoveralllevelofinterchangefeeregulation.UsingtheEUasanexampleisnotwithoutitschallenges.AsnotedintheIssuesPaper,theseregulationshaveyettobeapprovedbytheEuropeanParliamentandtheCounciloftheEU.Underthecurrentproposal,membercountrieshaveflexibilityinhowtheywouldbeimplemented.

Further,thepaymentsmarketinmostEUcountriesisquitedifferentthanthatseeninAustralia(orjurisdictionssuchasCanadaortheUK).AsnotedintheIssuesPaper,overallcreditcardusethroughoutcontinentalEuropeismodest.

AjurisdictionwhichhasaprofilemoreakintoAustraliaisCanadawhereinlate2014,VisaandMasterCardagreedtoafiveyearcommitmenteffectiveApril2015toreducetheireffective(average)interchange feerates to 150 basispoints.Therewasalso commitmentonnew lower rates for charities and independent businesses such as newsagents and

pharmacies.ThisvoluntarycommitmenthasbeenincorporatedintotheCanadianCodeofConductchangesannouncedbytheCanadianMinisterofFinanceon13April2015.1

Onthisbasis,itishardtoseeAustraliabeing“outofstep”withoverseasdevelopmentsbyretainingthe50basispointweightedaverage.

Further,inthe2007/08Review,inconsideringamovefrom50to30basispoints,theRBAsoughtindustrycommitmenttoenhancedinnovationthroughthedevelopmentofeftposPaymentsAustraliaLimited(ePAL)andanewonlinepaymentsoffering.TheAustralianindustry,hasinrecentyears,demonstrateditscommitmenttoenhancingcompetitionandinnovationthroughthedevelopmentofePALandcommitmenttotheNewPaymentsPlatform.

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3.1.ExcessiveSurcharging

“Excessivesurcharging”occurswhensurchargesareperceivedtobehigherthanthecostsofcardacceptance.Excessivesurchargingisaconcern,asitdistortspricesignalsandadverselyimpactsonpaymentssystemefficiency.

APCAacknowledgesthatexcessivecustomersurchargingremainsacontroversialpracticethatrequirescloseattention.Ideallythesurchargeshouldreflectthecostofacceptance.Howeverinpractice,itappearsthatmarketpowerexertedbymerchantsisoftenthekeydeterminantofexcessivesurcharging.APCA’sexistingpolicypositionisthatmarketandself-regulatorybasedsolutionsorexistinglegislationshouldbeexploredbeforeconsiderationofanynew pricecappingresponse to addressexcessivesurcharging.Thisincludestheapplicationofexistingconsumerprotectionprovisionsonpricing.

Asexcessivesurchargingisoftenconcentratedinparticularindustries,thesolutionmay alsobetargeted.TheapproachoftheVictorianGovernmenttoregulatingsurchargingwithintheVictoriantaxiindustryrepresentsonewayinwhichatargetedapproachcouldaddresscommunityconcerns.

Thethree-tieredapproachthattheFSIFinalReportproposesappearscomplexandpotentiallydifficulttoimplement.Wearenotawareofthisapproachbeingimplementedorconsideredanywhereintheworld.Inparticular,wewouldbeconcernedifissuersoracquirerswereexpectedtochangetheirpractices,forinstancewhetherissuerswouldbeexpectedtoreissuecardssothatthecardinformedthecustomerwhetherasystemwas“low/medium/high”. Further,whilethePSBwouldbeexpectedto“setlimits”onsurcharging,todatethishasnotbeenthechallenge.Ratherthechallengehasbeeninmonitoringandenforcement.

Recommendation6:APCArecommendsthattheFSIrecommendationforthree-tieredsurchargingnotbepursuedbutrathertargetedmeasuresbeexplored.

GiventheRBA’sobjectiveforpaymentsefficiency,thereshouldbeclarityontheabilityofmerchantstosurchargebothcardandnon-cardpaymentinstrumentstorecoupacceptancecostsandtoeffectmorerobustpaymentinstrumentcompetition.

Recommendation7:APCArecommendsthatclaritybeprovidedontheabilitytosurchargenon-cardpaymentsinstruments.

4.1.CompetitiveNeutrality

APCAsupportscompetitionandtransparency.InrespecttoAmericanExpress,includingfinancialinstitution-issuedcards,competitionandpricesignalsappeartobeoperating.MerchantshavebeenabletodistinguishAmericanExpressfromothercardsandhaveoftenchosentorefuseorsurchargethesecards.

Itisourbeliefthattheissueofcompetitiveneutralityandcompanioncardsisanoutcomeofthelimitationsofthecurrentapproachwhichreliesondesignationofindividualpaymentsystems.Thisapproachworkswellinanenvironment wherethenumberof differentpaymentmethodsandschemesarestableandwell-defined.Newentrants,newtechnologyanddeepeningcompetitionintheschemespaceexposesomeofthedifficultiesofthisapproach.Imposingsimilarrequirementsondesignatedschemesisadifficultandtime-consumingprocess,particularlywheredifferentbusinessmodelsandfeesstructuresareused.Aswell,non-designatedschemesmayretainacompetitiveadvantage.

Despitetheseanomaliesandrecognisingthechallengethiscreatesfortheregulatedschemes,interchangefeeregulation beingextendedtoanotherschemedoesnot addressthelong-termunsustainabilityofthisregulatoryapproach.

Recommendation8:APCAdoesnotsupportfurtherextendinginterchangefeeregulationtoadditionalschemes.

PublishingthresholdsastowhenanentitywillbesubjecttointerchangeorrelatedregulationwouldassistinprovidingtransparencyandenablingentrantstomakedecisionsaboutenteringtheAustralianmarket.Thisapproachwillrequirethedevelopmentofobjectivecriteriaandthecollectionofaccuratedata,bothofwhichwillprovechallenging.Ifpossible,thiscouldbeanimprovementonthecurrentsituation.However,italsopointstotheunderlyingproblemswiththecurrentapproachandthatinterchangefeeregulationisnotasustainablelong-termsolution.

4.2.Routing

The RBAis seeking viewson clarifying arrangements for competing paymentoptionswithinasingledeviceorapplication.

Theintroductionofcontactlesscardshasmadethisanurgentissueandthedevelopmentofnewtypesofdigital walletsandtheuseofmobiletechnologywillonlyexacerbatethechallengeofwhosetsthedefault,whocanoverridethatandonwhatbasistheycandoso.Clarityonthisisimportantasisworkingtowardsanoutcomethatsupportsrobustschemecompetitionandprovidestransparencyforbothcardholdersandmerchants.

APCAbelievesthatthefollowingprinciplesshouldbeapplied:

  • Thatthecardholdershould beabletochoosewhichaccountorschemeis usedwhenmakingatransactionwherechoiceisavailableandnothavethatchoicechangedwithouttheirknowledgeandconsent;
  • Thatnooneschemeshouldbeabletounfairlyrestrictorinhibittheabilityofanothertocompete;
  • Maximisinginteroperabilityofcardsinstruments,terminalsandhostprocessingisdesirable;
  • Respectingtheconfidentialityofcommerciallysensitivedata;
  • Maximisingtheoperationalefficiencyofthesystem;and
  • Promotinginnovationincardservicesandproducts.

The“dual-networkdebitcard”announcementbytheRBAonthe21August2013providesahigh-levelindicationastotheagreementtheRBAreachedwiththecardschemes.Howeverdetailsofthisagreementarenotinthepublicdomainand,asaresult,itisdifficultforAPCAtocomment.

Further,enablingmerchantroutingmayhavetheunintendedconsequenceofbenefittinglarger,establishedplayersthatareabletomaketheinvestmenttotakeadvantageofroutingwhilesmallerplayersmaybeunabletodoso.

5. Process

AsthePSBdevelopsitsresponsetothisReview,APCAwouldrecommendthatthePSBworktowardshigh-level policyobjectivesandthenforindustry to worktowardsanagreementonaspecificsolution/implementation.ThisapproachwassuccessfullyemployedintheStrategicReviewofInnovation,byprovidingbothpublicpolicydirectionbutalsorelyingonindustryexpertisetoexploreandcraftamoreefficientandworkableoutcome.

APCAandtheAustralianPaymentsCouncilcouldplayaroleindevelopinganindustryresponse,withAPCApotentiallyplayinganimportantroleinimplementingpolicy.FurtherassistancecouldbeprovidedthroughAPCA’sIssuersandAcquirersCommunityandengagementwiththemainschemes, whicharenow OperatorMembersofAPCA.Thiscouldbedoneinanopenandinclusivefashion.

Recommendation9:Inresponding totheReview,thePaymentsSystemBoard shouldfocusonarticulatinghigh-levelpolicyobjectivesandseekengagementwithindustryonidentifyingsolutionsandimplementationpaths.

APCAcontinuestobelievethatcompetitionandtransparencyshouldbepromotedratherthanregulationimposed.Wealsobelievethatinterchangefeeregulationisunsustainableinthefaceoftechnologicalandcommercialdevelopments.

Anychangestotheexistingregimeshouldbesubjecttocarefulscrutinytominimiseanytransitionalcosts.However,APCAbelievesthattheremaybechangestotheexistingregime,suchaschangingwhentheweightedaverageiscalculatedandan upperlimitonthehighestinterchangefeerate,whichcouldbedoneinanefficientfashionandwhichaddresstheconcernsofsmallmerchantsoverthenumber,complexityandrangeofinterchangefeerates.

TheAustralianindustryhasdemonstrated,throughinitiativessuchastheNewPaymentsPlatform, its ability to findsolutionstoseeminglyintractableandcomplex industryissues.Onthatbasis,thePSBshouldseektoestablishhighlevelpolicyobjectiveswiththeindustryengagingcollaborativelytofindmeaningfulandworkablesolutionsandimplementations.

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