RBA Kicks off its Review into the Future of Retail Payments Regulation

5 Dec 2019

- On 29 November 2019, the Reserve Bank of Australia (RBA) launched a Review of Retail Payments Regulation (the Review) with the publication of an Issues Paper. Submissions are due 31 January 2020.

- This is the latest in a series of semi-regular reviews of payments regulation that the RBA has conducted since the early 2000s, most recently in 2015. Reflecting the rapidly changing payments landscape, the current review is broader in scope than earlier iterations – looking at broader trends within payments, rather than just the cards system.
 

- The Review is at an early stage, and the RBA is currently collecting stakeholder views on the issues raised, and considering any ‘gaps’ in the payments system. If the RBA deems necessary, a further review with more detailed policy proposals will follow in 2020.

 

 

Sources RBA, Review of Retail Payments Regulation: Issues Paper (Link)


POINT OF VIEW

On Friday, 29 November, the RBA released the Issues Paper, Review of Retail Payments Regulation.

Compared to earlier reviews of card payments regulation, the scope is broader. The RBA states that the review: “is intended to be broader-ranging and to consider whether there are any gaps in the payments system that should be addressed, as well as whether there are any regulatory issues arising outside of the narrower topic of card payments.”

The Issues Paper does not ask any specific questions. Rather it is “the first stage in the review process.” It “summarises relevant developments since 2015–16 and identifies some potential issues for the review.” Following receipt of submissions, the RBA states it will “endeavour to meet with stakeholders to discuss their submissions in more detail.” A second stage of consultation – on more detailed proposals for reform – will occur if it “emerges that in the Board’s view a consultation on policy actions is in the public interest.”


Landscape Changes since the Previous Review

The scope of the inquiry reflects the evolution of the payments system since the previous Review of Card Payments Regulation in 2015-16. Trends include new business models, the growth of the fintech industry, new technologies and the continued growth in importance of mobile devices. Older trends have continued or accelerated – Australians continue to move away from cash and cheques have almost disappeared.

The regulatory landscape for payments and the financial sector also continues to evolve. The Productivity Commission (PC) 2018 Report, Competition in the Australian Financial System, made several recommendations around the payments system, many of which are currently already under consideration or consultation. The Australian Securities and Investments Commission (ASIC) is currently reviewing the ePayments Code and the Council of Financial Regulators (CFR) recently finalised a review of the regulatory regime for stored-value facilities, which is now with the Treasurer.

Previous regulatory reviews in 2011 and 2015 have significantly shaped the Australian payments system, including reforms such as:

· The implementation of same-day settlement for direct entry transactions;
· The formation of the Australian Payments Council;
· The development of the New Payments Platform;
· Changes to the weighted-average interchange fee benchmark for debit cards;
· Benchmark compliance observed quarterly rather than triennially;
· Designation of the AMEX companion card system; and the
· Introduction of a definition of “permitted surcharge” based on the merchant’s average cost of acceptance for each scheme.

 

  • The implementation of same-day settlement for direct entry transactions;

  • The formation of the Australian Payments Council;

  • The development of the New Payments Platform;

  • Changes to the weighted-average interchange fee benchmark for debit cards;

  • Benchmark compliance observed quarterly rather than triennially;

  • Designation of the AMEX companion card system; and the 

  • Introduction of a definition of “permitted surcharge” based on the merchant’s average cost of acceptance for each scheme.
     

IMPLICATIONS

 

Reflecting the broader scope of the review, the Paper asks seventeen questions across five separate sections:

 

  • Strategic Issues in the Retail Payments System

  • Competition in the Cards Market

  • Interchange and Net Compensation Regulation

  • Surcharging

  • Regulation and Enforcement

Indeed, the structure of the Issues Paper reflects the ongoing evolution of the payments system. The review has not been undertaken in a vacuum. As outlined below, each section references significant changes that have recently occurred (or are currently underway) domestically and internationally.


Strategic Issues in the Retail Payments System


Noting the ongoing AusPayNet consultation on the future of Australia’s payment systems, including direct entry, the first section seeks views on whether there are any “major or prospective developments in the broader payments industry [that] are particularly relevant to this review.” The section outlines recent developments in Australian retail payment systems, and global developments such as as stablecoins.

Whilst consumer cash use continues to decline, the RBA Report Where’s the Money? An Investigation into the Whereabouts and Uses of Australian Money, identified that the value of of cash in circulation in Australia continues to increase. This “less-cash” society, has led to concerns in some countries such as Sweden and the UK which has resulted in recommendations for reasonable “access to cash”.

The increasingly digital nature of the payments system has brought the policy implications of operational resilience into sharper focus. This is an area that the PSB has raised previously – in May 2019 it endorsed the RBA working “with the industry and [APRA] on a standard set of operational performance statistics to be disclosed by individual institutions” and in November, it “emphasised the importance of financial institutions ensuring that their systems and services are resilient and reliable.” The Paper also solicits views on the rise of crypto-currencies, including “global stablecoins.” Reflecting their rise in prominence over recent years, crypto-currencies have increasingly been a focus of global regulators. The World Economic Forum has noted that some countries are experimenting with central-bank digital currency – either general use (retail) or for use by commercial banks and clearing houses (wholesale).

Conversely, “global stablecoins” are crypto-currencies backed by assets or fiat currency. A recent example is Facebook’s June 2019 announcement that it would launch “Libra” coin, governed by a consortium of 28 firms. Concurrently, subsidiary Calibra stated it will a digital wallet for Libra in 2020 that will allow users will to transfer Libra amongst themselves and to merchants via WhatsApp, Messenger and a stand-alone app. These transfers will reportedly occur at “low to no cost.”

Since the announcement, Libra has been subject to regulatory and political scrutiny globally. In turn, these discussions have sparked further investigation of how to regulate global stablecoins. In October 2019, the G7 Working Group on Stablecoins issued the report Investigating the impact of global stablecoins. Noting that the RBA is working with international counterparts, the Paper seeks stakeholder views on relevant policy issues around global stablecoins.  
 

 

Competition in the Cards Market


 

The Paper then moves to discuss competition issues in the cards market. The issues discussed in this section include dual-network cards (DNDCs) and least-cost routing, competition in card acquiring, scheme fees, access regimes, digital wallets and mobile payment applications.
 

The Paper notes that the RBA “has supported the issuance of DNDCs because they are convenient for users and can contribute to competition and efficiency in the payments system.” In particular, the Paper argues that DNDCs facilitate “both consumer and merchant choice.” DNDCs have also been discussed in other inquiries. For example, the Final Report of the PC Inquiry into Competition in the Australian Financial System recommmended that the PSB should set a regulatory standard that “gives merchants should be given the capacity to select their own default route that is to be used for payments by dual network cards.”


 

Different aspects of DNDCs were the subject of an earlier review by the RBA itself – in the December 2016 consultation on Dual-Network Cards and Mobile Wallet Technology.
 

In both cases, the PSB eschewed imposing a standard. In the case of the 2016 Dual-Network Card review, the PSB ultimately stated that “following discussion with industry participants through the consultation process, the [RBA] has received commitments … that address these concerns.” Likewise, in reviewing the PC recommendation, the PSB ultimately did not feel the need to issue a standard, but did state that “failure to deliver on commitments or to provide the payments services that the community need will inevitably lead to calls for further regulation.” Given this ongoing policy focus, it is unsurprising to see DNDCs and least-cost routing raised again in this consultation paper.


Interchange and Net Compensation Regulation

As noted above, interchange fees have been a subject of earlier regulatory reviews. Since the conclusion of the 2015 review, they have also been separately by the PC and the Black Economy Taskforce (BET).The BET considered lower interchange fees as part of what it described as a “small business incentive” to encourage businesses to move away from cash payments. In late 2017, the BET recommended that “in its next review of card payments regulation, RBA should consider whether there are further actions it could take to put downward pressure on interchange fees that would be in the public interest.”


The PC’s recommendations went further, recommending that the PSB “should introduce a ban on card payment interchange fees by the end of 2019” and that “any other fees should be made transparent and published.” The PC stated that “the case for keeping interchange fees is not strong.” In the PC’s view, removing interchange fees would  “increase transparency and efficiency of the payments system” and cause “merchant service fees [to] likely fall.”

From the perspective of competitive neutrality, the PC also recommended that the PSB and ACCC investigate “whether current or recommended interchange fee regulation favours three-party card schemes and, if such a distortion exists, whether it is significant enough to require further regulatory intervention.”


 

The PSB considered the PC Report in August 2018, stating that “the impact of the new regulatory framework resulting from [the 2015] review is still being observed” and agreeing “it was appropriate to undertake comprehensive reviews of the regulatory framework around every five years.”
 

Given the attention of the BET and the PC in this area, it is unsurprising that these have again come under attention. The Issues Paper specifically references these earlier Reports and seeks comments on questions related to their recommendations.


 

Surcharging

Given the rapid growth of the sector, it would have been surprising if Buy Now Pay Later (BNPL) wasn’t mentioned in this review. There has been much said about how millennials are moving away from traditional credit for debit or instalment payment types. In 2018 ASIC undertook a review of this sector, and in 2019 Senate Standing Committee on Economics released the Report, Credit and financial services targeted at Australians at risk of financial hardship. The Senate Report found that there are a variety of BNPL business models. Some consumers have opened multiple BNPL accounts and fall into financial difficultly.

However, the focus of the RBA review on BNPL relates to cost of payments – specifically the issue of surcharging. The Paper states: “the Bank has long been of the view that the right to apply a surcharge on more expensive payment methods plays an important role in signalling the costs of different ways of making payments to consumers.” However, some BNPL providers have disputed that they are a “payments option”, but rather a service “designed to generate business for retailers.” In their view, this means that costs should “be considered in comparsion with other marketing and advertising expenses.”


Regulation and Enforcement​

The final (and shortest) area of the report is regulation and enforcement. Specifically, the paper notes that the recently introduced net compensation provisions, which are more complex than other standards, “have led the Bank to give some recent consideration to what powers it would have available in the event of a significant breach.” The Paper notes that penalties are “substantially lower than for offences under other legislation relating to the financial sector.”

The Issues Paper, therefore, asks for stakeholder views on whether the RBA has the correct powers and any changes to enforcement mechanisms.


Conclusion

It is important to recognise both the wider context of payments regulation, and also its ongoing nature. Responding to the changing nature of the payments landscape, many of the issues being addressed by the current review are already under consultation or have recently been subject to review.

While the review is still in early stages (as noted above, a more detailed policy proposals paper may follow in 2020), It is therefore possible that the RBA will take an evolutionary rather than revolutionary view of the future of payments regulation with a particular focus on innovation, competition and consumer and small business choice.



The opinions and views expressed in this publication are those of the authors exclusively and do not purport to reflect the opinions, views or official policy position of AusPayNet or its members. This publication is also subject to the AusPayNet Terms of Use and Privacy Policy available on the AusPayNet website.

 

 

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    The opinions and views expressed in this publication are those of the authors exclusively and do not purport to reflect the opinions, views or official policy position of AusPayNet or its members. This publication is also subject to the AusPayNet Terms of Use and Privacy Policy available on the AusPayNet website.

     

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