Federal Treasurer Josh Frydenberg this week gave the Reserve Bank’s Payments System Board a taste of how payments regulation might operate in the future after he told the regulator it should compel Australian banks to deliver least cost routing to their merchant customers.
Following the release of the Farrell report on Monday recommending sweeping changes to the regulatory architecture of the payments system – including mandatory powers for the treasurer - Frydenberg delivered a stern message to the PSB’s seven-member board that it should take swift action to help lower costs borne by small businesses for accepting debit card transactions.
The muscularity of Frydenberg’s messaging to the regulator was underlined by his decision to release copies of a letter he sent the PSB on Monday.
Frydenberg’s letter to the PSB is heavily nuanced and contains an implication that the epicentre for setting payments policy has already shifted from the PSB to the treasurer’s office and his department.
“Today I released for consultation the Payments System Review (Farrell Review) which assessed the adequacy of our current regulatory frameworks in light of rapid technological change and consumer preferences,” Frydenberg tells the PSB in the letter.
“The review recognised that there are regulatory gaps and reform is needed to ensure that the Government’s policy objectives can continue to be met in a digital environment.
“In consulting on the Review and updates needed to the regulatory framework, the Government will consider changes that may be necessary to promote least-cost routing more broadly, particularly in an online and contactless environment.”
Frydenberg’s letter is an ultimatum to the PSB: if the regulator sticks with its current position not to mandate least cost routing - the government will make it happen anyway.
The PSB’s regulatory approach to least cost routing was announced in May in the preliminary findings of its retail payments review.
“The Board does not see a need for explicit regulatory requirements regarding the provision of LCR at this stage,” the PSB stated in the report.
It was this statement that riled small business leaders most after fighting the LCR battle for more almost four years.
Previously, many peak industry bodies shared a view that the PSB would eventually force the major banks to roll out accessible LCR services if the industry could not deliver them voluntarily.
While PSB officials in the last few years publicly warned the banks that they would consider using the regulator’s designation powers to impose change, the banks in practice were largely left to do as they wanted.
The May report horrified a swathe of small business advocates who within a few days embarked on an intense lobbying campaign in Canberra.
Small business leaders were also disappointed with the PSB’s preliminary decision to dilute its long standing expectation that all banks would issue dual network debit cards.
The PSB’s May report opened the door for most banks – except the four majors – to issue single network cards.
That prospect fuelled the small business backlash because without a requirement for issuers to include more than one payments network on debit cards, the benefits of least cost routing would be diminished.
Frydenberg directly called out the PSB on the dual network card issue in his letter.
“Recognising the critical role of dual-network debit cards in facilitating least-cost routing, the Government strongly encourages the Board to consider mandating their issuance for major and medium-sized institutions,” he told the regulator.
The PSB, which held its quarterly meeting only last week, has not yet responded publicly to the treasurer’s letter.
It seems that the treasurer has made the role of the PSB as the premier regulator of payments in Australia a debatable issue until at least the end of the year when the government finalises its policy response to the Farrell inquiry.
There’s no doubt that Frydenberg will eventually get his way on LCR, which is destined to upend the economics of several strategic deals negotiated between mid-tier Australian banks and the global card schemes, Visa and Mastercard.
Macquarie Bank, which last year reconfigured its debit cards only to function on the Mastercard network, will now have to review its business model.
Macquarie is a mid-sized player in the debit card market and faces having to redesign its cards to include Eftpos functionality. It might also be forced to review a decision to withdraw from credit card market.
Global card schemes Mastercard and Visa last night raised concerns about amending the PSB’s preliminary conclusions on LCR and dual network debit cards.
“We support the RBA’s proposal, as outlined in the Consultation Paper, that issuers outside of the major banks can issue Single-Network Debit Cards,” said Julian Potter, Visa’s country manager in Australia.
Mastercard challenged RBA and PSB research that shows Eftpos is on average a cheaper service for merchants to use than the global schemes.
“It’s just not true to say routing through eftpos represents a cost saving for every merchant,” Mastercard said in statement.
“We believe the RBA is incorrectly equating least-cost routing to an “all or nothing situation”, where all of a merchant’s volume is routed to one scheme or the other.
“It’s not as simple as that.”
Mastercard welcomed the treasurer’s decision not to call for dual network debit cards to be mandated for small banks, but insisted that such a requirements for larger banks would increase issuing costs.
“Mandating two networks on a card that must be designated schemes results in a negative impact on competition and can increase cost to issuers,” Mastercard said.
The four major banks will be the biggest losers from mandatory LCR because they will rake in less fees from not being able to default contactless transactions exclusively to the Visa or Mastercard networks.
The revenue losses of the major banks will be compounded by Frydenberg’s demand that the any LCR mandate should apply to online or so-called “card-not-present” debit card payments.