Payments Regulation in Asia

August 2024

Contents Report Introduction . ...........................................................................................................................................4 Payments 101 – Key Terms and Trends ...............................................................................................5 Report Introduction......................................................................................................................4 Payments Fees Definitions ............................................................................................................................5 Payment Method Definitions .......................................................................................................................5 Price Signaling, Competition Within the Card Market, Interchange Caps, and Pricing Transparency – Executive Summary...........................................................................7 Measuring Success of Regulatory Interventions .........................................................................................7 Price Signaling ................................................................................................................................................7 Payments Mix and Baseline Costs of Acceptance .......................................................................................6 Payments Mix by Country . ................................................................................................................... x Definition ...............................................................................................................................................7 Country Implementation ........................................................................................................................7 Impact Analysis ......................................................................................................................................7 Key Takeaways........................................................................................................................................8 Interchange Caps . ..........................................................................................................................................9 Definition ...............................................................................................................................................9 Country Implementation ........................................................................................................................9 Impact analysis........................................................................................................................................9 Key Takeaways .....................................................................................................................................10 Co-badging and Routing ..............................................................................................................................11 Definition .............................................................................................................................................11 Country Implementation ......................................................................................................................11 Impact Analysis ....................................................................................................................................11 Key Takeaways......................................................................................................................................12 Interchange and Network Fee Pricing Transparency ................................................................................13 Definition ..............................................................................................................................................13 Country Implementation.......................................................................................................................13 Impact Analysis.....................................................................................................................................13 Key Takeaways......................................................................................................................................13 Price Signaling, Competition Within the Card Market, and Interchange Caps – In-Depth..........14 Price Signaling ..............................................................................................................................................14 Australia.........................................................................................................................................x India...............................................................................................................................................x Japan.............................................................................................................................................x Singapore......................................................................................................................................x Public Resource for Cost Analysis ........................................................................................................ x Australia.........................................................................................................................................x India...............................................................................................................................................x Japan.............................................................................................................................................x Singapore......................................................................................................................................x Card Fees Paid by Country ................................................................................................................... x Australia.........................................................................................................................................x India...............................................................................................................................................x Japan.............................................................................................................................................x Singapore......................................................................................................................................x Price Signaling , Competition With the Card Market and Interchange Caps . ..................................... x Price Signaling . ...................................................................................................................................... x Card Surcharging..................................................................................................................................14 Cash Discounting by Countries............................................................................................................15 Case Study: Surcharging in Australia....................................................................................................16 Interchange Cap Regulation ........................................................................................................................18 Active Interchange Cap Developments in 2023...................................................................................20 Countries with Discontinued Interchange Caps...................................................................................20 Co-badging Regulation ................................................................................................................................21 Case Study: Australia Co-badging Mandate and Routing....................................................................22 Card Surcharging........................................................................................................................... x Cash Discounting by Countries.....................................................................................................x Australia Surcharging Case Study.................................................................................................x

Payments Regulation in Asia

Interchange Cap Regulation ................................................................................................................. x Methodology and Country Profiles ............................................................................................. 25 Executive Summary . ....................................................................................................................................25 Active Interchange Cap Developments in 2023............................................................................x Countries with Discounted Interchange Caps...............................................................................x Australia................................................................................................................................................25 India......................................................................................................................................................26 Japan....................................................................................................................................................27 Singapore. ............................................................................................................................................27 Australia ........................................................................................................................................................30 Payments Mix........................................................................................................................................30 Public Reporting of Card Fees..............................................................................................................33 Analysis of Publicly Available Card Fees...............................................................................................34 APM Case Study: PayTo and NPP.........................................................................................................38 India . .............................................................................................................................................................41 Payments Mix........................................................................................................................................41 Public Reporting of Card Fees..............................................................................................................43 Analysis of Publicly Available Card Fees ..............................................................................................44 APM Case Study: India – UPI and Other Wallet-Based APMs..............................................................46 Japan .............................................................................................................................................................50 Payments Mix........................................................................................................................................50 Public Reporting of Card Fees..............................................................................................................53 Analysis of Publicly Available Card Fees...............................................................................................54 APM Case Study: Digital Wallets..........................................................................................................60 Singapore ......................................................................................................................................................63 Payments Mix........................................................................................................................................63 Public Reporting of Card Fees..............................................................................................................65 Analysis of Publicly Available Card Fees...............................................................................................65 APM Case Study: PayNow and Instant Payments.................................................................................66 Merchant Pass-Through to Consumers.......................................................................................67 Co-badging Regulation . ........................................................................................................................ x Australia Co-badging Mandate and Routing Overview................................................................x Competition Outside the Card Market .......................................................................................................... x Case Study 1: Australia - PayTo and NPP ............................................................................................ x Case Study 2: India - UPI and Other Wallet Based APMS .................................................................. x Case Study 3: Japan - Digital Wallets .................................................................................................. x Case Study 4: Singapore - PayNow and Instant Payments ................................................................ x Merchant Pass-Through to Consumers . ......................................................................................................... x

Payments Regulation in Asia

Report Introduction In collaboration with Amazon, CMSPI is pleased to present this paper on payments trends and regulations across four of the largest retail payments markets in the Asia Pacific region. The countries in scope are Japan, India, Singapore, and Australia. Across these countries, card payments represent between 15% and 40% of total retail payments, and this share has been growing in some countries by 3x in just five years. This report will examine the key trends around cost, consumer behavior, and regulation in each of the jurisdictions covered.

In almost all four countries, card fees, particularly interchange fees and scheme fees, have either risen, or been cited as an issue for merchants due to the high costs of acceptance.

In addition, when merchants sign card acceptance agreements with the card networks, they are bound by the rules of the card networks. These rules can include restrictions on merchant treatment of the card brand (i.e., prohibitions on card surcharging) as well as limitations on merchant choice of acceptance. For example, ‘honor-all-cards’ rules by the global networks may require debit-accepting merchants to accept credit cards, which can cost nearly twice as much as debit cards. Given the market share that the global card networks maintain, merchants are not always able to turn off acceptance of card networks without sacrificing potential sales and customer convenience. In addition, card-accepting merchants are exposed to the asymmetric treatment of interchange within the two-sided card market. As networks compete for issuance, the price of interchange is driven up, a phenomenon sometimes referred to as reverse or ‘perverse’ competition. 1 Citing rising fees, regulatory interventions have been taken by certain markets with the intention to alleviate rising fees and establish a more efficient payments market. This report examines merchant-focused regulatory interventions in two ways: competition and controls within the card market and competition with the card market through investment in local competitor payment methods. Within the card market, regulators have enacted a variety of interventions, such as setting the maximum price of interchange, thus curtailing the effects of reverse competition; mandating competition on card payments through the use of co-badging; guaranteeing merchant rights to surcharging; and mandating pricing disclosure of interchange fees. The report examines the approach by each country to intervene on rising card costs and analyzes publicly available data associated with the costs of card acceptance. Regulators have also invested in pay-by-bank infrastructure which offers an alternative route for digital payments. In some countries, usage of pay-by-bank solutions has grown dramatically, surpassing the share of cards for retail payments in-store and online. Typically, these solutions offer efficiencies above card rail offerings, such as faster settlement and greater interoperability, and are usually lower cost for processing than card payments. Digital wallets are also able to build on and integrate with pay-by-bank rails, offering consumers and merchants an alternative to card payments as well.

https://constantinecannon.com/wp-content/uploads/2016/03/NYB104.pdf

Payments Regulation in Asia

Competition within the card market, competition with the card market, and regulation protecting market competition and efficiencies are essential to a functioning payments system, and this report examines how these areas have applied to the countries in scope.

Payments Fees Definitions

For each card transaction, the merchant must typically pay three members of the supply chain:

A network fee, or scheme fee, is typically set and received by the network operator for that given transaction.

A processor fee, or acquirer fee , is typically set and received by the merchant’s bank or acquiring bank, the party that helps facilitate the acceptance of card transactions.

An interchange fee , typically the largest of the three, is typically set by the network operator for that given transaction and received by the consumer’s issuing bank. Interchange functions as an incentive for issuers to ‘badge’ a given network on a card. For example, if an issuer is launching a new credit card and requires a network operator for that card, and Network A prices interchange higher for a given card than Network B, then the issuer would receive a higher fee per transaction if badging Network A.

The sum of these three fees is what’s commonly referred to as the Merchant Discount Rate (MDR) or the Merchant Service Charge (MSC).

Payment Method Definitions 2 Account to Account: Electronic payments made directly from one party to another while bypassing card network rails. A2A payments are embedded in apps and online services such as Pix in Brazil, iDEAL in The Netherlands and BLIK in Poland. Buy Now, Pay Later: BNPL service providers settle a payment with the merchant at the time of purchase while allowing consumers to pay for goods and services at a later date, typically in a finite set of installments and without interest if repaid within the agreed time. Cash and Cash on Delivery: Cash is limited to physical cash or checks and excludes central bank digital currencies (CBDCs). Cash on Delivery is defined as goods ordered online and paid for with cash at the time of delivery. Credit Card: Credit cards are issued by financial institutions affiliated with a global card brand network. Credit cards allow consumers to make purchases via an extension of credit from a financial institution.

2 Given the basis of the payment method analysis is primarily based on 2017-2023 WorldPay Reports on Global Payments, all definitions can be sourced from the 2023 report unless otherwise specified.

Payments Regulation in Asia

Debit Card: Cards that facilitate purchases with funds directly debited from consumer accounts held at a financial institution. Debit cards are issued by financial institutions in affiliation with a global card brand network. Digital Wallets: Visa defines three types of digital wallets. 3 These are pass-through wallets 4 , stored value wallets, and staged digital wallets. Pass-through wallets are typically mobile phone-based solutions that allow customers to pay in-store or online, usually via a tokenized, digital version of their physical Visa product. Stored value digital wallets operate like prepaid cards, which the customer pre-loads with funds using a payment credential before being able to transact with sellers. Staged digital wallets can perform ‘real-time load’ transactions which allow the customer to make a transaction when there are not sufficient funds pre-loaded in the digital wallet account.

POS financing: Credit extended to consumers at the point of sale. This includes credit offered by retailers, financial institutions and third-party BNPL services such as Klarna, Afterpay and Affirm.

PostPay: Consumers order products online and pay for them in full later at an affiliated physical store or ATM.

Prepaid card: Cards issued by financial institutions that run scheme networks such as Visa and Mastercard and that are funded in advance. Prepaid cards can be funded once or reloaded, and they can be used to make purchases as easily as debit or credit cards. PrePay: Services that allow consumers to make e-commerce purchases without a card account and without providing personal data. Services such as Paysafecard and Neosurf offer flexible payments via vouchers redeemable at participating merchants.

Others: Emerging and otherwise uncategorized e-com payment methods, like mobile carrier billing and central bank digital currencies.

3 https://usa.visa.com/content/dam/VCOM/global/support-legal/documents/digital-wallet-guide-march-2023.pdf 4 https://usa.visa.com/content/dam/VCOM/global/support-legal/documents/digital-wallet-guide-march-2023.pdf

Payments Regulation in Asia

Price Signaling, Competition Within the Card Market, Interchange Caps, and Pricing Transparency – Executive Summary Merchant payment costs, as exhibited in the methodology section below, are complex and rising to the point where regulators are stepping in. To combat rising complexity and costs of acceptance, regulators and lawmakers must ensure that merchants have unfettered access to resources and tools that offer greater control over payment costs. These tools can come in the form of price signaling protections, co- badging requirements and routing rights, and transparency or disclosure standards. In addition, some governments have set price controls on the level of interchange. Measuring Success of Regulatory Interventions In this section of the report follows a review of the effectiveness of various government interventions to reduce merchant costs of acceptance or prevent merchants and consumers from incurring higher payments costs. This is done by examining regulatory interventions on price signaling, co-badging and routing, interchange caps, and pricing transparency by each country in scope and evaluating interventions against publicly available data on merchant payments costs.

Price Signaling

DEFINITION

Price signaling involves the conveyance of information about a company’s pricing intentions to competitors, customers, or the broader market, either explicitly or implicitly, with the aim of influencing market behavior or expectations. For retail payments, price signaling can come in the form of a card surcharge (typically a percent-based fee levied on of the customer’s bill should the customer pay with a payment card) or cash discounting (typically a percent-based discount subtracted from the customer’s bill should the customer pay with cash).

COUNTRY IMPLEMENTATION

Where national or local regulators do not intervene, the global network rules apply. For Visa and Mastercard, networks prohibit merchants from levying a fee on top of the transaction price unless applicable laws or regulations require that a merchant be permitted to impose a surcharge. Across the four countries reviewed, Australia is the only country in which surcharging has been regulated as a guaranteed right for merchants.

Despite the difficulties of surcharging, network prohibitions on cash-discounting are limited, however there are no regulatory guarantees in any of the countries surveyed that protect cash-discounting.

IMPACT ANALYSIS

In 2003, the RBA permitted merchants to surcharge at the cost of acceptance but must ensure that the surcharge is adjusted to be percentage-based or per item fee based on how the underlying costs are applied. Network rules in Australia have been adjusted to account for the national regulation, with Visa and Mastercard both requiring the surcharge to be reasonable and proportional to the cost of acceptance. In the years following the introduction of surcharging rights, there has been a

Payments Regulation in Asia

steady decline in the cost of acceptance for certain cards. While many factors influence this decline, surcharging allows merchants to apply persistent and consistent pressure on the card networks to reduce costs of acceptance. In the 15-year period following implementation of interchange caps and surcharging laws, the cost of accepting American Express cards fell from above 2.5% to below 1.5%. This appears to be the effect of indirect downward pricing pressure as a result of the interchange caps as well as the prevalence of surcharging on American Express credit cards. Based on the results of an Australia Competition & Consumer Commission survey, almost three out of four consumers would continue with the transaction if they “encountered a ‘high’ transaction fee and no fee free alternatives.” 5 However, nearly one in four would cancel the purchase, but this can vary by country and channel. For example, price sensitivity may be more prevalent in certain countries and industries. KEY TAKEAWAYS • Limited Implementation by Regulators: Only Australia, one country of the four in scope, has protected surcharging rights for merchants. In all other markets, global network prohibitions on surcharging apply. Despite those restrictions, some countries, such as Singapore, have seen surcharging occur in certain sectors. • Surcharging May Apply Downward Pressure on Uncapped Card Types: As observed in Australia, American Express and Diners Club cards were exempt from the 2003 interchange caps, and yet have seen their total merchant fees steadily fall in the period 2003-2023. American Express rates have fallen from 2.51% in 2003 to 1.32% in 2023. While many factors influence this decline and controlling for myriad factors is empirically difficult, it’s possible that surcharging has contributed to this decline.

https://studylib.net/doc/9398470/credit-card-surcharges-and-non-transparent-transaction-fee

Payments Regulation in Asia

Interchange Caps

DEFINITION

Interchange fees, the fee set by global card networks, paid by the merchants, and received by the issuing bank, is typically the largest portion of the MDR. To prevent rising interchange fees, central banks around the world have set caps on the price of interchange. These caps range from per item, to percent, to weighted-average limits.

COUNTRY IMPLEMENTATION

Across the countries surveyed, only Australia currently has interchange caps across credit and debit transactions. The table below presents current and former interchange caps by region:

Effective Date(s) of Current Cap

Country

Credit

Debit

Exceptions

AUD 0.08 (~$0.05) weighted avg. ($0.10 or 0.2% for individual txns) 7

Three Party Card Networks, International Cards

0.5% weighted avg (0.8% for individual txns) 6

2017, 2021 (updated debit)

Australia

Singapore

No Debit or Credit Interchange Cap in Singapore

0.9% (POS/online), 0.8% (QR code) 8 ; for SMBs 0.4% (POS/ online), 0.3% (QR code)

Credit Cards, International Cards

India

2018

Japan

2019 (discontinued)

3.25%

Debit Cards

Table 1. Interchange Caps (Current and Discontinued) by Country

IMPACT ANALYSIS

Immediately following the enforcement of the 2003 interchange caps and surcharging protections in Australia, there was a sharp decline in Mastercard and Visa average cost of acceptance for Australian merchants. Between Q1 2003 and Q1 2004, the average Visa and Mastercard cost of acceptance fell from 1.45% to 1.08% (Figure 1). 9

6 https://www.rba.gov.au/payments-and-infrastructure/review-of-card-payments-regulation/conclusions-pa- per-may2016/interchange-fees-and-transparency-of-card-payments.html 7 The RBA also established a sub-benchmark for the weighted average interchange cap of single-network debit cards (SNDCs) at AUD 0.08 to remove incentives for issuing these kinds of cards. https://www.rba.gov.au/payments-and-infrastructure/ review-of-retail-payments-regulation/conclusions-paper-202110/pdf/review-of-retail-payments-regulation-conclusions-pa- per-202110.pdf 8 Small merchants have an annual turnover below Rs 20 lakh (~$24k) https://www.medianama.com/2017/12/223-rbi- mdr/ 9 https://www.rba.gov.au/payments-and-infrastructure/resources/payments-data.html

Payments Regulation in Asia

KEY TAKEAWAYS • Limited Implementation by Regulators: Only Australia, one country of the four in scope, has active interchange caps for credit and debit transactions. While Japan had previously introduced an interchange cap of 3.25% on credit transactions, due to significant pushback from the credit card industry, lawmakers reversed their stance, allowing card companies the discretion to decide whether or not to uphold the cap. 10 India’s market has introduced interchange caps for debit and UPI-enabled transactions, but credit transactions remain uncapped. • Immediate Drop in Interchange Fees: In Australia, the market with the most robust public reporting on card fees, there was a precipitous drop in the average total merchant fees for Visa and Mastercard credit and debit rates. From Q3 to Q4 2003, Visa and Mastercard total merchant fees fell from 1.44% to 1.18%, the largest single drop in average rates quarter-over- quarter. By Q1 2004, average Visa and Mastercard rates reached 1.08% (Figure 1).

3.00%

2.50%

2.00%

1.50%

1.00%

0.50%

0.00%

2003

2004

2005

American Express Credit

Diners Club Credit

eftpos Debit

Mastercard and Visa All

Figure 1. Australia Total Merchant Fees by Card Type (2003-2005)

Ibid

Payments Regulation in Asia

Co-badging and Routing

DEFINITION

Co-badging refers to a single payment card that has at least two or more payment card networks enabled on it, allowing the card to be used for transactions across multiple payment networks. This is especially relevant in countries where there exists at least one local network for processing. Local networks are typically networks that operate domestically or regionally, whereas global networks are typically offered across a variety of regions. Examples of local card networks include eftpos in Australia and RuPay in India, while a global network would be considered Visa or Mastercard. Merchants can take advantage of co-badging by routing transactions via competing networks. Co- badging and routing also offer merchants a strategic lever when establishing commercial deals with networks, providing the opportunity to reduce their payment costs and promote competition between card networks.

COUNTRY IMPLEMENTATION

Some countries, such as the United States, have mandated co-badging through central bank regulations, while regulators in Australia have established expectations or incentives for issuers to co-badge debit cards by setting higher interchange caps for co-badged cards. None of the other countries in scope have mandated or incentivized payment card co-badging. All countries in scope, however, operate at least one local debit network (Table 2).

Estimated Local Market Share

Country

Local Card Networks

Australia

Eftpos

20%

India

RuPay

14%

Japan

Suica, Aeon, J-Debit

4-10%

Singapore

NETS

17%

Table 2. Domestic Debit Networks by Country and Market Share 11

IMPACT ANALYSIS

In Australia, the market with the strongest public reporting of merchant fees, rates for the domestic debit network eftpos are on average less than Visa and Mastercard debit merchant fees. By Q4 2023, average eftpos merchant fees were 35 basis points, 15 basis points lower than Visa and Mastercard’s debit fees at that time. With unfettered access to domestic debit networks, CMSPI estimates approximately $800 million of benefit annually for merchants. 12

Euromonitor 2022

12 https://cmspi.com/news/breaking-news-what-merchants-need-to-know-about-the-rbas-latest-payments-update/

Payments Regulation in Asia

KEY TAKEAWAYS • Domestic Networks Exist Across All Markets: Every market operates at least one domestic network. In Australia, the domestic debit network eftpos is on average 15 basis points cheaper per transaction than Visa and Mastercard debit. • Limited Regulation of Mandated Co-Badging: Only Australia, one of four countries analyzed, regulates debit card co-badging by setting expectations for issuers and processors to facilitate least-cost routing. In addition, there is a higher interchange cap for dual-network badged cards than single-network badged cards, creating an incentive for issuers to ensure at least two networks are available on the card for routing. • Merchant Fees for Domestic Debit Transactions on Average Lower Than Global: Over the period Q2 2020 to Q4 2023, Visa and Mastercard average total merchant fees ranged from 0.47-0.54%, while in this period eftpos rates ranged from 0.26-0.35%. In any given quarter between Q2 2020 and Q4 2023, the Visa and Mastercard total merchant fees were between 42-89% higher than eftpos rates. While co-badging may not directly contribute to the lower rates for domestic debit networks, a mandate for issuers to co-badge cards grants merchants access to lower cost networks.

Payments Regulation in Asia

Interchange and Network Fee Pricing Transparency

DEFINITION

Regulators may mandate that networks publish interchange or network fee pricing as these are typically multi-laterally set fees that impact both card issuers and card-accepting merchants.

COUNTRY IMPLEMENTATION

Of the four countries in scope, both Australia and Japan have mandated card networks to publish interchange fees. Clause 6.1 of the RBA’s Standards No. 1 and No. 2 of 2016 required card schemes in Australia to publish “Multilateral Interchange Fee rates or amounts.” Pursuant to these clauses, global card schemes Visa 13 and Mastercard 14 publish interchange rates for domestic transactions made on credit, debit, and prepaid cards. In addition, in September 2022, Japan’s Ministry of Economy, Trade, and Industry (METI), responsible for enhancing economic and industrial aims of the Japanese government, required the card networks to disclose interchange fees “in order to ensure fair competitive conditions among international brands in the credit card issuance market and raise the transparency of the credit card market as a whole.” 15

IMPACT ANALYSIS

The availability of country-level payments statistics varies significantly by country. In some countries, central banks will publish payments statistics through financial institution data collections or surveys. Where available, this data can be used by merchants to benchmark their own rates or to gauge their performance against a market average. In addition, while isolating the effects of price transparency from other determinants of price is empirically difficult, some examples of transparency in financial markets suggest transparency lowered prices. From a review of empirical research on price transparency, “most research suggests that when better price information is available prices for goods sold to consumers fall.” 16 Markets in intermediate goods, however, is more complicated, with price transparency on the one hand providing buyers and sellers important information about the true economic value of goods or services, on the other hand, “public prices may make collusion among sellers easier.” 17 KEY TAKEAWAYS • Limited Regulation of Mandated Transparency: Of the four countries analyzed, only Australia and Japan have mandated interchange fee disclosures for Visa and Mastercard. • Pricing Transparency May Contribute to Market Efficiencies and Lower Costs: Studies show that pricing transparency may contribute to lower prices for consumers. However, in intermediary markets such as payments, empirical studies show mixed results on the efficacy of pricing transparency to reduce costs.

https://www.visa.com.au/about-visa/interchange.html

https://www.mastercard.com.au/en-au/business/overview/support/interchange.html

https://www.meti.go.jp/english/press/2022/0914_002.html

16 https://crsreports.congress.gov/product/pdf/RL/RL34101#:~:text=Despite%20these%20complications%2C%20great- er%20price,efficient%20outcomes%20and%20lower%20prices. 17 Ibid

Payments Regulation in Asia

Price Signaling, Competition Within the Card Market, and Interchange Caps – In-Depth Price Signaling Price signaling involves the conveyance of information about a company’s pricing intentions to competitors, customers, or the broader market, either explicitly or implicitly, with the aim of influencing market behavior or expectations. For retail payments, price signaling can come in the form of a card surcharge (typically a percent-based fee levied on of the customer’s bill should the customer pay with a payment card) or cash discounting (typically a percent-based discount subtracted from the customer’s bill should the customer pay with cash). The motivation for surcharging or cash discounting is to recoup costs of acceptance for card payments or to steer customers to lower cost payment methods. With a surcharge, the merchant intends to recoup card fees by levying a surcharge equivalent to the costs of acceptance. With a cash discount, the merchant intends to steer customers to cheaper payment methods, like cash. The effectiveness of prices signaling varies depending on the context and the parties involved.

CARD SURCHARGING

Once a merchant signs a contract to accept card payments from a certain network, the merchant is regulated by the rules levied by the card networks, which can be quite complex and restrictive. Surcharging, the practice whereby a merchant adds a charge to a transaction based on the customer’s chosen payment method (e.g., card and other payment methods), card type, or card network, is broadly prohibited by the card network rules, and, in markets where surcharging is permitted by national or local law, card network rules can complicate surcharging implementation. In addition, while default network rules typically restrict whether and how merchants can surcharge, some jurisdictions have mandated surcharging rights for merchants, overruling the default card network rules (Table 2).

Country

Surcharging Rules

Merchants are allowed to surcharge up to the cost of acceptance

Australia

India

Network rules apply

Japan

Network rules apply

Network rules apply, but local merchants, such as taxis, have been reported to apply a surcharge on card transactions 18

Singapore

Table 3. Surcharging Rules by Country

https://blog.seedly.sg/merchant-credit-card-fees-singapore/

Payments Regulation in Asia

In countries or locales where surcharging has been permitted by law, merchants are often required to be transparent about the surcharge. This means that customers must be clearly informed about the additional fee before they make the purchase. There are broadly three types of surcharges: product-level, brand-level, and blanket surcharges (Table 3). Each has unique use cases and regulatory permissions and can depend heavily on how the country has regulated or guaranteed surcharging rights.

Table 4. Description and Characterization of Types of Surcharges and Cash Discounts

CASH DISCOUNTING BY COUNTRIES

In lieu of a surcharge, some merchants may choose to offer the consumer a discount for using cash. This has not been widely regulated, and below follows an examination of regulatory interventions on this subject. Australia – Card surcharging is legal in Australia, allowing for customers to use cash as a way to avoid card surcharges. The Australian Competition and Consumer Commission (ACCC) states that if the customer has no way of avoiding a card surcharge (i.e., the merchant does not accept cash), the business must properly display the cost of the card surcharge. 19

https://www.accc.gov.au/business/pricing/card-surcharges

Payments Regulation in Asia

Japan – Network rules apply in Japan. From an interview conducted with network representatives, providing discounts for cash payments may be in violation of JCB’s member store terms and conditions while Visa’s rules do not restrict member stores. However, network rules do not currently cover all use cases of discounting. For example, networks have indicated a case-by-case evaluation in the event a store provides alternative incentives for customers, such as additional store points when customers pay with cash. 20 Case Study: Surcharging in Australia The RBA found that the 2003 payments reforms including surcharging and interchange cap had the desired effect on the payment landscape – consumers became more conscious of price signaling by avoiding surcharges when possible and the cost of card acceptance steadily decreased in the following years (Figure 1). 21 In 2016 restrictions against ‘no-surcharging’ rules have been expanded to include other payment methods such as eftpos, American Express, Diners Club, UnionPay, and PayPal. 22 Immediately following the enforcement of the 2003 interchange caps, there was a sharp decline in Mastercard and Visa average cost of acceptance in Australia. Following implementation of interchange caps and surcharging laws, the cost of accepting American Express cards, exempt from the interchange regulations, also fell from above 2.5% to below 1.5% over a 15-year period. At this time, merchants had a greater incentive to dissuade the use of unregulated cards as a result of the interchange caps on Visa and Mastercard and had greater access to pricing controls with new surcharging rights for American Express credit cards. The RBA is a strong proponent of a merchant’s right to surcharge “for payments system efficiency and… to hold down the cost of goods and services to consumers generally.” 23 However, since the percentage of merchants surcharging in Australia has increased, there have been concerns of excessive card surcharging. In response to these concerns, the RBA issued new surcharging and interchange standards for large and small merchants in 2016 and 2017, respectively. This new regulation defines the meaning of a “permitted cost of acceptance” and ensures cards will not be surcharged in excess of a merchant’s cost of acceptance for that card system. 24 The central government has since banned the practice of excessive surcharging and provided the ACCC enforcement powers on this matter.

https://topics.smt.docomo.ne.jp/article/otonanswer/life/otonanswer-162245?redirect=1

21 https://www.rba.gov.au/payments-and-infrastructure/review-of-retail-payments-regulation/pdf/review-of-retail-pay- ments-regulation-issues-paper-nov-2019.pdf 22 Ibid 23 https://www.rba.gov.au/payments-and-infrastructure/review-of-retail-payments-regulation/pdf/review-of-retail-pay- ments-regulation-issues-paper-nov-2019.pdf 24 Ibid

Payments Regulation in Asia

Based on the ACCC rules, merchants interested in surcharging should ensure that surcharges are calculated to be percentage-based or per item, depending on how the underlying costs are applied, and not based on a blended cost of acceptance across networks. Notably, these federal rules do not apply to the taxi industry, which“remains the responsibility of state regulators,” where the majority of Australian states have passed regulation limiting surcharges to 5%. 25 These regulations vary from state to state with federal rules taking precedence for non- exempt industries. The RBA continues to consider how to improve the current surcharging regulatory standards and how to apply it to new emerging payment methods, specifically Buy-Now-Pay-Later (BNPL) methods, which encompassed around 14% of Australian ecommerce spend (See Australia Country Profile). After a two-year review, the bank has announced its intentions to extend the no-surcharge rule prohibition to BNPL providers like Afterpay and Zip. 26 Although strongly anticipated, BNPL regulations have been delayed until 2024 for drafting constraints. 27

25 https://www.rba.gov.au/payments-and-infrastructure/review-of-card-payments-regulation/q-and-a/card-pay- ments-regulation-qa-conclusions-paper.html#surcharging-consumers-q7 26 https://www.reuters.com/business/finance/australias-central-bank-tells-buy-now-pay-later-firms-drop-surcharge- ban-2021-10-22/ 27 https://www.afr.com/companies/financial-services/bnpl-laws-delayed-until-new-year-amid-legislative-drafting-con - straints-20231124-p5emmy

Payments Regulation in Asia

Interchange Cap Regulation Many governments and regulatory bodies worldwide have imposed interchange fee caps. Interchange fees are transaction fees paid indirectly by merchant through their acquirer to issuing banks. Although issuing banks receive interchange fees, the fees are set by four-party card networks who typically set the fees multilaterally, meaning the interchange fee categories and their associated rates usually apply across all card issuers. Interchange caps are often designed to address concerns about competition, transparency, and fairness with how interchange fees are set and collected. By limiting the maximum interchange fee, regulators seek to create a more level playing field for businesses. Striking the right balance between fostering competition and ensuring the financial sustainability of the payment ecosystem is a complex challenge that regulators grapple with as they design and implement interchange fee regulations. There are often two methodologies for capping interchange: the cost methodology and the competition methodology. The competition methodology, or “tourist test” used by the European Commission, considers the level of interchange that makes a merchant indifferent between accepting payments by card and a competing method, typically cash. On the other hand, the cost methodology, employed in the U.S. and Australia, focuses on aligning interchange fees with the underlying cost incurred by issuers for processing a given transaction. While both methods are able to achieve significant savings, each has their own limitations and risks. For example, central banks implementing a cost-based interchange cap may rely on self-reported issuer data on card processing costs. In these cases, issuers may have an incentive to report or maintain higher costs of processing. In addition, a cost-based methodology will not ensure merchant costs of acceptance for prevailing payment methods are equal, which could lead merchants to engage in surcharging or cash-discounting, ultimately pushing higher costs to consumers. With a competition-based approach, merchant costs of acceptance across payment methods may hold equal, but the predictability of future costs may change depending on the competing payment method used to set the interchange cap. For example, the cost of cash, typically charged on a fixed cost basis, may rise as cash spending declines. With a competition-based approach, the economics of a competing payment method may influence the level of the interchange cap. While neither methodology has proven more efficient, it’s essential that regulators consider the limitations and risks unique to each methodology. The routine collection and monitoring of data is essential, and the development of mechanisms to adjust the cap are essential for ensuring long-term market efficiency.

Payments Regulation in Asia

Table 4 offers a review of the key interventions by country with respect to interchange caps.

Effective Date(s) of Current Cap

Country

Credit

Debit

Exceptions

AUD 0.08 (~$0.05) weighted avg. ($0.10 or 0.2% for individual txns) 29

Three Party Card Networks, International Cards

0.5% weighted avg (0.8% for individual txns) 28

2017, 2021 (updated debit)

Australia

No Debit or Credit Interchange Cap in Singapore

Singapore

0.9% (POS/online), 0.8% (QR code) 30 ; for SMBs 0.4% (POS/online), 0.3% (QR code)

Credit Cards, International Cards

India

2018

2019 (discontinued)

Japan

3.25%

Debit Cards

Table 5. Interchange Caps (Current and Discontinued) by Country

https://www.rba.gov.au/payments-and-infrastructure/review-of-card-payments-regulation/conclu-

sions-paper-may2016/interchange-fees-and-transparency-of-card-payments.html 29 The RBA also established a sub-benchmark for the weighted average interchange cap of single-network debit cards (SNDCs) at AUD 0.08 to remove incentives for issuing these kinds of cards. https://www.rba.gov.au/ payments-and-infrastructure/review-of-retail-payments-regulation/conclusions-paper-202110/pdf/review-of-re- tail-payments-regulation-conclusions-paper-202110.pdf 30 Small merchants have an annual turnover below Rs 20 lakh (~$24k) https://www.medianama. com/2017/12/223-rbi-mdr/

Payments Regulation in Asia

ACTIVE INTERCHANGE CAP DEVELOPMENTS IN 2023

India

In December 2021, the Reserve Bank of India (RBI) invited consultation feedback from stakeholders by October 2022 on a number of issues related to payment system charges, including proposal to introduce credit card interchange caps for the first time and to reintroduce charges for UPI, the nation’s real-time system, which has operated under a zero-interchange framework since 2020. 31 However, Finance ministry quickly issued a follow-up clarification stating its intention to maintain fee exemptions for UPI as it was “digital public good with immense convenience for the public and productivity gains for the economy”. 32 While the industry awaits further developments on credit interchange caps, fees have been introduced for UPI transactions performed in certain industries.

COUNTRIES WITH DISCONTINUED INTERCHANGE CAPS

Japan

Japan previously had a 3.25% interchange cap on credit card fees and a government- subsidized points program to offset the cost of the national sales tax increase from 8% to 10% in 2019. 33 Initially, the fee cap was intended to persist even after the conclusion of the points program in June 2020. However, due to significant pushback from the credit card industry, lawmakers reversed their stance, allowing card companies the discretion to decide whether or not to uphold the cap. 34

31 https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/DPSSDISCUSSIONPAPER5E016622B2D3444A9F294D07234059AA. PDF 32 https://www.thebanker.com/India-s-digital-payments-market-looks-beyond-its-borders-1692889695 33 https://asia.nikkei.com/Economy/High-credit-card-fees-threaten-Japan-s-push-to-go-cashless 34 Ibid

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Payments Regulation in Asia - CMSPI Whitepaper