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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.
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