State of the Industry Report September 2024

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CMSPI – IAC State of the Industry Report

Section 5.1.2 – Co-badging/Dual Network Routing Regulation

India In December 2021, the Reserve Bank of India (RBI) sought feedback from stakeholders by October 2022 on several payment system fee issues. These included the proposed introduction of credit card interchange caps and reinstating charges for UPI, India’s real-time system, which operated interchange-free from 2020 until recently. 223 In 2023, the Reserve Bank of India introduced interchange fees ranging from 0.5-1.1% on select UPI transactions. 224 United States In March 2024, a proposed settlement to one of the largest class action lawsuits in U.S. history to provide injunctive relief to U.S. merchants accepting Visa and Mastercard was announced. The proposed settlement contains a variety of changes to the Visa and Mastercard global rules and their credit interchange programs for domestic transactions. The proposed settlement intervenes in Visa and Mastercard’s domestic credit interchange programs by: Reducing the published interchange rates as of 12/31/2023 by 4 basis points for a period of 3 years Reducing Visa and Mastercard’s combined system-wide average effective rate by 7 basis points for a period of 5 years Holding the domestic credit interchange rates at the 12/31/2023 levels for a period of 5 years The proposed settlement is subject to court approval and has received criticism from some retail and consumer groups. 225 226 227 On June 28th, 2024, the judge rejected the proposed settlement. 228 1 2 3

Co-badging denotes a single payment card enabled with two or more unaffiliated payment networks, enabling transactions across multiple networks. Often, local cards will have global card networks co-badged on them for international acceptance when their cardholders travel abroad. Countries like the United States and Australia have paired co-badging and merchant-choice routing requirements or incentives. The goal is to empower merchants to choose over which network to route a transaction. The rationale is that merchants, as the ones bearing card fees and often fraud costs, are best suited to choose the network that minimizes these fees (a practice known as Least Cost Routing). This dynamic fosters competition among card networks who otherwise may not have incentives to attract merchant volumes since they would likely focus more on driving revenues to card issuing banks to increase network uptake. Additionally, having multiple networks co-badged on cards implies effective conversions, higher availability, and increased uptime due to network redundancies. There may be functional variations aside from cost that will dictate merchant routing choice, such as a lack of online functionality for some local networks or integration challenges between global networks and local digital wallets. However, local networks are motivated to enhance functionality to incentivize merchants and cardholder usage. As discussed in Section 4, Visa, Mastercard, American Express, China UnionPay, Discover, and JCB are international payment networks, with extensive merchant and financial institution partnerships, facilitating worldwide electronic transactions. On the other hand, local card networks like Cartes Bancaire in France and eftpos in Australia are payment networks that operate within a specific country or region. Figure 5.1 below illustrates local networks around the world. These networks are often limited to debit such as the U.S. debit networks, eftpos in Australia, and Girocard in Germany. However, Cartes Bancaire in France, Aeon Card in Japan, and BC Card, Shinhan Card, and Nonghyup Card in South Korea support credit, as well. In April 2023, Bank Indonesia announced it will launch a domestic credit card network to “transition away from foreign credit card networks.” 229 The United Arab Emirates, which has neither a domestic credit nor debit network, has licensed India’s Rupay technology to roll out its own domestic card scheme, Jaywan, into 2026. 230

223 https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/DPSSDISCUSSIONPAPER5E016622B2D3444A9F- 294D07234059AA.PDF 224 https://economictimes.indiatimes.com/wealth/spend/upi-merchant-transactions-ppi-which-upi-payments- will-attract-interchange-fee-will-you-have-to-bear-the-cost/articleshow/99087712.cms?from=mdr 225 Retailers Ask Judge to Reject Swipe Fee Settlement | Convenience Store News (csnews.com) 226 https://www.law360.com/articles/1832103/barnes-noble-joins-visa-mastercard-settlement-objectors 227 https://advocacy.consumerreports.org/research/cr-objects-to-visa-and-mastercard-antitrust-settlement- with-u-s-merchants/ 228 https://www.frsco.com/swipefeesettlement/

229 https://www.thebanker.com/Indonesia-takes-its-credit-card-network-in-house-1681804248#:~:text=Indone- sia’s%20central%20bank%2C%20Bank%20Indonesia,role%20of%20foreign%20payment%20providers. 230 https://www.khaleejtimes.com/life-and-living/banking-in-uae/jaywan-in-uae-soon-all-debit-cards-to-be-issued- with-new-payment-solution