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Following implementation of interchange caps and surcharging laws, the cost of accepting American Express cards also fell from above 2.5% to below 1.5% over a 15-year period. Merchants had a greater incentive to refuse or surcharge the use of these cards as a result of the interchange caps on Visa and Mastercard. The RBA is a 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.” 332 However, since the percentage of merchants surcharging in Australia has been made public (Figure 5.3), there have been concerns of excessive card surcharging. In response to these concerns, the bank 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. 333 The central government has since banned the practice of excessive surcharging and provided the Australian Competition and Consumer Commission (ACCC) enforcement powers on this matter. This does not appear to have impacted merchants’ appetite to apply surcharges: RBA data suggests 7.3% of all card payments incurred a surcharge in 2022, up from 4.7% in 2019. 334

Based on the ACCC rules, merchants interested in surcharging should ensure that surcharges are calculated to be percentage-based or per item fee based 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%. 336 These regulations vary from state to state with federal rules taking precedence. 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 in 2022 (see Section 4.1.3). After a two-year review, the bank has announced its intentions to extend its no-surcharge rule prohibition to BNPL providers like Afterpay and Zip. 337 Although strongly anticipated, BNPL regulations have been delayed until 2024 for drafting constraints. 338 CONCLUSION Australian regulators have been trailblazers and continue to regularly reassess and lower interchange caps based on cost analysis. The RBA’s intervention on debit LCR is important for competition, but it’s important that regulators and the industry can learn from the U.S.’ experience with network tokenization and its potential impact on debit routing (see Section 5.2.2). Section 5.5 – Payments Industry Regulation in Japan As we saw in Section 1.2, Japan has some of the world’s highest card fees for merchants. This could be linked to the fact that there are no major interventions in interchange caps, co-badging or price signaling, despite increasing market scrutiny from the competition regulator, the Japan Fair Trade Commission (JFTC). As discussed in Section 4.3.3, in 2018, the Japanese Ministry of Economy, Trade, and Industry formulated the “Cashless Vision” which aims to increase cashless transactions to 40% by 2025. 339 High credit card merchant fees have been cited as a challenge to expanding cashless payments in Japan 340 , and within this context the JFTC has conducted two surveys of credit card market participants. 336 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 337 https://www.reuters.com/business/finance/australias-central-bank-tells-buy-now-pay-later-firms-drop-surcharge- ban-2021-10-22/ 338 https://www.afr.com/companies/financial-services/bnpl-laws-delayed-until-new-year-amid-legislative-drafting- constraints-20231124-p5emmy 339 https://www.weforum.org/agenda/2022/09/japan-cashless-society-digital-salary-payment/#:~:text=In%20 2018%2C%20the%20Ministry%20of,possibly%2080%25%20in%20the%20future. 340 https://www.whitecase.com/insight-alert/jftc-market-study-report-credit-card-transactions-suggests-standard-in- terchange-fee

Figure 5.3 – Percent of Surveyed Merchants Surcharging on at Least One Credit Card Over Time 335

332 https://www.rba.gov.au/payments-and-infrastructure/review-of-retail-payments-regulation/pdf/review-of-re- tail-payments-regulation-issues-paper-nov-2019.pdf 333 https://www.rba.gov.au/payments-and-infrastructure/review-of-retail-payments-regulation/pdf/review-of-re- tail-payments-regulation-issues-paper-nov-2019.pdf 334 Card Payments | RDP 2023-08: The Evolution of Consumer Payments in Australia: Results from the 2022 Consumer Payments Survey | RBA 335 East & Partners (2010), Australian Merchant Acquiring and Cards Markets: Special Question Placement Report prepared for the Reserve Bank of Australia