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CMSPI – IAC State of the Industry Report
CMSPI – IAC State of the Industry Report
Section 5.6 – Risks and Outcomes from Each Policy Intervention This section reviews three components of payments policy often employed by regulators: interchange regulation, co-badging, and price signaling (i.e. surcharging). Interchange cap regulation is the most common approach among the countries in scope (16 out of 20 countries), while only two countries provide co-badging oversight from public authorities. Meanwhile, surcharging rights for merchants are somewhat more common with permissions in Australia, the U.S., and Canada. It’s essential to note that the effectiveness of all of these policies is dependent on implementation, industry cooperation, and regulatory support. In this dynamic payments landscape, merchants heavily rely on ongoing evaluations of payment policy developments. The engagement of industry stakeholders in this ongoing evaluation process is imperative to ensure that established policies align with evolving market dynamics and serve the best interests of all stakeholders. Section 5.6.1 – Interchange Caps Interchange caps can be an effective way of reducing the cost of card payments, with case studies demonstrating successful reduction of overall costs in the European Union, United States and Australia. However, challenges arise due to limited scoping (often only on interchange fees – not inclusive of network fees - or with exceptions to certain cards like commercial cards) with evidence suggesting unregulated fees can increase following interchange caps. Additionally, interchange cap setting is naturally subjective, and caps can often be set above efficient levels, regardless of the methodology used. Section 5.6.2 – Co-Badging Co-badging rules are only in place in the U.S. and Australia, but both case studies highlight significant savings for merchants leveraging competition for routing priority between networks. 350 Co-badging is also the only solution that looks to fundamentally solve competition issues in the payments industry without impacting the customer experience and inhibiting innovation. However, in practice we have seen that the ability to route can be limited or inhibited, which has reduced its impact in both the U.S. and Australia. Additionally, co-badging requires technological enhancements, introducing delays in implementation. Most importantly though, co-badging requires issuer enablement, and in both countries, it has necessitated proactive ongoing involvement from public authorities to ensure that routing remains widely available.
Additional cost transparency is a welcome tool for merchants, and this intervention mirrors the U.S. where interchange rates weren’t published until 2006-07 following Congressional pressure. However, the JFTC has so far stopped short of capping interchange fees. Additionally, there are currently no co-badging rules and routing rights for Japanese merchants to leverage with card networks. About 80% of merchant respondents reported that they were highly dependent on international brands for their transactions. The JFTC’s 2022 report also evaluates the network rule bans on merchant “price steering.” The JFTC highlight its concern that the prohibition of steering clauses limits a merchant’s negotiation levers and may be in conflict with Japan’s Antimonopoly Act. Despite these concerns, the JFTC mentions the following considerations about making steering possible for Japanese merchants.
Not many merchants wanted to utilize payment steering. If steering was possible, over 60% of merchant respondents stated they would not promote consumers to use payment methods with lower fees. Steering prohibitions may protect cardholders’ preference of payment method. Depending on the transaction size, 60-70% of cardholders stated that, if requested, they would use an alternative payment method, while 30-40% said they would stop shopping at that store all together if it was not essential.
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Ultimately, the Japanese authorities’ lack of firm regulatory action in terms of caps, co-badging and surcharging, despite market studies, desire for a cashless society and enhanced transparency requirements, likely goes a long way to explaining the high card fees we observe in Section 1.2. These fees may become further exacerbated by the 3DS (see Glossary) acceptance mandate for online card transactions as required by the Credit Card Security Guidelines resulting from the Installment Sales Act. 349 As a result, interchange may also go up as issuers invest to comply with 3DS. While it is unlikely that merchants will face fines for failure to comply, 3DS in other global jurisdictions has been known to also attract network fees and potentially impact conversion rate performance.
350 https://www.rba.gov.au/publications/bulletin/2024/apr/the-effect-of-least-cost-routing-on-merchant-pay- ment-costs.html
349 https://support.stripe.com/questions/3ds-mandate-in-japan
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