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CMSPI – IAC State of the Industry Report
CMSPI – IAC State of the Industry Report
The Findings • The cost methodology and the competitor methodology are the two most common ways of calculating interchange fee caps • When fee caps are implemented, they are often followed by increases to other, non- regulated fees charged to merchants • Merchants have mixed preferences over whether they would like to surcharge transactions • Even if one provider is regulated, there are often many other supply chain participants who must enable the regulation to ensure it reaches merchants and consumers • New technologies may act to limit competition between card networks or payment methods • Regulators are increasingly including specific, forward-looking provisions when crafting payments regulation to protect its benefits The Numbers • $4 billion The estimated annual savings available from full enablement of network routing choice on debit cards in the U.S. 194 • 72% The share of total U.S. card fees that were incurred on credit cards in 2023 195 • 90% The proportion of debit card transactions covered by Australian co-badging requirements 196 • $5.5 billion The value of the monetary award in the U.S. class action settlement upheld in 2023 over the setting of interchange fees 197
Section 5 Overview Payments and Regulation
Over the preceding Sections, we explored the factors that make payments a complex industry to navigate. In Section 2, we caught a glimpse of the implications of that complexity; very few players have the technological capabilities and knowledge to participate in the market, which can generate high barriers to entry and the opportunity for significant profit margins. Those same factors make payments a market ripe for regulation. Over the past three decades, digital payments regulation has taken shape globally. As with everything in payments, it looks different in every market; early interveners like Australia started with fee caps and price signaling flexibility and are now expanding into competition- based regulation, whereas markets such as Japan are just starting out with a transparency-first approach. However, while many have benefited from payments regulation, economists know well that no industry is immune from the Law of Unintended Consequences, which says that every action – especially those of governments – will have unanticipated effects. 193 In this section, we begin to draw a thread between interventions around the world, noting which were most effective and what the next generation of regulators can learn from their predecessors.
The Questions • How have different countries approached payments regulation?
• What is co-badging, and how does it affect competition? • Do interchange fee caps work, and how are they calculated? • In what ways can savings from regulation be eroded? • What guarantees can regulators provide for consumers and merchants in order to protect the benefits of regulation?
194 CMSPI estimates and analysis 195 CMSPI estimates and analysis (see Section 1) 196 Executive Summary | Review of Retail Payments Regulation – Conclusions Paper | RBA 197 Visa, MasterCard $5.6 bln settlement with retailers is upheld | Reuters
193 Law of unintended consequences (upenn.edu)
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