Co-branded or Companion Cards

Co-branded or Companion Cards means a tripartite agreement between -

(i) MasterCard (or Visa, OR AMEX or Diners Club);

(ii) a Credit (or Debit) Card Issuer; and

(iii) a large retailer (eg. David Jones, QANTAS, Woolworths etc).

The large retailer markets its own Credit Card or Debit Card directly to its customer base offering 'extra goodies'.

The AUSTRALIAN RETAILERS ASSOCIATION - SUBMISSION TO THE RBA - MARCH 2014 argues forcefully that the BBA should bring Co-branded Three-Party Schemes (eg. Qantas American Express Business Card) under the same regulation that were imposed by the RBA on Four-Party Schemes in 2004.

See below extract from The AUSTRALIAN RETAILERS ASSOCIATION - SUBMISSION TO THE RBA - MARCH 2014:

"REGULATION OF ALL SCHEMES

The Reserve Bank Act (1959) and the RBA’s Payment System Board (PSB) must ensure that within its limitation of power, it must exercise its powers to ensure that in the opinion of the board it will contribute to control risk within the financial system, promote competition in the market for payment systems and ensure consistency within the overall stability of the financial payment system.

In 2004 the RBA decided to regulate both Visa and MasterCard (regulation of Four-Party Schemes), however, as American Express and Diners Club were Three-Party Schemes, they did not fall under the same regulation. The regulation was in relation to interchange and pricing, and as such has caused a change in the payments landscape, bringing unintended consequences to the payments system in Australia with major changes to the card payment landscape.

As both Visa and MasterCard were regulated under the Four-Party Schemes, Merchants were able to process transactions via their Card Acquirer with a fair and reasonable Merchant Service Fee (MSF) and Merchants essentially decided if they would/would not accept payments via American Express (AMEX) and Diners Club. Many Merchants declined to accept AMEX and Diners Club as the MSF was often four to five times the rate of Visa and MasterCard. With increased issuing of Co-branded or Companion Cards (David Jones, QANTAS etc) it is difficult for retailers not to accept these cards as consumers expect retailers to accept most card payment types.

The ARA does not believe that at present, under the current regulation of the Australian Payment System, there is a level playing field, and we strongly believe that not all payment providers are treated equally by the Australian regulatory system, which should encourage and promote an efficient competitive market for payment transactions..

Under the Payment System Regulation (Act) 1998 the RBA has power to designate payment systems and has the ability to set and enforce standards and access for designated payment systems. As noted above, in 2001 the RBA designated/regulated the Four-Party Schemes, being both MasterCard and Visa, however they chose not to regulate the Three-Party Schemes of both AMEX and Diners Club which were left out of the regulatory environment.

The ARA has completed anecdotal research with its members, and the results have shown that depending upon the type of retailer involved, they will change the type of payment method used - from cash to tap and go to charge cards, however, the one consistent result was that there has been a far increased usage of Three-Party Scheme cards in all retailers where these cards are accepted.

In 2003 following on from the regulation of the Four-Party Schemes, AMEX entered into arrangements with the major commercial banks to issue Co-branded or Companion Cards. These Co-branded or Companion Cards are issued alongside existing Visa or MasterCard credit cards products. As these cards have a much higher MSF than both Visa and MasterCard, which AMEX charges and the retailer pays for, it provides the issuing bank an incentive to issues these cards alongside the Co-branded or Companion Cards, therefore allowing these cards to provide greater reward points for spending particularly when compared to the Visa or MasterCard product.

In the view of the ARA, these Co-branded or Companion Cards are now being issued as a Four-Party Scheme card and must be regulated and designated under the <50 basis cap as a Four-Party Scheme Card - the same way as Visa and MasterCard are regulated and designated under a Four-Party Scheme.

When researching for this submission – the ARA has spoken anecdotally with retailers and we have been advised that use of American Express cards has increased from approximately 13% to 18% over the last four years. The ARA is prepared to conduct a full survey of members to provide a more comprehensive view on card use, please advise us if you would like the ARA to look into developing a thorough member survey.

Via AMEX global network services (GNS) the issuing banks in Australia are highly incentivised to issue these Co-branded or Companion Cards and now act as an Card Acquirer for these cards. The ARA understands that currently these Co-branded or Companion Cards represent more than 35% of the AMEX market globally (refer to American Express Company 2011 Annual report). The Co-branded or Companion Cards are extremely strong in Australia and may well represent more than the 35% of the Australian AMEX market.

The ARA believes that as new payments systems are developed, particularly as new entrants develop new technology in the digital technology and internet payment space these cards will give undue pressure to Merchants, unless they are regulated by the RBA. The regulation should encompass interchange fees/MSF that can be charged to Merchants, and these new schemes must be regulated to ensure that there is a competitive market place consistent with the overall stability of the financial system, as well as ensure Merchants do not suffer from unintended consequences in the payment transaction space. Many of the new entrants in the payments area are neither price regulated nor are there regulations restricting it from having a "no surcharge" rule.

Due to the competitive nature of retail and due to the increased volume of Co-branded or Companion Cards, Merchants are unable to refuse acceptance of these cards, as the major Merchants accept these cards. For the independent SME retailer as well as the major chains, any impediment or barrier to the consumer by trying to steer the consumer away from using these Co-branded or Companion Cards will result in the consumer remembering the experience, and when next purchasing, they will look to a merchant that doesn’t steer by surcharging and accepts their preferred method of payment.

The ARA believes that there is currently an unequal playing field. The new entrants into the payment system are able to decide their own pricing model and they are able to choose if they wish to allow surcharging by the merchant, however, both of the schemes Visa and MasterCard are regulated to ensure that Merchants rightfully are not charged more than a reasonable MSF. It is therefore only right that all participants in the payments system must be treated fairly and equally. Regulations need to be broadened to include both Three-Party Schemes (AMEX and Diners) and the existing regulated Four-Party Schemes (Visa and MasterCard) as well as new and developing entrants into the payment space.

Merchants should have the choice of routing Co-branded or Companion Cards directly to the issuing bank instead of AMEX. For all practicable purposes, these Co-branded or Companion Cards are the same as the original Visa or MasterCard, and are linked to the same account and issued by the issuers on their own card platforms - they do not require any processing or routing via AMEX. Routing via AMAEX only adds costs and generates an additional revenue stream for card issuers and AMEX and additional points to the cardholder, without any value add to the payment functionally or process. If AMEX wants to have information on the purchasing of the Co-branded or Companion Cards, then the issuers should send a file with the detail to AMEX at AMEX’s own cost.

FUNDING OF INNOVATION IN PAYMENTS

Merchants are concerned about the costs associated with innovation. An example of innovation costs being when eftpos introduced the new interchange fees - retailers understand in the case of eftpos that the changes were necessary to ensure that eftpos remained as a true low cost scheme to compete with the existing card schemes. According to eftpos, the increased scheme fees were introduced to allow issuers to invest in new innovations, such as contactless cards, and although this change is laudable it should also be noted that moves to contactless cards requires investment by Merchants in both new equipment at POS and that new interchange fees mean that Merchants, unlike the issuing bank, have less money to invest in a process which will now cost them more. As technology changes rapidly from cards to mobile devices to new POS equipment, Merchants will need to invest heavily in new technology, both hardware and software. Therefore, any costs to Merchants need to be controlled. The ARA believes this is why structural changes need to be made to prevent the mandating of higher costs on Merchants without reasonable consultation with the wider Merchant community.

TRANSACTION ROUTING

Merchants have for many years accepted many types of cards that are introduced into the payments market place, invariably the cost of acceptance is one that is "thrust upon" them rather than consultation with the merchant to establish if they are prepared or willing to accept these costs. An example where costs to Merchants have been "forced" upon them include Merchant Service Fees on scheme debit cards which could be routed either via the eftpos network (pressing savings) or via the Visa and MasterCard scheme network by pressing the credit button. Some Merchants, particularly in the high discretionary spend, would prefer that the consumer pressed the saving button where the transaction MSF would be in the area of 7c to 14c per transaction. Equally for a merchant with low value and a high number of large volume transactions, the merchant may prefer to have the credit button pressed, as the MSF may well be at a more acceptable level.

Following on from the lead of Woolworths, who via owning their own switch simply turned off the ability for a customer to use the credit button when a scheme debit card was presented, a number of Merchants have informed the ARA that they had been advised by their merchant Card Acquirer that the Card Acquirer is unable or unwilling to program the terminal to turn off the credit button so that the transaction is routed via the eftpos network.

As an example: A merchant sells goods on an average ticket price of $85:00 who has an eftpos fee of 14c per transaction including GST using the savings button. If the same merchant processes a sale via the Visa or MasterCard scheme, and the MSF for the scheme fee is 0.79 inc GST, the MSF for the transaction is 0.67cents (this is the rate that the ARA has negotiated for its members). Obviously this Merchant would prefer to have all Visa and MasterCard transactions routed via the eftpos network.

Consider as another example a merchant who has low value average transactions of $10.25 per transaction - if the same MSF applied as above then this merchant would pay .14c per transaction using the eftpos network, however if that transaction was routed via the Visa or MasterCard scheme (pressing the credit button) that transaction would cost the merchant 0.08c per transaction.

The ARA believes that all acquiring banks should allow all Merchants to decide if they wish to route transactions via a particular scheme route. In fact, the ARA via the Australian Merchant Payments Forum in a submission to the RBA in May 2011 (5.1) made reference to unbundling of card schemes and branding from the network, process, clearing and settlement activities would increase competition and innovation by encouraging new entrants into the Australian payments market.

Merchants should have a choice of routing for all payment transactions, including but not limited to the option of routing American Express (AMEX) Co-branded or Companion Cards issued by banks directly to the issuing bank instead of AMEX. For all practical purposes, these Co-branded or Companion Cards are the same as the original Visa or MasterCard and linked to the same account and are issued by the issuers on their own card platforms and do not require any processing or routing via AMEX. Routing via AMEX only adds costs and generates an additional revenue stream for card issuers and additional points to the cardholder without any value added to the payment functionally or process.

Overseas examples of merchant routing options occur in Europe (via SEPA for Cards and Payments Services Directive – PSD). Transaction routing choices guaranteed to the merchant under the Durbin amendment which prevents a scheme from mandating that a network is used for authorising, clearing or settling a debit card transaction.

Ownership of BINs is also an issue affecting routing. For contactless cards with multiple applications (e.g. eftpos and scheme debit applications on a single piece of plastic) the routing choice is determined by the BIN, which is typically "owned" by the international card schemes (Visa and MasterCard). This potentially prevents Merchants from choosing to route these transactions over the lowest cost network. It also prevents consumers from choosing whether they wish to process the transaction as an eftpos transaction or as a scheme debit transaction."