An Access Regime for the ATM System – February 2009 5. Consultation

As previously noted, the ATM reform process has involved extensive consultation with industry over many years. In particular, the industry proposal that is supported by the Regime is the product of an intensive round of discussions and consultation that took place through 2006 and 2007. As such, many issues have been canvassed and considered in those earlier rounds. This section focuses on the particular issues related to the draft Access Regime. Details on earlier discussions can be found on the Reserve Bank's website as set out in media releases, consultation documents, industry submissions and industry discussion papers.

5.1 Views expressed during consultation

The Consultation Document requested submissions from interested parties by 16 January 2009. The Bank received thirteen submissions – from industry bodies, a consumer advocacy group, organisations representing people who are blind or vision impaired, and a number of participants in the ATM system, including banks, independent deployers and a sub-network operator. Eleven of the parties making submissions chose to meet with Bank staff to further discuss their views.

As might be expected given that the industry has requested regulation by the Reserve Bank, submissions were generally supportive of the proposal to set an Access Regime and of the ATM reform package more generally. Other comments largely related to the setting of the cap on the direct connection charge and the Bank's view that there should be no charge for establishing a direct clearing/settlement arrangement. There were also some calls for greater flexibility in the provisions relating to interchange fees.

The banks, the Australian Bankers’ Association (ABA) and APCA questioned the proposal to set the cap on the direct connection charge at the lowest cost of respondents to the APCA connection cost survey. They argued that this approach is biased toward access seekers because all but one access provider would be required to subsidise new entrants. Some also suggested that the variation in connection costs in the survey reflects the size and complexity of institutions’ operations rather than efficiency, undermining the usefulness of the lowest-cost respondent. Submissions from the largest banks suggested that the average cost of connection from the survey be used, rather than the lowest cost, with the ABA noting that this approach would still provide access providers with an incentive to reduce costs.

A non-bank payments service provider supported setting the cap at the lowest cost in the survey, while a regional bank noted that it would be difficult to adopt a significantly different approach to that adopted in the EFTPOS system.

APCA suggested that setting a direct connection cap that is too low might lead to the establishment of connections that are inefficient because they do not generate sufficient volume of transactions to justify establishment and operation. Similar arguments were made in relation to direct clearing/settlement arrangements. APCA proposed that a ‘peer or pay’ model be adopted, under which additional charges would apply if, after a period of time, certain volume thresholds had not been met.

A number of bank submissions, along with those from the ABA and APCA disagreed with the Reserve Bank's view that there should be no charges for establishing direct clearing/ settlement arrangements. They argued that there are significant costs involved in establishing these arrangements, which access providers should be permitted to recover. APCA argued that direct clearing/settlement arrangements should not be viewed as distinct from direct connection arrangements because, in most respects, they are identical; the only point of difference is physical connectivity between access provider and access seeker.

Most banks indicated a preference for a direct clearing/settlement cap based on the average direct clearing/settlement cost in the APCA survey. APCA again suggested a ‘peer or pay’ model.

One submission supported the notion that the right to clear and settle is a ‘basic need’ of the payments system and should not incur a charge. It was also noted in discussion that this outcome could not practically be achieved unless it was explicitly addressed in the Access Regime. The same party also called on the Bank to review direct clearing/settlement arrangements for the EFTPOS system.

Most submissions supported the general approach to interchange fees taken in the draft Access Regime, although several argued for some additional flexibility to allow for circumstances where interchange fees might be beneficial. One major bank argued that prohibiting the payment of interchange fees between direct connectors is unnecessarily prescriptive and might prevent the emergence of new and innovative business models. Similarly, another suggested that the draft Access Regime be changed so that, rather than eliminating interchange fees, it instead set interchange fees to zero to provide flexibility if necessary to advance ATM reform. APCA suggested that a provision be included in the Regime that would allow the Bank to approve interchange arrangements that enhance competition.

Some submissions specifically noted their support for allowing interchange fees within sub-networks and for one-way arrangements. One submission argued that smaller institutions should be permitted to have in place two one-way access arrangements. Few submissions commented on the transparency provisions of the draft Access Regime, but those that did supported the approach taken.

While not specifically part of the current regulatory process, a number of submissions commented on two further issues raised in the Consultation Document. The first was the Bank's suggestion that it would consider taking a more active role in ATM access arrangements if further improvements in the access model have not been achieved by March 2010. Characteristics identified by the Bank as important for indicating progress included: the establishment of a single point of access for new entrants, minimising the extent to which negotiation with multiple participants is required; the use of message formats that are standardised to the fullest extent possible; and the use of international standards where appropriate. Submissions that commented on this issue tended to be supportive of the overall objective, with some pointing to developments that were already taking the industry in the desired direction. This included the work of APCA in this area and the establishment of a ‘community of interest network’ (COIN) by two of the major banks. However, some banks expressed concern about the Bank's timetable, in one case suggesting that considerable work needed to be undertaken on the underpinnings for new network arrangements and in another that the timing of investment is driven by other factors. One submission argued that the prospect of obtaining access through a single connection in a year's time would deter potential entrants from seeking access in the coming year.

The second issue addressed by several submissions, but not directly related to the proposed Access Regime, was the level of foreign fees. Some submissions argued that banks will continue to face a number of costs from foreign ATM transactions when interchange fees are eliminated, including for transaction processing, dispute resolution and fraud, and that it was appropriate that banks be able to recoup these costs through foreign fees.Another submission argued that the cost to issuers of foreign transactions was likely to be only a few cents and that the imposition of a material foreign fee would undermine elements of the reform process. The Consumer Action Law Centre argued that the Access Regime should be extended to explicitly address pricing to customers – preventing the charging of foreign fees where no interchange fee is levied and placing constraints on direct charges.

Some submissions also raised what they felt might be unintended consequences of direct charging. The Consumer Action Law Centre noted that the application of direct charges to balance enquiries could discourage people from verifying that they have funds available before making a withdrawal. It suggested that ATM owners be required to provide a warning screen if a transaction would lead to an overdrawn account.

Blind Citizens Australia and Vision Australia raised concerns about the ability of blind and vision-impaired people to use audio-enabled ATMs (which provide audio instructions to assist transactions) when direct charging is introduced. They were concerned that the audio software on the available ATMs might not be updated in time for the start of direct charging, rendering them unusable for blind or visually-impaired people. They were also concerned that blind and visually-impaired people tend to be highly restricted in the ATMs they can use and are therefore less likely to be able to search for an ATM from their own institution or a foreign ATM with a lower fee.

5.2 Discussion

The consultation process has demonstrated the industry's continued support for the setting of an Access Regime for the ATM system under Section 12 of the Payment Systems (Regulation) Act. Given this, the following discussion focuses on three main issues: the calculation of the cap on direct connection costs; whether the cost of setting up direct clearing/settlement arrangements should be capped explicitly in the Access Regime; and the exemptions for interchange fee-like payments.

The Bank has considered the argument that the surveyed connection cost upon which the direct connection charge cap is based is unrepresentative and leads to subsidisation of new entrants by all but one access provider. It remains of the view, however, that the cost paid by new entrants ought not be determined by the complexity of others’ systems and that a low cost of connection is important to achieving competitive outcomes in a system where potential entrants must separately connect with a number of incumbents. If the average cost were used, as suggested by some submissions, this might imply a total connection cost of well over $1 million for a new entrant wishing to establish a full set of direct connections. Furthermore, consistency with the EFTPOS Access Regime argues for adoption of the lowest surveyed connection cost as the benchmark. The Bank, therefore, continues to be satisfied that a direct connection charge cap of $76,700 represents an appropriate balancing of the interests of access seekers and access providers.

The Bank has also reconsidered whether access providers should be permitted to charge access seekers for establishing direct clearing/settlement arrangements. Although there are costs to financial institutions of implementing such arrangements, the Bank remains of the view that clearing and settling are fundamental aspects of banking business and that it is appropriate that each institution meet its own costs in this area. A significant part of the public benefit accruing from the payments system stems from the ability of consumers to make payments regardless of the institution they bank with or the institution the merchant banks with. Efficient clearing and settlement arrangements are essential if these benefits are to be realised. Allowing participants to impose fees for the establishment of direct clearing and settlement arrangements would not only increase costs for new entrants but might also force some financial institutions to clear and settle indirectly through an agent who is also a competitor. While many institutions may find such agency arrangements efficient, they may hinder the ability of others to compete. On balance, therefore, the Bank is of the view that the benefits of prohibiting charges for establishing direct clearing/settlement arrangements outweigh the costs to current participants of providing that access without charge.

As noted above, the Draft Access Regime did not make any explicit reference to charges for establishing direct clearing/settlement arrangements. During consultation it was argued that this approach could present further access problems if institutions chose to impose large charges for clearing and settlement (perhaps outside of the industry Access Code). In finalising the Access Regime, therefore, the Bank has included a clause stating that parties seeking to establish direct clearing and settlement arrangements with other participants cannot be charged a fee.

In terms of interchange fees, the Bank recognises the benefits that would come from the Access Regime having some additional flexibility. The variety and complexity of business arrangements that apply for participants in the ATM system make it difficult to be certain that the carve-outs in the draft Access Regime will cover all circumstances where payment of an interchange fee might be beneficial. Submissions have suggested that the Access Regime provide the Bank with the ability to approve interchange fee arrangements that enhance competition.

The Bank sees merit in this suggestion and has therefore included a clause in the Access Regime allowing it to grant an exemption to the interchange fee provisions and setting out the matters the Bank will take into account when granting such an exemption. Exemptions will only apply to particular arrangements and will be evaluated on the same basis as the exemptions already explicitly included in the Access Regime – that is, having regard to: whether the exemption would be in the public interest; the interests of current participants in the system; the interests of people who, in the future, may want access to the system; and any other matter the Reserve Bank considers relevant. In addition, the Bank will publish notice of any exemptions granted on its website, including the nature of the exemption and the identity of the participants involved.

The Bank sees no particular advantage to rewording the Access Regime to set interchange fees to zero, rather than simply removing them. In the event that there was a view that the new arrangements should be changed in some way, the same processes for variation of the Access Regime, including public consultation, would likely be required regardless of whether interchange fees are set to zero or abolished.

The Bank has also re-examined whether participants should be permitted to have more than a single one-way arrangement for access to another network's ATMs. Permitting small institutions to have two or more such arrangements would potentially make it possible for them to establish larger fee-free networks than the existing networks. While clearly an advantage to these institutions, it could put the whole reform process at risk by encouraging large networks to look for ways to re-establish bilateral interchange fees, thereby reintroducing the problems of the current system. The new arrangements will provide small financial institutions with the opportunity to have a fee-free network at least as large as those of the major banks while maintaining the integrity of the reforms by removing bilateral interchange fees between the main networks. In addition, small institutions may still, if they wish, absorb the cost of ATM withdrawals for their customers to provide broader fee-free access to ATMs, just as they currently do. This is a business decision for them. The Bank, therefore, does not propose to change the Access Regime to allow participants to have more than one one-way arrangement under which they access another participant's ATMs.

Finally, the Bank has noted the concerns raised by Blind Citizens Australia and Vision Australia in relation to accessibility of ATMs. The Bank encourages ATM operators to ensure that audio-enabled ATMs are updated in a timely fashion and issuers to consider rebating direct charges to cardholders who are restricted to using foreign ATMs for reasons of accessibility.