Access Regime for the ATM System: A Consultation Document – December 2008 5. Draft Access Regime
The draft Access Regime is set out in the Attachment. It should be considered in conjunction with the draft Access Code developed by APCA.
The draft Access Regime addresses two issues. It imposes a cap on the charge for providing a ‘Direct Connection Service’ and it specifies that no interchange fees will be paid except where particular conditions are met.
5.1 Cap on connection charges
In determining an access regime that meets the requirements of the Payment Systems (Regulation) Act, the Board has considered the two types of connection services defined in the draft Access Code:
- a direct connection – a direct communication link between two parties that enables them to directly exchange ATM transaction messages, and clear and settle ATM transactions that arise between them; and
- a direct clearing/settlement arrangement – an arrangement between two parties that are indirectly connected via a switch that enables them to directly clear and settle ATM transactions that arise between them.
A direct connection service is essential for new entrants that wish to participate directly in the ATM system. As discussed in Section 3, a fundamental feature of the bilateral technical architecture is that new entrants have to establish connections with a number of participants in order to participate fully in the payment system. Currently, new entrants have no rights to such connections and participants are not obliged to provide them. The Access Code would provide such rights and obligations and envisages that those obliged to provide the direct connection will be able to recover some of their costs from new entrants as a connection charge. The Board sees a strong case to cap this charge both to provide some certainty to new entrants around the cost of direct participation and to ensure that potential new entrants do not face unnecessary barriers to entry.
A direct clearing and settlement service is somewhat different. An integral part of any financial institution's business is the provision of payment services to its customers. This necessarily involves having arrangements with other financial institutions to send and accept payment messages, and for clearing and settling the resulting obligations. Clearing and settling is fundamental banking business and, provided financial institutions meet appropriate objective prudential standards, they should have the right to clear and settle directly with other financial institutions. It is therefore the Board's view that, if a new entrant meets the eligibility criteria under the Access Code to seek access to direct clearing and settlement services, it should not be charged to establish this service. The access seeker will still, however, have to meet its own costs and any fees for membership of the Access Code and the clearing system for ATM transactions.
The draft Access Regime therefore proposes setting a cap on direct connection only. From the date the ATM Access Regime comes into force, the cap for the cost of a direct connection service is to be set at the lowest estimated cost of providing that service as reported in a survey of ATM connection costs undertaken by APCA in August 2008. On the basis of this, the draft Access Regime sets a cap on the cost of a direct connection service of $76,700. This cap will apply to any applications from an access seeker for a direct connection service under the Access Code from the date the Access Regime comes into force.
The choice of this cap refl ects a balancing of the interests of both current and prospective participants as well as being the methodology adopted for setting a cap on the cost of EFTPOS connections in the EFTPOS Access Regime. The basis of the methodology is that the cost should be capped at the cost of the most efficient provider of the connection service. This represents, in the Board's view, an appropriate balance between the interests of existing participants and prospective participants, given existing technology, while also providing incentives for efficiency within the system. It is the Board's view that setting any higher cap would overweight the interests of existing participants at the expense of both prospective participants and the overall efficiency of the system.
Consistent with the view that access seekers should not be charged for the establishment of direct clearing and settlement services, the draft Access Regime does not provide for access providers to charge access seekers for establishing this service. The Board expects that the industry Access Code will not impose such a charge either.
Although the proposed Access Regime sets a cap on the cost of a bilateral connection,
the Board's view is that the existing bilateral web of connections is no
longer promoting the efficiency of the system. These connections unnecessarily
complicate access and are based on obsolete technology that is due for replacement.
The Board is therefore proposing that any Access Regime (and complementary
Access Code) should only be a temporary measure while the industry moves to
a more access-friendly architecture. One consequence of this is that the proposed
Access Regime does not allow for the recalculation of the cap as was done in
the EFTPOS Access Regime. The Board's views on the future of the ATM network
architecture are discussed in more detail in
Section 6.
5.2 Interchange fees
As discussed in Section 3, the Board is of the view that bilateral interchange fees in the ATM system are not subject to competitive pressures and can act as a barrier to entry. It therefore sees merit in the industry's reforms that would set a common interchange fee of zero with ATM owners recovering their costs through direct charges that are transparent and subject to competition. To implement these reforms, the draft Access Regime requires that no interchange fees be paid between participants in the ATM system except in some special circumstances. These are:
- the fee is being paid by a participant to a provider as a one-way arrangement for access to the provider's ATMs (a bespoke agreement); or
- the fee is being paid between participants of an ATM sub-network and is set as a multilateral fee by that sub-network.
The draft Access Regime also prevents a participant that receives an interchange fee in a one-way arrangement from paying an interchange fee to any other participant, other than within a sub-network.
The purpose of allowing fees to be paid between participants in these circumstances is to permit arrangements that enhance competition. The Bank has received representations from many small financial institutions highlighting the difficulties they face in competing with financial institutions that have large networks of ATMs. Small institutions argue that in order to compete effectively, they need to be able to offer to their customers a reasonable network of ATMs from which they can withdraw cash at no charge – just as large institutions do. They have historically achieved this in a couple of different ways.
First, many small institutions have joined sub-networks in which there is a multilateral interchange fee between the participants. Customers can use ATMs within that network, but can also use ATMs outside that network through the switching capability of the network operator. These sub-network arrangements were explicitly allowed for in the reform package proposed by the industry.
Second, some small institutions have negotiated ‘bespoke’ agreements with a large network (typically a large bank) in which their customers can use the large institution's ATMs. This involves the payment of what might be best regarded as an access fee to the large institution. These arrangements have only recently come to the Bank's attention and it has clarified its views on such bespoke arrangements to the industry in a letter to APCA of 1 September 2008.[1]
The draft Access Regime explicitly allows for both such arrangements while making it clear that bilateral interchange arrangements between direct connectors in the ATM system must have no interchange fees.