An Access Regime for the ATM System – February 2009 6. Regulatory Requirements and Analysis

The Payment Systems (Regulation) Act permits the Bank to impose an access regime on a designated payment system where it considers it appropriate, having regard to:

1. whether imposing the access regime would be in the public interest;
2. the interests of the current participants in the system;
3. the interests of people who, in the future, may want access to the system; and
4. any other matters the Reserve Bank considers relevant.

As discussed above, the Bank has considered an access regime for the ATM system at the request of the industry. The central choice for the Bank has been whether or not to proceed with a regime of this type. If it were to not proceed, there is likely to be considerable dislocation in the ATM industry, and the reform process would be delayed further, perhaps for many more years. The Bank is satisfied that the Access Regime, together with the industry-developed Access Code, is in the public interest.

The benefits of proceeding with the Access Regime and the introduction of the new arrangements fall into three categories:

• encouraging choice and convenience for customers;
• introducing transparency in pricing of ATM transactions undertaken at foreign ATMs; and
• improving competition in the provision of ATM services.

As noted in Section 2, one of the features of the current arrangements is that revenue received by ATM owners is determined by agreements entered into when the system was first established which have very little flexibility. Under these arrangements, it is therefore likely that, as costs rise over time, the availability of ATMs will decline. This would result in less choice and convenience for consumers. By providing ATM owners with the ability to price their service, subject to competition from other ATM owners, the new arrangements will ensure that ATMs continue to be widespread, including in some areas that currently may not have an ATM. Furthermore, with an ability to determine their own prices, ATM owners will have an opportunity to investigate additional services that ATMs might offer on a competitive basis.

Under the new arrangements, as is the case currently, most customers will not be charged for use of their own financial institution's ATMs and smaller financial institutions will be able to enter into arrangements with larger networks to provide fee-free access to ATMs for their customers. Where a foreign ATM is used, the fee charged by the owner of the ATM will be clearly disclosed before the cardholder makes the withdrawal. If the cardholder decides not to proceed with the transaction they will be able to cancel the transaction without charge.

With the fee disclosed up front, there will be more competitive pressure on ATM fees than is currently the case. Under the new arrangements, the cost of an ATM withdrawal may vary across locations, although it is likely that a number of banks will have universal pricing across their own networks. In high-traffic locations, where the cost of providing each ATM withdrawal is likely to be relatively low, fees might be lower than in higher-cost locations. It is important to note, however, that attempts by ATM owners to charge fees well in excess of costs is likely to lead to a competitive response from other ATM owners, including by installing a lower cost ATM in the same area.

In the Bank's view, the benefits of these new arrangements are likely to be maximised if foreign fees are eliminated. Given the changes that are taking place, and since most institutions now provide transaction accounts which offer unlimited electronic transactions for a monthly fee, the Bank no longer sees a case for financial institutions to charge their customers these fees. While the Bank has no regulatory power over foreign fees, its view is that the pricing transparency of the system and the competitive pressures will be diluted if cardholders have to pay fees to the ATM owner and to their own institution.

Finally, the simplified access arrangements will facilitate entry to the market, further assisting in keeping pressure on fees and improving convenience for customers.

While the Bank judges that these benefits are significant, it recognises that there have been implementation costs for the industry, including: reprogramming of ATMs (and in some cases replacement of ATMs); changes to systems that support the exchange of payment messages; and customer education. These costs have been incurred across financial institutions, independent deployers and switches. Many of the costs would have been incurred even without the reforms due to the need to upgrade the ATM fleet and technology in order to ensure that Australia has a modern and up-to-date ATM system. Importantly, these costs have been incurred as part of an industry initiative, the outcome of which will ultimately be a more convenient, transparent and competitive ATM system going forward.

If the Bank were not to proceed with an access regime, there is a significant risk that the industry would abandon most, if not all, of the reform package. The Bank's liaison with industry participants suggests that a significant number of financial institutions would not be willing to proceed with a cap on the connection charge or the elimination of interchange fees in the absence of the Bank's Access Regime. In particular, some institutions are concerned that the alternative of authorisation by the Australian Competition and Consumer Commission (ACCC) would not provide the degree of legal certainty required, since the setting of zero interchange fees in the EFTPOS system gained ACCC authorisation, but was subsequently overturned by the Australian Competition Tribunal. Further, some are concerned about the liability of directors of the ATM Access Company if the arrangements are found to constitute price fixing.

Even if the industry did decide to proceed with some aspects of the Access Code, the failure of the current Access Code to address interchange fees and connection costs would leave unresolved the central issues that have raised concerns over many years. Further, despite the technical changes to allow direct charging having already been put in place, a decision by the Bank not to impose an access regime would be likely to lead to some industry participants becoming reluctant to enter business arrangements with ATM owners that choose to direct charge.

If the reform package were to be abandoned, the cost and effort that has already been applied by the industry to ready itself for the implementation of the package will have been unnecessary. While this can be thought of as a sunk cost, the failure of these reforms would nevertheless likely lead to a presumption that genuine industry-based reform is not possible, at least under the current legislative framework. Given that there are many elements of the payments system where further reform would be desirable, this would be an unfortunate outcome. It is therefore possible that limited regulatory intervention in the current case could help to head off the need for greater regulatory intervention in the future.

6.1 Conclusion

It is the Bank's view that the benefits of setting an access regime and thereby ensuring that the ATM reform package is implemented in its entirety outweigh the possible disadvantages and costs of imposing such a regime. In contrast to the alternative where the Bank does not regulate, it ensures that the reforms will be implemented with the associated public benefits. This is particularly true given that the industry costs of implementing the reforms have already been incurred by the participants.