Variation to the MasterCard and Visa Access Regimes: Details-stage
Regulation Impact Statement – March 2014 6. Consultation

The Consultation Process

The Reserve Bank released Review of Card System Access Regimes: A Consultation Document, in May 2013. The Reserve Bank sought the views of interested parties on three policy options: varying the Access Regimes to expand eligibility to a wider range of entities, revoking the Access Regimes and maintaining the status quo. The Reserve Bank also sought views on a number of questions related to the risks faced by card schemes and their members, how they should be addressed and the shape and potential effect of possible revised access arrangements. Taking into account views expressed by stakeholders, the Reserve Bank released Proposed Variation to the MasterCard and Visa Access Regimes: Consultation Document in December 2013 and began a second round of consultation. The December 2013 document refined the three options outlined in the May 2013 paper, with more detailed consideration of how each option could be implemented and included draft variations to the Access Regimes under Option 2. The paper expressed the Board's preliminary view that Option 2 would best serve the public interest. The objective of this consultation was to seek any further views on the options, given the more detailed proposal under Option 2, and to seek comments on the draft Access Regimes.

In total, the Reserve Bank received 16 submissions in the May 2013 consultation and 14 submissions in the December 2013 consultation, including from financial institutions, industry groups, potential members and the card schemes. Non-confidential submissions are published on the Reserve Bank's website. Participants' views remained largely consistent across the May and December consultations, with more parties favouring Option 2 in the December consultation. Most parties took up the invitation to discuss their submissions with the Reserve Bank.

The main points raised in these submissions are discussed below.

With regard to the options-stage RIS, the Reserve Bank has fully complied with the RIS requirements. Specifically, the options-stage RIS:

  • includes a minimum of three elements (the problem, objective and options)
  • includes at least three options, including a regulatory option, a non-regulatory or light-handed regulation option, and a do-nothing option
  • has been certified at the secretary or deputy-secretary level and provided to the OBPR before consideration by the decision-maker
  • has been published following the public announcement of an initial decision to regulate.

May 2013 Consultation

Views on current access arrangements

The majority of submissions supported either varying or revoking access regulation, while incumbent scheme participants and industry associations expressed a preference for maintaining the status quo. Those supporting the status quo argued that maintaining APRA supervision was important in giving each participant some comfort on the financial condition of other participants and maintaining confidence in and stability of the system. They argued that APRA supervision provides clarity, transparency and objectivity, and obviates the need for ‘overlapping screening’ by the schemes; moreover, the regulatory approach should not be changed just because prospective participants wish to avoid what they perceive as onerous requirements by APRA. Most of the remaining submissions, however, agreed that the Access Regimes in their current form are not fulfilling their objectives and may be hindering competition by creating unnecessarily high barriers to entry – particularly for companies with business models that pose little risk to the system.

Options for reform

Among those favouring a change in the access framework, most preferred continued (but somewhat more flexible) regulation while a small number of submissions supported a complete removal of the Regimes. Those arguing for a complete removal of access regulation noted that the schemes are now more willing to accept a wider range of members than at the time when the existing arrangements were put in place. Nonetheless, even some of these submissions argued for the continued involvement of the Reserve Bank (e.g. through scrutiny of scheme rules or for voluntary undertakings to be given by the schemes).

Both incumbent and prospective participants questioned the schemes' ability, in the absence of regulation, to manage entry in a non-discriminatory way that appropriately managed risks. On one hand, some argued that entry would not be sufficiently restrictive because the schemes' commercial interests in increasing participation would override their interest in adequately managing risks. Others, however, suggested that entry might remain too restrictive, arguing that there remained a role for some form of regulatory oversight that was fair and non-discriminatory yet more flexible than current arrangements.

In line with this, a relatively common view (particularly among prospective participants) was that prudential supervision should continue to play a role while incorporating some additional flexibility. A common concern was that supervision of SCCIs did not sufficiently recognise differences in the risks presented by different business models. Some parties argued that requirements applicable to SCCIs – including those on capital, shareholder composition and reporting – are more onerous than warranted by the limited business they undertake. In addition, a number of players pointed to significant differences between the risk profiles of different types of SCCI business, which argued for more nuanced supervision. In this context, many parties referred to the differences in issuing and acquiring risk, arguing that they each warranted a different supervisory approach (e.g. a framework that allows for an ‘acquirer-only’ category that is supervised by either a regulator or an industry body but is not required to be an ADI). Some submissions also argued that entities already regulated in another jurisdiction should be subject to reduced regulation in Australia.

Views of the schemes

While both MasterCard and Visa were in favour of removing the Access Regimes, their views differed on whether participants should be prudentially supervised. MasterCard argued that since it was already proactive in ensuring the safety of the payment system and since stability and reliability of the system were in MasterCard's interest, the Access Regimes had created distortions that unnecessarily increased the costs to some entities wishing to join and prevented some others from joining entirely. By contrast, Visa believed that some form of minimum publicly set and overseen regulatory standard should remain by retaining the SCCI class of APRA-regulated institutions, albeit with less stringent requirements than presently the case. Visa argued that the approach would ‘enhance competition while maintaining an appropriate screening and monitoring device for new entrants into card systems’. The schemes also diverged on whether undertakings on criteria for participation should be provided to the Bank if the Access Regimes were to be revoked, with Visa willing to do so and MasterCard arguing that it would be inappropriate as any regulation should occur via a public, transparent process.

Other issues

ADI sponsorship and partnerships

A number of incumbent participants suggested that prospective entrants that found regulatory requirements too onerous had the option of undertaking a partnership or a ‘BIN sponsorship’ arrangement with an existing participant.[1] However, some prospective participants argued that these arrangements could constrain the sponsored party's ability to compete and innovate.

A level playing field

Some parties noted concerns that allowing some entities to participate in the scheme with a lower standard of supervision (or no supervision) would provide those players with a competitive advantage. Others pointed out that a ‘full service’ bank generally has other competitive advantages over more specialised players, such as the capacity to bundle a number of services together in its customer relationship.

Reserve Bank participation

A small number of submissions addressed the merits of the Reserve Bank becoming a participant in the MasterCard and Visa systems. The main objection was that it would be inappropriate for the Reserve Bank to compete with private sector entities for provision of government banking services. A participant in the schemes noted in consultation that the ability of the Reserve Bank to participate in one card scheme (eftpos) but not others appeared to be an anomaly.

December 2013 Consultation

Most parties that made a submission to the December 2013 consultation re-iterated their views from the May 2013 consultation. Most acknowledged that the current framework may be unduly inhibiting competition and were in favour of varying the Access Regimes; a minority – representing incumbents – preferred maintaining the status quo. Only one party, a scheme, continued to prefer the removal all access regulation, while the other scheme continued to advocate the removal of the Access Regimes but retention of prudential oversight at a lower level by APRA.

Preferred option

A majority of submissions supported the removal of the APRA SCCI regime while retaining some controls via the Access Regimes. These parties noted that current arrangements were more onerous than necessary for prospective participants and that Option 2 strikes the best balance between allowing new entrants into the schemes while managing any risks that these entrants might bring to the payments system.

Two submissions – one in support of Option 2 and one in favour of retaining some prudential oversight – advocated that the Bank set the minimum level of risk assessment required of the schemes, arguing that relying on transparency and ex post reporting would not be sufficient to ensure that the schemes strike an appropriate balance between competition and financial safety. One of these parties also proposed that the Reserve Bank set minimum capital requirements on a case-by-case basis to take into account the applicant's risk profile. Several parties sought opportunities for input to the setting of membership thresholds; one suggested that the schemes be required to publish their eligibility and assessment criteria before the Access Regimes are varied.

Two industry associations and one incumbent participant argued that the status quo should remain, as they did in the earlier round of consultation. These parties continued to argue that prudential regulation of scheme participants is efficient, non-discriminatory, and essential to maintain confidence in the payments system. It was also argued that current arrangements are flexible enough to allow new entrants into the schemes (such as through ‘BIN sponsorship’ arrangements) and are not an impediment to innovation.

Views of the schemes

The schemes largely restated the views they expressed during the May 2013 consultation, with one scheme expressing more support for Option 2 than in the previous consultation.

While noting its continued preference for the removal of all access regulation, MasterCard noted the benefits of Option 2 relative to the status quo and that it would welcome additional, risk-appropriate participants to its system. However, it expressed some reservations over specific wording of the draft Access Regimes. One concern related to the requirement to publish eligibility and assessment criteria, with MasterCard arguing that the criteria should remain confidential as publication could lead to some applicants ‘gaming the system’ to gain access. It also expressed some concerns over the distinction between ‘eligibility’ and ‘assessment’ criteria, and sought more clarity on timing requirements for decisions on applications from prospective participants.

By contrast, Visa continued to be in favour of revoking the Access Regimes while retaining ‘some form of regulatory benchmark of approval’ that would encompass a wider set of entities than the SCCI regime. This could be achieved by, for example, lowering the current SCCI benchmark. Visa noted that its next preferred option was to remove all access regulation and argued that the removal of the SCCI regime would lead to the schemes performing a ‘quasi-regulatory role’. Like MasterCard, Visa also expressed concern over the requirement in the draft Access Regimes for the schemes to publish their risk-based eligibility and assessment criteria, noting the commercial-in-confidence nature of this information. Visa also objected to the requirement for the schemes to certify that successful applicants met at all times all risk-related criteria set by Visa.

Outcome of Consultation

Many of the views expressed in both rounds of consultation focused on central issues in determining whether current access regulation is striking a balance between new entry and risk that is in the public interest. In particular, they focused on: the extent to which current arrangements are constraining new entry and therefore competition; potential risks arising from new entry; and how the balance between these should best be managed. There was no consensus among submissions on these issues, but the views put have informed the Bank's assessment of the appropriate regulatory response.

A number of parties expressed concerns during the first consultation that, while the existing access framework was overly restrictive, there might be a temptation for the schemes to either give too little weight to risk or to also be overly restrictive or inconsistent in the granting of access. The Bank sought to address this in the design of Option 2 for the second consultation, by introducing transparency of the schemes' eligibility and assessment criteria and reporting to the Reserve Bank on how the access arrangements have been applied. This gave rise to subsequent concerns by the schemes about making access criteria publicly available. The Bank sees the proposed approach as a light-touch means of encouraging open and consistent access arrangements and is prepared to discuss with the schemes the appropriate level of detail in public disclosures.

Taking into account the views expressed by the schemes during consultation, the Bank made several minor or technical changes to its draft variations to the Access Regimes. These changes relate to clarifying the scope of reporting requirements, decision timelines and certification of compliance with the Access Regimes. In the view of the Bank and many parties making a submission, having transparent eligibility and assessment criteria is crucial to the objective, non-discriminatory application of these criteria by the schemes. The schemes' annual certification of compliance with the Access Regimes and transparency on the timing of decisions would serve a similar purpose. The Bank therefore proposes to retain these provisions under Option 2, with minor wording changes to address the schemes' concerns.

The Bank is not proposing to modify its approach as a result of other frequent themes in consultation:

  • ‘Light-touch’ oversight – a number of submissions supported a lighter-touch SCCI framework operated by APRA or another regulator. This would require legislative change and is outside the scope of the Board's consideration. In any event, the case for public supervision of public participants is not strong given the nature and magnitude of financial risks generated by the card systems, and an approach that may create ambiguity or confusion about the role of APRA's prudential supervision of ADIs is not supported by APRA.
  • Alternative avenues of participation – some submissions suggested that potential entrants could access partnership or sponsorship arrangements if they could not meet the hurdles set by the SCCI framework. This does not appear to be a persuasive argument against considering regulatory change as the approach imposes higher-than-necessary costs and potentially other commercial constraints on new entrants, inhibiting their capacity to compete with existing players.
  • Level playing field – some incumbent participants suggested that allowing entities that are not supervised by APRA to compete with those that are (i.e. ADIs) would constitute an uneven playing field. However, under Option 2 regulatory costs would only be imposed as a consequence of ADIs' broader banking activities rather than card issuing or acquiring. In any event, the ability of those conducting broader banking business to bundle card business with other banking products most likely confers ADIs an advantage over specialists in the card business.
  • Specifying minimum participation criteria – some submissions argued for the inclusion of specific minimum participation criteria (e.g. on capital adequacy) in the Access Regimes. They argued that this would protect against the schemes excessively weakening entry criteria. While it was not proposed that the Bank supervise participants, this proposal implies the Bank, rather than the schemes, making judgements about the appropriate trade-off between new membership and risk. The Bank's view is that this is unnecessary and could even be counterproductive if it is accepted that the schemes have the appropriate incentives to balance these elements. An alternative approach suggested in one submission was for the Bank to ‘pre-vet’ the schemes' eligibility criteria before varying the Access Regimes.

Footnote

In a ‘BIN sponsorship’ arrangement, the incumbent would allow the new entrant to use scheme card or acquirer numbers allocated to the incumbent. As the member of the system, the incumbent would take responsibility for the performance of obligations related to those BINs. [1]