Variation to the MasterCard and Visa Access Regimes: Details-stage
Regulation Impact Statement – March 2014
2. The Problem
The 2004/05 reforms sought to balance competition and financial safety in the MasterCard and Visa systems, including by creating a new class of ADI (SCCIs) and requiring that they be eligible to participate in the schemes and not be discriminated against.[1] Nonetheless, the Access Regimes imposed by the Reserve Bank established that only ADIs were eligible to participate in the systems. It is the Bank's view that this regulatory framework no longer strikes an appropriate balance and may now be unnecessarily restricting competition. In particular, it is too restrictive for the following reasons:
- limiting membership to ADIs is preventing potential participants that the schemes might be willing to accept as members from participating
- APRA's supervisory framework for SCCIs necessarily mirrors the requirements for banks and as a result is more onerous than necessary for participants in credit card systems. This both discourages entry and imposes unnecessarily high costs on those that seek SCCI status.
The consequence is that competition in card issuing and acquiring markets is reduced relative to what might otherwise be the case.
As an illustration, a company that wishes to issue credit cards in Australia and have them widely accepted would need to be able to access an acceptance network (e.g. point of sale terminals) and arrangements for clearing those transactions and settling the amounts owing to merchants. In accessing a credit card scheme, the potential issuer could either become a member of the scheme or they could do so indirectly (i.e. by relying on an existing direct member, such as one of the banks). In the latter case they would be charged a fee for this and would be at a competitive disadvantage to direct members as a result. The same is true of potential acquirers, who would need to be able to provide merchants with the ability to process transactions from many issuers and would in effect need to gain access to both the MasterCard and Visa systems to provide a viable service. Constraints on membership therefore have a direct effect on competition in both issuing and acquiring.
This problem has recently been most apparent in the case of issuers of virtual credit card transactions; that is, card transactions that utilise only the card number, rather than the physical card – often for a single, specific-purpose transaction. A number of entities provide these services overseas, particularly in the travel industry, but may be ineligible to do so in the MasterCard and Visa systems in Australia because they are not ADIs. In some cases these entities might not be eligible to become ADIs, for instance due to ownership restrictions in the Banking Act. In addition, given the very narrow focus of their business, the costs of APRA authorisation as an ADI (e.g. fees, reporting costs and the cost of holding capital) are likely to be large relative to the potential size of the business proposed. As a result, entry into the Australian market is likely to be discouraged, and availability of this type of product may be reduced, as may competition for the provision of similar services.
An indication of the relatively restrictive nature of the existing arrangements is that only two of the 15 to 20 direct issuers and acquirers in the MasterCard and Visa systems in Australia are SCCIs. As discussed below, the Bank is aware of at least 11 entities that have expressed an interest in issuing or acquiring credit card transactions in Australia but are not ADIs. This suggests a considerable potential for new entry and that card markets may be less efficient, costs higher and services more limited for users of the payments system (consumers, business and government) than they would be if access was less restricted.
Measures to enhance competition and efficiency in the credit cards market are desirable given the extensive use of cards in the economy. There are 5.1 million credit card transactions in Australia (amounting to $720 million) per day, with almost 60 per cent of Australians over the age of 18 holding a credit or charge card.[2] The benefits of any reforms are likely to increase over time as the number of payments made with credit cards continues to grow, having experienced an average annual growth of 5.8 per cent between 2007/08 and 2012/13.[3]
The Bank's view is that the schemes are much better placed to make judgements about access to their respective systems than in 2004, but a reduction in the current regulatory constraints is necessary for the schemes to exercise this judgment.
Limiting Access to ADIs is Preventing New Entry
As noted, only two entities have gained SCCI status in Australia since the current access framework was implemented. While this modest take-up might simply indicate that relatively few non-traditional parties have seen a business case for joining the schemes, the Reserve Bank is aware that a number of parties have, in the past, considered gaining SCCI status but decided against it.
More recently, the Reserve Bank has become aware of at least nine entities focused on new or niche business models, as well as several current indirect participants in the schemes, that have indicated an interest in issuing or acquiring credit card transactions in Australia. Most have indicated in consultation that they consider the requirements to become an SCCI to be significantly more onerous than warranted for the business they plan to undertake.[4] In the absence of changes to access arrangements, some of these players will most likely not enter the Australian market directly, while others may nonetheless decide to pursue SCCI authorisation and as a consequence bear significant costs. Those that choose to enter indirectly (by relying on the services of a scheme member) will also bear additional costs.
In contrast to the case in 2004, MasterCard and Visa have indicated that they would be prepared to admit a wider range of entities than those who currently hold ADI/SCCI status in Australia (and a wider range than they would have been prepared to admit prior to the reforms), although Visa has expressed a preference for participants to be regulated entities in some form. Both schemes have changed their corporate structure since the initial access reforms, moving away from member associations of banks to publicly listed companies. This could be expected to alter the schemes' incentives in favour of allowing wider participation.
The current requirements for participation may be preventing users of the payments system from gaining the benefits that new entrants might bring. For instance, the virtual card products proposed by several prospective entrants have the potential to significantly improve the efficiency of payments and reconciliation for businesses operating in the travel industry. Other potential entrants offer improvements in efficiency for other types of payments system users. More generally, any additional entry has the potential to apply competitive pressure to the prices and service levels of incumbent payments system participants.
A second element suggesting that the existing access arrangements might be too restrictive is that the Access Regimes in their present form prevent the Reserve Bank from participating in the international card schemes. This arises because the Access Regimes restrict eligibility for participation in the schemes to ADIs. The Reserve Bank is not an ADI but it is nonetheless able to undertake banking business under the Reserve Bank Act 1959. This appears to be an artificial constraint which prevents the Reserve Bank from delivering services to the Commonwealth Government in the most efficient way possible. It also results in an inconsistent treatment of card schemes in Australia, with the Reserve Bank able to become a member of the eftpos payment system but not of the MasterCard and Visa systems. This may be detrimental to competition between the schemes.
To summarise, the aim of the access arrangements is to encourage competition and efficiency in the payments system by striking an appropriate balance between new entry and risk control. There is some evidence that the correct balance is not currently being achieved.
Prudential Framework
APRA's prudential framework for ADIs (including SCCIs) requires an authorisation process and ongoing compliance with a range of prudential requirements, together with the payment of application and ongoing fees (see Section 5 for details). While SCCIs do not take deposits like other ADIs (at least not to any material extent), they must by and large meet the same standards as other ADIs. This reflects an important principle that all ADIs should be supervised to the same standard. Applying a lower level of supervision for some ADIs would create confusion about what ADI status and prudential supervision means and could cause reputational damage if an entity supervised to a lower standard were to fail, potentially reducing confidence in more systemically important institutions.
APRA supervision is directed to ensuring that ADIs manage risk prudently so as to minimise the likelihood of financial losses to depositors. However, the nature of risks in a credit card system is quite different to those being addressed by APRA for other ADIs. Holders of credit cards do not in the normal course of events have an exposure to credit card issuers as they are receiving credit rather than providing deposits. Therefore APRA's depositor protection mandate is not relevant. Merchants may have a financial exposure to card acquirers, as merchants require settlement of the funds owed to them for credit card purchases. Risk to merchants is reduced to an extent by the fact that acquirers are largely passing through funds from issuers and the schemes have mechanisms in place to provide confidence that settlement between issuers and acquirers will occur.
In effect, the largest exposures are managed within the card schemes, while participants must cover losses arising from the credit provided to their cardholders (for issuers) and non-performance by a merchant (for acquirers). Some merchants may have exposures with respect to funds passed through by their own acquirer.
This suggests that, although not intended, APRA supervision of SCCIs largely operates to protect the MasterCard and Visa systems rather than the users of those systems. This might be justified if these exposures were of a scale that presented some risk to financial stability, but the daily value of transactions in all credit card systems in Australia averaged only $720 million per day in 2012/13, compared with Real Time Gross Settlement (RTGS) payments of $158 billion and Direct Entry payments of $40 billion.[5]
APRA believes that supervising credit card system participants is no longer an appropriate use of its resources and is not consistent with its core mandate. In APRA's view, responsibility for determining access to the card schemes rests with the schemes themselves, not a prudential regulator charged with the protection of depositors.
The above factors mean that prudential supervision by APRA is imposing higher costs than necessary on SCCIs and potentially preventing direct participation in the MasterCard and Visa systems by some prospective entrants. The current regulatory regime is estimated to cost an additional $1.6 million per year, on average, for a participant than would be the case in the absence of the SCCI regime.[6]
Footnotes
In particular, the issues identified by the Bank relating to access arrangements in card systems centred on such aspects as the high membership fees for the Bankcard system, as well as scheme rules in the MasterCard and Visa systems restricting competition in issuing and acquiring activities. See Reserve Bank of Australia and Australian Competition and Consumer Commission (2000), Debit and Credit Card Schemes in Australia: A Study of Interchange Fees and Access, October, p 58, available at <https://www.rba.gov.au/payments-and-infrastructure/resources/publications/payments-au/interchg-fees-study.pdf>. [1]
Estimates of credit card transactions based on data from the 2012/13 financial year. [2]
See ‘Trends in Retail Payments’ in Reserve Bank of Australia (2013), Payments System Board Annual Report 2013, available at <https://www.rba.gov.au/publications/annual-reports/psb/2013/html/>. [3]
The business undertaken might for instance include issuing cards only to corporate customers or acquiring only for post-paid services, where there is no chargeback risk from the default of a merchant that has yet to deliver its services. [4]
Credit card transaction figures include American Express and Diners Club. All debit card transactions (including eftpos) averaged around $540 million per day. [5]
One-off costs are amortised over 10 years. [6]