Reform of Debit Card Systems in Australia:
A Consultation Document – December 2005 2. Gaining Access to the EFTPOS System

Concerns about the difficulty of gaining access to the EFTPOS network were first raised by the Australian Competition and Consumer Commission (ACCC) and the Bank in 2000. In particular, the Joint Study concluded that ‘Access to the debit card network through a series of bilateral agreements can put both new issuers and acquirers at a competitive disadvantage, because they may need to use more expensive gateway arrangements’.[1]

Access arrangements for the EFTPOS system in Australia differ significantly from access arrangements for similar systems in most other countries. Typically, in other countries, there is a single point of entry to the system for new participants, who must meet a single set of technical criteria and business requirements. Where there are entry fees, these fees are usually known in advance and, where there are interchange fees, they generally apply uniformly to all participants. In contrast, in Australia, the system is built around a series of bilateral connections and there is much less standardisation of the terms of access.

In the Australian EFTPOS system, the largest participants each have direct bilateral connections with one another; in total, there are eight institutions with direct connections. These connections are complemented by bilateral business agreements, including agreements over interchange fees. Smaller participants typically have access to the system through gateway arrangements provided by one of the organisations that has already established a series of direct connections. By entering the system this way, smaller participants can avoid the significant costs of establishing a series of direct connections, but they pay higher variable costs for each transaction processed through the gateway.

The current arrangements complicate access in two ways.

The first is that a new participant wanting to establish direct connections must separately approach each of the existing eight participants with direct connections to negotiate the technical and business arrangements for exchanging EFTPOS transactions. Each existing participant may require the new participant to meet different technical and business requirements, increasing the costs of entry.

The second complication arises from the fact that existing direct connectors have little incentive to facilitate the entry of a new participant, particularly when the entrant is likely to be a direct competitor in at least some business lines. For example, if a new participant planning to specialise in acquiring seeks to establish a bilateral connection with an issuer, the issuer may be reluctant to establish the connection in a reasonable time frame, or at a reasonable cost, if it itself has a substantial acquiring business. At present, existing participants have no obligation to establish direct connections with new participants and could frustrate the establishment of a connection in several ways.

One way of doing this would be to delay the necessary technical work to establish the connection. This would make it difficult for a new entrant to schedule the testing that is required, increasing costs and creating uncertainty as to when entry can occur. A second possible way to make entry difficult would be for existing participants to charge a potential entrant a very high price for establishing a connection. In addition, because the cost of connection is not known in advance, and may vary widely across institutions, potential entrants may be faced with unnecessary difficulties in developing a business plan.

A third way in which entry could be made difficult would be for an existing participant to be unwilling to agree to an interchange fee that is similar to the fee paid to, or received from, existing participants. Currently, interchange fees in the EFTPOS system are paid between direct connectors and are concentrated in a range from 18 cents to 25 cents, with the fee paid by the issuer to the acquirer. These fees are typically reciprocal, with the same fee being paid irrespective of which institution is the issuer. If, however, an existing issuer were prepared to pay only a much lower interchange fee to a new acquirer, that acquirer might find it very difficult to compete for the business of merchants against other acquirers receiving a much higher interchange fee.

These concerns are longstanding and have been raised in discussions with the Bank over a number of years. It has taken some direct connectors in the EFTPOS system many years to establish bilateral connections with some of the larger participants, who have been reluctant to give priority to establishing these connections. Some current direct connectors have not been able to establish complete sets of bilateral connections with all other direct connectors despite efforts over a number of years.

The possibility of interchange fees being used to frustrate access has also been raised in recent consultation. APCA has noted that its EFTPOS Access Code could be rendered ineffective if interchange fees were not standardised (regardless of the particular level at which they were set).[2] Similar arguments were made during consultation over the Bank's proposed interchange standard for the EFTPOS system released in February 2005.[3]

Given that a potential new entrant – whether an acquirer, a gateway provider, or an issuer – may judge it important to establish direct connections with all existing direct connectors, a decision by just one existing participant to frustrate entry through any of the above responses could have a significant effect on the viability and timing of the entrant's plans. As a result, the bilateral structure of the Australian EFTPOS system means that it is particularly important that appropriate access arrangements are in place. Without such arrangements, one cannot be confident that the normal forces of competition arising from either new entry, or the possibility of new entry, can operate to produce efficient outcomes.

Overall, the Bank is of the opinion that, given the current architecture of the EFTPOS system, access arrangements should, at least, satisfy the following:

  1. Current or prospective participants should have an ongoing right, provided that they meet objective and transparent criteria primarily relating to technical and security issues, to establish direct connections to existing direct connectors.
  2. There should be a clear and enforceable timetable under which existing participants are required to establish direct connections with those seeking them.
  3. The fee charged by existing participants to establish a new direct connection should be reasonable and not adversely affect competition and efficiency.
  4. Negotiations over interchange fees between new entrants and existing participants should not be able to be used as a barrier to entry.

In addition, new entrants should have confidence that, once they become a participant in the system, future negotiations over interchange fees cannot be used to put them at a material competitive disadvantage.

The first element is aimed at ensuring that no single existing participant in the system can effectively veto entry by refusing to establish a connection to an institution that meets specified criteria that are transparent and known in advance. The second is directed towards ensuring that entry is not frustrated by an existing institution giving inadequate priority to testing or implementation of a new connection. The third is aimed at ensuring that new entrants are not charged unreasonably high fees by existing participants to establish a direct connection. The final element recognises that, due to the bilateral nature of the EFTPOS system, interchange fees can potentially affect competition by allowing larger participants to discriminate against new or smaller participants in the system.

In the Bank's opinion, access arrangements that satisfied these four elements in a reasonable fashion would promote competition and efficiency in the EFTPOS system and the payments system more generally. They would facilitate entry to the EFTPOS system by new competitors, on both the issuing and acquiring sides of the market, by affording them greater certainty in planning for participation in the system and providing entry on terms likely to be more commercially reasonable than they would be able to obtain under current access arrangements. They would also contribute to enhanced competition in credit card acquiring, since any business wishing to provide credit card acquiring services to merchants must, in practice, also be able to acquire debit card transactions. Finally, they may also encourage current EFTPOS participants to streamline their technical and business procedures for handling new connections, potentially also contributing to the increased efficiency of the system.

Footnotes

Australian Competition and Consumer Commission and Reserve Bank of Australia, Debit and credit card schemes in Australia: A study of interchange fees and access, Sydney, 2000, p71. [1]

Australian Payments Clearing Association, Submission to the Reserve Bank of Australia, 21 October 2004. [2]

MoneySwitch, ‘Proposed Standards for Interchange Fees for EFTPOS’, Submission to the Reserve Bank of Australia, 29 April 2005. [3]