Reform of Debit Card Systems in Australia:
A Consultation Document – December 2005 4. Interchange Fees, Access and Competition

APCA's Access Code has not sought to deal with interchange fees in the EFTPOS system. As discussed above, negotiations over these fees have the potential to be used to inhibit access and competition in the system. In EFTPOS systems overseas, this potential difficulty is typically overcome by arrangements that mean that all participants receive a common, multilaterally set interchange fee. In Australia's bilateral EFTPOS system, however, these fees remain determined by bilateral negotiation between participants. The Bank sees two potential problems for access and competition in the EFTPOS system arising from these arrangements.

The first is that negotiations over interchange fees could become a barrier to entry. It is possible that a new entrant could plan to take advantage of APCA's Access Code and the cap on the access charge in the Bank's Access Regime, only to find that entry was frustrated by negotiations over interchange fees. This could happen if, for instance, a new acquirer was offered an interchange fee of say 5 cents, compared to the range of 18 to 25 cents currently received by most acquirers.

The second is that negotiations over interchange fees can also affect competition between participants already in the system. In the past, agreements between current participants, once struck, tended not to change because, if a new agreement could not be reached, the contracts remained as they were. If forced to change, say because of a merger, fees have been renegotiated, but otherwise they have typically remained unchanged because the potential loser can refuse to agree to a new fee.

Under the Bank's draft interchange Standard for the EFTPOS system, the cap on interchange fees will be re-calculated every three years, potentially requiring interchange fees to be renegotiated with the same frequency. This renegotiation may provide existing participants the opportunity to offer participants, with which they already have agreements, substantially less favourable interchange fees than currently. Smaller participants may have no choice but to take such an offer, since to refuse could effectively limit their ability to participate directly in the system. Although there is no evidence to date of any existing participants behaving in this way, the fact that there will be regular renegotiations of interchange fees raises the possibility that such behaviour could become an issue in the future. This suggests that, in the interests of competition, there may be a need to address interchange fees not only for new entrants but also existing participants.

The Bank proposes to deal with these issues in two ways.

The first is to include ‘no discrimination’ provisions in the Access Regime. The effect of the provisions is to ensure that, while interchange fees would still remain subject to bilateral negotiations, existing participants could not negotiate an interchange fee with a new entrant that was less favourable than the least favourable of its existing interchange agreements.

The second is to place a floor under interchange fees in the EFTPOS system, in addition to the cap previously proposed. This will ensure that an existing participant is not unduly handicapped by being forced to accept interchange fees much less favourable than those received by competitors.