Reform of Debit Card Systems in Australia:
A Consultation Document – December 2005 1. Introduction

In February 2005 the Reserve Bank of Australia released a set of proposals for reform of Australia's debit card systems.1 These proposals addressed interchange fees in the EFTPOS and Visa Debit systems, as well as the ‘honour all cards’ rule in the Visa system. The issue of access arrangements to the EFTPOS system was not addressed at that time, as industry participants were developing an Access Code to facilitate entry to the system. This work has now been completed. Accordingly, the Bank is now releasing a set of proposals that complement the industry's Access Code. These proposals are set out in this Consultation Document.

The EFTPOS Access Code, developed by members of the Australian Payments Clearing Association (APCA) in consultation with the Bank, is available on APCA's website (www.apca.com.au). The Code contains detailed provisions under which existing participants in the EFTPOS system would agree to provide direct connections to new and current participants. The Bank regards development of the Code as a successful example of the co-regulatory approach envisaged by the Government when it established the Payments System Board.

The Bank is proposing to supplement the industry Access Code with an Access Regime under the Payment Systems (Regulation) Act 1998. This proposed Regime deals with two issues. The first is the fee that existing participants may charge entrants (or other existing participants) for establishing a direct connection; the Regime imposes a cap on this fee, and sets out a process for periodic re-calculation of this cap. The second issue is the possibility that negotiations over interchange fees might be used by existing participants to frustrate entry; the Regime includes ‘no discrimination’ provisions that would ensure that new entrants are offered interchange fees that do not place them at a competitive disadvantage to existing participants.

The Bank is also amending the draft EFTPOS interchange Standard released for consultation in February 2005. The amendments are designed to ensure that negotiations over interchange fees between participants in the EFTPOS system cannot be used to adversely affect competition in the system, either between existing participants or from new entrants. The effect of the proposed amendments is to constrain interchange fees in the EFTPOS system to a relatively narrow range, by placing both a cap and a floor on these fees. The Bank is not, at this stage, proposing any change to the cap included in the proposals released in February 2005.

Taken together, the EFTPOS Access Code, the proposals set out in this Consultation Document and those released in February would:

  1. move interchange fees in the EFTPOS system and Visa Debit system closer together;
  2. abolish the ‘honour all cards’ rule in the Visa system, and the no-surcharge rule in the Visa Debit system;
  3. establish access arrangements for direct connections to the EFTPOS system based on objective criteria and clear timetables;
  4. set a cap on the price for establishing a direct connection to participants in the EFTPOS system; and
  5. ensure that bilateral negotiations over interchange fees in the EFTPOS system cannot be used to frustrate entry or reduce competition.

In the Bank's opinion, implementation of this package of reforms would result in a set of arrangements that would promote competition and efficiency in both the EFTPOS system, and the Australian payments system more broadly.

Details of the first two parts of this package, and the reasoning behind them, can be found in the Consultation Document released in February 2005, which should be read in conjunction with this document. The Bank has already undertaken extensive consultation on these parts of the package, during which useful submissions on a broad range of issues have been made. These have included submissions on: the proposed caps on interchange fees in the EFTPOS and Visa Debit systems; the manner in which these caps are to be calculated and their impact on the market; and the effects of the removal of the honour all cards rule on the overall payments system. The Bank has not yet reached any conclusions on these matters.

The Bank is now seeking submissions from interested parties on the proposed reforms contained in this document. To the extent that these reforms affect any parties' views on the previously released elements of the Bank's proposals, the Bank welcomes further submissions on these issues as well. Given that the Federal Court has recently ruled in the Bank's favour in the case brought by a group of merchants challenging the designation of the EFTPOS system, the Bank will proceed to consider issues raised in earlier consultation jointly with any issues raised in this round of consultation.

This document is structured as follows. Section 2 discusses current possible impediments to entry to the EFTPOS system and desirable features of access arrangements in the EFTPOS system. Section 3 sets out in some detail the co-regulatory process and the progress that has been made by the industry in addressing access to the EFTPOS system. Section 4 discusses the role of interchange fees in influencing access and competition within the system. Finally, Sections 5 and 6 outline the draft Access Regime and amended draft interchange Standard. The draft Access Regime and amended draft Standard are shown in Attachments A and B.

Submissions on the Bank's proposals should be made by 17 February 2006, with all submissions being placed on the Bank's website. Those making a submission will have the opportunity to discuss it with the Bank in the second half of February 2006. Submissions should be made to:

Head of Payments Policy
Reserve Bank of Australia
GPO Box 3947
Sydney NSW 2001

or

pysubmissions@rba.gov.au

Footnote

Reserve Bank of Australia, Reform of the EFTPOS and Visa Debit Systems in Australia, Sydney, 2005. [1]