Reform of Debit Card Systems in Australia:
A Consultation Document – December 2005 3. The Co-Regulatory Approach to EFTPOS Access

The Explanatory Memorandum accompanying the Payment Systems (Regulation) Bill 1998 emphasised that ‘the philosophy of the Bill is … co-regulatory. Industry will continue to operate by self-regulation in so far as such regulation provides an efficient, competitive and stable payments system’. On access regimes, it noted ‘the development of access regimes and standards will be undertaken, as far as possible, in conjunction and consultation with the private sector’. This is the approach the Bank has followed in developing the proposed access arrangements for the EFTPOS system and, in particular, the Access Regime. The result is that a large proportion of the work on access arrangements has been undertaken by APCA in consultation with the industry. The process has stretched over several years and reflects a desire by both the industry and the Bank that, as far as is appropriate, the industry play a central role in the development of suitable access rules.

Participants in the EFTPOS system have been working on access arrangements since 2003, when a group of financial institutions submitted an application to the ACCC for authorisation of a proposal to set EFTPOS interchange fees to zero. The ACCC initially denied the application, but suggested that suitable access reform could balance the benefits in favour of authorisation. In its draft Determination, the ACCC stated ‘… the Commission considers that, in the event that suitable access reform was to be introduced, the proposed Agreement is more likely to be in the net public benefit’.[1]

In the months that followed, the financial institutions that had made the application to the ACCC asked APCA to develop an access code for the EFTPOS system. The Bank supported this request, although it noted that, should this work falter, it would consider using its regulatory powers.

On the basis of APCA's early endeavours and the Bank's reassurances, the ACCC concluded that more appropriate access arrangements were likely to be put in place over time. On this basis, the ACCC authorised the interchange fee application in December 2003, although the authorisation was subsequently overturned by the Australian Competition Tribunal (ACT) on appeal. Despite the ACT's decision, APCA continued to work on its EFTPOS Access Code with the Bank taking a close interest in progress.

In June 2004, the Bank invited submissions on whether it would be in the public interest for it to designate the EFTPOS system. In commenting on possible designation of the EFTPOS system, most submissions supported the APCA process for access reform. Nevertheless, four organisations argued that the Bank should take over the process, arguing that vested interests meant that it was unlikely to deliver the best possible outcome.

In September 2004, the Bank designated the EFTPOS system with a view to considering imposing a standard that would reduce interchange fees in the system. When doing so, it noted that ‘the Board is closely monitoring work being undertaken by APCA to improve access arrangements for the EFTPOS debit card payment system and will keep under review the question of whether it would be in the public interest for it to impose an access regime under the Act’.[2]

During the second half of 2004, APCA worked with its members that are direct connectors in the EFTPOS system and, in December 2004, a draft EFTPOS Access Code was circulated to participants in the system. The draft Code addressed many of the relevant matters, but the Bank still had concerns about a number of features of the Code. It was also concerned that only a few of the direct connectors had indicated whether they were prepared to endorse the essence of the draft Access Code some months after it had been circulated.

In late January 2005, the Bank wrote to APCA indicating its view that the draft Code provided too little certainty on the price of access for new participants and that the proposed penalties for delays in testing and connections were inadequate. The Bank was also concerned that minimum volume thresholds that would have to be met by new participants would unnecessarily limit competition, and played no role in the security and stability of the system. The Bank made it clear that, unless these matters were satisfactorily addressed, the EFTPOS Access Code would not be able to fulfil its fundamental purpose of providing sufficient certainty on the cost and timing of access.

A series of discussions followed and, in May 2005, the Bank wrote to APCA indicating that if access arrangements could not be finalised in a timely fashion, and in an acceptable form, the Bank would consider whether it was in the public interest to impose an access regime on the EFTPOS system. The Bank indicated to APCA that it expected a reasonable cap would be placed on the price of establishing a connection to existing participants; a clear timetable for the testing of connections would be set with penalties for not meeting the timetable; and the proposed requirement that entrants must meet a minimum transaction volume before the new arrangements became applicable would be removed. The Bank also sought APCA's commitment to bring the revised arrangements into effect in a timely way.

By July 2005, the Bank was able to report that APCA's members had agreed in principle to modifications to the EFTPOS Access Code to meet the Bank's requirements.[3]

The draft Access Code developed by APCA:

  1. commits participants who sign up to the Code to provide direct connections to new participants that:
    • meet the technical requirements set out in the Consumer Electronic Clearing System Manual published by APCA; and
    • are prepared to establish two direct connections within 12 months and a third direct connection within three years.
  2. defines the nature of the connection service that at a minimum would have to be provided; and
  3. sets clear timetables for testing of connections and establishing ‘live’ connections. Penalties would apply if either party did not meet its obligations under these timetables.

The Bank's judgement is that the implementation of APCA's Access Code would promote competition. Given the co-regulatory philosophy on which the Payment Systems (Regulation) Act 1998 is based, the Bank sees no need for the matters dealt with in the Code to be addressed in an access regime under the Act.

The Bank expects that all existing and new direct connectors in the EFTPOS system will sign up to APCA's Code. If this were not to occur, the Bank would need to consider whether to impose a more comprehensive access regime on the industry.

The price of access

While the draft Access Code developed by APCA addresses a number of important issues, it does not set a price of access. The industry, however, recognised from the outset that the charge for establishing a direct connection is important to access. Early drafts of the Access Code dealt with this issue by providing for arbitration if negotiations on this charge between an existing direct connector and a prospective direct connector were unsuccessful. The Bank's view, however, was that, given the unequal bargaining positions resulting from the structure of the EFTPOS system, this could lead to charges that were both high and uncertain, and that, in turn, could limit competition and efficiency by discouraging new entry.

Participants held a variety of views about how to respond to this issue. One view was that new participants should be required to reimburse all of the costs that an existing participant incurs in establishing a new connection. The argument was that an existing participant has no other reason to incur these costs and receives no benefit from doing so. Another view was that a cap should be placed on the charge, in recognition of the fact that new participants should not be penalised if some existing participants have systems that can only be altered to accommodate new participants at much higher cost than is the case for other existing participants. Most existing participants agreed that there is merit in a cap on access charges in some form. There was, however, much less agreement on how the cap should be determined, and there was a reluctance among many access providers to set it at a level that did not allow them to recover all of their costs of providing a connection.

This issue was resolved after the Bank put forward a model that allowed for negotiation over the access charge, but with a cap based on the estimated incremental direct costs that would be incurred by the most efficient existing participant providing a direct connection. A 2004 survey undertaken by APCA of estimated connection costs indicated that the institution with the lowest connection costs could provide a connection for $78,000 (excluding GST).

The Bank is of the view that such an approach provides a balance between the interests of both the existing and potential future participants, as well as meeting the Bank's statutory obligations to promote efficiency and competition. Importantly, it would ensure that the fee charged for establishing a connection cannot be used as an unreasonable barrier to entry. While setting the initial level of the cap equal to the estimated connection costs of an efficient access provider could result in commercial disadvantage to a participant whose connection costs remained high, doing so is likely to place pressure on direct connectors within the EFTPOS system to streamline their IT systems, and ensure their connection capabilities are as near as possible to best practice within the industry.

Following the participants' agreement to this model for access charges, APCA wrote to the Bank asking it to give consideration to imposing the cap under the Payment Systems (Regulation) Act 1998.

The Bank is now proposing to do this through an Access Regime. The alternative of leaving it to industry to put in place appropriate access charge arrangements, including possibly seeking authorisation from the ACCC for a cap on the access charge, poses considerable risks. In the event that the Bank indicated that it did not wish to impose an Access Regime to establish a cap on the price of access there is a significant possibility that the industry would not proceed with the reforms. Even if industry did proceed, and took an application to the ACCC for approval, there would be considerable uncertainty as to the timing of any final decision and implementation of improved access arrangements. Given that there are potential access seekers currently awaiting the opportunity to enter the EFTPOS system, further delays to the implementation of the Access Code would be detrimental to competition and efficiency.

Finally, a decision by the Bank not to assist industry to put in place more appropriate access arrangements, and instead to encourage an application to the ACCC, would run counter to the view of both the Bank and the ACCC that responsibility for regulation of Australia's payment systems be as clearly delineated as possible, so as to avoid uncertainty stemming from overlapping regulatory jurisdictions. Such delineation would, in this instance, argue in favour of the Bank having responsibility for access-related arrangements in the EFTPOS system.

Footnotes

Australian Competition and Consumer Commission, ‘Draft Determination in relation to the collective setting of interchange fees’, 8 August 2003, p56. [1]

Reserve Bank of Australia, Media Release 2004-08, 9 September 2004. [2]

Reserve Bank of Australia, Media Release 2005-08, 20 July 2005. [3]