Reform of the EFTPOS and Visa Debit Systems in Australia:
Final Reforms and Regulation Impact Statement – April 2006
2. Background
2.1 Debit card systems in Australia
There are two types of debit card systems in Australia; the proprietary EFTPOS system and systems operating under the brands of the major international credit card schemes. Both types of system allow cardholders to make payments to merchants from a deposit account held at an authorised deposit-taking institution. The EFTPOS system can also be used, in some cases, to withdraw cash at a merchant.
In the EFTPOS system, a cardholder undertakes a transaction at a merchant by swiping a card and then keying in a personal identification number (PIN). Once the payment is authorised, the cardholder's account is debited. EFTPOS cards are issued by financial institutions as part of a deposit account and carry the institution's brand. The EFTPOS system is not able to be used in situations in which a PIN cannot be entered into a secure PIN pad, such as over the internet or telephone. Furthermore, the EFTPOS system is a purely domestic system and so EFTPOS cards cannot be used overseas. The system is built around a series of bilateral technical links and business contracts between financial institutions offering deposit accounts and acquirers (most of whom are also financial institutions). Interchange fees are paid by the issuer to the acquirer and are typically in the range of 18 to 25 cents per transaction. The EFTPOS system accounts for around 85 per cent of debit card transactions in Australia.
In the scheme debit card systems, a cardholder undertakes a transaction at a merchant by swiping a card and then authorising the transaction by signature. These systems use the processing infrastructure of the international card schemes (MasterCard and Visa). Scheme debit cards can also be used to undertake transactions over the internet and telephone (without a signature), and as the schemes are international, the cards can be used overseas. In contrast to the EFTPOS system, interchange fees are paid by the acquirer to the issuer and are around 0.55 per cent of the transaction value. The Visa Debit system has been operating in Australia for many years, and accounts for around 15 per cent of debit card transactions. The first MasterCard debit card in Australia was launched in late 2005.
Further details of these systems are provided in Reserve Bank of Australia, 2005a.
2.2 The reform process to date
The Bank has been examining interchange fees and access arrangements for Australia's debit card systems for a number of years, commencing with its work with the Australian Competition and Consumer Commission (ACCC) in 1999 (see Table 1). That work resulted in the publication by the Bank and the ACCC of Debit and credit card schemes in Australia: A study of interchange fees and access (the Joint Study) in October 2000.
| September 1999 | Reserve Bank and ACCC announce the commencement of a study on interchange fees and access in credit and debit card systems in Australia (the Joint Study). |
|---|---|
| October 2000 | Joint Study published. |
| February 2002 | EFTPOS Industry Working Group (EIWG) formed to look at possible reforms to the EFTPOS system. |
| February 2003 | A group of financial institutions apply to the ACCC to authorise a proposal to set EFTPOS interchange fees to zero. |
| March 2003 | Australian Payments Clearing Association (APCA) commences work on an EFTPOS access code. |
| August 2003 | ACCC releases draft determination denying authorisation of proposal to set EFTPOS interchange fees to zero, on the grounds that the issue of access was not addressed. |
| December 2003 |
ACCC authorises agreement to set EFTPOS interchange fees to zero in the expectation that access arrangements would be reformed. A group of merchants lodges an appeal to the ACCC's authorisation in the Australian Competition Tribunal (ACT). |
| February 2004 | Reserve Bank designates the Visa Debit system in Australia. |
| May 2004 | ACT overturns ACCC authorisation of zero interchange fees in the EFTPOS system. |
| September 2004 | Reserve Bank designates the EFTPOS system. |
| October 2004 | A group of merchants challenges the designation of the EFTPOS system in the Federal Court. |
| February 2005 | Draft Standards released for EFTPOS and Visa Debit interchange fees and the honour all cards rule in the Visa system. |
| July 2005 | Draft Access Regime for Visa Debit released. |
| August 2005 | Access Regime for Visa Debit imposed. |
| November 2005 | Challenge to designation of EFTPOS system dismissed. |
| December 2005 | Revised draft Standard for EFTPOS interchange fees and draft EFTPOS Access Regime released. Draft industry Access Code for the EFTPOS system released. |
The study highlighted a number of aspects of the operation of debit card systems in Australia that were potentially not conducive to competition and efficiency of the Australian payments system. In particular, the study noted the significantly different interchange fees in the credit card and EFTPOS systems, concluding that there did not appear to be a convincing case for an interchange fee in the EFTPOS system in either direction. It also concluded that the bilateral nature of the system could put new entrants at a competitive disadvantage. The study also highlighted interchange fees in the Visa Debit system, which was at that time the only scheme debit system operating in Australia. It noted that interchange fees in this system were the same as those in the Visa credit card system and argued that there was no case for applying credit card interchange fees to debit cards.
Since the release of the Joint Study, both the industry and the Reserve Bank have worked to address a number of issues identified in the study. Relatively early on in the process, however, it became clear that voluntary reform of the credit card system was unlikely and, as a result, the Bank subsequently used its powers to reduce interchange fees, improve access and require the removal of restrictions on merchants. Details of these reforms are provided in the Payments System Board's Annual Reports.[1]
Voluntary reform of the Visa Debit system has also proved to be problematic, with the Bank designating the system in February 2004, and releasing a draft interchange Standard in February 2005.[2] An Access Regime was also imposed on the Visa Debit system in August 2005.[3] This Access Regime, which was supported by Visa, ensured that specialist credit card institutions (which are supervised by the Australian Prudential Regulation Authority – APRA) were eligible to participate in the Visa Debit system.
Compared to the credit card and Visa Debit systems, the prospects for a voluntary industry-based solution in the EFTPOS system looked stronger. At a relatively early stage, the industry indicated a willingness to address the Bank's concerns and an industry working group was set up. At the time, the Bank was hopeful that this work could be completed to coincide with the reforms to the credit card system, given that the Bank has always seen reforms to the credit and debit card systems as complementary. For a number of reasons this did not occur.
As a result of the work by the industry group, a group of financial institutions took a proposal to the ACCC in February 2003 to set interchange fees in the EFTPOS system to zero. After issuing a draft determination rejecting the application due to concerns about access, the ACCC then approved the proposal in December 2003, in the expectation that the issue of access would be adequately addressed. A group of merchants then challenged the ACCC's decision in the Australian Competition Tribunal (ACT), with the ACT finding in the merchants' favour in May 2004, concluding that the public benefit from the proposed agreement to set interchange fees to zero did not outweigh the public detriments.
After examining the ACT's ruling and consulting with interested parties, the Bank designated the EFTPOS system in September 2004, noting that there was little further prospect of industry reform of interchange fees. This was followed in October 2004 by a legal challenge in the Federal Court by a group of merchants to the validity of the Bank's designation of the EFTPOS system.
In an effort to prevent further unnecessary delay and regulatory uncertainty, in February 2005, the Bank released draft Standards for interchange fees in both the EFTPOS and Visa Debit systems and a Standard that would require the removal of the honour all cards rule in the Visa system. It noted at the time, however, that no final decisions would be made until the legal challenge in the Federal Court was decided. Subsequently, the Court delivered its judgement, finding in favour of the Bank in November 2005.
During the period in which interchange fees were being addressed, the industry (under the auspices of APCA) was developing an Access Code for the EFTPOS system. After two years, the industry agreed to a Code that was acceptable to the Bank. APCA, however, asked the Bank to consider giving regulatory certainty to the proposed cap on the price of establishing a new connection through an Access Regime.
After considering the judgement in the Bank's favour in the EFTPOS designation case, the Bank issued a second consultation document in December 2005 setting out a draft Access Regime and making an amendment to the draft Standard on EFTPOS interchange fees.[4] The Bank invited submissions and consultation on the new proposals as well as on the earlier components of the package.
Details on these various proposals are discussed in Section 5.