Reform of the EFTPOS and Visa Debit Systems in Australia:
Final Reforms and Regulation Impact Statement – April 2006 6. Submissions on the Bank's Proposed Standards and Access Regime

In total, 37 submissions were made on the Bank's proposed Standards and Access Regime (see the Reserve Bank's website for details). Fifteen parties took up the invitation to discuss their submission with the Bank, with many organisations having more than one meeting.

This section sets out the main points that arose in consultation, many of which were made by more than one party. In summary:

  • Many respondents recognised the need to improve arrangements for access to the EFTPOS system. While some argued that the proposed arrangements did not go far enough, others argued that the proposals tipped the balance too far in favour of new entrants, with the result that existing participants would be required to subsidise new participants.
  • A variety of views were put on the desirability of moving interchange fees in the EFTPOS and Visa Debit systems closer together, with some participants arguing for moving EFTPOS interchange fees, but not those for Visa Debit, while others argued the reverse. Some participants argued for larger changes than implied by the draft Standards, while others argued for smaller changes. Many submissions argued that a consistent approach should be applied to setting interchange fees, but the submissions differed markedly on which consistent approach should be used.
  • Merchants argued that the honour all cards rule should be abolished in the Visa Debit system. In contrast, Visa and Visa Debit issuers argued that doing so would be unnecessary (and counter-productive) if the interchange fee were reduced and merchants were free to surcharge for Visa Debit transactions.

6.1 The Access Regime

The draft Access Regime is supported by the Australian Consumers' Association (ACA), the Australian Merchant Payments Forum (AMPF), APCA, Bank of Queensland and CreditLink.[1] The AMPF argued that the Access Regime and Access Code are a useful first step, but that there should be a single point of access to the EFTPOS system. APCA supported the introduction of the Access Regime but expressed no view about the process for determining the cap on the amount that a new entrant could be charged for establishing a direct connection. While the Bank of Queensland supported the draft Access Regime, it was concerned that the complementary Access Code developed by APCA would result in changes to APCA rules, and that it had not been able to participate in the process that had led to these potential changes.

First Data International (FDI) and National Australia Bank both criticised the draft Access Regime on the grounds that the $78,000 cap was too low.[2] FDI argued that there should be no cap, with the price charged for establishing a new connection being negotiated bilaterally but with reference to a non-binding benchmark price determined by APCA. It suggested that this benchmark should be the average of the estimated connection costs in APCA's 2004 survey (around $200,000). National Australia Bank did not directly present specific arguments, but said that it strongly supports the view of the Australian Bankers' Association (ABA) in its submission to the Commonwealth Government's Regulation Review Taskforce. That submission argued that the effect of the Access Regime would be to subsidise new entrants. It proposed that any Access Regime determined under the Payment Systems (Regulation) Act 1998 should not result in ‘owners or operators of the payment system recovering less than their direct incremental costs of providing access' or require ‘the owners or operators of the payment system to bear some or all of the costs of extending or maintaining the payment system to provide access'.[3]

FDI also commented on APCA's Access Code, which complements the Bank's Access Regime. It argued that the benefits of the Code should be available only to new entrants that are prepared to commit to establishing five direct connections, rather than the three currently specified. FDI also noted that in many cases it provides additional consulting support to firms establishing new connections, and was concerned that its ability to offer these services on a commercial basis might be limited by the cap.

6.2 The interchange Standards

Merchants were strongly opposed to any reduction in EFTPOS interchange fees. Some argued that the fees should be increased, in recognition of the costs merchants incur in providing EFTPOS transactions. In contrast, most banks supported the reduction in EFTPOS interchange fees; some argued that the Bank should go further and reduce the interchange fee to zero, while others encouraged the Bank to reverse the direction of fees, so that acquirers would pay issuers.[4]

Only one submission opposed the proposal that interchange fees should be subject to a floor as well as a cap: CUSCAL argued that the floor would constrain its ability to negotiate an even lower interchange fee. Of those that supported the floor, Coles Myer argued that it would mitigate concerns that there was a potential for negotiations over interchange fees to adversely affect competition.[5] However, Coles Myer, together with the AMPF, also argued that the proposed Standard would so tightly constrain interchange fees that a common fee may as well be set, removing any residual scope for discrimination.[6] The floor was supported by MoneySwitch, which also argued that the Standard should require that the interchange fee between any two organisations be reciprocal.[7]

On the Visa Debit interchange Standard, neither Visa Debit issuers nor Visa argued against a reduction in interchange fees, but they argued that any reduction should be smaller than proposed.[8] In contrast, some merchants argued that the same interchange fee should apply in the Visa Debit and EFTPOS systems, with the fee paid by issuers to acquirers.[9] Most of the banks that do not issue Visa Debit did not express a view on the interchange fee in that system.

The arguments put forward to support these positions were varied and sometimes at odds with one another. The main arguments are discussed below.

The proposed changes to EFTPOS interchange fees will have little effect on payment patterns

Merchants argued that the proposed changes would have little effect on payment patterns of cardholders. This reflected two arguments.

The first is that, although EFTPOS acquirers are likely to pass on the change in interchange fees in the form of higher merchant service fees, issuers will not lower the prices they charge cardholders for EFTPOS transactions. The merchants noted that, while issuers have had many opportunities to give assurances that they would pass on lower interchange fees, they have not been prepared to do so. The merchants also noted that currently many EFTPOS cardholders face no per-transaction charges, either because cardholders are within their ‘fee-free limit' or, increasingly, because they have an ‘all you can eat' account that offers unlimited fee-free EFTPOS transactions for a fixed monthly fee.

The second is that even if issuers passed on the changes in interchange fees in the form of lower prices for using EFTPOS, there would be little substitution from credit cards to EFTPOS since, for many cardholders, the two cards are viewed as different products.

The merchants also argued that the main effect of the reforms would be an increase in the general level of retail prices due to higher merchant service fees.

Consistency between interchange Standards

Many submissions argued that the interchange Standards determined by the Bank should all use a consistent methodology.

A common view was that the Visa Debit interchange Standard should be constructed in exactly the same way as the credit card Standard, although it should exclude the interest-free period from eligible costs. In particular, it was argued that:

  • the methodology used in the draft Standard underestimates the fixed costs of authorisation and processing;[10]
  • fraud and fraud prevention costs should be included in eligible costs. The data on the fraud experience of Visa Debit issuers suggest that doing so would add around 11 cents to the benchmark for the average Visa Debit transaction; and
  • the Visa Debit interchange Standard should be based on the eligible costs of Visa Debit issuers rather than issuers of credit cards. Visa undertook a study of these costs in 2005 and found that if the Standard were based on the costs of Visa Debit issuers, and included fraud costs, the benchmark interchange fee would be around 37 cents, only slightly less than the current level of around 40 cents on a Visa Debit transaction of average size. Visa offered to undertake a new survey of costs that could be used in calculation of a benchmark in 2006.

In the case of the Standard for interchange fees in the EFTPOS system, the consistency argument was used by some issuers to support a standard where the fee is paid by the acquirer to the issuer as in the credit card Standard.[11] Such a standard would include the same eligible costs as in the credit card Standard without the cost of the interest-free period. If this approach were adopted, the resulting benchmark for the EFTPOS system would be lower than that for Visa Debit if fraud costs were included in the Visa Debit interchange Standard.

The merchants used the consistency argument to support an opposite position – that Visa Debit interchange should flow from issuers to acquirers, and the benchmark should be based on acquirers' costs, not issuers' costs.

In its Consultation Documents, the Bank has argued that, although consistency is desirable, it would require a change in direction for at least one interchange fee and that this could be quite disruptive. The approach proposed was therefore one of moving the fees closer together without changing the direction of any of them. Visa Debit issuers argued that this justification is not consistent with the Standards. They argued that the changes would be very disruptive to their business and that the merchants are the only parties to benefit from this evolutionary approach. One submission argued that the Bank has ‘bowed to pressure from the retailers' and that ‘the very disruptive changes referred to relate to the merchants' involvement in the EFTPOS network'.[12]

A number of submissions, most notably from the major banks, argued that the Bank should move to a zero interchange fee for the EFTPOS system, arguing that such an outcome was an appropriate compromise amongst competing interests.

Merchants should be paid for providing banking services

Some merchants argued that, in accepting EFTPOS, they are essentially providing outsourced banking services to banks' customers, and thus they should be compensated by banks. In particular, some argued that the definition of eligible costs in the EFTPOS interchange Standard should be expanded to include the costs of PIN pads and the time taken to process an EFTPOS transaction over and above that needed for a cash transaction (merchants estimated this incremental cost at around 25 cents per transaction).[13]

Coles Myer also argued that banks that provide PIN pads to merchants have the option of recovering those costs through rental charges levied on merchants, but as a self acquirer it does not have that option. As a result, to maintain competitive neutrality it argued these costs should be included in eligible costs.[14]

The EFTPOS interchange Standard should not apply to cash out

Merchants argued that, since the Bank has not regulated interchange fees for ATM withdrawals, they would be at a competitive disadvantage to ATM owners if the proposed EFTPOS interchange Standard were to apply to transactions involving cash out. At present, ATM owners receive around $1 when a cardholder uses a ‘foreign' ATM, while, in contrast, large merchants receive around 15 cents from their acquirer when an EFTPOS transaction (including a transaction involving cash out) is made. As noted above, the merchants argued that this 15 cents represents compensation for providing a service to banks' customers, and that reducing the EFTPOS interchange fee to 4 to 5 cents would mean they would no longer receive any such compensation and, as a result, may cease providing cash out. Accordingly, merchants argued that transactions involving cash out should not be subject to the Bank's proposed Standard.

The proposed Visa Debit interchange Standard would push cardholders to credit cards

Visa Debit issuers argued that the reduction in the interchange fee proposed in the Visa Debit Standard would create an incentive for them to encourage their customers to switch to credit cards.[15] The ACA also expressed concerns that the Standard might encourage more consumers to hold, and use, credit cards.[16] Some of the Visa Debit issuers argued that, in terms of functionality, a Visa Debit card is much closer to a credit card than to an EFTPOS card. In particular, they argued that cardholders value the ability to use the card over the telephone and the internet, and overseas, and that cardholders will therefore prefer to move to a credit card than to an EFTPOS card.[17] One building society stated that it has plans to move as many customers as possible onto low-limit, low-interest-rate credit cards if the proposed Standard were implemented.

Intervention will discourage investment

Merchants argued that implementation of the proposed Standard would reduce their incentive to invest in EFTPOS infrastructure, including the upgrading of PIN pads, particularly to 3-DES encryption standards. In addition, more generally some banks argued that reductions in interchange fees paid to card issuers reduce the attractiveness of investing in card schemes.

Change is not urgent

Merchants argued that intervention to lower EFTPOS interchange fees was unnecessary, because the earlier reduction in credit card interchange fees had already encouraged a shift away from credit cards towards EFTPOS. Given this, they argued that judgements about EFTPOS interchange fees should wait until 2007, when the Bank has signalled that it will review the effects of the credit card reforms introduced in 2002.

6.3 The honour all cards Standard

Both Visa and most issuers of Visa Debit cards opposed abolition of the honour all cards rule, arguing that the rule reduces the costs of bringing new products to market and thus encourages competition and efficiency.[18] They argued that cardholders would be confused if they could not be sure which of their Visa cards would be accepted by merchants, and that such confusion would reduce the effectiveness and efficiency of the system. Some Visa Debit issuers argued that they would be particularly badly affected if merchants chose not to accept Visa Debit cards. They also argued that large acquirers might choose not to acquire Visa Debit transactions in order to disadvantage the small institutions.

Visa, and some others, also argued that any case to abolish the honour all cards rule would be substantially weakened if merchants were free to surcharge for Visa Debit transactions, and if a separate, lower, interchange fee applied to Visa Debit transactions. In particular, they argued that, in this case, any disadvantages of the honour all cards rule to merchants would be outweighed by the benefit to cardholders.

In contrast, merchants supported the abolition of the rule, arguing that tying reduces competition and increases their costs.[19] They argued that, if new products were to be introduced, merchants should have the ability to accept, or decline, them on their merits, and not be forced to accept a new method of payment simply because they accepted other related means of payment.

A number of comments were also made on the requirements that Visa Debit cards be visually identifiable and that transactions be electronically identifiable.

Some of the Visa Debit issuers argued that it would be extremely costly for them to reissue Visa Debit cards outside their normal card replacement cycles. CUSCAL, for example, estimated that the total cost to its members to reissue ahead of schedule would be around $11.6 million.[20] The building societies estimated their costs at $4 to $6 million.[21]

CUSCAL indicated that cards on issue can have a lifespan of up to three years; the building societies indicated two to three years. They suggested that the Bank should consider changing the draft Standard to require new Visa Debit cards issued after a certain date to be visually identified as debit cards or to increase the length of the transition period.

Visa Debit issuers also noted the fraud risks of reissuing cards ahead of schedule. Normally when cards are reissued, the cards being replaced have expired. A reissue ahead of schedule would involve replacing valid cards with new cards. The issuers noted that with two unexpired cards on one account in circulation, the possibilities for fraud would increase. Although customers would be asked to destroy, or return, the old card, it is unlikely that all old cards would be removed from circulation.

On the issue of electronic identification, several issuers and Visa noted that their Visa Debit cards already have unique Bank Identification Numbers (BINs) and, if the merchants had the relevant BINs, they could use this information to electronically distinguish debit from credit cards.

Visa and FDI also argued that a requirement that all acquirers and Visa introduce system changes to ensure every merchant could separately identify Visa Debit cards electronically could be quite difficult and may involve considerable expenditure and time. FDI argued that several years of work would be needed, and expressed concern that the Standard is not clear about what is required of acquirers.

Footnotes

See submissions to the Bank by: ACA, 17 February 2006; AMPF, 16 February 2006; APCA, 10 February 2006; Bank of Queensland, 17 February 2006; CreditLink, 14 February 2006. [1]

See submissions to the Bank by: FDI, 17 February 2006; National Australia Bank, 22 February 2006. [2]

See submission to the Regulation Review Taskforce by the ABA, 16 December 2005, p26. [3]

See submissions to the Bank by: Australian Settlements Ltd (ASL), 29 April 2005; Bank of Queensland, 29 April 2005, 17 February 2006; MoneySwitch, 29 April 2005, 17 February 2006; Credit Union Services Corporation (Australia) Ltd (CUSCAL), 29 April 2005; National Australia Bank, 29 April 2005. [4]

See the submission to the Bank by Coles Myer, 17 February 2006. [5]

See the submission to the Bank by AMPF, 16 February 2006. [6]

See the submission to the Bank by MoneySwitch, 17 February 2006. [7]

See submissions to the Bank by: CreditLink, 29 April 2005; St George Bank, 29 April 2005; CUSCAL, 29 April 2005; ASL, 29 April 2005; Suncorp-Metway, 27 April 2005; Visa International, 29 April 2005. [8]

See submissions to the Bank by: Coles Myer, 26 July 2005; AMPF, 29 April 2005. [9]

See the submission to the Bank by Visa International, 29 April 2005. [10]

See the submission to the Bank by ASL, 29 April 2005. [11]

See the submission to the Bank by ASL, 29 April 2005, p5. [12]

See submissions to the Bank by: Coles Myer, 17 February 2006; AMPF, 16 February 2006. [13]

See the submission to the Bank by Coles Myer, 17 February 2006. [14]

See submissions to the Bank by: ASL, 29 April 2005; CUSCAL, 29 April 2005; St George Bank, 29 April 2005. [15]

See the submission to the Bank by ACA, 29 April 2005. [16]

See submissions to the Bank by: ASL, 29 April 2005; CUSCAL, 29 April 2005. [17]

See submissions to the Bank by: CreditLink, 29 April 2005; Bank of Queensland, 29 April 2005; ASL, 29 April 2005; St George Bank, 29 April 2005; CUSCAL, 29 April 2005; Westpac Banking Corporation, 29 April 2005; Suncorp-Metway, 27 April 2005; Visa International, 29 April 2005. [18]

See submissions to the Bank by: Coles Myer, 26 July 2005; AMPF, 29 April 2005. [19]

See the submission to the Bank by CUSCAL, 2 August 2005. [20]

See the submission to the Bank by ASL, 29 April 2005. [21]