A Revised Interchange Standard for the EFTPOS System – November 2009 5. Consultation

The Bank called for submissions from interested parties in its media release of 22 September 2009. In total, 16 submissions were received, 13 of these by the deadline of 23 October 2009. The submissions were from banks, retailers, industry associations, card scheme operators, specialist financial institutions and an industry analyst. All parties who made submissions were provided with an opportunity to discuss their submission and the submissions of others with the Bank.

Opinion about the appropriate course of action was divided between the submissions, with some supporting the changes and others opposing them. There were five main themes explored in the submissions: whether EFTPOS needed interchange fee flexibility to compete with the scheme debit systems; the distinction between card-present and card-not-present transactions; how to deal with bilateral arrangements; the implications for access; and the implications of these changes being transitional. These are discussed in turn below.

Does EFTPOS need the flexibility to compete?

A number of submissions argued that it was appropriate to put EFTPOS on the same regulatory footing as the scheme debit systems and, indeed, that this flexibility was necessary if EFTPOS was to compete with these systems. A number of these submissions argued that the proposed change ensured competitive neutrality and, as such, was appropriate. Some submissions further argued that interchange fees in the EFTPOS system needed to flow from acquirers to issuers, the same as for scheme debit cards, for EFTPOS to compete effectively. Two submissions argued for a floor on interchange fees as well as the proposed cap to ensure that interchange flowed from acquirers to issuers.

Two submissions, however, argued that providing interchange fee flexibility was inappropriate because the nature of competition in card payment systems was flawed and led to inappropriately high levels of interchange fees. One of these submissions suggested that, if regulatory change was to occur, EFTPOS interchange fees should be limited to a range from 5 cents paid to the issuer to 5 cents paid to the acquirer, a proposal that the Board had already identified as a possible final outcome. A number of submissions argued that the systems are different and therefore different interchange fees, and potentially regulation, may be appropriate. Some argued that a better way to ensure competitive neutrality would be to change the existing scheme debit interchange regulations to match the EFTPOS interchange regulations.

The distinction between card-present and card-not-present transactions

One submission noted that EFTPOS does not currently compete with scheme debit systems in card-not-present environments. It argued that in the card-present environment EFTPOS was currently very strong and, indeed, enjoying increased usage relative to scheme debit. This submission suggested that, given this distinction, there did not need to be any change to the regulatory environment for card-present transactions. It noted that, for card-present transactions, scheme debit transactions were below the 12 cent weighted-average cap. It was suggested that any increased flexibility in EFTPOS interchange setting should be targeted at card-not-present transactions where EFTPOS does not currently compete.

Another submission suggested that since EFTPOS does not compete for online transactions, setting the interchange fee cap for EFTPOS the same as for scheme debit would give EFTPOS a competitive advantage in card-present environments. The international schemes typically set interchange fees for card-not-present transactions higher than both card-present transactions and the regulated cap. The greater the proportion of card-not-present transactions within a system, therefore, the lower card-present interchange fees would need to be to comply with the cap. It was argued that this would allow the EFTPOS scheme to set interchange fees for card-present transactions higher than the equivalent fees in the scheme debit systems.

Treatment of bilateral arrangements

A number of submissions highlighted potential problems with the operation of bilateral arrangements under the proposed regime. Some observations also reflected a view that future arrangements in the industry are more likely to be multilateral, with bilateral arrangements being phased out. Two submissions suggested that existing bilateral arrangements could be grandfathered at their current levels and only multilateral interchange fees be given the greater flexibility allowed by the proposed Standard. One submission raised concerns that, to the extent that arrangements in the EFTPOS system remained bilaterally based, the system would be at a disadvantage because of the more restrictive regulation of bilateral interchange fees that has been proposed – namely a hard cap compared with a weighted-average cap. There was a general (although not unanimous) view in submissions and subsequent discussions that the regulatory changes should, to the extent possible, encourage a move to multilateral interchange fees, although they differed on the most appropriate way to achieve this.

Implications for access

Submissions were mixed on whether the proposed changes would adversely affect access to the system. Some submissions suggested that access was a relatively minor problem and that EPAL could now work to further reduce any access problems to the system. A number of submissions, however, acknowledged that an easing of the existing constraints on bilateral interchange fees could create additional difficulties for access seekers and that, in general, multilateral interchange fees are more access-friendly than bilateral arrangements. One submission noted that competition would be stronger if more parties were able to freely access the system. It was argued that, while access remained difficult, greater flexibility of interchange fees would not necessarily result in a more competitive outcome and that it would therefore be preferable to keep the current constraints on interchange fees until such time as access problems were dealt with. During discussions, some parties suggested that this may merely be a theoretical problem and that it was unlikely that any industry participants would expend effort on renegotiating bilateral interchange fees, with the attendant access concerns, given that the EFTPOS system is likely to move to multilateral interchange fees.

Implications of these changes being transitional

A number of submissions argued that the likely life of these transitional arrangements, when combined with the amount of time required to change existing interchange fee arrangements, means that there is a danger that the final regulatory outcome will be in place before any meaningful renegotiation can take place. That is, that either no changes will actually occur in the time available or that renegotiation costs will be incurred twice for a minimal interim benefit. These submissions therefore argued for leaving regulation unchanged because the likely benefits of change would not outweigh the costs over the limited lifetime of the new regulations. One submission argued that any changes to interchange fees in the proposed transitional phase might simply be reversed if the Bank were ultimately to move to a regime of lower, regulated interchange fees instead of deregulation. Many submissions supported the changes only to the extent that they were transitional and expressed a preference for different long-term arrangements.

A number of other issues were raised in submissions that are not discussed here. Of note, however, was that a number of submissions raised questions about the treatment of cash-out transactions. This is considered in the analysis of the options, below. The submissions can be found on the Reserve Bank's website <https://www.rba.gov.au/payments-and-infrastructure/debit-cards/submissions-recd.html>.