Reform of Australia's Payments System 7. Summary of the Main Conclusions

This section summarises the main preliminary conclusions of the Review and the Board's proposed direction for the regulation of card payment systems in Australia.

1. In the Board's view, the reforms have met their main objectives of: improving price signals in the Australian payments system; increasing transparency; improving access; and creating a more soundly based competitive environment. The reforms have improved competition and efficiency in the payments system, contributing to an improvement in overall resource allocation and substantial welfare gains to the community.
2. The Board acknowledges that the reforms have not affected all parties equally. In particular, those who use EFTPOS and cash are more likely to have been made better off as a result of the reforms than those who use credit cards extensively and pay their balances off by the due date. Previously, this latter group was receiving significant benefits, partly at the expense of the former.
3. Close oversight of retail payment systems will continue to be necessary. To a large extent, this stems from the way in which competition between merchants affects their ability to decline to accept payment cards. The competitive environment means that, in aggregate, merchants are prepared to pay more for credit card acceptance than the benefit they receive. In the past, this distortion has been amplified by various rules that have been imposed on merchants by the schemes.
4. The Board sees no case for allowing the schemes to re-impose their no-surcharge rules. It has considered altering the existing Standard to allow schemes to limit the size of any surcharge, but is of the view that such a restriction is unnecessary and would limit the competitive pressure on interchange fees that can be imposed by merchants.
5. The Board sees no case for allowing the schemes to re-impose their earlier honour-all-cards rules. Indeed, it is proposing further changes to scheme rules to ensure that merchants can make independent acceptance decisions about pre-paid cards. It is also proposing changes that would prohibit merchants being penalised with higher interchange fees if they do not accept all cards of a scheme. These changes could be made voluntarily by the schemes, but if this does not occur, the Board would consider imposing the changes through regulation.
6. The Board is proposing to retain the various Access Regimes. While access has been improved as a result of the reforms, further improvements are necessary, particularly to those systems based on bilateral contracts. With the current technology in a number of these systems nearing the end of its life, the Board encourages the industry, as a matter of priority, to examine alternative approaches that would address this issue and possibly allow entry on the basis of one connection only.
7. The Board sees a strong case for further improving the transparency of the payments system. In particular, average interchange fees and average scheme fees should be published regularly. The Board also sees advantages in clarifying the conditions surrounding bypass of scheme switches. Ideally, the schemes would provide this information voluntarily, although the Board is prepared to consider regulation if that is necessary.
8. While the Board sees a strong case for ongoing interchange regulation, it is prepared to step back from the regulation of these fees on the condition that industry takes further steps to improve the competitive environment. This option is now able to be considered as a result of the significant changes in the environment that have taken place over recent years as a result of the previous reforms. The Board remains of the view that these reforms – including the forced reduction of interchange fees – were appropriate given the state of competition that applied at the time.
9. The specifics of developments over the next year will be crucial in convincing the Board that its concerns about efficiency and competition would continue to be addressed if it removed interchange regulation. The Board has identified changes in three areas that would, in its opinion, further strengthen the competitive environment. These include: changes to the EFTPOS system that would enhance competition; modifications to the honour-all-cards rule in addition to those discussed in point 5; and greater transparency around scheme fees and average interchange fees.
10. In the Board's view, if changes are not made to the EFTPOS system there is a significant risk that, in the longer term, the current system will not be able to compete effectively with the international card schemes. Without an effective competitor, the Board's view is that the case for allowing the industry to set interchange fees free of regulation is significantly weakened. In terms of specifics, the Board has identified a number of changes to the EFTPOS system that would be expected to improve the competitive environment. These include:
    1. the introduction of a scheme to replace the existing bilateral contracts, with the scheme able to make decisions about multilateral interchange fees;
    2. the creation of effective arrangements to promote the development of the system;
    3. reform of current access arrangements; and
    4. the development of alternative payment instruments for use in online payments (either by the EFTPOS scheme or through another channel).
11. If the Board is to step back from interchange regulation, it is proposing that the honour-all-cards rule be modified to allow merchants to make independent acceptance decisions for each type of card for which a separate interchange fee applies. This change could be made by the schemes. If this does not occur, the Board will consider the case for making this change through regulation.
12. If the above steps to improve the competitive environment are not made within a reasonable time, the Board's current thinking is that interchange regulation would continue, although changes would be made to the current Standards. In particular, the Board would consider establishing a common benchmark for interchange fees in the EFTPOS and scheme debit systems of around 5 cents (paid to the issuer) and a further reduction in the credit card interchange fee benchmark to around 0.30 per cent. A number of technical changes to the operation of the interchange Standards would also be made.
13. If interchange regulation is to continue, the Board would not require the modification of the honour-all-cards rule discussed in point 11 above, as interchange fees would be constrained primarily by regulation, rather than through competitive forces.
14. The Board is conscious that the changes being suggested will take time for the industry to implement. It is proposing to take stock of progress in August 2009. At that time, it would decide whether to proceed to modify the Standards along the lines outlined in point 12 or remove the existing interchange fee Standards. Changes to the arrangements would then likely be effective in the first quarter of 2010.
15. If the Board did remove its regulations on interchange fees, and average fees in the credit card systems subsequently rose materially, the Board would consider the reimposition of interchange regulation, along the lines discussed in point 12. Although the Board recognises that interchange fees may well be higher in a deregulated environment than in the regulated environment, a substantial rise in these fees would likely signal that insufficient competitive forces had been able to be brought to bear on these fees.
16. The Board welcomes initiatives by industry participants to develop arrangements that would allow the industry itself to address the Board's concerns around competition and efficiency. The Board notes, however, that specific proposals are yet to be agreed upon.