Background | Review of the Regulatory Framework for the eftpos System: Consultation on Designation March 2012 | Consultations

Review of the Regulatory Framework for the eftpos System: Consultation on Designation – March 2012 2. Background

Current Regulation of the eftpos System

The Payments System Board originally designated the eftpos system in 2004 as the first step towards implementing reforms to interchange fees and access arrangements in that system. The Board's decision that designation would be in the public interest reflected its concerns that differences in interchange fees between the scheme debit and eftpos systems at that time would likely result in outcomes that would be harmful to the efficiency of the overall payments system. It therefore decided that interchange fees in the two systems should be considered at the same time, which required designation of both the eftpos and Visa Debit systems.^[1] The Board also came to the view that improvements in access arrangements could be beneficial to competition in the eftpos system and therefore would be in the public interest. Designation would provide the Board with the ability to impose an access regime if industry initiatives being undertaken were to falter.

Following designation, the Reserve Bank introduced regulations in 2006 addressing the pricing and access concerns that had been identified by the Board. The Reserve Bank introduced a standard, The Setting of Interchange Fees in the EFTPOS System (interchange fees Standard), requiring a reduction in interchange fees on eftpos purchase transactions from around 20 cents to within a range of between 4 and 5 cents, paid to the acquirer.^[2] The interchange fees Standard was updated in 2009 to distinguish between interchange fees agreed bilaterally and those set on a common multilateral basis by the new eftpos scheme, eftpos Payments Australia Limited (ePAL – see discussion on changes to governance arrangements below). Under the revised interchange fees Standard, the weighted average of multilateral interchange fees set by ePAL is capped at 12 cents flowing to the issuer, in line with the Visa Debit interchange fee Standard.

Concurrently, the industry developed an access code setting out a procedure for new entrants seeking access to the eftpos system to negotiate and implement bilateral connections with existing participants. This industry Access Code is complemented by an access regime, Access Regime for the EFTPOS System eftpos Access Regime), imposed by the Reserve Bank. The eftpos Access Regime places a cap on the amount existing participants can charge new entrants to establish a new connection. It also contains ‘no-discrimination’ provisions designed to prevent incumbents from using negotiations over interchange fees to frustrate entry. The ‘no-discrimination’ provisions require existing eftpos participants to offer new entrants interchange fee terms that are no less favourable than those agreed with other existing participants.

Recent Industry Developments

At the time that the initial designation and the regulation of the eftpos system were imposed, governance of the system was largely based on bilateral agreements between financial institutions, with certain rules set collectively via the Australian Payments Clearing Association (APCA). Specifically, interchange fees and connection arrangements were agreed bilaterally between individual participants in the system. There was no central body responsible for promoting the use of eftpos; making strategic decisions about the system, such as the development of new functionality; or adjusting pricing to better compete with other card payment systems. The bilateral governance structure made it difficult for the eftpos system to adapt to changing technology and the demands of end-users, and to compete effectively with the scheme debit systems.

The Payments System Board noted these concerns about the bilateral arrangements in the eftpos system in its conclusions to its 2007/08 review of the payments system reforms.^[3] Reflecting these concerns, the Board pushed for the establishment of an eftpos scheme that could promote and make decisions in the interests of the eftpos system as a whole. The Board was of the view that an eftpos scheme would be best placed to strike a balance between the interests of merchants, issuers and cardholders, and would contribute to a more competitive environment for debit cards. The industry's response was the establishment of ePAL in April 2009.

ePAL is owned and funded by 14 member institutions, including two large merchants. Since its establishment, it has been active in promoting the use of eftpos and in positioning the system in a way that makes it attractive to the various participants in the eftpos system. ePAL has established scheme rules, which cover aspects of access and interchange fees, as well as technical operational and security rules for its members. A particularly notable strategic decision made by ePAL has been the introduction of a common multilateral interchange fee schedule for the eftpos system. This schedule, which came into effect in October 2011, reverses the flow of interchange fees in many cases; for most eftpos transactions, a multilateral interchange fee of 5 cents is paid to the issuer, whereas under bilateral arrangements, an interchange fee of between 4 and 5 cents is paid to the acquirer. The system is in the process of transitioning to ePAL's multilateral interchange fee schedule; for some participants, existing bilateral arrangements may remain in place until they expire or are terminated, or both parties agree to opt-in to the multilateral fee arrangements.

Alongside developments in the governance of the eftpos system, the underlying architecture of the eftpos system has undergone significant change. Since 2009, with encouragement from the Reserve Bank, the industry has worked on migrating to a Community of Interest Network (COIN) for message exchanges in the bilateral payment systems, including the eftpos system. The COIN simplifies links between participants by allowing each participant to connect to all other participants in the system using a single physical connection. Accordingly, the COIN potentially has implications for the cost and timeframe for new entrants to establish connections.

In light of these significant changes to the governance of the eftpos system, as well as changes to the underlying architecture of the system, the Payments System Board announced in September 2011 that it would undertake a review of the regulatory framework for the eftpos system. The aim of the review is to ensure that regulations for the eftpos system continue to meet their objectives. The first step in this review is consideration of the designation of the eftpos system, as discussed in the following section.

Footnotes

At the time, Visa Debit was the only scheme debit system in operation in Australia. MasterCard's debit product was launched in Australia in November 2005. [1]

The cap and floor of between 4 and 5 cents does not apply to purchase transactions with a cash-out component. [2]

Reserve Bank of Australia (2008), Reform of Australia's Payments System: Conclusions of the 2007/08 Review, September. [3]