Designation of the EFTPOS System | Review of the Regulatory Framework for the EFTPOS System: Consultation on Options for Reform June 2012 | Consultations

Review of the Regulatory Framework for the EFTPOS System: Consultation on Options for Reform – June 2012 3. Designation of the EFTPOS System

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The EFTPOS Designation

The EFTPOS designation dated 9 September 2004 (original designation) defines the system as follows:

The EFTPOS system is the electronic funds transfer at point of sale payment system described in clause 1 of the CECS manual for the Consumer Electronic Clearing System and governed by the rules of that system set out in the manual, supplemented or modified by contracts, arrangements or understandings between individual issuers, acquirers and merchant principals (as that latter term is defined in the CECS manual) in the system. This system allows cardholders to use a debit card to pay for goods or services or withdraw cash at the point of sale.

As discussed in Section 2, EPAL has put in place scheme rules as well as technical and other requirements for the EFTPOS system. These types of requirements, along with a description of the EFTPOS system, had previously been set out in APCA's CECS Manual and Regulations, but were removed with the establishment of EPAL and replaced with a reference to EPAL's Scheme Rules. The previous references to the EFTPOS system in the CECS manual, however, had formed an integral part of the definition of the system for the purposes of the designation. Hence, the original designation no longer clearly defines the EFTPOS system.

In addition, other industry developments, including the establishment of EPAL, have meant that the original designation is arguably no longer appropriate. The original designation was intended to describe a system primarily based on bilateral contracts between participants, with clearing and settlement arrangements governed by the CECS manual; that is, a system without a central governing scheme.

Given the changes to the EFTPOS system since it was first designated in 2004, the Board considered the original designation to be no longer appropriate. It therefore released a document for public consultation in early March, seeking views on an appropriate definition of the EFTPOS system. The consultation on designation was a necessary precursor to the current consultation on the broader regulatory framework.

The Board specifically sought views on two options regarding the definition of the EFTPOS system to be adopted in a new designation:

Option 1: a definition based on EPAL membership and Scheme Rules
Option 2: a broader definition in order to capture those parts of the system that lie outside the scope of EPAL's membership and Scheme Rules.

The Board's preliminary views were that Option 1 would clearly define the EFTPOS system and would recognise the central role that EPAL has taken in the system. It would also be similar to the form of designation for the MasterCard and Visa credit card systems, and the Visa Debit system. However, the Board also considered that this definition could be restrictive as some participants may not seek to join EPAL as members, but may still wish to conduct EFTPOS transactions as they have been doing under bilateral agreements.

Option 2, by contrast, would potentially be more inclusive. However, it would be less clear on the scope of the EFTPOS system and the role of the central governing body since the EFTPOS system would be defined to extend beyond the bounds of EPAL.

The views expressed on the two options in consultation are discussed below.

Views Expressed in Consultation

The Bank received 21 submissions in total from financial institutions, merchants, merchant associations, card schemes, payments solution providers, and a private citizen. Bank staff met with a number of those making submissions.

In broad terms, nearly all submissions were of the view that the original designation of the EFTPOS system is no longer appropriate and should be revoked. However, there were divergent views about whether a new designation is, in fact, required. The majority of submissions suggested that a new designation should be put in place, at least in the establishment phase of the centralised EFTPOS system, while two submissions commented that there may be no need for ongoing regulation of the EFTPOS system and so the designation could be revoked without replacement.

There was little consensus from the submissions on the form the new designation should take if one were to be put in place. Indeed, submissions were relatively evenly balanced between those supporting Option 1 and those supporting Option 2. Most of those supporting Option 1 – a narrow definition of the EFTPOS system, limited to EPAL's Scheme Rules – were from existing members of EPAL. Broadly, these submissions argued that the narrow designation would:

give the EFTPOS system ‘designation parity’ with the regulated Visa Debit system (as well as the MasterCard and Visa credit card systems)
enable EPAL to determine access arrangements and provide a consistent interchange fee structure for members of the EFTPOS system
align technological and other developments
enable EPAL to better compete with the international scheme debit card schemes
reduce industry and regulatory complexity
lessen risk within the EFTPOS system by enabling EPAL to centralise management of fraud, operational and credit risk, and business continuity planning.

The remaining submissions supported the Bank adopting Option 2 – a broader definition for designation. These submissions generally commented that a definition based on EPAL's Scheme Rules would be restrictive given that there are various participants (including those that are not issuers and acquirers) in the EFTPOS system that are not members of EPAL. The main concern raised in these submissions, centred on a perception that non-EPAL participants in the EFTPOS system had limited ability to express views on various aspects of the EFTPOS system, such as marketing in stores and pricing decisions. One merchant association, in particular, made the point that EPAL membership is, in large part, composed of the largest banks, and that this is evident in decisions, such as the reversal of interchange fee flows. Participants that made these submissions were also concerned about there being adequate competition and the incentive to innovate among participants within the EFTPOS system if it were to be narrowly defined.

Some submissions commented that the current designation of the EFTPOS system – which references the CECS Manual and Regulations – is still workable. For example, EPAL suggested that the CECS manual still adequately refers to the EFTPOS system, though it is supportive of a review and updating of the designation as per Option 1. One merchant (an EPAL member) suggested that the Bank may wish to leave the original designation in place as well as issuing a new designation with reference to EPAL Scheme Rules and membership. In its view, the designation in its original form still adequately describes the EFTPOS system, particularly given that not all participants are members of EPAL, and hence it provides the basis for regulation of this part of the system.

The Decision on Designation

Under section 11(1) of the Payment Systems (Regulation) Act, the Bank may designate a payment system if it considers that designating the system is in the public interest. Section 11(3) of the Act provides that the Bank may revoke the designation if it no longer considers that it is in the public interest that the system be designated. The Act, however, does not provide the Bank with the power to vary a designation. Therefore, to ‘vary’ the original designation, the Bank needs to revoke the original designation and impose a new designation in its place, provided that these actions are in the public interest.

The meaning of the public interest is set out in section 8 of the Payment Systems (Regulation) Act. Specifically, in determining both the revocation of the original designation and the imposition of a new designation for the EFTPOS system, the Bank is required to have regard to the desirability of payment systems:

being (in its opinion):
1. financially safe for use by participants; and
2. efficient; and
3. competitive; and
not (in its opinion) materially causing or contributing to increased risk to the financial system.

The Reserve Bank may have regard to other matters that it considers are relevant, but is not required to do so.

Taking into account the views expressed in consultation, the Board has decided that it is in the public interest to:

revoke the original designation – Designation No 2 of 2004; and
designate the EFTPOS system, where the system is defined as one based on EPAL's Scheme Rules.

The Board reached this decision for several reasons. In particular, the Board formed the view that it is in the public interest to align the definition of the EFTPOS system with the current rules and governance structure for the system by revoking the original designation and imposing a new one. A new definition that keeps pace with industry developments in terms of defining the scope of the EFTPOS system removes any uncertainty regarding the participants subject to the Bank's regulatory framework. In addition, as discussed later in the paper, the Board has formed the preliminary view that regulation of the EFTPOS system may still be required to promote efficient price signals and competitive access to the system. To consult on future regulation, a new designation of the EFTPOS system needs to be in place.

On the form of the designation, the Board has decided that a narrow definition based on EPAL's Scheme Rules provides the clearest definition of the EFTPOS system. In making its decision, the Board recognised the central governing role that EPAL has now undertaken. In its opinion, giving regulatory recognition to the role EPAL plays is the best way to ensure that EFTPOS remains a viable alternative debit card system to the international card schemes, thereby promoting competition between debit card systems, which is in the public interest. A broader definition would run the risk of undermining EPAL's ability to set and control any aspects of access or pricing that are regulated by the Bank. In addition, a narrow definition provides consistent regulatory treatment with the designated Visa Debit system, thereby promoting competition in the debit card system as a whole.

The new designation in relation to the EFTPOS system is set out in Attachment 1. This designation is relevant to the discussions in the following sections related to the future regulatory framework, particularly the imposition of a new access regime and interchange fees standard, should the Board determine that these are required. As a technical matter, the Board has not determined that it is in the public interest to revoke the existing designation at this stage. Its intention is that the existing designation will remain in place during consultation of the broader regulatory framework, to avoid a period without any EFTPOS regulation in force (given that the existing interchange fees Standard and Access Regime currently refer to this designation). Having the new designation concurrently in place enables the Bank to proceed with consultation on a future interchange fees standard and access regime.

It should be noted that a narrow designation does not mean that proprietary debit transactions cannot occur outside EPAL's Scheme Rules. It simply means that regulation imposed by the Bank on the new designated system would not apply to those transactions. For instance, restrictions on interchange fees or connection charges that may apply to the EFTPOS system would not apply to arrangements outside the designated system. Any bilateral agreement made between two EPAL members as provided for and defined in EPAL's Scheme Rules would, however, form part of the new designated system.