Options for Reform | Proposed Variation to the MasterCard and Visa Access Regimes: Consultation Document December 2013 | Consultations

Proposed Variation to the MasterCard and Visa Access Regimes: Consultation Document – December 2013 6. Options for Reform

As discussed in section 4, the Bank's objective in revisiting the access framework is to foster greater competition and efficiency in the payments system by achieving a balance between new entry to the MasterCard and Visa systems and risk in those systems that is in the public interest. This section discusses a number of possible approaches.

As noted in the May consultation paper, other regulations may also have to be altered to complement any changes to the Access Regimes. In particular, the Banking Act 1959 stipulates that only entities that are ADIs, the Reserve Bank or those with exemptions can carry on ‘banking business’ in Australia. Under the Banking Regulations 1966, banking business includes both credit card issuing and acquiring. Therefore, even if the Access Regimes were removed, any entity wishing to issue or acquire credit cards in Australia would be required to become an ADI.^[1] The Banking Regulations would need to be amended for access to the MasterCard and Visa systems to be effectively liberalised.

The Reserve Bank has authority only in relation to the Access Regimes and not the Banking Regulations, though some of the policy options discussed in this section would require amendments to the Banking Regulations to be effective. The discussion of those policy options necessarily assumes that the required amendments to the Banking Regulations are made. If the Board concludes that amendment of the Banking Regulations is required to achieve its preferred policy option, the Reserve Bank will work with APRA and the Treasury with the aim of achieving this.

Option 1: Maintain the Status Quo

This option would retain the current MasterCard and Visa Access Regimes and continue to rely on ADI/SCCI status to determine eligibility to participate in the schemes. Maintaining the status quo brings with it the benefits of clear and objective entry criteria and a regime that minimises the potential for risk to the card systems arising from system participants. However, it is clear that under this approach some potential entrants will not be eligible to participate, may be required to meet higher regulatory hurdles than appropriate or may as a result opt not to participate directly (or at all). The limited new entry that has occurred since 2004 suggests that new entry under current arrangements is likely to remain limited.

The status quo also means that an important element of risk management for the schemes will in effect be carried out by APRA, which places demands on its supervisory resources and does not fit within its core mandate. As discussed, cardholders generally do not face risks from the MasterCard and Visa systems and risks within those systems are not of a magnitude to generate systemic risk. Retaining the status quo would require a judgement that there is a case for supervision of participants to be undertaken by the public sector rather than the schemes.

It is instructive that systems of much greater systemic significance determine participant eligibility themselves and do not rely on ADI status. For instance, for settlement systems and central counterparties operated by the Australian Securities Exchange (ASX), eligibility is determined by the ASX, subject to overarching principles established by the Reserve Bank and ASIC.

One possible argument in favour of retaining APRA's role is that it may allow assessment of participant risks to be centralised, rather than assessment processes being conducted in parallel by both MasterCard and Visa for some entities. This has to be weighed against the effects of the high hurdles and inflexibility of the ADI regime and the cost of prudential supervision.

Option 2: Removing the APRA SCCI Regime, but Retaining Some Controls via the Access Regimes

Option 2 aims to provide the schemes with greater freedom to grant membership to new types of participants, while continuing to place some obligations on the schemes through the Access Regimes. Under this option, the Access Regimes would be varied to widen the range of entities eligible to participate in the MasterCard and Visa systems. Rather than the current approach where only ADIs are eligible, the Bank's proposed approach is for ADIs and entities that were SCCIs at a specified date to remain eligible, but for the schemes to have the discretion to also allow additional types of entities to participate. The schemes would be required to make public their risk-based criteria for determining which additional entities would be eligible. Further confidence in the objectivity of the schemes' processes could be provided by requiring them to report to the Reserve Bank on how they had used this discretion.

This option would only be effective if Banking Regulation 4 (which defines credit card issuing and acquiring to be banking business) were removed, meaning that the SCCI category of ADIs would no longer exist. So as not to lose the benefits of the earlier reforms, the amended Access Regimes would ensure that existing SCCIs remain eligible to participate in the schemes once the new arrangements come into place. However, it should be noted that this would not guarantee any individual entity ongoing membership; an SCCI's membership could be terminated if over time it fell below transparent risk-related membership criteria set by the scheme.

An implication of this approach is that former SCCIs and potentially some other members or potential members will no longer be supervised by APRA, potentially placing a greater onus on the schemes to assess and manage participant risk.

This approach has several advantages. Most importantly, it allows the schemes to admit members that would not currently be eligible, providing the potential for increased competition in issuing and acquiring and therefore greater efficiency in the payments system. By allowing new types of participants, it also has the potential to increase innovation, again with potential benefits for efficiency. Moreover it would achieve this while providing a mechanism for ensuring that current participants remain eligible.

At the same time, this approach allows the schemes themselves to balance benefits of new entry against the risks that new participants might bring to each system. This should allow a more efficient balance to be struck than by applying APRA's supervisory framework, which is geared to different types of entities and risks. A direct effect is likely to be that the costs of participation would be reduced for some entities. In addition, APRA would no longer bear the cost of authorising and supervising SCCIs, allowing it to better direct supervisory resources to its core mandate.

A potential drawback is that by placing greater judgement in the hands of the schemes, there is a risk that access will not be expanded beyond the minimum requirement of ADIs and existing SCCIs. This means that a new entity that was otherwise similar to the existing SCCIs would have no guarantee of eligibility. On the other hand, it is also possible that the schemes might compete excessively to lower the hurdles to new entrants and not take adequate account of the risks they bring to the respective systems. The proposed requirement for the schemes to have transparent risk-based criteria for eligibility would be expected to mitigate both risks to a degree, by requiring schemes to publish their risk-based approach to membership.

Option 3: Removal of All Access Regulation

The third option is the complete removal of the Access Regimes, leaving access entirely in the hands of the schemes. Once again, this option would only be effective if Banking Regulation 4 was removed so that issuers and acquirers of credit cards were no longer required to be ADIs. In other words, access arrangements would be the same as prior to the reforms in 2004; the ability of current SCCIs or new entrants to participate would be determined solely by the schemes' willingness to admit them. As discussed earlier, there are some indications that the schemes are now more willing to admit new types of participants.

While it is possible that this option could provide the same outcomes as Option 2, it does not provide the same safeguards, namely, it does not:

require that entities that are SCCIs under the current framework remain eligible;
require transparent risk-based criteria for determining eligibility and assessing applications; or
provide a mechanism for a person denied access to ask the Bank to give a direction, and provide the right to apply to the Federal Court for an order for compliance and/or compensation.

Like Option 2, this option would provide the benefits of reducing APRA's costs of authorisation and supervision and potentially the compliance costs of any non-ADIs that the schemes chose to admit.

Visa Debit Access Regime

The Access Regime for the Visa Debit system was put in place in 2005. At the time that the credit card Access Regime was being developed, the Bank expected that an SCCI joining the Visa credit card system with the intention of acquiring credit card transactions would also be able to acquire Visa Debit transactions. However, Visa indicated that since the Access Regime strictly applied only to the credit card system, its rules may have precluded an SCCI from acquiring debit card transactions, given that an SCCI cannot accept deposits. The Bank considered two options: first, to request that Visa review and modify its rules; or second, to impose an Access Regime on the Visa Debit system, mirroring that imposed on the Visa credit card system. While the first would have avoided the need for further regulation, Visa's decision-making structure meant that rule changes were likely to involve not just its Australian operations but also its Asia-Pacific and International boards, and thus could take an extended period of time and would have an uncertain outcome. The second option was therefore more likely to promote competition in card acquiring, and would do so in a timely fashion. The same complication did not arise with respect to MasterCard, as it had different rules regarding eligibility to join the MasterCard system.

It is not clear whether these considerations will still be relevant for the approach contemplated under Option 2. A draft revised Access Regime for the Visa Debit system is included in this consultation paper (see Attachment 2), essentially mirroring the changes proposed for the credit card systems. However, if consultation indicates that this Regime is no longer required, the Bank's preliminary view is that it can be revoked.

Footnote

This would not be true of the Reserve Bank, which is permitted to undertake banking business without ADI status, but has been prevented from participating in the MasterCard and Visa systems by the Access Regimes. [1]