Proposed Variation to the MasterCard and Visa Access Regimes: Consultation Document – December 2013 7. Preliminary Assessment

The Reserve Bank may vary an access regime if it considers it appropriate to do so, having regard to:

1. whether the variation would be in the public interest; and
2. the interests of the current participants in the system; and
3. the interests of people who, in the future, may want access to the system; and
4. any other matters the Reserve Bank considers relevant.

In determining the public interest, the Reserve Bank must have regard to the desirability of payment systems:

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

The Bank's preliminary view after the initial round of consultation is that Option 2 in Section 6 – varying the Access Regimes – would best promote the public interest and balance the interests of current and prospective future participants in the MasterCard and Visa credit card systems and the Visa Debit system.

Its preliminary view is that the status quo is not in the public interest because the current constraints on access are likely to reduce competition and efficiency in these systems relative to the other options. The status quo would be to the detriment of parties who may wish to participate in the systems because they will be prevented from entry if they are not ADIs and may be subject to more onerous regulatory requirements than warranted for their business if they seek to become ADIs. This option is likely to reduce competition relative to the other options. Some current participants (SCCIs) may also be subject to higher regulatory imposts than under the other options.

The Bank's assessment is that the current impediments to new entry are also to the detriment of users of the payments system. The virtual card products proposed by several prospective entrants have the potential to significantly improve the efficiency of payments and reconciliation for businesses operating in the travel industry. Other potential entrants offer improvements in efficiency for other types of payments system users. More generally, any additional entry is likely to exert pressure on the prices and service levels of incumbent payments system participants.

Removing all access regulation has some potential benefits over Option 1 in that, by placing greater discretion in the hands of the schemes to determine eligibility for membership, it provides the potential for expanded entry. This benefits potential participants, while some existing participants may be subject to reduced regulatory imposts because they would no longer be required to be ADIs. However the outcomes of this approach are quite uncertain; while there are indications that the schemes are willing to admit a wider range of members, it would be possible for them to deny access to the current SCCIs if they chose. Similarly, while the schemes would be expected to take account of risks to their systems in deciding which new entities to admit, there is no requirement for them to do so. This approach also has the potential to increase the schemes' costs of administering participation relative to Option 1, as they would no longer be able to rely on APRA's authorisation and supervision as a screening mechanism for some entities.

Overall, the Bank's preliminary view is that there are insufficient controls in this approach to be confident of outcomes that properly balance the efficiency and competition benefits of new entrants against the potential risks they bring to the system.

On balance, the Bank's preliminary view is that varying the Access Regimes (in conjunction with the removal of Banking Regulation 4) would strike the best balance between the interests of potential and existing participants in the system and would be in the public interest. The schemes would be able to admit new types of entrants, while existing participants that had gained entry under the previous reforms would remain eligible. In the Bank's view, this provides the best prospect of increasing participation in the systems and therefore enhancing competition and efficiency. At the same time, it requires the schemes to establish risk-based criteria for determining eligibility and assessing applications, meaning that the schemes will be required to take account of risks in admitting new members and provide a risk-based justification for excluding members. This should help to provide an appropriate balance between competition and risk, while allowing the schemes discretion to tailor membership arrangements to match the risk appetite of the system.

This approach will result in some new costs for the schemes. There would be some cost in establishing and publishing eligibility and assessment criteria, along with a modest cost in reporting to the Reserve Bank each year. There are also likely to be costs involved in assessing potential entrants, both initially and on an ongoing basis if accepted, though these will be incurred anyway to the extent that access is broadened by some other means.

As noted elsewhere in this paper, the Access Regimes are interrelated with Banking Regulation 4 and APRA's SCCI regime. The Bank has control only over the Access Regimes, but changes to the Regimes would need to occur in conjunction with amendment of the Banking Regulations to be effective. The discussion in this section has focused on benefits that would flow from increased participation as a result of changes to the Access Regimes (supported by amendment of the Banking Regulations). It should be noted that there may be additional benefits from amending the Banking Regulations, including that APRA would no longer supervise card scheme members that were not conducting other banking business, allowing its resources to be better directed to its core mandate.

Other Considerations

The following briefly addresses some of the other issues raised during consultation.

A number of submissions supported a lighter-touch SCCI framework operated by APRA or another regulator. As discussed in section 3, an approach that creates ambiguity or confusion about the role of APRA's prudential supervision of ADIs, or that risks compromising confidence in that regime, is not desirable and is not supported by APRA. Accordingly, APRA has indicated that it does not support providing exemptions from Banking Act obligations for any credit card issuers or acquirers, or applying less stringent requirements than for other ADIs.

The creation of an entirely separate supervisory framework for SCCI-like entities would require legislative change and is outside the scope of the Board's consideration. In any event, given the nature and magnitude of the financial risks generated by the MasterCard and Visa card systems, the case for supervision of participants to be conducted by the public sector rather than by the schemes themselves is not strong.

Some submissions suggested that potential entrants could access partnership or sponsorship arrangements if they could not meet the hurdles set by the SCCI framework. This does not appear to be a persuasive argument against considering regulatory change. This approach imposes higher than necessary costs and potentially other commercial constraints on new entrants, inhibiting their capacity to compete with existing players.^[1]

Allowing the schemes greater discretion over participation may result in parties that are not supervised by APRA issuing and acquiring card transactions in Australia. As a result, some participants might be subject to regulatory costs that are not imposed on others – an outcome identified by some as an uneven playing field. Under the proposed framework, regulatory costs will be imposed as a consequence of ADIs' broader banking activities, rather than card issuing and acquiring. Imposing higher than warranted regulatory costs on entities conducting only issuing and acquiring business to redress this would not be in the interests of the efficiency of the payments system. In any event, the ability of those conducting broader banking business to bundle card business with other banking products most likely confers ADIs an advantage over specialists in the card business.

The fact that the Reserve Bank is the only entity permitted to conduct banking business in Australia but not permitted to become a member of the MasterCard and Visa systems is an anomaly in the current Access Regimes. The Access Regimes' use of ADI status as the test for eligibility to the schemes was a means of obtaining some confidence in the financial standing of participants and thereby controlling risk. There is no case for excluding the Reserve Bank from the systems on the basis of risk. The fact that the Reserve Bank is eligible to participate in the eftpos system further highlights this anomaly and raises the possibility of distortions to competition between schemes if the Bank chose to become a member of one scheme, but could not join the others.

Footnote

Note that any card transactions issued in Australia for a domestic purchase should be subject to the Reserve Bank's interchange regulation. A foreign-domiciled entity issuing to Australian residents should do so in a form that ensures that domestic transactions are captured in interchange cap calculations, including via a BIN sponsorship arrangement if necessary. [1]