Reform of the EFTPOS and Visa Debit
Systems in Australia:
Final Reforms and Regulation Impact Statement – April 2006
9. Recommended Option
A central issue in the Bank's deliberations has been the relative competitive positions of the EFTPOS and scheme debit systems. As noted above, the Bank is concerned that, should the current arrangements remain in place, the EFTPOS system will be at a distinct competitive disadvantage because of the honour all cards rule and the configuration of interchange fees.
This concern is supported by experience in the United States, where debit card systems with the interchange fee most favourable to issuers have gained market share. Over the 1990s, the market share of scheme debit transactions (which attracted relatively high interchange fees) rose from 45 per cent to over 60 per cent, a trend that was arrested only when the gap in the interchange fees was compressed. In Australia, one major bank has recently introduced a Visa Debit product and MasterCard has recently introduced a debit card.
This concern about the competitive position of the various debit card systems does not reflect a view that the EFTPOS system has some intrinsic merit and thus should be protected. Nor does it reflect a view that simply because the EFTPOS system has lower resource costs, it should necessarily be encouraged. Rather, the Bank's view is that efficiency of the overall payments system would be promoted by the various payment systems competing on their merits, rather than through interchange fees that themselves are not subject to normal competitive pressures.
The proposed interchange Standards bring the interchange fees closer together, although there will still be a difference. There is a possibility that this difference may be narrower than that indicated by the Standards, as the removal of the honour all cards rule may put downward pressure on the interchange fees in the scheme debit systems, as the schemes seek to ensure merchant acceptance. If this were to occur, actual interchange fees in the scheme debit systems may be lower than the cap imposed in the Standard. Whether or not this occurs will depend upon negotiations involving merchants, the card schemes, issuers and acquirers.
It is difficult to predict exactly how the two systems would evolve under the various options. However, in the Bank's view, a narrowing of the difference in interchange fees in the two types of system makes it more likely that decisions by issuers and acquirers about the systems and their use will be made on the basis of their relative costs and benefits to the various parties, rather than driven by interchange fees. Similarly, cardholder decisions about whether to make a payment through the EFTPOS system or the scheme debit system will more closely reflect the relative costs and benefits of the systems, rather than interchange fees.
In reaching its decisions, the Bank also considered the likely impact of the reforms on the relative use of the EFTPOS system and the credit card system. In the Bank's view, the combination of the previous reduction in credit card interchange fees and the proposed reduction in EFTPOS interchange fees would promote more soundly based competition in the payments system and likely lead to greater use of EFTPOS than would otherwise be the case. As noted above, this is not viewed as an objective in itself, but rather a reflection of the more appropriate price signals facing cardholders.
Another issue the Bank considered is the possibility that investment in the payments system would be adversely affected by these reforms. In submissions, merchants argued that reducing the EFTPOS interchange fee would limit their scope to recover their investment in PIN pads and associated infrastructure and, as a result, they might invest less in the system. Similarly, Visa has argued that a regulated reduction in the credit card or scheme debit interchange fee would reduce investment in those systems.
The Bank was not persuaded by either of these arguments. Both are based on the premise that interchange fees are a source of revenue to the system, rather than a means to rebalance revenues within the system and to affect the extent to which cardholders and merchants pay for payment services. The fact that, in payment systems overseas, investment occurs in both debit and credit card systems under a wide range of interchange fees suggests that there is no reason to expect that a change in interchange fees should necessarily deter investment.
Another argument raised in consultation was that the Access Regime for the EFTPOS system might inhibit investment as it allows new competitors to enter at ‘subsidised prices' and raises the possibility of similar regulation in the future. A related argument was that the Bank's intervention, including its general interest in the architecture of the system, was creating uncertainty and thus reducing investment. The Bank does not accept these arguments. Allowing access on the terms set out in the Access Regime and Access Code is unlikely to affect the incentive to invest and the Bank has made it clear that it has no plans to impose technologies on participants in the payments system.
Another issue considered by the Bank was the likely effects of lower interchange fees in the Visa Debit system on credit card usage. As noted earlier, one effect of lowering the Visa Debit interchange fee by the amount proposed is that issuers may have an incentive to encourage use of credit cards over scheme debit cards. One result may be a switch from scheme debit to credit cards. While the Bank recognised this possibility, it is of the view that any such substitution cannot be considered in isolation, and has to be considered in conjunction with the likely substitution between types of debit cards that would result in the absence of reform. Moreover, the Bank took account of the fact that the resource costs involved in a credit card and scheme debit card transaction were broadly equivalent.
On the issue of the competitive position of Visa Debit issuers (which tend to be relatively small) the Bank recognised that a reduction in Visa Debit interchange fees would reduce their revenue flows, and may lead to some adjustment in product pricing by these institutions. It also views it as unlikely that banks providing acquiring services to merchants would cease acquiring Visa Debit cards. In addition, it sees no reason that distortions in the payments system should be sustained simply to maintain the competitive positions of various institutions.
Given the considerations discussed above, the Bank has decided to proceed with Option I – the implementation of all four elements of the package of reforms. A decision to implement the access reforms alone (Option II(a)) or implement all elements of the package with the exception of the EFTPOS interchange Standard (Option II(b)) would not adequately address the Bank's concerns regarding interchange fees. Similarly, leaving the honour all cards rule in place (Option II(c)) would remove any possibility for downward pressure on interchange fees in the scheme debit systems that might result if merchants had the option of deciding not to accept scheme debit cards.
The following section discusses various options considered by the Bank for modifications to the proposed Standards and Access Regime.