Reform of Australia’s Payments System:
Issues for the 2007/08 Review – May 2007
II. Background to the Review
The Financial System Inquiry
- The Reserve Bank’s current responsibilities in the payments system stem from the Financial System Inquiry findings and recommendations released in 1997. The Inquiry found that, while earlier deregulation had improved competition and efficiency, further gains were possible. To that end, it recommended the establishment of the Payments System Board at the Reserve Bank with responsibility and powers to promote greater competition, efficiency and stability in the payments system. The Government accepted those recommendations and established the Payments System Board in 1998.
The Payments System Board
The early work of the Board involved extensive data
collection and analysis, with that work focussing
on the following four broad areas:
- the effect of interchange fees on price signals in the payments system;
- the effect of restrictions placed on participants (most notably merchants) in payment systems;
- access arrangements for potential providers of payment services; and
- the availability of information about the pricing and operation of different payment systems.
- This early work culminated in the publication (with the Australian Competition and Consumer Commission (ACCC)) of Debit and Credit Card Schemes in Australia: A Study of Interchange Fees and Access (the Joint Study) in October 2000.4
- The Joint Study concluded that: the relative prices to cardholders for card payments did not generally reflect relative costs; restrictions on merchants’ ability to charge for credit card transactions impeded competition and efficiency; access arrangements for a number of payment systems were more restrictive than necessary to ensure the stability of those systems; and important information on the operation of payment systems was not always readily available.
- In addressing these issues, the Bank has sought to achieve change through working co-operatively with industry, viewing regulation as a last resort. This is consistent with the Government’s intention that the Payments System Board should adopt a co-regulatory model, with industry self-regulation to be considered before explicit regulation is imposed. In a number of cases, voluntary reform has proved possible, while in others it has not, and the Bank has used its regulatory powers.
- Although the individual reforms have been implemented at different times, partly reflecting the desire to pursue voluntary processes wherever possible, the Bank considers the various reforms to be a package. The Bank has consistently emphasised a whole-of-system approach with, for example, reforms to interchange fees considered in the context of the impact of these fees on the relative prices for various payment services.
- While this is the first formal review, the Bank’s reforms have been subject to considerable scrutiny over the past few years. In 2002, MasterCard and Visa challenged the legality of the Bank’s regulatory actions with respect to credit cards in the Federal Court and, in 2004, a group of merchants mounted a similar challenge to the designation of the EFTPOS system. Both challenges to the Bank’s jurisdiction and regulatory processes were dismissed on all counts.5
- In May 2006, the reforms were also considered in a 1½ day special hearing by the House of Representatives Standing Committee on Economics, Finance and Public Administration. This hearing took submissions from the Reserve Bank, industry participants and academics. The Committee’s report recognised that there are a wide range of views about the reforms, but concluded that ‘the benefits of the reform, at this point, outweigh any alleged disadvantages’.6
- In addition, a number of interested parties and academics have published assessments of the reforms.7 The Payments System Board also regularly reports on the reforms and their effects through its Annual Reports.
- This work was also, in part, a response to two specific recommendations of the Financial System Inquiry (1997): that ‘The PSB [Payments System Board] should consider whether interchange pricing arrangements are appropriate for credit and debit cards. A review of arrangements by the ACCC is warranted where such arrangements are priced contrary to efficiency principles.’ (Recommendation 67); and that ‘Access to clearing systems should be widened to include all institutions fulfilling objective criteria set by the regulator, the PSB.’ (Recommendation 69).
- See Federal Court of Australia (2003) and Federal Court of Australia (2005).
- House of Representatives Standing Committee on Economics, Finance and Public Administration (2006), p.iv.
- See, for example, Australian Bankers’ Association (2005), Chang, Evans and Garcia Swartz (2005), Citigroup (2006a, 2006b), Gans (2006, 2007) and Visa International (2005).