Access Regime for the ATM System: A Consultation Document – December 2008 3. The Reform Process to Date

3.1 The issues

For a number of years, both the Reserve Bank and many industry participants have seen a need to improve arrangements in the ATM system. In particular, two main issues with the current system have been identified: a lack of competitive pressure on interchange fees; and the access difficulties facing potential new participants.

3.1.1 Lack of competitive pressure on interchange fees

As noted above, an important feature of the current arrangements is the existence of bilateral interchange fees between the major participants. When the Bank studied these fees in 2000, it made two main observations.

The first was that these fees had remained fixed for many years at the levels agreed when the links were first established and that it was very difficult for existing ATM owners and card issuers to negotiate different rates. At the time of the Joint Study, the Bank was aware of only 15 changes to bilateral interchange fees since the mid 1980s, with many of these being a result of mergers between financial institutions.

The second observation was that although interchange fees were paid to ATM owners as recompense for providing the service, the fees bore little relationship to the cost of providing an ATM withdrawal. The Bank found that while interchange fees averaged around $1.00, the average cost of a cash withdrawal at an ATM was around $0.50 and there appeared to be no competitive pressures to reduce interchange fees or, by extension, foreign fees. The foreign fee being paid by cardholders for a cash withdrawal was, therefore, substantially more than the cost of providing the service and there seemed to be only limited competitive pressures to reduce that margin.

One reason why ATM interchange fees are not subject to the normal forces of competition is that bilateral interchange agreements are not easy to renegotiate. The potential loser out of any renegotiation naturally prefers the status quo so unless the potential winner is prepared to walk away from the agreement – which may be difficult if its cardholders have become used to the convenience of access to a wider ATM network – the interchange fee is likely to remain unchanged. Experience suggests that such ‘sticky’ interchange fees are a common feature of bilateral payment systems.

A second reason why normal competitive forces do not bear on ATM interchange fees is that cardholders have no infl uence over these fees. Although interchange fees have some bearing on foreign fees, customers face the same foreign fee from their financial institution regardless of the interchange fee paid. They therefore have no incentive to favour ATMs with lower interchange fees. This in turn means that there is no incentive for ATM owners to lower their interchange fees to promote use by cardholders. More generally, it implies that the relationship between interchange fees and the costs of providing ATM withdrawals is weak.

This weak relationship between interchange fees and costs raises a potentially important issue going forward. Because of the difficulties with renegotiating bilateral interchange fees noted above, these fees may remain at their current levels even if costs rise. As a result, there is a risk that many ATMs will become uneconomical over time. Indeed, the Bank estimated in 2007 that the average cost to an ATM owner of providing the service of a cash withdrawal was around $0.75, up from $0.50 in 2000.[1] As costs continue to rise, it is possible that the number of ATMs – particularly those operated by the independent deployers – will decline if interchange fees are not renegotiated. This would result in less convenience for consumers and reduced public benefit from the ATM system.

3.1.2 Access difficulties

The second issue with current arrangements is the difficulties faced by new entrants in gaining access to the system. These difficulties are similar to those identified by the Bank with respect to the EFTPOS system and which were addressed in a co-regulatory framework by the Bank and APCA in 2006.[2]

The bilateral arrangements in the ATM system make access complicated in three main ways. First, any potential new provider of ATM services that wants to be a direct player in the system must separately approach existing participants to negotiate agreements to establish connections. Each individual agreement is likely to be slightly different with respect to technical and business requirements, further complicating the negotiation process and increasing costs.

Second, existing direct connectors have little incentive to facilitate entry since the prospective entrant is likely to be a competitor in at least some aspects of the participant's business and, in the case of smaller new entrants, might offer existing participants only limited benefit in terms of network expansion. This means that participants may either refuse to negotiate or delay the process. Even if an in-principle agreement to connect is reached, there are no standardised procedures around testing or guidelines around timing. As a consequence, the incumbent may effectively hold up entry by delaying the technical work required. In addition, there is no standard cost of connection nor is the cost of connection known in advance, so new entrants may find it difficult to build a robust business case.

Third, in a bilateral system, negotiation of the interchange fee to be paid can also act as a barrier to entry. At its most prohibitive, the inability of a new entrant to negotiate an interchange fee would prevent it from participating in the system. But even if the other participants are prepared to negotiate such an agreement, the new entrant may find that the only interchange fee the incumbents are prepared to consider is at a level that would render the new entrant uncompetitive. If, for example, the owner of a new ATM network found that other participants were only prepared to pay it $0.50 for use of its ATMs by cardholders when other ATM owners were receiving $1.00, it would immediately be at a competitive disadvantage to other participants. Bilateral interchange fees therefore effectively act as a price of access.

3.2 Evolution of the reform proposal

In response to these issues, the industry, with the support of the Reserve Bank, has been working for a number of years on a reform package for the ATM system. Following the release of the Joint Study, the industry, with the assistance of the Reserve Bank, established a working group (the ATM Industry Steering Group) in 2001 to develop a reform proposal. The working group made slow progress but by early 2004 it had developed a proposal to submit to the ACCC for authorisation.

The centrepiece of the proposal was for ATM owners to recover their costs by charging a fee directly to the user of the ATM, rather than through an interchange fee. This is known as direct charging. There were, however, some carve-outs to assuage the concerns of the smaller institutions. In particular, smaller institutions were permitted to continue paying interchange fees within the existing sub-networks (Cashcard and CUSCAL).

This model was seen as a way to address the lack of competition over interchange fees. ATM owners would be able to compete on the basis of the charge to cardholders, and cardholders could, by their choices, exert competitive pressure on these charges. Furthermore, direct charging was seen as addressing the lack of incentive to provide ATMs in locations for which the cost is higher than the prevailing interchange fee, and as promoting widespread availability of ATMs.

Before the working group submitted its proposal to the ACCC for authorisation, however, the Australian Competition Tribunal overturned the ACCC's authorisation of a proposal to set EFTPOS interchange fees to zero. This led to concern among some members of the working group that seeking authorisation from the ACCC for zero interchange fees in the ATM network would not necessarily offer a timely or successful outcome and no proposal was submitted.

In June 2004, in response to these developments, the Reserve Bank called for submissions on whether it would be in the public interest to designate the ATM payment system with a view to achieving reform through the use of its regulatory powers. In response, industry participants expressed a strong view that industry could develop and implement the reforms without the need for regulation. At the same time, the majority of submissions supported the working group's proposal for the abolition of bilateral interchange fees and the ability of ATM owners to direct charge – although there were disagreements over the extent of the carve-out for smaller institutions. In September 2004, the Bank announced that it would not, at that time, designate the ATM system, allowing the industry more time to develop its proposal.

While industry participants indicated that an industry-based solution could be developed, progress effectively came to a halt in mid 2005, prompting the Chairman of the Australian Bankers' Association (ABA) Council to write to the Reserve Bank in July 2005 asking for guidance on the way forward. The Bank subsequently met with a wide range of participants in the ATM system to discuss their views on the reform process. Following these consultations, the Bank highlighted two aspects of the current arrangements in the ATM system that, in its view, should be addressed in further industry work: access to the ATM system and direct charging.[3]

On access, the Bank stated that it saw merit in the development of an access code to liberalise access arrangements in the ATM system. It also indicated that it saw merit in arrangements that ensured that negotiations over interchange fees could not be used in a way that adversely affected access or competition; it suggested that one way of achieving this would be to establish a common interchange fee for ATM transactions, as exists in many other countries. The Bank also indicated that ATM owners should be able to levy a direct charge at the ATM if they saw a case for doing so, and that accordingly, there was ‘a strong case for the removal of any technical or business restrictions that limited the ability of ATM owners to impose a direct charge’.

In response to the Bank's views, the Chairman of the ABA Council wrote to the Reserve Bank on 15 December 2006 setting out a proposal for reform. This proposal was then refined during a number of industry-wide meetings facilitated by the Bank and a final reform package was considered by the Payments System Board at its August 2007 meeting. This package involved:

  1. an industry-developed access code implemented through APCA;
  2. ATM owners having the freedom to charge cardholders directly for the use of an ATM;
  3. zero interchange fees between direct connectors, implemented through an access code;
  4. sub-networks being able to retain their multilateral interchange fees;
  5. an ability for institutions to enter into arrangements to rebate the direct charge for their customers at the time of the transaction; and
  6. a dispute resolution and disclosure regime.

Since May 2007, the industry has been working on both the technical and legal changes necessary to implement the proposal, which it has committed to introducing by 3 March 2009. This work has been proceeding broadly to timetable and is set out in progress reports compiled by APCA and posted on the Reserve Bank's website.[4]


Schwartz C, J Fabo, O Bailey and L Carter (2008), ‘Payment Costs in Australia’, in Payments System Review Conference, Proceedings of a Conference, Reserve Bank of Australia and Melbourne Business School, Sydney, pp 88–138. The fi gures are not directly comparable as the 2007 measure of average cost is more comprehensive. Nevertheless, a number of comparable component costs of a cash withdrawal do appear to have increased over the period; for example, cash handling, off-site rental and float costs. [1]

Reserve Bank of Australia (2006), Update on Payments System Issues, Media Release 2006-06, 13 September [2]

Reserve Bank of Australia (2005), Payments System Board – November 2005, Media Release 2005-13, 25 November. [3]

See <>. [4]