Access Regime for the ATM System: A Consultation Document – December 2008 4. Why is Regulation Needed?

Notwithstanding the substantial progress on implementing the reforms, the industry has recently come to the view that the most effective way of providing legal certainty to the process is for the Reserve Bank to designate the ATM system and set interchange fees to zero. This is despite earlier arguments that the industry itself could address the relevant issues.

The main alternative to regulation by the Bank is for industry participants to apply to the ACCC for authorisation of the arrangements. This was the route taken by the industry when it created the clearing systems for APCA. While some industry participants have supported this approach, this support has not been sufficiently widespread for an application to proceed.

The Board has strongly encouraged industry participants to find an industry-based solution to reform of the ATM industry. While it welcomes the significant progress that has been made over the past year or so, it is disappointed that after such a long process the industry has not been able to find a solution that does not involve designation of the ATM system and formal regulation by the Bank. Notwithstanding this, the Board is of the view that the package of reforms developed by the industry will improve competition and efficiency in the ATM system and is therefore proposing to provide legal certainty to some aspects of that package by introducing regulations requiring that no interchange fees be paid between direct participants in the system and improving access arrangements.

Although the Bank has in the past set standards to regulate interchange fees, in the case of ATM interchange fees the Board is of the view that the most appropriate regulation to give effect to zero interchange fees is an access regime. As discussed in Section 3.1.2, because interchange fees are set bilaterally in the ATM system, agreement on a fee is a condition of access for new entrants. Inability to agree on a bilateral interchange fee, or one at least as favourable as other participants, can effectively act as a barrier to entry. Setting bilateral interchange fees to zero is, therefore, standardising a price of access.

As discussed in Section 3.1.2, another of the complications for a new entrant to the ATM system is that if it wants to participate directly, it has to establish a number of direct connections with other participants. This includes negotiation with each participant on the cost of any such connection – there is no once-off, standardised entry fee. Participants could use such negotiations to limit competition by charging a very high price to establish a connection. By capping such a cost, an access regime can provide some certainty to current participants and new entrants, while ensuring that the cost to new entrants does not act as a barrier to entry.

The Payment Systems (Regulation) Act 1998 sets out the criteria that the Bank must take into account when imposing an access regime on a payment system. Specifically, the Act states that:

The access regime imposed must be one that the Reserve Bank considers appropriate, having regard to:

  1. whether imposing the access regime would be in the public interest; and
  2. the interests of 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.

The Act also sets out the matters that the Bank is required to take into account in determining if a particular action is in the public interest. Specifically, the Bank is required:

to 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 to the financial system.

The Board is of the view that the combination of an Access Code implemented by the industry and the proposed Access Regime is in the public interest. It will provide a number of benefits and address the shortcomings in competition identified in Section 3.

First, by replacing interchange fees with direct charges by the ATM owner, stronger competitive forces will be able to be brought to bear on fees paid by consumers. Unlike interchange fees, on which normal competitive forces could not act, consumers will be able to directly observe direct charges and, if they are too high, choose to withdraw cash elsewhere. ATM owners will therefore face competitive pressures when setting their fees.

Second, by setting interchange fees to zero and capping the cost of connection, the proposed Access Regime will make access less complicated for new entrants, particularly when combined with the industry Access Code, which allows for a clear and enforceable timetable for access. Access has long been an issue for the ATM system and, although the reforms will impose costs on current participants, this is a necessary feature of opening up access in a system with a bilateral architecture.

Third, the ability to direct charge will help ensure that ATMs continue to be widely available, including in high-cost locations, and that as costs rise over time, ATM numbers will not decline simply due to an inability to renegotiate interchange fees. Over recent years, there has been a substantial rise in the number of ATMs, primarily driven by independent ATM owners. This has increased the convenience and reach of the ATM network, offering substantial benefits to Australian consumers. These reforms, of which the proposed Access Regime is an integral part, will help ensure that these benefits are maintained.

Fourth, the reforms will result in fees for cash withdrawals being more transparent to customers. The direct charge will be disclosed at the time of the transaction and the cardholder will be given an opportunity to cancel the transaction at no cost. Furthermore, with interchange fees at zero, card issuers will no longer have to pay a fee to the ATM owner and the Board is therefore of the view that foreign fees should be eliminated, particularly given that per-transaction charges do not currently apply to most transaction accounts in Australia.

While the proposed Access Regime and Access Code will liberalise entry to the ATM system, there will be no diminution in the safety of the system for participants, nor will risk in the financial system rise. The requirements imposed on access seekers by the proposed Access Code, and in particular the requirement that access seekers join the Consumer Electronic Clearing System and meet the associated technical and security requirements, will ensure that the safety and security of the ATM system in Australia is maintained.

Although the proposed Access Regime will set bilateral interchange fees between direct participants to zero, it will still permit fees to be paid in two circumstances. The first is within sub-networks that have multilateral interchange fees, and the second is bespoke agreements between small financial institutions and large networks. Both of these arrangements allow small financial institutions to compete more effectively with large financial institutions in offering a widespread network of ATMs and are therefore pro-competitive. This issue, along with detail on how the proposed Access Regime will allow for these arrangements, is discussed in Section 5.

While the Board is of the view that the proposed Access Regime will help improve competition, it nevertheless has ongoing concerns about access arrangements in Australian bilateral payment systems, including the ATM system.[1] In particular, while the proposed Access Code and Access Regime address some concerns such as timeframes and cost of access, they do not address the more general concern that, as a result of the bilateral architecture, new entrants need to establish multiple connections and business relationships. The Board is therefore of the view that further reform is needed. In particular, the Board would like to see, as a matter of priority, the industry introduce alternative access arrangements which would allow entry without the need to establish a multitude of bilateral connections. This issue is discussed in Section 6.


These concerns were also raised in the conclusions of the review of the card payment system reforms. [1]