An Access Regime for the ATM System – February 2009 4. The Draft Access Regime

The new arrangements for the ATM industry are the outcome of many years of work by the industry and the Reserve Bank. With the broad details of the package being developed by industry participants in consultation with the Bank it had been hoped that the reforms could be implemented entirely by the industry, without the need for regulation. This, however, has not proved possible. While the industry, under the auspices of APCA, has been able to finalise an Access Code that addresses the rights and obligations of access seekers and access providers, and has developed and implemented the technical arrangements necessary for direct charging, it came to the view in late 2008 that the most effective way of providing legal certainty to two elements of the package was through regulation by the Bank. These elements relate to the arrangements for setting interchange fees to zero and to the establishment of a cap on the cost of connection to the ATM system. Given that both these elements affect the ease of access for potential participants to the ATM system, the Bank is implementing the necessary regulations through an access regime (rather than a standard) under Section 12 of the Payment Systems (Regulation) Act 1998.

A Draft Access Regime was released by the Bank for consultation on 10 December 2008. This draft Regime addressed three main features of the ATM system: the cap on connection charges; the establishment of zero interchange fees (with some exceptions); and the transparency of arrangements under which interchange fees continue to be paid.

4.1 Connection charges

The connection charge is the charge that an incumbent may apply to a new direct connector in the ATM system in order to establish and test a connection that will allow the new entrant to exchange transaction messages and clear and settle ATM transactions with the incumbent. A new entrant wishing to participate fully in the ATM system would need to establish direct connections and pay fees to all existing direct connectors. The cap to be set under the Access Regime seeks to limit that cost to that of an efficient provider of access and also provide some certainty for potential entrants.

The proposed cap of $76,700 included in the Draft Access Regime is the lowest cost of providing a direct connection estimated in a survey of anticipated direct connection costs undertaken by APCA in mid 2008. An alternative suggested by some participants was to use the average cost of connection from the survey, which would be around $200,000. The Bank's choice of the lower cap reflected a balancing of the interests of both current and prospective participants as well as being the methodology adopted for setting a cap on the cost of EFTPOS connections in the EFTPOS Access Regime. While this means that some existing participants would not be able to cover fully the cost to them of establishing a new connection, it also means that new entrants wishing to establish multiple connections would not be required to meet additional costs associated with the complexity or inflexibility of some participants’ systems. At the same time, an incentive would be provided to existing direct connectors to adopt more efficient systems.

The Draft Access Regime did not provide for a review of the direct connection cap. This reflected the Bank's view that the network architecture and associated access arrangements will need to change in the period ahead to allow new entrants to access the system with a single connection and minimal bilateral negotiation. A move to access arrangements of this type should largely eliminate the need for bilateral connection charges.

The Consultation Document also noted that the Bank was of the view that no fee should be charged for the establishment of a direct clearing/settlement arrangement.This is an arrangement that allows two parties that are indirectly connected via a switch to directly clear and settle ATM transactions between them. The Bank views clearing and settlement as fundamental banking business and, provided financial institutions meet appropriate objective prudential standards, they should have the right to clear and settle directly with other financial institutions, with each institution meeting its own costs (including any fees for membership of the access company and the clearing system for ATM transactions).

4.2 Interchange fees

The Draft Access Regime would eliminate interchange fees between the direct connectors that form the core of the ATM system. However, the Bank has been conscious that interchange-like fees can be pro-competitive in some circumstances where they apply outside the group of direct connectors. In particular, fees which allow small institutions access to a larger network of ATMs than they would be able to provide themselves, free of direct charges, may help those institutions to compete on a more equal footing with the larger players in the industry. To that end, the Draft Access Regime allowed interchange fees to be paid between members of a sub-network – in line with the original industry proposal. The Draft Access Regime also allowed institutions to establish one-way arrangements whereby they pay a per-transaction fee to an ATM owner so that their customers can access those ATMs without a direct charge being levied. Under a one-way arrangement, those institutions could not provide reciprocal arrangements to the ATM owner. A single one-way arrangement is sufficient for a small institution to gain access to a network of ATMs of a similar size to the major banks, free of direct charges. The Draft Access Regime therefore limited an institution to a single one-way arrangement to access another party's ATMs. An important consideration in setting this restriction was the desire to avoid a renewed proliferation of bilateral interchange fees.

In the Bank's view, the alternative of not allowing interchange fees in any circumstances would place small financial institutions at a significant competitive disadvantage since customers would be attracted to the larger banks’ ability to offer a wide network of ATMs to their customers free of direct charges. Smaller institutions could not hope to replicate those networks.

4.3 Transparency

The above arrangements for allowing interchange fees in limited circumstances were supported in the Draft Regime by transparency provisions. In order to ensure that access arrangements for sub-networks are open and transparent, the Draft Regime required any multilateral interchange fee within a sub-network to be publicly disclosed and the rules governing access to that sub-network to also be published. In addition, it required one-way arrangements to be reported to the Reserve Bank shortly after the introduction of the Regime or within 30 days of the establishment of a new arrangement. This would allow the Bank to monitor the use of such agreements and compliance with the Regime. The proposed transparency arrangements should impose minimal compliance costs on participants.