Proposed Variation to the MasterCard and Visa Access Regimes: Consultation Document – December 2013 5. Consultation

The Consultation Process

The Bank released Review of Card System Access Regimes: A Consultation Document, in May 2013. The Bank sought the views of interested parties on three policy options: varying the Access Regimes to expand eligibility to a wider range of entities, revoking the Access Regimes and maintaining the status quo. The Bank also sought views on a number of questions related to the risks faced by card schemes and their members, how they should be addressed and the shape and potential effect of possible revised access arrangements (see Attachment 1 for the questions posed).

In total, 16 submissions were received, including from financial institutions, industry groups, potential members and the card schemes. Non-confidential submissions are published on the Reserve Bank's website. Most parties took up the invitation to discuss their submissions with the Bank.

The main points raised in these submissions are discussed below.

Views Expressed During Consultation

Views on current access arrangements

The majority of submissions supported either varying or revoking access regulation, with a range of views regarding the preferred approach. These differed in terms of the role of prudential supervision of card scheme participants and the capacity of the schemes to assess applicants' eligibility for membership in an objective manner. By contrast, incumbent scheme participants and industry associations (APCA and the ABA) expressed a preference for maintaining the status quo, with entry restricted to ADIs as currently.

Those supporting the status quo argued that maintaining APRA supervision was important – to give each participant some comfort on the financial condition of other participants and to maintain the confidence in and stability of the system. They argued that APRA supervision provides clarity, transparency, objectivity and regulatory neutrality. One bank, for instance, stated that prudential supervision represents an ‘efficient and non-discriminatory’ way to manage risks and reduces the need for ‘overlapping screening’ by the schemes. Other parties argued that the regulatory approach should not be changed just because prospective participants wish to avoid what they perceive as onerous requirements by APRA.

Most of the remaining submissions, however, agreed that the Access Regimes in their current form are not fulfilling their objectives and that they may be hindering competition by creating unnecessarily high barriers to entry. A number of smaller entities wishing to gain access to the MasterCard and Visa systems highlighted that the current regime is more onerous than necessary for companies with business models that pose little risk. Several also said that they had been discouraged from applying for an SCCI authority by the prudential (and in particular capital) requirements that apply to ADIs.

Options for reform

Among those favouring a change in the access framework, some favoured the removal of regulation – with access left entirely in the hands of the schemes – while most preferred continued, but somewhat more flexible, regulation.

A small number of submissions supported a complete removal of the regimes. They argued that there have been sufficient changes in the market to allow this option, with the schemes now more willing to accept a wider range of members than at the time when the existing arrangements were put in place. A retailer with a significant payments presence contrasted the restrictive entry requirements for the MasterCard and Visa schemes with the flexibility shown by both APCA and ePAL, in which the major retailers now participate. One potential entrant argued that the schemes enforce rigorous requirements for scheme membership which appropriately balance a desire for the broadest possible membership with the need to exclude those that are not ‘equipped, experienced or adequately funded or collateralised to participate’. However, even among those arguing for a complete removal of access regulation, some argued for the continued involvement of the Reserve Bank, for instance through scrutiny of scheme rules to ensure there are no undue barriers to entry. Some saw the potential for voluntary undertakings by the schemes in relation to some elements of access, although MasterCard opposed this.

A number of submissions (including both incumbent and prospective participants) questioned the schemes' ability to manage entry in a non-discriminatory way that appropriately managed risks. On one hand, some argued that entry would not be sufficiently restrictive because the schemes' commercial interests in increasing participation would dominate their interest in adequately managing risks. Others however suggested that entry might remain too restrictive if left in the hands of the schemes, for instance pointing to experiences in other jurisdictions. These parties argued that there remained a role for some form of regulatory oversight or supervision that was fair and non-discriminatory, yet more flexible than current arrangements.

A relatively common view, particularly among prospective participants, was that prudential supervision should continue to play a role, but should incorporate some additional flexibility. For instance, some commented that their experience with APRA had been open and fair, but constrained by a ‘strict and prescriptive’ SCCI framework. A number of different elements of the current framework were noted as causing concern for potential entrants, including capital requirements, shareholder restrictions and reporting requirements. Accordingly, some parties argued that access could be expanded by targeted changes to particularly onerous aspects of that framework.

A common concern was what was viewed as a ‘one size fits all’ approach to supervision, which does not recognise differences in the risks presented by different business models. At a broad level, some parties argued that authorisation requirements and prudential standards applicable to SCCIs are more onerous than warranted by the limited business they undertake. In addition, a number of players pointed to significant differences between the risk profiles of different types of SCCI business, which argued for more nuanced supervision.

In this context, many parties referred to the differences in issuing and acquiring risk, arguing that they warranted a different supervisory approach. An option cited by several was for the regulatory framework to allow for a new category of ‘acquirer-only’ businesses that are supervised, but not required to be ADIs. An alternative suggestion was to retain prudential supervision for issuers (possibly at a reduced level), but for acquirers to be supervised via an industry body with an accompanying code of practice.

A focus of some submissions and discussions was the specific case of entities that are already regulated in another jurisdiction. One entity argued that it is already supervised on the basis of its global operations by an appropriate supervisor and should have significantly reduced regulation in Australia.

Views of the schemes

MasterCard argued that concerns over the financial safety of the payments system if access was not regulated were largely unfounded. The scheme claimed that stability and reliability of the system were as important for it as for the Reserve Bank, and that the scheme was proactive in ensuring the safety of the payment system. It therefore argued that the Access Regimes had created distortions, unnecessarily increased the costs to some entities wishing to join, and prevented some others from joining entirely. Accordingly, it considered that the regimes should be removed. It noted that seeking to achieve the same ends via voluntary undertakings was inappropriate, arguing that if regulation of network access were to continue, it should occur via a public, transparent process.

Visa was also in favour of removal of the Access Regimes, but believed that some form of minimum publicly-set and overseen regulatory standard should remain. The scheme therefore supported revocation of the Access Regimes but retention of the SCCI class of APRA-regulated institutions. It argued that this would ‘enhance competition while maintaining an appropriate screening and monitoring device for new entrants into card systems’. It nonetheless supported the notion that lower minimum standards could be applied to SCCIs. The scheme also indicated that it was prepared to offer an undertaking to the Reserve Bank setting out the criteria it would apply to membership assessment.

Other issues

ADI sponsorship and partnerships

A number of incumbent participants suggested that prospective entrants that found regulatory requirements too onerous had the option of undertaking a partnership or a ‘BIN sponsorship’ arrangement with an existing participant. In the latter case, the incumbent would allow the new entrant to use card or acquirer numbers allocated to the incumbent. As the member of the system, the incumbent would take responsibility for the performance of obligations related to those BINs.

In contrast, some prospective participants argued that these arrangements could constrain the sponsored party's ability to compete and innovate.

A level playing field

Some parties noted concerns that allowing some entities to participate in the scheme with a lower standard of supervision (or no supervision) would provide those players with a competitive advantage. Others pointed out that a full service bank generally has other competitive advantages over more specialised players, such as the capacity to bundle a number of services together in its customer relationship.

Reserve Bank participation

A small number of submissions addressed the merits of the Reserve Bank becoming a participant in the MasterCard and Visa systems. The main objection was that it would be inappropriate for the Reserve Bank to compete with private sector entities for provision of government banking services. A participant in the schemes noted in consultation that the ability of the Reserve Bank to participate in one card scheme (eftpos) but not others appeared to be an anomaly.