Consultation on Proposed Changes to the EFTPOS Interchange Fee Standard
In its conclusions to the review of the payments system reforms, released in September 2008, the Payments System Board indicated that it would be prepared to step back from interchange regulation if industry participants took sufficient steps to reduce the risk that interchange fees would rise in the absence of regulation. But the Board also indicated that if sufficient progress in addressing its concerns was not made by August 2009, interchange regulation would be retained. In this latter case, the Board proposed bringing the EFTPOS and scheme debit systems under the same regulatory regime by limiting the weighted average of interchange fees in all debit systems to between 5 cents paid to the issuer and 5 cents paid to the acquirer.
As announced in a Media Release on 26 August, the Board concluded that, although some progress had been made in addressing its concerns, it was not sufficient to warrant a decision to step back from interchange regulation. Given the progress that had been made, however, the Board decided to defer consideration of any further reduction in interchange fees, and instead to maintain the current regulations for the time being.
One implication of this decision was that, if the Board took no further action, the difference in regulatory treatment of the scheme debit and EFTPOS systems would remain until a final decision was made on whether to remove regulation or proceed with a further realignment of interchange fees. The Board was of the view that this difference may be detrimental to competition. It therefore indicated that it proposed to consult on the possibility of changing the interchange regulation on the EFTPOS system to be consistent with that currently applying to scheme debit. Such a change would be transitional and ensure that the EFTPOS system was not at a competitive disadvantage to the scheme debit systems while the Board reached a final decision on future regulation. This paper sets out the Board's approach and seeks submissions on the proposal.
Background
The Board has for many years been concerned about the nature of competition between EFTPOS and scheme debit. In April 2006, when the Board finalised its reforms to the EFTPOS and scheme debit systems, it noted that the interchange differentials existing at that time were putting EFTPOS at a competitive disadvantage to scheme debit. It also noted that interchange fees in these schemes were not subject to normal competitive pressure. It therefore concluded that efficiency and competition in the payments system would be promoted if the interchange differential were narrowed and the debit schemes competed on their merits rather than through interchange fees.[1]
Accordingly, the Board implemented standards that: reduced scheme debit interchange fees from around 40 cents on an average sized transaction to a weighted average of around 12 cents (paid to the issuer); and lowered the EFTPOS interchange fee for purchase transactions from around 20 cents per transaction to between 4 and 5 cents (paid to the acquirer). The effect of these changes together was that the interchange differential between scheme debit and EFTPOS was reduced from around 60 cents to less than 20 cents on an average sized transaction.
Despite the decline in the interchange differential, however, the Board was concerned that the remaining differential might still be hindering competition between the debit systems. The issue was therefore examined closely in the review of the payments system reforms. This confirmed the Board's view that the difference in regulation between the EFTPOS and scheme debit systems was putting the EFTPOS system at a competitive disadvantage. In particular, it was concluded that:
‘Under the current set of regulations, a transaction on a scheme debit card attracts, on average, around 17 cents more interchange revenue for an issuer than an equivalent transaction using the EFTPOS system. The Board had been concerned that, were this differential to persist, the EFTPOS system would be at a disadvantage to the scheme debit systems, not because of its merits but because issuers can earn more interchange revenue from a scheme debit transaction than for an EFTPOS transaction.’[2]
As noted, in the event that the Board decided to retain a modified form of interchange regulation, it planned to address this concern by aligning the regulatory regimens for the debit systems. But by delaying its decision, the Board has preserved, for the time being, the different regulatory regimes for the debit systems. The current consultation therefore seeks to address this issue until such time that the Board decides to remove regulation or move to a regime of lower, regulated interchange fees.
The Proposed Approach
The Board is considering applying the current regulatory framework for scheme debit – a cap on weighted-average interchange fees of 12 cents per transaction – to EFTPOS interchange fees. The reason for standardising the treatment in this way is that such a regime is more flexible than that currently applying to EFTPOS in which interchange fees on purchase transactions are restricted to be between 4 and 5 cents paid to the acquirer. Imposing a cap of 12 cents on EFTPOS interchange fees would provide more freedom for the EFTPOS scheme to set interchange fees – either multilaterally or bilaterally – than is currently the case.
The draft standard also proposes that the benchmark would apply differently to interchange fees depending on whether they are set multilaterally or bilaterally. If the EFTPOS scheme sets multilateral interchange fees then the cap would apply to the weighted average of those fees. If, however, EFTPOS interchange fees remain bilaterally negotiated, the actual fees would be required to be below the cap; this reflects the difficulty of calculating and enforcing a weighted-average limit for independently negotiated bilateral agreements. Finally, the standard would require the EFTPOS scheme to make information on any multilateral interchange fees publicly available and require information on bilateral fees to be reported to the Reserve Bank.
The framework proposed is more flexible than that proposed in the conclusions to the review, which was for interchange fees in the debit system to be within a band of 5 cents paid to the issuer and 5 cents paid to the acquirer. This is still a possible outcome. But until the Board finalises its approach to regulation, the proposed change will allow the debit systems to compete on a similar regulatory footing.
The flexibility for the EFTPOS system embodied in the above approach raises the issue of whether negotiation over interchange fees could again become a barrier to access to the system. One issue of concern to the Board when it was considering an EFTPOS interchange Standard in 2005 and 2006 was the possibility that bilateral negotiation over interchange fees could frustrate access by new participants, undermining the beneficial aspects of access reform. In particular, new entrants could find themselves unable to negotiate an interchange fee as favourable as the incumbents, immediately putting them at a competitive disadvantage. The Board therefore decided to place both a floor and a cap on bilateral interchange fees, to limit the ability of incumbents to offer unfavourable interchange fees to new entrants. The suggested approach here removes this restriction, raising the possibility that bilateral negotiations could again be used to limit access.
The changes to the governance of the EFTPOS system that are in train, however, offer the prospect that access will not be as difficult as in the past. Where centralised governance arrangements exist in other payment systems they have tended to encourage membership and minimise barriers to entry. The Board expects the newly formed EFTPOS body to act similarly and reflect this in its access criteria, including those for setting interchange fees. On balance, therefore, the Board is of the view that the additional flexibility for the EFTPOS system in setting interchange fees when combined with improved governance arrangements need not be detrimental to access. The Board welcomes comments on the likely effects of these proposed changes on access to the EFTPOS system.
Next Steps
Submissions on the proposed changes are invited by 23 October and should be sent to:
Head of Payments Policy
Payments Policy Department
Reserve Bank of Australia
GPO Box 3947
Sydney NSW 2001
Or
All submissions will be posted on the Reserve Bank's website and those making submissions will be provided with an opportunity to discuss their submission with Reserve Bank staff.