Review of the Regulatory Framework for the eftpos System: Consultation on Designation – March 2012 3. Reviewing the Designation of the eftpos System
The Need to Review eftpos Designation
The Bank considers that a review of the designation of the eftpos system is required before a consultation on the entirety of the regulatory framework for the eftpos system can be undertake.
Under the Payment Systems (Regulation) Act 1998, the Reserve Bank must designate a payment system, if it considers it to be in the public interest, before it can impose standards or an access regime. The current designation defines the eftpos system in the following way:
The EFTPOS system is the electronic funds transfer at point of sale payment system described in clause 1 of the CECS manual for the Consumer Electronic Clearing System and governed by the rules of that system set out in that manual, supplemented or modified by contracts, arrangements or understandings between individual issuers, acquirers and merchant principals (as that latter term is defined in the CECS manual) in the system. This system allows cardholders to use a debit card to pay for goods or services or withdraw cash at the point of sale.[4]
Since its establishment, ePAL has taken over most of the responsibilities for coordinating technical and other requirements for the eftpos system that had previously been managed by APCA, and has set up scheme and other rules for this purpose. As a result, a number of references to the eftpos system have been removed from APCA's CECS manual and replaced with reference to ePAL's rules. Some of these references, however, formed an important part of the definition of the eftpos system used in the eftpos designation. Hence, the eftpos designation no longer clearly or accurately defines the eftpos system.
More broadly, there is a case for updating the definition of the eftpos system to take into account industry developments, including the establishment of ePAL. The current designation relies on a definition intended to describe a system without a central governing scheme; that is, one that is primarily regulated by bilateral contracts between participants, with clearing and settlement arrangements set out in the CECS manual maintained by APCA. It may now be appropriate to update that definition to acknowledge the role of ePAL in the eftpos system.
While there is a stand-alone case for reconsidering the form of the designation of the eftpos system, in this case it is being considered as the first step in a broader review of the regulatory framework for the eftpos system. To the extent that the review may result in changes to the current interchange fees Standard or eftpos Access Regime, a formal consultation and gazettal of draft variations will be required. In order for such consultation to occur, there must be clarity about what is included in the system to which a varied interchange fees Standard or varied Access Regime applies. Therefore,the Bank is consulting now on the form of the designation so that it is in a position to put a new designation in place, if it determines it is in the public interest to do so, before it enters a wider consultation on the regulatory framework itself.
Process for Establishing a New Designation
While the Bank has explicit powers in the Payment Systems (Regulation) Act to vary access regimes and standards, subject to certain requirements, the Act does not provide the Bank with the power to vary a designation. Therefore, it is not possible for the Bank to simply vary the existing designation to take account of industry developments. The Bank does, however, have the power to designate a payment system or to revoke a designation of a payment system, provided that the designation or revocation is in the public interest. Therefore, variation of the designation of the eftpos system can be achieved only by revoking the existing designation and imposing a new designation in its place.
In determining whether the revocation of the existing designation and imposition of a new designation for the eftpos system is in the public interest, the Bank is to have regard to the desirability of payment systems:
- being (in its opinion):
- financially safe for use by participants; and
- efficient; and
- competitive; and
- not (in its opinion) materially causing or contributing to increased risk to the financial system.[5]
The Bank may also have regard to other matters relevant to assessing the public interest of imposing or revoking a designation.
While designation does not of itself create rights or obligations for a payment system or its participants, it is the first step in bringing a payments system under the Bank's regulatory control. The Bank may then impose standards or an access regime on a designated system where it determines that it is in the public interest to do so. As discussed above, a new designation would need to be in place prior to consultation on possible changes to the eftpos Access Regime and interchange fees Standard, to allow informed consultation on the effect of any proposed changes.[6]
Options
Given the changes that have occurred in the eftpos system, the Board is considering two options regarding the definition of the eftpos system to be adopted in a new designation should it be required to support future regulation of the system. Some of the issues that will be considered as part of a later consultation regarding future regulation are set out in Section 4; interested parties may find these issues relevant in considering the two options for defining the eftpos system set out below.
Option 1: A definition based on ePAL membership and rules
Under this option, the designation would rely on a definition of the eftpos system based on ePAL's rules and cover participants that are members of ePAL. Such a definition would clearly define the eftpos system and recognise the central role that ePAL has taken in the eftpos system. It would be similar to the form of the designations for the MasterCard and Visa credit card systems, and the Visa Debit system.
However, a definition along these lines may be restrictive. Some participants may not seek ePAL membership but may still wish to conduct eftpos transactions (given the history of being able to do so under bilateral agreements). The form of the designation may be critical to the position of these entities in the system.
Option 2: A broader definition
A second option is to adopt a broader definition of the eftpos system in order to capture those parts of the system that lie outside the scope of ePAL's membership and scheme rules. This might involve making reference to ePAL's scheme rules while also including other arrangements involving non-members or arrangements not covered by the scheme rules.
A definition along these lines would be more inclusive, although any definition under this option would still need to clearly define the scope of the eftpos system. More generally, taking this approach would be acknowledging, from a regulatory perspective, that the eftpos system can extend beyond the bounds of ePAL. This is not the case in the Bank's regulation of the MasterCard and Visa systems. The Board is therefore interested in any views on this possibility.
Further Considerations
The Payments System Board is seeking views on the appropriate approach to defining the eftpos system as set out in the two options above. These options are relevant should the Bank consider that ongoing designation is in the public interest. As noted above, a new designation would need to be in place before consultation on any specific changes to the interchange fees Standard and eftpos Access Regime could be undertaken. However, as discussed in the next section, one possible outcome of the review of the broader regulatory framework is that regulation of the eftpos system may no longer be required. Were this approach preferred, consideration would be given to revoking the current designation of the eftpos system at the appropriate time, without replacement.