Media Release Payments System Reforms

Following a meeting of the Payments System Board on 28 March 2006 the Reserve Bank has today released a package of reforms to the EFTPOS and scheme debit systems. It has also revoked the designation of the Bankcard system, which is in the process of winding up, and determined that the Payment Systems (Regulation) Act 1998 does not apply to a number of classes of purchased payment facilities.

Debit Card Systems

The reforms to the debit card systems have been developed over a number of years and follow extensive consultation with a wide range of interested parties. Broadly, the reforms involve:

• the adoption of a cap and floor on interchange fees in the EFTPOS system, with the result that these fees, which are paid by financial institutions that issue EFTPOS cards, are likely to fall to around 4 to 5 cents per transaction, from an average of around 20 cents currently;
• the adoption of a cap on the weighted-average interchange fee in the Visa Debit system, with the result that interchange fees in the Visa Debit system, which are paid to financial institutions that issue Visa Debit cards, are likely to fall to an average of around 15 cents per transaction, from around 40 cents currently;
• requiring the Visa system to remove the restrictions on merchants that require them to accept Visa Debit cards if they accept Visa credit cards, and that prohibit merchants from imposing a surcharge on Visa Debit transactions; and
• the adoption of a cap on the price that existing participants in the EFTPOS system can charge new and existing participants for establishing a connection.

These reforms and their rationale are discussed in detail in the attached Regulation Impact Statement. The reforms are substantially the same as those released in the February and December 2005 Consultation Documents, although some changes have been made, reflecting views put through the consultation process.

Interchange Fees

For some years, the Reserve Bank has been concerned that payment patterns in Australia were being distorted by interchange fees, which themselves are not subject to the normal forces of competition. A significant step in promoting a more efficient system was taken in 2003, when interchange fees in the credit card system were reduced and the no-surcharge rule was removed. The reforms to the debit card systems announced today are the next step in this process.

As the Bank has previously noted, the current structure of interchange fees creates a strong incentive for financial institutions to promote the Visa Debit system over the EFTPOS system, despite the EFTPOS system having lower operating costs. If a cardholder makes a payment with an EFTPOS card, the institution that issued the card must pay around 20 cents to the merchant's bank. In contrast, if the payment is made with a Visa Debit card, the institution that issued the card receives around 40 cents on average. This difference in fees is despite both forms of payment accessing a deposit account.

The reforms announced today will narrow the current 60 cents difference in interchange fees to around 20 cents. In the Bank's view, if the current arrangements were to remain unchanged, it is highly likely that the Visa Debit system would grow at the expense of the EFTPOS system, simply because of the structure of interchange fees. By significantly narrowing the difference in these fees, these reforms will promote competition between the schemes based on the benefits that they offer to cardholders and merchants, rather than on fees that are not subject to normal competitive pressures.

The main difference between the interchange Standards released today and the Bank's earlier proposals is that EFTPOS transactions involving the provision of cash by merchants to cardholders will not be subject to the benchmark cap set out in the EFTPOS Standard on interchange fees. At this stage, the Bank is not convinced that the public interest would be served by regulating these fees, particularly when interchange fees for cash withdrawals through ATMs are not subject to regulation. As a result, issuers and acquirers will be able to negotiate a separate interchange fee for EFTPOS transactions involving the provision of cash.

At the time that the reforms to the Visa Debit system were being developed, MasterCard did not offer a debit product in Australia. MasterCard has, however, subsequently introduced a debit card and has indicated to the Bank that it would voluntarily comply with any standards imposed upon Visa Debit.

The EFTPOS interchange Standard is being gazetted today, with the new lower interchange fees to apply from 1 November this year. The Visa Debit interchange Standard, however, has not yet been gazetted and has therefore not been brought into force. This reflects a view put by Visa during consultation that imposing regulation on Visa Debit, but not on the new MasterCard debit product, was not ‘competitively neutral’. The Bank is therefore now providing both schemes the opportunity to comply voluntarily with the Standard. In particular, the Visa Debit Standard on interchange fees will only be gazetted, if, by 1 July 2006, Visa has not provided the Bank with an enforceable undertaking that would deliver the same outcomes as the Standard. Similarly, the Bank will consider designating the MasterCard debit system, and then imposing a Standard, if by 1 July 2006, MasterCard has not provided the Bank with an enforceable undertaking to the same effect.

‘Honour All Cards’ Rule

Currently, merchants that accept Visa credit cards are also required, by Visa, to accept Visa Debit cards. As a result, normal competitive pressures cannot bear upon the price or acceptance of Visa Debit cards.

The ‘honour all cards’ Standard requires that this tying of acceptance of Visa credit and debit cards be removed by Visa. It also requires that Visa Debit cards be identified both visually and electronically to allow merchants to decline acceptance if they so choose. The Standard also sets out transition provisions that take account of concerns by financial institutions that the re-issue of Visa Debit cards outside the standard timetable would involve significant costs.

As with the Visa Debit interchange standard, both Visa and MasterCard are being given the opportunity to comply voluntarily with the ‘honour all cards’ Standard, with the same arrangements applying as for the Visa Debit Standard on interchange fees.

EFTPOS Access Regime

The EFTPOS Access Regime is the result of co-operative work between the Bank and the Australian Payments Clearing Association (APCA) over a number of years. Together with the EFTPOS Access Code developed by APCA, it will significantly improve access arrangements to Australia's EFTPOS system.

The Access Regime is relatively limited in nature. In particular, it sets a cap on the price that an existing participant can charge to establish a new connection and sets out provisions that will help ensure that negotiations over interchange fees are not used to frustrate entry. Other important aspects of entry are covered in APCA's Access Code. These include providing new and existing participants with the right to establish direct connections with participants in the EFTPOS system and setting a time frame under which connections must be established.

The Access Regime will be gazetted once APCA's Access Code has been formally adopted. This is likely to be within the next month, with the Access Regime expected to come into force on 31 May.

Bankcard

The Payments System Board has decided to revoke the designation of the Bankcard scheme, given that the scheme has announced that no new Bankcard cards will be issued and that the scheme will be wound up in first half of 2007. The Board has also decided to revoke the access regime imposed on the Bankcard scheme and to remove references to the scheme in the credit card interchange Standard.

Taking these actions at this time, rather than when the Bankcard scheme formally closes, means that the scheme and its members will not incur the expense of collecting cost data to be used in the recalculation of the benchmark for credit card interchange fees later this year. While the Bankcard scheme will no longer be subject to regulation under the Payment Systems (Regulation) Act 1998, the Bank expects that the scheme's current interchange fees will be maintained until the scheme is closed.

At the same time as the Bank is amending the drafting of the credit card interchange Standard to remove references to Bankcard, it is making some small drafting changes to improve the clarity of the Standard. Accordingly, a revised version of the Standard The setting of wholesale (‘interchange’) fees in the designated credit card schemes is being gazetted today.

Purchased Payment Facilities

Following a decision by the Board, the Bank has declared, under Section 9(3) of the Payment Systems (Regulation) Act 1998, that the Act does not apply to gift cards, pre-paid mobile phone accounts, loyalty schemes and electronic road toll devices. As a consequence, the Bank has revoked the specific exception granted to the Westfield gift card facility in August 2005. The Bank's declarations are in line with the recent decision of the Australian Securities and Investments Commission to provide unconditional class order relief for these facilities from certain provisions of the Corporations Act 2001.

In addition, the Board has decided to broaden the range of other facilities to which the Payment Systems (Regulation) Act 1998 does not apply. In particular, the Bank has declared that the Act does not apply to facilities where the total amount outstanding is less than $10 million, rather than $1 million previously.