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COMMISSIONED PAPER SERIES
REGULATORY INTERVENTIONS AND THEIR CONSEQUENCES IN THE AUSTRALIAN PAYMENT SYSTEM PROFESSOR STEVE WORTHINGTON
DEPARTMENT OF MARKETING MONASH UNIVERSITY 28 OCTOBER 2013
ABSTRACT This paper reports on the impact of regulatory interventions in the Australian payment card market, over a ten year period from 2003-2013. The paper documents the interventions; their consequences and some of the reverberations that have provoked the need for further interventions. It discusses these by topic area, starting with the credit card; then the debit card; the issue of surcharging; innovation in the payment card system and finally Automatic Teller Machines. It concludes by discussing the overall changes in the way that Australians access and then spend their disposable income and the ever increasing shift towards a Less Cash Society, if not a Cash Less society.
Executive Summary This paper reports on the impact of regulatory interventions in the Australian payment card market, over a ten year period from 2003-2013. Payment system regulators in other jurisdictions are taking an ever increasing interest in the way that such systems are organised and they could and arguable should, learn a lot from the Australian experience. The Reserve Bank of Australia (RBA) is the most prominent of the regulators in this country and its first intervention into the payment system market was in 2002, hence it has probably the world’s longest and deepest experience of regulating this market and of dealing with some of the ‘unintended consequences’ of its interventions. The paper documents the interventions; their consequences and some of the reverberations that have provoked the need for further interventions. It discusses these by topic area, starting with the credit card; then the debit card; the issue of surcharging; innovation in the payment card system and finally Automatic Teller Machines. It concludes by discussing the overall changes in the way that Australians access and then spend their disposable income and the ever increasing shift towards a Less Cash Society, if not a Cash Less society. The RBA has established a Payment System Board (PSB), to be directly responsible for determining payment system policy and their 2013 Annual report was released in late October 2013 and it can be used to reinforce many of the points that are made in this paper. Credit cards – This was the payment product where the RBA made its first intervention in August 2002, subsequently coming into effect in October 2003. It was intended to progressively change payment cardholder behaviour away from spending on credit cards, to spending on debit cards, by introducing transparency into the Merchant Service Fees (MSF’s) associated with credit card payments. This was to be achieved by halving the interchange element of the MSF, and by placing a cap on the weighted average of this fee for the MasterCard and Visa credit card schemes. The paper (see Figure 1) shows the subsequent decline in the MSF’s for MasterCard and Visa and a similar decline in MSF’s for American Express and Diners Club. Credit/charge card payments by value increased by 4 per cent in the financial year 2012/13, whilst the value of debit card payments grew by 11 per cent, reflecting a continuation of the plateauing of credit/charge card payments and the continued growth of debit card payments (see Figure 3).
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One unintended consequence of the regulation of the weighted average for interchange fees has been a proliferation of different fee categories, based on the type of cardholder, the type of merchant or the type of transaction, e.g. contactless. The PSB Annual Report 2013, comments that the number of interchange fee categories in the MasterCard and Visa credit card systems combined , now stands at 42, up from 8 in November 2003 and notes that some small and medium sized merchants may now be paying higher MSF’s than they were before the RBA’s intervention took effect in 2003. Debit cards - The interchange fees on this card payment product and the direction in which they are paid, has also attracted the attention of the regulator. Following a number of interventions, multilateral interchange fee benchmarks have also been introduced for debit cards and by 2013, these were 12 cents per transaction, with the fees being paid by the merchant acquirers to the card issuing bank. Thus the three debit card schemes in Australia, (MasterCard, Visa and eftpos) now have the same benchmark interchange fee. Once again all the different schemes have introduced ‘differential’ rates for different categories of merchants. Usage of debit cards to make payments and access cash has continued to increase, both by volume (up 14.4 per cent 2012/13) and value (up by 11.1 per cent) and if current trends continue, the value of purchases by debit card will soon be greater than that by credit card; a trend already evident in some other international markets. Cardholders are also increasingly using the ‘cash-out’ facility of these cards, to access their cash at the Point-of Sale, (see Figures 11 and 12). By contrast the value and volume of cash withdrawals from ATM’s has begun to decline (see Figure 16). Surcharging – The RBA’s interventions in 2002 included the abolition of the ‘no-surcharging’ rules which had prevented merchants from surcharging for transactions made using either a credit/charge or debit card. The prevalence of surcharging in Australia has since become more widespread (see Graph 1) and the regulator has become increasing concerned that some of the surcharging practises used by some merchants are distorting the pricing signals to consumers, that this intervention was meant to convey. For example some merchants apply a surcharge at a ‘blended’ rate, which averages out all the different MSF’s for all card types.
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This ‘unintended consequence’ has led to the regulator re-visiting the surcharging Standards that it introduced and new Standards took effect in March 2013, which limit Australian merchants surcharges to ‘the reasonable costs of acceptance’. Exactly who is going to ‘police’ these new surcharge Standards has yet to be made clear. Innovation – Following a strategic review of innovation in the payments system, the PSB concluded that the removal of some of barriers to cooperative innovation had the potential to deliver significant public benefits to Australia. Recognising that there were impediments to the payments industry collectively delivering innovative improvements to the system, the PSB decided to be more proactive in setting out strategic objectives for the payment system. Thus work has now begun to develop a new payments system that will facilitate real-time retail payments in Australia and as part of this the RBA itself will build a ‘settlement hub’ which will be a central clearing utility, owned by and located at the RBA. The PBS has also announce the creation of a new, high level industry coordination body, the Australian Payments Council, to promote via a direct dialogue, effective industry coordination and cooperation between the industry and the regulator. It is anticipated that the Australian Payments Council will begin meeting in early 2014. Automatic Teller Machines (ATM’s) – These have grown in number in Australia in recent years (see Figure 15), and they account for 60 per cent of the value of cash withdrawals, the average value of which in 2012/13 was $185. However the activity levels on these machines has now begun to contract ( see Figure 16), whilst the growth in EFTPOS terminals (see Figure 17) has increased the availability of ‘cash-out’ at the Point-of- Sale ,with the average withdrawal from this channel of distribution in 2012/13 being $63. The RBA intervened in the Australian ATM market in 2009, to regulate the fees that cardholders paid to access their cash through ATM’s. ‘Own –bank’ transactions are now fee free, to customers of that bank, whilst ATM transactions at ‘foreign’ ATM’s generally incur a fee, which is shown on the ATM screen, prior to the cardholder deciding whether to proceed with or cancel the transaction. The share of transactions at ‘foreign’ ATM’s by both value and volume is shown in Figure 18.
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The conclusions drawn in this paper about the impact of the regulatory interventions in the Australian payment card system are that the RBA has succeeded in changing the relative prices of using credit and debit cards, such that along with macro-economic trends, spending on credit cards has plateaued, whilst spending on debit cards has substantially increased and shows no sign of abating (see Figure 20). Also that whilst the level of cash payments remained steady during 2012/13, most forms of non-cash payments grew at a healthy level, such that by June 2013 the combined value of debit card purchases, including cash-outs, was considerably higher than the value of ATM withdrawals (see Table 2). Consumers thus appear to be using their debit cards more frequently and the increased number of contactless cards and EFTPOS terminals that can accept this type of ‘tap and go’ payment , will further reduce payment by cash at the Point-of Sale. Hence the regulatory interventions in the Australian payment card system have had a major impact on the economics and the balance of power in the system. There have been ‘unintended consequences’ and these have reinforced the need for ‘co-opetition’ in the market , that is the need for all ‘players’ to accept the seeming paradox of simultaneously cooperating for their mutual benefit, whilst also competing for the own benefit.
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1. Introduction The Australian payment card market has been described as mature and well-developed. Card issuers have a wide range of products to attract customers (credit, debit, charge, prepaid; annual fee or fee free; reward or no-frills) and there is also an ever increasing number and variety of merchants (both bricks and mortar and on-line) who will accept payment cards in exchange for their goods and/or services. By mid-2013 there were around 20 million credit and charge cards and over 36 million debit cards, in issue to the 19 million bank customers in Australia. This paper will describe the regulatory interventions in Australia that have taken place and offer insights into the impact of these interventions, as well as thoughts on how they might continue to influence the future direction of the card payments system in Australia. Australia has a number of regulators in the payment system arena, the most prominent of which is the country’s Central Bank, the Reserve Bank of Australia (RBA), although the Australian Consumer and Competition Commission (ACCC) also has responsibility for competition and access to the Australian payment system.
The RBA established its
Payments System Board (PSB) in 1998, to be responsible for determining the RBA’s payment system policy and it is charged with promoting both efficiency and competition in the Australian market for payment services.
Australia has been among one of the first
countries in the world to make efficiency and competition in payment systems an area for regulatory intervention. Using these powers, in April 2001 the RBA formally ‘designated’ the credit card schemes of MasterCard and Visa in Australia, as the first step in establishing standards and access regimes for this particular payment system product, to deal with public interest issues and to fulfil its obligation to ‘achieve a payments system which is to the greater advantage of the people of Australia’. Hence the RBA has probably the world’s longest and deepest experience of regulating the payment systems market and of dealing with the ‘unintended consequences’ of some of its interventions. The regulators of payment systems in many other countries around the world are taking an ever increasing interest in the way that such systems are run and they could and arguably should, learn a lot from the Australian experience.
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To illustrate the extent of the interest in this topic, The Federal Reserve Bank of Kansas City released a paper in August 2013(a), which summaries all the actions taken by regulators around the world on interchange fees and surcharges. As examples of other recent interventions, regulators in Europe (the European Commission) have in July 2013 confirmed plans for a new directive on payment services across the EU and made proposals to cap interchange fees for domestic card-based transactions. The Federal Reserve System in the USA has also intervened in October 2011 to set standards for debit card interchange fees in that country, by establishing a cap on those fees which had previously been on average US$0.50. However a recent court decision in July 2013 has criticised the Federal Reserve for setting too high a cap, around US$0.21, on the interchange fees paid by merchants on debit card transactions. The Federal Reserve Bank of Kansas City has also released in August 2013(b), a paper on credit and debit card interchange fees in the United States and for a wider range of comparisons see the paper released by the Federal Reserve Bank of Kansas City in August 2013(c), on credit and debit card interchange fees in various countries. This paper now goes onto document the regulatory interventions in the Australian payment card system; the consequences of those interventions and some of the ‘unintended consequences’ that have provoked the need for further interventions. It discusses these by topic area, starting with
the credit card
then moving onto the debit card
the issue of surcharging
innovation in the payment card system
and finally Automatic Teller Machines.
There are a number of concepts that need to be understood in the explanation of the payment card system reforms in Australia. These concepts, which are international in their use, are the payments system itself, interchange fees and the no surcharge rule. The payment system allows customers to make payments without using cash and the person making the payment has her/his account at a financial institution, which is then debited and the recipient receives the credit in their financial institution. Examples of payment systems in
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Australia include cheques, credit and debit cards, BPAY and direct debit and credits. In the case of credit cards, financial institutions usually charge an annual fee for the card and interest is payable on borrowings that are not repaid by the specified due date. Merchants who accept credit cards are also charged by their financial institution, via what is known as a ‘merchant service fee’, for every card payment transaction that they accept. In both the credit and debit card systems, the financial institutions who are involved also pay fees to one another. These fees are known as ‘interchange fees’ and they are historically not known to either the cardholders who pay with, or the merchants who accept, such cards. In Australia for credit cards which carry the MasterCard or Visa acceptance marque, these interchange fees are paid by the merchants financial institution, to the cardholders financial institution, every time a payment is made using MasterCard or Visa cards. Bullock (2010), describes this process in more detail and Diagram 1 below, shows the fee flows in a credit card transaction, where there are four parties involved. As there are no interchange fees paid in the American Express and Diners Club business models; they are known as the three party schemes, which comprises of the card issuer, the cardholder and the merchant who accepts these cards. Here the card issuer is also the sole acquirer for transactions on these cards. Diagram 1: Fee Flows in a Four Party Credit Card Transaction
Interchange fee
Card issuer
Merchant’s financial institution
Merchant service fee
Card fees (and interest payments)
Cardholder
Merchant
Source; RBA
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These interchange fees are at the heart of many of the regulators interventions into the Australian payment card system and this paper now goes onto discuss the reasons why the regulators were concerned about the developments in the credit and charge card market here in Australia. The data in this paper is mainly taken from the RBA’s statistics on payment systems and it shows the changes that have taken place since the initial interventions by the regulator which came into effect in 2003, by comparing the trends in payment card activity in Australia over a 10 year period, from June 2003 up to June 2013.
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2. Credit cards The RBA as the key regulator had been studying the payment card system since the establishment of the Payments Systems Board in 1998 and it had concluded that the structure of pricing in the Australian market was encouraging the inefficient use of credit cards in the electronic funds transfer at the point of sale (EFTPOS), relative to the use of debit cards. In particular the prices of using the different type of payment cards (credit or debit) did not appear to reflect their costs and restrictions on merchants appeared to be inhibiting their bargaining power over the merchant service fees that they paid to their credit card transaction ‘acquirer’ when accepting payment by cards. The RBA therefore ‘designated’ the credit card schemes of MasterCard and Visa in 2001 and the results of its investigations into the reform of the credit card schemes and hence its first intervention, were announced in August 2002. Following an unsuccessful legal challenge by the card associations of MasterCard and Visa, these then came into effect from October 2003. The RBA’s rationale for ‘designating’ the credit card schemes was that despite its belief that the general situation in Australia was one where, ‘the use of credit and debit cards as a proportion of all non-cash retail payments had increased significantly’, nevertheless, ‘credit card growth in Australia has significantly outstripped debit card growth’. One of the reasons for this had been the proliferation in Australia since the mid 1990’s of loyalty/reward programs attached to the credit cards issued under the acceptance marques of MasterCard and Visa. These ‘rewards’ cards were issued to assist the MasterCard and Visa schemes in gaining market share in the credit card market in Australia, at the expense of the Bankcard, a credit card which could only be used in Australia and which had previously been the market leader since it was first issued by the major Australian banks in October 1974. These credit card reward programs, as elsewhere in the world, were partly funded from the interchange element of the merchant service fee (MSF) paid by the merchant accepter, to the card issuer, through the merchant acquirer. The reforms suggested by the RBA in August 2002, were then an attempt to progressively change cardholder behaviour away from spending on credit cards, to spending on debit cards and to introduce transparency into the MSF’s associated with credit card payments.
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Chan et al (2012) makes the point that in Australia since 2002 the effective price to cardholders for using their credit cards has increased and this has encouraged the use of lower-cost payment methods, such as debit cards. At the same time, the cost to merchants of accepting credit cards has declined, with the likelihood that this benefit will have been passed on, in the form of lower prices, to all consumers, not just to those who pay by credit card and who had also previously potentially earned rewards for paying by credit card. Thus this intervention by the RBA was designed to improve the price signals to cardholders, about the costs of using different payment methods at the point of sale (POS). The reforms were essentially threefold. Interchange Fees Firstly the interchange fee element of the MSF was effectively halved by placing a cap on the weighted average of these fees for the MasterCard and Visa credit card schemes. The cap is regulated by the RBA every three years, the last time being November 2012. The effect of this cap, currently set at 0.5 per cent of the value of the transaction, has been to reduce the interchange fees in these two card schemes by around 45 basis points. Thus the MSF’s that merchants paid in Australia were reduced and by June 2004 the reforms had seen the average MasterCard and Visa interchange fee fall to 0.55 per cent (0.5 per cent, plus a Goods and Services Tax at 10 per cent). RBA data subsequently confirmed that the total MSF’s fell by the full amount of the reduction in interchange (see Figure 1). Thus by June 2013, the average MasterCard/Visa MSF was 0.81; American Express 1.79 and Diners Club 2.04. As a point of comparison, interchange fees for credit cards in the USA can range between 1.25 and 2.4 per cent of the value of the transaction. Figure 1, below illustrates the reduction in the MSF’s for credit and charge cards, issued under the American Express, Diners Club, MasterCard and Visa acceptance marques since 2003; the percentages include the interchange fees. One consequence of the reduction in interchange fees for the MasterCard and Visa card schemes has been a gradual decline in the average MSF’s for both American Express and Diners Club, as they have come under pressure from merchants to reduce their MSF’s (again see Figure 1). The RBA’s interventions have caused merchants to review which payment cards that they chose to accept and/or to impose surcharges on. The merchants
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have hence been able to exert more ‘leverage’ in their negotiations with American Express and Diners Club, over MSF’s. American Express and Diners Club traditionally issue charge cards to their members, which are used to pay for transactions, but on which the entire balance has to be repaid at the end of the account period. American Express has now widened its product proposition to include credit cards, on which a cardholder can revolve their balance and hence pay interest, in the same manner as the conventional MasterCard and Visa credit cards. Figure 1
Change in average merchant service fee MSF per cent of purchase value
3.00
2.50 2.00 1.50 1.00 0.50 0.00 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13
Year MasterCard and Visa
American Express
Diners Club
Source; RBA Payments System Board Statistics, Chart 3
The paper by Chan et al (2012) also describes in some depth how the RBA’s interventions have had an effect on the types of credit card products offered by the various card schemes and their card issuers, in order that they can maintain their income streams, within the regulatory framework. There has been something of a proliferation of ‘premium’ credit cards, which provide various benefits to cardholders but which have higher interchange fees and this has in part led to some merchants ‘bundling’ their various MSF’s together into a ‘blended rate’, which then enables them to charge a uniform surcharge on every card transaction, no matter which card is being offered by their customer at the POS. The Payments System
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Board has commented on the steady growth in the number of interchange categories and the variability in the level of fees between categories, since the RBA’s reforms of 2003. As an example, the major supermarket groups and the RBA itself are charged lower interchange fees and charities no interchange fee at all. However ‘premium’ credit cards, such as platinum have higher interchange fees. Surcharges The second aspect of the RBA’s reforms of 2002 had the objective of improving the transparency of the MSF’s, by allowing the merchant’s to surcharge cardholders for credit and charge card payments. This required the removal of the previous card association rules that prevented surcharging and the rationale here was to make it clear to the decision maker who makes the choice of payment instrument (the cardholder), the costs involved in such transactions. Not all merchant’s accepted this ‘offer’ from the RBA, but some did and indeed some profited from it by surcharging the cardholder, more than the ad valorem rate of the MSF that the merchant was paying. The issue of surcharging is dealt with, as a separate issue, later in this paper. Access The third part of the RBA’s reforms was aimed at improving the cardholder’s choice of card issuer and the merchant’s choice of card acquirer, by widening the access regime, to encourage new entrants into the Australian payment card market and thus increase competition. For a review of the parties involved in the payment system and the concepts of interchange fees, the no-surcharging rule and the honour-all-cards rule, for both credit and debit cards, see Bullock, 2010. So where are we now in Australia, over a decade since the RBA’s first intervention in the payment systems market? Well according to the RBA’s monthly figures, there has since the introduction of the reforms in 2003, still been growth in the number of both the credit and charge cards accounts (see Figure 2).
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Figure 2
The number of credit and charge accounts Number in thousand
16000 14000 12000 10000 8000
6000 4000 2000 0 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13
Year
Source; RBA Payments Systems Board Statistics, Chart 1
However the previous strong increases in credit and charge card spending have weakened, as consumers have switched to increasing their use of their debit cards and merchants have been willing to promote debit card acceptance. Indeed credit and charge spend in the month of June 2013 was $21,096 million, a figure 1.4 per cent below that of June 2012 and by June 2013 the annual rate of growth in credit and charge card spending was only 3.3 per cent. Figures 3 and 4 show both the value and volume of purchases made by credit and charge cards as against those made by debit cards and how the value of credit and charge card transactions has plateaued in recent years, whilst that of debit cards has continued to rise. Figure 3
Value in million dollars
The value of purchases 30000 20000 10000 0 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13
Year Credit and charge card
Debit card
Source; RBA Payments System Board Statistics, Chart 1 and Chart 5
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Figure 4
Number in million
The volume of purchase transactions 300
200 100 0 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13
Year Credit and charge card
Debit card
Source; RBA Payments System Board Statistics, Chart 1 and Chart 5
The more dramatic increase in the volume of debit card payments when compared to the value of debit card payments can be explained by the fact that most debit card payments are for a lesser value than credit card payments. Cash advances on credit and charge cards in the year ending June 2013 also fell by 3.3 per cent, reflecting the less use of cash, the cost to the cardholder of accessing cash in this manner and the more restrained use of credit by consumers. See Figure 5 for the continued decline of the volume and value of cash advances using either credit or charge cards. Figure 5
4000
1500
3000
1000
2000 500
1000 0
0 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13
Year Value
Value in million dollars
Number in thousand
The volume and value of cash advances
Volume
Source; RBA Payments System Board Statistics, Chart 1
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The RBA also reports on the changes in market share of the value of purchases divided between MasterCard and Visa, and American Express and Diners Club. Figure 6 shows the changes in market share from June 2003 up to June 2013. Bankcard was closed down in April 2007. It should be noted here that American Express has been particularly active in the Australian market in issuing credit cards, as well as its original charge card product. It has a number of co-branded credit cards with airlines, retailers and banks, usually with a rewards scheme attached and these credit cards are included in the American Express figures which are used to consolidate the market share of the three party schemes. The market share growth enjoyed by American Express and Diners Club since the RBA’s initial intervention in the payment system arena in 2003 appears now to have peaked. The three party schemes increased their share of the credit and charge card purchases by value, from around 14 per cent in 2003, to a high of 20.5 per cent in June 2012. Since then their share has stabilised and it was again 20.5 per cent in June 2013. Figure 6
Market share in value %
Market shares of credit and charge cards 100.0 80.0 60.0
40.0 20.0 0.0 Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Year American Express and Diners Club
Bankcard, MasterCard and Visa
Source; RBA Payments System Board Statistics, Chart 2
American Express and Diners Club were able to increase their market share in the immediate post RBA intervention of 2003, by attracting new cardholders with offerings that featured attractive reward programs based on cardholder spend, whilst at the same time the
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MasterCard and Visa credit cards were diluting their reward programs, due to the RBA’s imposed reduction of the interchange fee, from which most of these rewards were funded. Table 1 below, shows the steady increase in the average spending required by a credit cardholder to earn a $100 reward and the consequent decline in that benefit to the cardholder, as a percentage of their spending. Table 1: Credit Card Rewards Programs: Four largest Australian banks, June 2012
2003 2004 2005 2006 2007 2008 2009 2010 2011
Average spending required for $100 shopping voucher $ 12400 14400 15100 16000 16300 16700 17000 18300 18400
Benefit to cardholder as a proportion of spending Per cent 0.81 0.69 0.66 0.63 0.61 0.60 0.59 0.55 0.54
Source: RBA Bulletin March Quarter, 2012
American Express has also entered into arrangements with the major Australian banks to issue ‘companion’ American Express cards alongside their existing MasterCard or Visa credit card products. These ‘companion’ cards were introduced by two of the major banks in 2009 and since then more banks have added the American Express card to their existing credit card accounts and these have been offered as an upgrade and added benefit to the traditional single acceptance marque cards of MasterCard and Visa. For existing credit cardholders there is no need to open a new account, the American Express card is linked to their existing credit card account, so that cardholders can enjoy the benefits of two cards, with the simplicity of one statement, one credit limit, one balance and the same interest rates. Under this arrangement, cardholders can typically earn more reward points for spending on their American Express card, as American Express can use their higher MSF’s to fund more generous rewards programs, to then both attract and retain cardholders. In the credit card market, competition among both card issuers and card schemes is focused firstly on attracting customers by getting them to apply for a particular credit card; secondly on encouraging the then new cardholders to activate their new cards and thirdly on trying to
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get that card issuer’s product to be ‘top of the purse/wallet’ and thus be the primary card of choice for payment. Encouraging cardholders to choose a particular card and then to maximise their spending on that credit card, has often been achieved through the generosity of the card’s reward program. In the four-party schemes (MasterCard and Visa) these reward programs are supported by the interchange fees that are associated with them (see Bullock, 2010). The financial institution that acts as the acquirer of the card transaction from a particular merchant, adds the interchange fee into the MSF that they then charge the merchant for accepting and processing that payment. Hence a credit card with high interchange fees may result in merchants and some cardholders, effectively subsidising the reward program for those cardholders who use a credit card which features a reward program. Furthermore, if the cardholder is able to pay off the balance owed on the credit card in full at the end of each account period (a so-called transactor), then they can receive rewards and defer their debt, at no cost to them, except the annual fee. Those cardholders who are unable to pay off all their credit card debt at the end of each account period, must ‘revolve’ some, if not all, of their balance and hence pay interest (the level of which does vary depending on who is the card issuer) on the amount that they are revolving. If applicable they still receive the rewards for spending, but their costs are higher than those of the ‘transactors’. In contrast to the four-party schemes, there are no interchange fees in the three party card schemes, such as those operated by American Express and Diners Club. This is because those card schemes are both the sole acquirer for transactions on their cards and typically also the sole card issuer. Their reward programs are funded directly from the fees paid by the merchants who chose to accept these cards and as these fees are higher than those of the four- party schemes (see again Figure 1), they can afford to offer more generous rewards to their cardholders, pro rata to the spending on these cards. As Figure 7 shows, whilst credit card spending has continued to grow, albeit at a slower rate, the proportion of credit card balances incurring interest, has recently begun to decline, as cardholders have begun to pay down their debt. In the year from June 2012 to June 2013, the average credit card balance fell by 1.6 per cent and the balances that accrue interest have also fallen in that period (see Figure 7).
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Figure 7
Balances accruing interest Accruing interest in million dollars
40000 35000 30000 25000 20000 15000 10000
5000 0 Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Year
Source; RBA Payments System Board Statistics, Chart 1
It is also worthy of note that by June 2013, a year after laws were introduced to make it harder for credit card issuers to make unsolicited offers to raise their customers credit card limits, that these have now stabilised, (see Figure 8). Card issuers are now prohibited from sending out offers to increase credit card limits, unless customers have given their prior consent to the issuer to communicate such offers to them. RBA figures show that the average credit card limit has fallen by $90 in the past year and that it now sits at $9091. This may have been a further influence on the dampening of spending on credit cards, which appears to be an ongoing trend and it is also a reflection of consumer conservatism towards accumulating this type of debt.
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Figure 8
Credit limits per account 10000
Credit limits per account
9000 8000 7000 6000 5000 4000 3000
2000 1000 0 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13
Year
Source; RBA Payments System Board Statistics, Chart 1
Thus the RBA’s interventions in August 2002 and their subsequent implementation, appear to have achieved the objective of switching the growth in customer spending on payment cards from credit and charge cards into debit card transactions and to also reducing the volume and value of cash withdrawals from credit and charge card accounts. However as with all interventions there have been some ‘unintended consequences’ which have then required further interventions by the regulator, to try to remedy some of these consequences. The first of these concerned the fees associated with the transactions made on debit cards and this paper now goes onto discuss this type of payment card.
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3. Debit Cards The interchange fees on this card payment product and the direction in which they are paid, came under scrutiny as a result of the previous focus on credit cards and also because of the wide spread adoption in Australia of the ‘scheme debit cards’ (MasterCard and Visa), which from 2006 had brought them into stronger competition with Australia’s existing domestic only debit card, the eftpos system, which had been in widespread use since its launch in 1988. Australian financial institutions issue debit cards to their customers who hold cheque and/or savings accounts with them and these debit cards can be used at the ATM or at the POS and the acceptance marques on them can be either a MasterCard or Visa brand, as well as an eftpos marque. In contrast to the direction of the fees paid in a credit card transaction, the eftpos payment system, originally paid interchange fees in a different direction. Here the cardholder’s financial institution paid the merchant’s financial institution, every time there was an eftpos transaction. Again Bullock (2010), provides an excellent summary of the fee flows in the debit card system before the RBA reforms, see Diagram 2. The arrival in Australia of the debit cards issued under the MasterCard or Visa acceptance marques, drew the regulators attention to the existing eftpos interchange arrangements, as in contrast the MasterCard and Visa debit card fee flows were in the same direction as with their credit cards, see Diagram 1. Diagram 2: The original fee flows in eftpos transaction
Interchange
Card issuer
fee
Merchant’s financial institution
Merchant service fee
Account keeping fees and transaction fees
Cardholder
Merchant
Source; RBA
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The RBA’s Payments System Board (PSB) had already designated the eftpos system in September 2004, as a first step towards implementing reforms to both the interchange fee and access arrangements in that system. The PSB had also previously designated the Visa debit card in February 2004 and the subsequent rulings on that scheme were also accepted in an undertaking for MasterCard debit in July 2006. These interventions were prompted by concerns that the then differences in the interchange fees between scheme debit and the eftpos system and the direction of the fee flows, would likely result in outcomes that would be harmful to the efficiency of the overall payment system. Particularly that the diminishing use of eftpos and the continued enhancement of scheme debit, would result it was feared in the eventual demise of eftpos, as had already occurred with the domestic only credit card system of Bankcard. Following the designation of the debit card system, the RBA subsequently introduced standards in July 2006 that required a reduction in interchange fees for both the scheme debit cards and eftpos transactions. The two debit card schemes previously had very different interchange fees, even though they both were essentially conducting the same sort of transaction that is, transferring money from a cardholder’s deposit/savings account, to a merchant, in exchange for goods and/or services. The new standards reduced the interchange fees in both systems, so that the weighted average of the multilateral interchange fee for MasterCard and Visa debit was capped at 12 cents per transaction and which flows to the card issuer (as per Diagram 1). The eftpos interchange fees were also to be capped to between 4 and 5 cents paid in the reverse direction to scheme debit, that is by the card issuer to the merchant’s financial institution (as per Diagram 2). The RBA decided at the time that it would be too disruptive to make the fees in the two systems the same (and payable in the same direction), but the new standard did make the interchange fees much more aligned with each other than they had been. This intervention did not however abate the growth of scheme debit versus eftpos, indeed in its 2009 annual report the PSB commented that scheme debit products had been heavily promoted by the schemes (MasterCard and Visa) and some issuers in recent years and that they had been growing strongly. One advantage that they had over eftpos cards, was that
22
they could be used in card-not-present environments (to make payments for example over the telephone or internet) and internationally. Using data comparing scheme debit transactions with eftpos transactions, that had then begun to be complied by the RBA, it appeared that over the year to the June 2009 quarter, the value of scheme debit purchases had increased by 35 per cent, compared to a 12 per cent increase in the value of eftpos transactions. Scheme debit then accounted for around one-quarter of the value of debit card payments in the June 2009 quarter, compared to a share of around one-fifth a year earlier. The RBA interchange benchmarks of 12 cents per MasterCard and Visa debit card transactions and 4 to 5 cents per purchase transaction in the eftpos system (excluding transactions with a cash-out component) had remained unchanged during the 2008/09 period and hence further intervention was deemed necessary. In its September 2008 review of the payment card reforms that had already been introduced, the Payments System Board indicated that it intended to address its concerns about the competition effects of the different interchange fee arrangements in the two types of debit cards, by either removing the regulations on both systems, or by making the regulations consistent. The PSB decide to consult on the possibility of changing the regulation of eftpos interchange fees, so that they would be consistent with those that applied to scheme debit. The results of the consultation was a revised interchange standard for the eftpos system, which was announced in November 2009. Hitherto the differences in the debit card interchange fees had been that the eftpos fees were bilaterally negotiated and paid by the card issuer to the transaction acquirer, whereas scheme debit interchange fees were set centrally (multilaterally) by the scheme operator (MasterCard or Visa) and which then flowed from the acquirer to the issuer. Originally the scheme debit interchange fees were the same as the MasterCard and Visa credit card interchange fees, that is an ad valorem fee of around 0.95 per cent of the transaction value. This variance in the historical evolution of the two types of debit card system, eftpos and scheme debit, meant that the differences in both value and direction of the interchange fees were entrenched. The PSB was therefore keen to promote both competition and efficiency, by moving the interchange fees of the two types of debit card system, even more closely together. Thus the conclusion of the PSB’s consultation on debit card interchange fees, was that the eftpos interchange fee standard be amended so that any multilateral interchange
23
fees set for eftpos, would be subject to the same weighted average cap as applied to the scheme debit systems and that this would come into force on January 1 st 2010 In order to revitalise the eftpos system, 2009 had seen the establishment of eftpos Payments Australia Limited (ePAL), a body set up to own and administer eftpos and which itself is wholly owned by 14 members, these being 12 financial institutions and 2 major retailers. Using the PSB’s revised standards, ePAL announced a multilateral interchange fee schedule in March 2011, to take effect in October 2011. This schedule was to reverse the direction of the existing bilaterally negotiated interchange fees for the bulk of eftpos transactions, so that it would be then in the same directional flow as for credit card transactions. This previous socalled negative interchange flow, which was unique to Australia, originated because in order to establish eftpos, the banks conceded revenue to the major merchants to incentivise them to promote this means of payment at the POS. The new multilateral interchange arrangements were to partially remedy that situation by making 5 cents payable by the acquirer (note that some major merchants self–acquire their debit transactions) to the issuer for purchases of $15 and above without cash-out and 15 cents payable by the issuer to the acquirer for purchase with cash-out and cash-out only transactions. The majority of eftpos transactions have now shifted to ePAL’s multilateral interchange fees, although the PSB still had concerns about the level of competition and efficiency in the Australian debit card system. Hence a further review of the regulatory framework for the eftpos system was announced in September 2011 and as a result of this the RBA decided to change its regulations by adopting the same framework for bilateral eftpos interchange fees, as that for multilateral eftpos fees and for scheme debit, that is a cap of 12 cents paid by the acquirer to the issuer. This harmonisation of the interchange fees across all three debit card systems (eftpos, MasterCard debit and Visa debit) would then place ePAL on the same regulatory footing as the other debit schemes and hence encourage further competition within the Australian payments system. These new standards came into effect on July 1 st 2013 and this has resulted in the multilateral interchange fee benchmark for the eftpos system being the same as applies to the MasterCard and Visa debit systems, that is, currently a fee of 12 cents per transaction.
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In April 2012, ePAL introduced ‘differential’ merchant rates into its multilateral schedule, to take effect from October 2012. These rates have a similar rationale to those of MasterCard’s and Visa’s strategic merchant rates, that is to encourage further use and promotion of eftpos by offering a variety of interchange rates for both transactions at the POS and cash-outs. For charities, Medicare rebates and low value transactions below $15, the eftpos interchange is zero; for point-of-sale transactions of $15 and above, the interchange is 5 cents and for cash-out or combined purchase and cash-out, the interchange is 15 cents payable by the issuer to the acquirer. For more details see the PSB’s 2012 annual report, page 17 and the frequently asked questions on the ePAL website. The fluctuations in MSF’s for eftpos debit cards from 2003 to 2013 are shown below in Figure 9 and these reflect the changes in both the level and direction of the interchange fees ,that have taken place over the past ten years. Figure 9
Change in Average Total Merchant Fee for eftpos Debit Cards 18
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The changes to the debit card interchange fees in Australia have galvanised the promotion of payment by debit card and consumers have reacted by increasing their use of this particular payment card, as shown in Figure 10. Thus whilst the value of credit card payments have begun to plateau, debit card payments have continued to increase. Whether this is due more to the marketing of both eftpos and the scheme debit cards of MasterCard and Visa, or the macro economic situation whereby consumers are more inclined to want to
25
pay now (debit) rather than pay later (credit), is unclear, but there would appear to be still be considerable upside in the use by consumers of their debit cards. There were around 15.5 million proprietary eftpos cards in issue in 2013 and over 15 million dual-network cards Figure 10
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Source; RBA, Payments System Board Statistics, Chart 1 and Chart 5
As well as being used to pay for purchases at the Point of Sale (POS), debit cards can also be used to access cash from their cardholder’s accounts, either from the ATM networks or from cash-out at the POS. This is a service offered by some of the large retailers (e.g. the supermarkets), who have cash that is costly to count, secure and then pay into their banks, hence they wish to encourage their customers to take a cash-out and hence reduce their costs of holding cash. The interchange fee on a cash-out at 15 cents per transaction is also attractive to these merchants, as it remains at nearly the level of the pre-RBA intervention and is still payable by the card issuer, to the card acquirer and then onto the merchant (see again Diagram 2). In the month of June 2013 the total value of purchases made by debit cards was $16,040 million and of that, $1441 million was taken out via cash-out or 8.98 per cent of the total (see Figure 11). The trend of taking cash-out at the POS is interesting, as this appears to indicate that consumers see considerable convenience to them in accessing their cash in this way. As Figures 11 and 12 below demonstrate there have over the past ten years been an ever increasing level of cash-outs, both in terms of value and volume, as
26
more and more merchants offer and promote this service to their customers who are paying by debit card. Figure 11
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Figure 12
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The RBA’s powers and their willingness to intervene in the payments markets, also seems to have altered the behaviour of some of the participants in the payment system. In the debit card market, the competing acceptance marques of the international MasterCard or Visa scheme debit and the domestic debit card marque of eftpos, can appear on the same card. These are the so-called dual-network debit cards, which can be co-branded with MasterCard and eftpos or Visa and eftpos and there are believed to be currently more than 15 million of this type of debit card on issue in Australia. This offers both cardholders and merchants the choice of point-of-sale functionality from two different payment networks (scheme debit or eftpos), which they can then choose from. The PSB had indicated that it supported the issuance of such cards in Australia, because they offer convenience for cardholders and encouraged stronger competition between networks at the point-of-sale. However the PSB had been concerned that the advent of contactless cards which allow payment on a ‘tap and go’ basis (and which currently can only be used on the scheme debit networks) could inhibit competition, limit consumer choice and hence increase costs. The outcomes of discussions between the various debit card networks and the RBA in 2013, has been that the three networks have agreed to address the PSB’s concerns and hence no further intervention by the RBA is deemed to be necessary at this time. The three networks( MasterCard, Visa and eftpos) have agreed that ‘where an issuer (a bank) wishes to include applications from two networks on the same card and chip then the networks have agreed to work constructively with the issuer to allow this’. This allows for the maintenance of the existing dual-network arrangement in the contactless environment. It has also been agreed by the networks that they will not prevent merchants exercising their choice of which network they will accept payment from, in both the contact and contactless environments. The implications of this are that new or replacement dual-network debit cards can be co-branded with the eftpos logo and either the MasterCard or Visa logo and that eftpos will have the same functionality on the card as scheme debit does. For eftpos the wider opportunity is to ensure that it is also accepted in the contactless environment. Merchants can also be offered the choice of which network that they wish to process a debit card transaction on and they might choose to route their debit card payments over the network that offers the lowest merchant service fee cost to them. ePAL plan to introduce an eftpos contactless card functionality in 2014, which when it appears on a dual-network card,
28
alongside the MasterCard and Visa acceptance marques, will then mean that both consumers and merchants will be able to choose which network they want to process transactions on. The PSB will maintain liaison with the payment card industry on dual-network cards issuance, as it is thought that whilst market forces are likely to lead to competition for such payments with very large merchants, the PSB will continue to take an interest in trends in debit card payments for smaller merchants. Thus at its meeting on August 16 th 2013, the PSB judged that its discussions with the three networks over dual-network debit cards has produced outcomes that were in the public interest and hence regulatory intervention, appeared to be unnecessary at present. 4. Surcharging A further influence on the shift from the use of credit cards for payment to the use of debit cards has been the RBA’s intervention on surcharging, which was intended to reduce the restrictions on this practice and hence increase the transparency of the MSF’s that were charged when using particular credit or charge cards. Surcharging occurs when a merchant adds an ad valorem charge to a purchase, dependant on the type of credit or charge card that is being presented by the customer. Prior to the RBA’s original intervention in August 2002, both the MasterCard and Visa card associations had rules which prevented merchants from surcharging and also forced merchants to ‘honour all cards’ issued under those acceptance marques. The RBA imposed the removal of the no-surcharge standards on the MasterCard and Visa credit card schemes to be effective from 1st January 2003. American Express and Diners Club voluntarily removed the equivalent rules in their systems and there was no equivalent rule in the eftpos system. This reform was considered to be important as it impacted on one of the key responsibilities of the Payments System Board, that of ‘promoting the efficiency of the payments system’. Thus the intervention which allowed surcharging was to enable merchants to signal to consumers that some payment methods were more expensive for merchants to accept than others, so that consumers could consider whether to pay by using a less costly method. Directly charging consumers for using higher-cost payment methods was also meant to signal to merchants that they did not have to build card acceptance costs into the prices of
29
all their goods and services, as they presumably had been doing before the removal of the ‘no-surcharge’ rules.
The rationale underpinning this was that there would then be no
necessity for the users of the less costly payment methods i.e. the debit card, to subsidise the users of the more expensive payment methods, i.e. the credit card, particularly if the more expensive method also had a rewards scheme which encouraged consumers to use it, in preference to a less costly method. Given that the expectation was that surcharging was likely to develop slowly, as it had in the United Kingdom where surcharging had been allowed since 1989, the RBA considered it appropriate to provide merchants with the freedom to set surcharges without constraint. Indeed surcharging was slow to develop among merchants in Australia, partly through inertia from merchants and partly because of an expectation by cardholders that no surcharges would apply. However the prevalence of surcharging in Australia has since become more widespread and research by East and Partners released in October 2013, suggested that over one-third of Australian merchants imposed a surcharge on at least one of the various types of payment cards that they accept. The average surcharge rate was 2.11 per cent, with MasterCard and Visa transactions averaging 1.4 per cent; American Express 2.7 per cent and Diners Club 3.3 per cent. According to the East and Partners survey of merchants, surcharging appeared to be more common among the very large merchants and these surcharges were found to be most common in the travel industry, (see Graph 1 below). As an example of the level of surcharging, a major Australian supplier of travel services currently, (September 2013), surcharges at 1.98 per cent for payment by MasterCard and Visa credit cards; 2.7 per cent for American Express and 3.00 per cent for Diners Club. This probably reflects the fact that in this industry online purchases using a credit or charge card are a common method of payment.
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Graph 1
The RBA has become concerned in recent years that some of the surcharging practices have developed in a way that potentially distort the pricing signals that surcharging was meant to convey. Some merchants have seized the opportunity to gouge the consumers by applying surcharges at excessive rates, hence some surcharging fees would appear to be well in excess of the MSF’s, as currently displayed on the RBA’s web-site (see again Figure 1). Other merchants apply a surcharge at a single ‘blended’ surcharge, which averages out all of the differential acceptance costs for all of the card acceptance marques and for all the different card types. These practices both distort the market and/or cause consumers to under or over utilise particular payments cards, which results in a less efficient payments system. Some merchants have used the RBA’s decision to allow surcharging, to apply the same surcharge for both credit and debit card transactions, even though the actual MSF’s for these different types of cards are very different in both their actual costs and in the basis of their
31
calculation, credit being an ad valorem, whilst debit is a cents per transaction. This situation is arguably counter-productive to the RBA’s intention, in that it can make a surcharge on a debit card transaction the same cost to the cardholder, as a credit card transaction, whereas the MSF’s charged to the merchant are lower for a debit card purchase, than for a credit card purchase. This situation is an example of an ‘unintended consequence’ of an intervention in the market by the RBA and it lead to the RBA reopening its consideration of the surcharging standard in early 2011 and following a period of consultation with the payment card industry and other stakeholders, a draft revision of the surcharging standard was released in December 2011. The new standards took effect on March 18th 2013, and they now allow the card scheme rules to limit a merchant’s surcharge to ‘the reasonable cost of acceptance’, which includes, but is not limited to, the merchant service fee that the merchant pays to the financial institution that acquires the merchant’s card based payments. These new standards are designed to improve the price signals that consumers face when choosing the payment method that they want to use. The changes (when they take effect via changes to the card scheme rules) enable the card schemes (such as American Express, Diners Club, MasterCard and Visa) to limit surcharges on both credit cards and debit cards and to address cases where merchants are clearly surcharging at a higher level than is justified. Precisely how such cases will be ‘addressed’ is yet to be made clear. The immediate response from Visa was that it may audit merchant’s credit card surcharges to ensure that they are not being used to generate profits. Media comment at that time identified airlines, travel companies and taxi charge operators, as being some of the worst offenders on surcharging fees. As an example, Cabcharge currently has a 10 per cent service fee on payments made with credit and debit cards to pay for taxi rides and as of February 2013, Cabcharge were in negotiation with their card payments transactions acquirer, the National Australia Bank about this service fee/surcharge. Cabcharge’s electronic payment system is believed to be used by 97 per cent of Australia’s taxis and they are under pressure to reduce their surcharge to 5 per cent. On March 18th 2013, Visa Australia amended its card scheme regulations to allow banks to enforce the RBA’s new surcharging standard. Visa has developed some mechanisms to
32
help merchants and their acquiring banks to work through the process of what is a ‘reasonable cost of acceptance’ and both MasterCard and Visa are keen to bring the practice of blended surcharging to an end, as they have lower merchant service fees, than those of American Express and Diners Club. A review of the implementation of the RBA’s surcharging standards has been carried out by the Commonwealth Consumer Affairs Advisory Council and the submissions to that review reveal some of the challenges as to who should be responsible for enforcing the standards. For example, Visa pointed out the difficulty that it would have in fulfilling the role that the RBA envisaged for it. The Visa submission said, ‘Card schemes are being asked to limit the activities of merchants, with whom they do not have direct relationships; card schemes have to work through acquiring banks, as they have the direct relationships with merchants’. However the submission from the Commonwealth Bank of Australia (CBA) argued that acquiring banks should not have the enforcement role, because they have an interest in maintaining their business relationship with their merchant customers. The CBA argues that the Australian Securities and Investments Commission (ASIC) is ‘the best candidate for monitoring merchant compliance with the surcharging rules, given its role in ensuring that financial markets are fair and transparent and supported by informed investors and consumers’. ASIC is also the favoured ‘enforcer’ for the Australian Consumers Association, as they claim that ASIC is already responsible for a wide range of consumer protection law. American Express pointed out that it has a further problem in fulfilling the role that the RBA has given it, as the enforcer of the new surcharging standards. Because American Express does not have the market power (see Figure 6), it does not have the same strength as the dominant card schemes (MasterCard and Visa), to enforce the RBA’s new guidelines. American Express claims that it needs to balance its ability to protect consumers from excessive surcharges, with the need for its cards to be accepted wherever their card holders want to use them. The only enforceable recourse available to American Express when confronting a merchant, who is excessively surcharging, is to cancel that merchant, so as to prevent them from accepting American Express cards. Such an outcome it is argued may not be in the best interests of consumers, as it will diminish competition and their ability to use the range of payment cards that they have in their purse or wallet.
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The critical question concerning the impact of the surcharging standards is who is going to implement them. Will it be the card schemes that will audit the surcharges and where appropriate inform merchants that they are too high and must be reduced? Or will it be each merchant transactions acquirer, who will monitor surcharges in terms of ‘the reasonable cost of acceptance’? Whoever takes up the responsibility for monitoring and implementing the RBA’s surcharging standards, will have to have both the power and the desire to force merchants to, where necessary, reduce their surcharges and they may lose business as merchants could then either refuse to accept their acceptance marques and/or seek to change their transactions acquirer. At the same time (2003), as introducing the option for merchants to surcharge on card payments, the RBA required MasterCard and Visa to widen access to their systems to encourage new entrants into the card payment market. Previously only authorised deposittaking institutions (ADI’s) had been permitted to join these two card schemes, but the RBA introduced regulations to allow institutions other than the ADI’s to become members of MasterCard and Visa and thus potentially issue credit cards to cardholders and/or provide card acceptance services to merchants. These institutions are now supervised by the Australian Prudential Regulatory Authority (APRA), but they no longer need to be deposittaking institutions. An example of this is Tyro Payments, who ten years after incorporating and six years after beginning to process payments, has now had its first operating profit of $3.3 million, for the year ending June 2013. The company focuses on Australia’s small and medium sized businesses, for example newsagents, pharmacies and restaurants and Tyro had more than 8,000 merchants and processed 5.3 million transactions in their last financial year. A New Zealand company Smartpay Holdings, who are the largest provider of EFTPOS terminals in New Zealand with more than 30,000 terminals, listed on the Australian Securities Exchange in August 2013. Their business model is different than Tyro Payments, who have a limited banking license (see above) that allows them to be a merchant acquirer in Australia. Smartpay aims to provide the same service as Tyro, but in conjunction with the major banks, which enables the banks to concentrate on managing the relationships with their merchants. The Smartpay business model is very similar to the one used by the
34
independent ATM suppliers in Australia, that is acting as an outsourced supplier and managing the rapidly changing payment technology networks, either under the brand of the banks or as what is known as a ‘white-label’ supplier. Under this model the major banks can acknowledge that the provision and operation of EFTPOS terminals is increasingly a noncore function for them. 5. Innovation in Payment Systems There have been suggestions that as the regulators interventions might result in reduced financial returns to card schemes, card issuers and merchant acquirers, a further ‘unintended consequence’ of the RBA’s interventions into the payments system market in Australia, has been a shortage of investment in innovation, particularly at a system level. This as described by the RBA, requires co-operation in the collective interest, even when there may be no strong proprietary benefits at the level of the individual service provider. It was hence the RBA’s concern that the bilateral nature of many of Australia’s existing retail payments systems was not conductive to collaborative innovation that prompted it to undertake a strategic review of innovation in the payments system, the conclusions of which were released in June 2012. These outline a distinct change in approach by the Payments System Board (PSB) in relation to payments innovation.
Recognising that there are
impediments to the payments industry collectively delivering solutions that would be valued by merchants and consumers, the PSB intends to be more proactive in setting out strategic objectives for the payments system and in clarifying its expectations for the services that the payments system should be able to offer in the future. It was envisaged that this would be facilitated by the RBA working with the industry, to create an enhanced industry coordination body that would engage directly with the PSB. The first fruits of this intervention by the RBA into how to stimulate innovation in the payments system, was the formation of a real-time payments committee (RTPC) composed of senior bank executives and under the auspices of the Australian Payments Clearing Association (APCA), who released their proposals on how to develop a real-time payments infrastructure in Australia in February 2013. The aim is to have an infrastructure in place that would allow fast payments for both consumers and business and hence more immediate availability of funds, and to build the systems needed to deliver these real-time payments by
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the end of 2016, a deadline which the RBA believes is ‘ambitious but achievable’. The RTPC proposal involves two layers, a central clearing system that would be jointly built by the banks and a separate ‘overlay’ service that the banks could tailor to the needs of their customers. The ‘hub’ infrastructure would be operated by a collaborative, mutually owned central clearing utility, which will be capable of supporting the exchange of fast flexible payments messaging and it will be linked to a Settlement Hub, which the RBA itself has committed to build. This central clearing utility will adopt an open access hub model and yet it will also allow an overlay of competing, commercial services to be built on top of the hub, by each participating financial institution. This for example could be a service to facilitate real-time mobile payments, which would then be better able to compete directly with other payment services. The hub would also facilitate the instant transfer of much more detailed messages, such as invoices and applications that would benefit from real-time payments, such as property transfers and car sales. APCA announced in July 2013 that the New Payments Platform (NPP) Steering Committee had held its first meeting and that a consulting firm had been appointed as the program manager to develop a new, fast, flexible and data-rich payments infrastructure for Australia. It is envisaged that 2014 will see a Request for Tender and then the subsequent selection of a solution provider for the basic infrastructure of the NPP. More than 17 institutions have committed towards the funding of the initial stages of the NPP project. These are the initial participants, the big four Australian banks; Bendigo and Adelaide Bank; Cuscal and the RBA and these have now been joined by Australian Settlements Limited; Bank of America; Bank of Queensland; Indue; HSBC; ING; Macquarie Bank; Paypal and Suncorp. At present the use of the NPP remains limited to the ADI’s, although the RBA has stated that there ‘is the facility for other approved entities to connect’. Eftpos has positioned itself for the NPP by announcing in October 2013, its intension to build a hub which will be an overlay service for its members to provide quicker eftpos transactions. Their hub would replace the network of complex bilateral links between financial institutions and merchants that are the legacy of the launching of eftpos cards in the 1980s. The hub will enable eftpos to implement chip and contactless payments and then mobile payments and it is intended to be live by mid-2014. The RBA has also proposed the formation of a high-level industry coordination body, the Australian Payments Council (APC), to facilitate more direct dialogue between the PSB and
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the industry. Given that the APC will only comprise of industry participants, the RBA will also establish a separate consultation group for end-users of the payments system, including consumers, merchants and governments. As a backdrop to the real-time payments initiative, paper cheque usage in Australia has continued to decline both by volume and value (see Figure 13). In April 2013, APCA issued a report in which it estimated that at the current rate of decline, ‘it would be predicted that cheques will no longer be used in Australia in 2018’. Whether or not this comes to pass, the decline in cheque usage reinforces the need for investment in the new real-time payments infrastructure, as new forms of payment will not need the historical paper based reconciliation that cheques required. Figure 13
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Intervention in the payment card system, once commenced by the regulators, is then seemingly inexorable. In Australia, the RBA’s Payments Systems Boards (PSB) remit extends to the efficiency and stability of the payment system as a whole and the PSB is now taking an interest in the operational resilience of individual payment systems providers. This follows a number of high profile outages in Australia which have affected the availability of
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services to significant numbers of customers, which whilst directly affecting those providers and their customers, also have a system wide dimension. The RBA has consequently put into place a more systematic reporting regime for retail outages and began a consultation process with the payment system providers, as to whether further measures are needed to improve operational resilience across the system. The need for users of payment systems be they customers, merchants, financial institutions who issue cards or the card schemes whose acceptance marques are on display, to be able to have confidence in the efficiency and stability of the payment system, is paramount. Any loss of confidence in any party could set back the existing trend towards electronic payments and thus reduce the economic efficiency of Australia. The rapid issuance and subsequent consumer take-up of contactless payments, shows that Australians will adopt more efficient payment options, if they can be assured that the infrastructure of the payment systems can offer them both efficiency and security. A key element in the rapid take-up of contactless payments has been the favourable co-incidence of there being a large number of contactless cards issued by both MasterCard and Visa through the financial institutions that are associated with each acceptance marque, already in the purses and wallets of cardholders; merchants with terminals that accepted contactless payments and cardholders prepared to give the new technology a trial, to see if it offered faster service at the POS and it was secure and hence safe to use. Contactless cards use near-field technology (NFC) to achieve a ‘tap and go’ payment environment, where there is no need to enter a PIN or sign for a purchase under $100, at merchants whose EFTPOS terminals accept contactless cards. Cardholders can either use their transaction account (cheque or savings) or their credit account, provided that their card(s) has the embedded antenna within the plastic that enables contactless payments. Purchases over $100 still require the cardholder to swipe or insert the card into the terminal and then provide a signature or PIN. As of June 2013 MasterCard reported that over 30 per cent of domestic MasterCard transaction in Australia that were under $100 are made using their contactless card technology. The use of contactless cards will be further encouraged if MasterCard and Visa succeed in their application lodged with the Australian Consumer and Competition Commission (ACCC), to cease the verification of credit card transactions by signature from 30th June 2014. Thereafter verification will only be facilitated as it is already
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with debit cards, by using the cardholders PIN or by a contactless verification if the purchase is under $100. In October 2013, the ACCC gave MasterCard, Visa and American Express permission to work together to phase out the use of signatures for card transaction verification, in favour of PINs, from the end of June 2014. This will be implemented by a public communications campaign, called PIN@POS, to be jointly funded by MasterCard, Visa, and American Express, so that a single message from the payments card industry can be delivered to both cardholders and merchants. The new rule will not apply when the magnetic stripe is used to validate the transaction, but it will apply when the chip on the card is used. This example of the different card acceptance marques working together is thus another unintended, but welcome, result of regulatory intervention. 6. Automatic Teller Machines (ATM’s) The importance of the ATM as a means of distributing cash has been reinforced by the decline in the number of face-to-face ‘points of presence’ in Australia. These include mobile lenders and agencies and statistics from APRA show that these have steadily declined since 2007 and this is also the case in remote and very remote areas in Australia (see Figure 14 below and Figure 19).
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Figure 14
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Source: APRA ADI Point of Presence
This makes the availability and operational consistency of ATM’s even more important as these ‘points of presence’ which includes bank branches, continue to be reduced in number. The examples of where there have been failures in the operational resilience of payment systems providers, has resulted in consumers being unable to access their funds, either through internet banking or via the ATM networks. ATM numbers in Australia have constantly grown in the recent past, and by June 2013 there were at 34,891 machines in operation (see Figure 15).
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Figure 15
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Source; RBA Payments System Board Statistics, Chart 8
However although the size of the ATM network has been growing, the activity levels on these machines are contracting. The year ended June 2013, has seen a steady decline, in both the value and volume of transactions conducted on the ATM network. Volume was down by 4.4 per cent and value down by 2.8 per cent in the year ended June 2013 (see Figure 16). Figure 16
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Source: RBA Payments System Board Statistics, Chart 4
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In contrast, the number of EFTPOS terminals in June 2013 was 779,555 and this represents an increase of 15,006 terminals over the last twelve months, although the growth trend in terminal numbers has slowed in the last year, relative to the previous four years (see Figure 17). These EFTPOS terminals were available in over 325,000 merchants and over 6 million EFTPOS transactions are made each day by Australians. This and the 15 cents fee that a merchant receives for each cash-out transaction, helps to explain why the share of cash taken out by consumers at EFTPOS terminals has continued to rise, whilst the share of cash taken from ATM’s has fallen in both value and volume (see Figure 16 above). Figure 17
Number of EFTPOS Terminals
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Source: RBA Payments System Board Statistics, Chart 8
The interventions by the RBA into the ATM networks in Australia have been well chronicled by Noone in 2012. This RBA Research Discussion Paper discussed the impact of the reforms of the Australian ATM network that the RBA instigated in March 2009. These reforms eliminated the interchange fees associated with the withdrawal of cash from ATM’s and this plus the promotion of each banks ‘own’ ATM network, resulted in a shift in consumers behaviour away from the so-called ‘foreign’ ATM’s, towards using ‘own-bank’ ATM’s. As in many countries, ATM’s have become a vital channel through which consumers withdraw cash, using their payment cards, attached to their cheque or savings accounts in their banks. According to research carried out by Emery et al, in 2007, two out of every three cash withdrawals in Australia were made by ATM’s and of these almost half occurred at
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machines that were not owned by the cardholders bank, that is, at so-called ‘foreign’ ATM’s. At this time a number of fees could be associated with this type of single transaction at a foreign ATM; an interchange fee (paid by the cardholders bank to the ATM owner); a foreign fee (that the cardholder pays to the her/his own bank for using another provider’s ATM) and the option of a direct fee (that the cardholder pays directly to the owner of the foreign ATM). As part of a series of reforms of the Australian ATM market, which were intended to increase competition and efficiency in the ATM system, interchange fees were prohibited by the RBA in March 2009 and a direct fee payable by the user to the ATM owner, was introduced as a means of ATM pricing for cardholders. Following the reforms, an ATM owner’s only recourse to recovering the costs associated with providing ATM services to other than its own customers, was to charge directly for ATM services – a direct fee. The RBA’s intervention did not formally ban ‘foreign’ fees, but these were discouraged by the RBA (RBA Bulletin, April 2009) and as the intention was to increase the transparency of ATM fees, direct fees had to be displayed on the ATM screen, prior to a transaction being finalised and at which point the customer can cancel the transaction at no cost to them. When the reforms were introduced in March 2009 many Australian ATM owners dropped their fees for ‘own-bank’ ATM withdrawals to zero, where they have remained. Cardholders are hence able to use their ‘own-bank’ ATM’s without charge. However direct fees payable for ATM transactions at ‘foreign’ ATM’s were introduced at an average of $2.00 per withdrawal. In this way cardholders see the total price of a ‘foreign’ ATM transaction, the direct fee, on the screen prior to deciding whether to proceed with or to cancel the transaction. As a result of the RBA’s interventions into ATM pricing, consumer behaviour has changed, in that prior to the reforms, transactions at ‘foreign’ ATM’s accounted for almost half of all ATM transactions, but they fell to around 40 per cent post reform (see Figure 18 below). Thus the communication of the new pricing regime seems to have had an impact on ATM users, such that if at all possible they seek to use an ‘own-bank’ ATM to withdraw their money from their bank.
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Figure 18
Share of transaction at foreign ATMs 60.0%
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Source: RBA Payments System Board Statistics, Chart 4
However as Australian consumers use more on-line, contactless and mobile payments, so their use of cash declines. ATM and EFTPOS cash withdrawals accounted for 20.4 per cent of all card based transactions in the financial year 2011/12, but fell to 18.2 per cent in the following year 2012/13. The number of EFTPOS terminals in Australia has grown to just under 780,000 by June 2013 and hence consumers are increasingly able to use ‘tap and go’ technology, even for relatively low value transactions, rather than use notes and coins. The development of the ATM and EFTPOS networks has achieved the purpose of allowing most Australian bank customers to access their funds at anytime and anywhere. These funds can then be used for electronic payments or accessed in cash to then make face-toface payments, in notes or coins. However there are concerns that indigenous communities have less choice of ATM’s, as there are less of these machines deployed in remote parts of Australia and with not having enough ‘own bank’ ATM’s, indigenous Australians are often forced to access their social security payments and their other funds through ‘foreign’ ATM’s and hence pay a direct fee to the these ATM operators. This then tends to exacerbate their social and financial disadvantages, as paradoxically the residents in these remote indigenous communities tend to be more heavily reliant on ATM usage then other
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Australians, due to their location, socio-economic situation and the reduction in the number of ‘points-of-presence’ in remote and very remote areas of Australia (see Figure 19 below). Figure 19
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Source: APRA ADI Point of Presence
In an attempt to improve this situation, in August 2012, the RBA, under its Access Regime for the ATM system, exempted participants in an arrangement for the provision of fee-free ATM services, to people living in very remote indigenous communities. Consequently on December 1st 2012, fee-free ATM access was introduced to people living in such communities. The Australian Bankers Association (ABA), working with fifteen retail banks and two independent ATM deployers, opened up fee-free access to 79 ATM’s in remote communities in the Northern Territory, Queensland, Western Australia and South Australia. The ABA is part of a multi-party working group set up by the Federal Government, to explore longer term solutions and develop strategies for addressing ATM usage and related issues in such communities, including identifying options for alternative cash transaction service delivery.
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7. Summary The initial objective of the regulators intervention into the Australian payment card system was to change the relative prices charged to cardholders for using their credit cards and debit cards, so that they would more clearly reflect the costs of these two different types of payment card. Prior to the intervention, cardholders were encouraged to use credit cards by the absence of any fees or caps on the number of transactions that they could carry out on their cards and by the practise of many issuers of offering ‘reward points’, pro rata to the value of their spending. On the other hand, cardholders were discouraged from using their debit cards because they paid transaction fees if these cards were used more often than the ‘cap’ allowed by their bank and there were no reward programs attached to them. The intervention by the RBA to reduce and reorientate interchange fees and the removal of the no surcharge and honour-all-cards restrictions on merchants, has succeeded in changing the relative prices of using credit and debit cards, such that along with other macro-economic trends, spending on credit cards has plateaued, whilst spending on debit cards has substantially increased and shows no sign of abating (see Figure 20 and Table 2 below). Figure 20
The way we spend (proportion of all value) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Jun-03
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Source: RBA Payments System Board Statistics, Charts 1, 4, 5 and 6
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There have been other trends in the payments card system, some as a result of regulatory interventions, others more to do with societal changes, but all leading towards a Less Cash Society, if not a Cashless Society. As Table 2 reveals the number of ATM withdrawals has grown over the past decade in terms of both value and volume, but that growth has been overshadowed by the increase in value and volume of debit card purchases. There has also been an actual decline in both the value and volume of cash advances on credit and charge cards and these trends are shown both in Figure 20 and Table 2, as the changing proportions of the way we access and then spend our money. Cash-out transactions have also increased substantially in both volume and value and by June 2013, the combined value of debit card purchases including cash-outs ($16.04 billion) was considerably higher than the value of ATM withdrawals ($11.43 billion). Thus consumers appear to be using their debit cards more frequently, both to pay at the POS and to access their cash at the POS rather than via an ATM. Table 2: The Less Cash Society
Number of Credit/Charge Card Transactions Value of Credit/Charge Card Transactions Number of Debit Card Transactions Value of Debit Card Purchases Number of ATM Withdrawals Value of ATM Withdrawals Number of Cash Advances on Credit/Charge Cards Value of Cash Advances on Credit/Charge Cards Number of Cash-out Transactions Value of Cash-out Transactions Value of Debit Card Purchases including Cash-outs
June 2003
June 2013
84.9mil $11.54bil 77.4mil $4.27bil 55.78mil $9.33bil 2.98mil $896mil 15.2mil $0.87bil $5.15bil
146.9mil $21.1bil 269.7mil $14.6bil 62.33mil $11.43bil 1.93mil $799mil 23mil $1.44bil $16.04bil
Source: RBA Payments System Board Statistics
The advent of the increased number of contactless cards and EFTPOS terminals that can accept this type of ‘tap and go’ payment will further reduce the need to make payment at the POS by cash. As contactless payments and then mobile payments become more ubiquitous, they will provide convenience for the consumer and reduce the cost inefficiencies of cash from a merchant’s perspective, thus adding to the Less Cash Society.
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Hence the regulatory interventions in the Australian payment card system have had a major impact on the economics and the balance of power in the system. The RBA is however, ‘mindful that the pace and volume of change are challenging both for the system and the regulators and that they raise the potential for unintended consequences’ (Schwartz 2013). Hopefully this paper will have described what interventions have already taken place in Australia, but also made the point that regulators need to be realistic about what can be achieved through the application of rules/standards alone and that the active and positive participation of card schemes, card issuers and acquirers, merchant accepters and cardholders, is vital for ongoing improvements to both the levels of competition and efficiency in the system.
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References Bullock, M. 2010, A Guide to the Card Payments System Reforms, Reserve Bank of Australia Bulletin, September Quarter, 2010. Chan, I., Chong, S. and Mitchell, S. 2012, The Personal Credit Card Market in Australia: Pricing over the Past Decade, Reserve Bank of Australia Bulletin, March Quarter 2012. Emery, D., West, T and Massey, D. 2008, Household Payments Patterns in Australia; in Proceeding of Payments System Review Conference, Reserve Bank of Australia, Sydney 2008, pp. 139-176 Noone, C. 2012, ATM Fees, Pricing and Consumer Behaviour: An Analysis of ATM Network Reform in Australia, Reserve Bank of Australia, Research Discussion paper, August 2012. Reserve Bank of Australia, Payments System Board Annual Report, October , 2013. Schwartz, C. 2013, G20 Financial Regulatory Reforms and Australia, Reserve Bank of Australia, September Quarter 2013. The Federal Reserve Bank of Kansas City, August 2013 (a), Public Authority Involvement in Payment Card Markets: Various Countries. The Federal Reserve Bank of Kansas City, August 2103 (b), Credit and Debit Card Interchange Fees in the United States. The Federal Reserve Bank of Kansas City, August 2013 (c), Credit and Debit Card Interchange Fees in Various Countries. UK Payments Markets 2013, The Payments Council, London, United Kingdom, 2013
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