2

2.1 Market Definition and Substitutability .....................................................5

2.2 The Credit Card Reforms experience – application of the “user pays

principle”...................................................................................................8

2.3. Relative Pricing of EFTPOS debit and credit cards................................10

2.4 Proposed EFTPOS interchange fee standard is contrary to the user-pays

principle ..................................................................................................12

2.5 Public Detriment .....................................................................................12

2.6. The Australian Competition Tribunal.....................................................14

2.7 Proposed EFTPOS Interchange Standard Effect on Investment.............17

2.8 Why EFTPOS Interchange is justified....................................................18

2.9 Anti-competitive effects of proposed EFTPOS debit Standard..............19

2.10 Competition in the EFTPOS Debit Market.............................................20

3

This submission is in response to the Reserve Bank of Australia’s (“RBA”) request

out the RBA’s draft standards for the EFTPOS and Visa Debit payment systems and

the RBA’s reasoning underlying these proposed standards.

public interest for the RBA to designate the EFTPOS system. We still remain of this

view and our comments on the proposed standard for EFTPOS are made without

prejudice to CML’s position in relation this issue.

The Federal Court is currently considering many of the issues on which the RBA has

formed the opinions set out in the Consultation Document and which have led it to

draft the standards on which submissions are sought. It is possible that the Federal

Court may come to a view on these issues that is contrary to the views expressed by

the RBA in the Consultation Document, irrespective of the outcome of the proceedings.

We therefore reserve the right to make further submissions following the decision in

the Federal Court proceedings.

The Consultation Document released by the RBA outlines three draft standards for the

EFTPOS and Visa Debit systems. The first two deal with the interchange fee

arrangements for each of these systems, and the third deals with the issue of the

“honour all cards rule” ("HACR") and the “no surcharge rule” as it applies to Visa Debit.

be considered when there is clear evidence to show that there is a market failure and

that the proposed intervention, by the adoption of standards for setting interchange

fees, will adequately address that market failure.

There is no evidence there has been a market failure and even if such a failure had

occurred, there is no evidence that the imposition of the proposed EFTPOS

interchange standard would address such a failure.

CML does not accept that a proposal to regulate EFTPOS interchange fees is in the

public interest. An examination of the RBA's reasoning does not support a conclusion

that such regulation will increase competition and efficiency in the EFTPOS network.

On the contrary, as we and others including the Australian Competition Tribunal have

concluded, such a proposal is not in the public interest as it would increase costs to

2005

July 2004 and Submission to the Reserve Bank of Australia, Designation of the Australian EFTPOS

Payments System, October 2004

4

consumers, reduce competition and efficiency, and threaten the ongoing viability of

the EFTPOS system.

CML believes that in proposing a standard for EFTPOS interchange fees, costs will be

transferred away from the users of the system and onto the general public, contrary to

the user-pays principle. CML also believes, on the basis of its own experience, that

the imposition of an EFTPOS interchange standard would reduce competition in the

EFTPOS debit card market, by raising barriers to entry and making entry by new

participants more difficult.

Set out below in sections 2 and 3 are our detailed submissions in relation to the

proposed EFTPOS Interchange standard (Standard Number 3 in the Consultation

Document).

On the question of the proposed Visa Debit standards, Coles Myer and the Australian

Merchants Payments Forum ("AMPF") have made a number of submissions raising

concerns about the Visa Debit payment system in Australia.

Fundamentally, Visa Debit is a debit card and there is no justification for the

imposition of credit card interchange fees. We believe that the way in which Visa

Debit operates in Australia is improper and contrived to earn credit card interchange

fees on debit card transactions.

The current interchange arrangements that apply to Visa Debit significantly increase

the costs of processing debit card transactions for merchants through higher merchant

service fees and, as they are non PIN based, expose both merchants and cardholders to

greater risks of fraud. We believe that Visa Debit issuers should not be rewarded for

introducing greater costs and risks to merchants and cardholders, and reducing the

efficiency of the Australian debit card market.

Set out below in section 4 is our detailed submission in relation to the Visa Debit

Interchange standard (Standard Number 4 in the Consultation Document).

We also support the abolition of the HACR, in so far as it forces merchants to accept

different products. We believe that an effect of this rule has been to unjustly and

unreasonably force merchants to accept this expensive Visa Debit card product with

the disadvantage of all its inherent risks.

We note that similar concerns regarding the HACR have been the subject of litigation

in the United States, which resulted in a multi billion-dollar settlement for merchants.

Merchants ought to have the right to choose whether they wish to accept Visa Debit,

regardless of whether they choose to accept other Visa products.

Set out below in section 5 is our detailed submission in relation to the HACR standard

(Standard Number 5 in the Consultation Document).

5

The RBA has decided that the best way to assess efficiency and competition is to

apply a number of practical benchmarks. The Consultation Document concludes that

an efficient and competitive payment system is one in which:

• the relative prices charged by financial institutions to consumers who use

payment instruments reflect the relative costs of providing those instruments

(except where the private benefits or costs do not match the society-wide

benefits or costs) as well as demand conditions;

• merchants are free to set prices for customers that promote the

competitiveness of their business;

• prices for payment services are transparent;

• any restrictions on entry of institutions to a payment system are the minimum

necessary for the safe operation of the system; and

• competition within each payment system and between payment systems is

open and effective.

In the RBA’s opinion, the above benchmarks provide a sufficient basis for judging the

efficiency and competitiveness of the current system.

However, in assessing a payment system against these benchmarks the RBA has

determined that it is not necessary to strictly define the market in which particular

payment systems including debit cards operate. Whilst noting that this type of

analysis is customarily undertaken when assessing competition and efficiency issues

under the Trade Practices Act, the RBA determined without a clear explanation that

such analysis would not assist and was not necessary in order to form an opinion

about competition and efficiency in Australia’s debit card payment systems.

CML is of the view that identifying the market is critical to the analysis as to whether

that market is efficient or effective. CML challenges the proposition that it is possible

to reach the conclusion that a market has failed and hence warrants intervention if the

market, which is said to have failed, has not been properly identified or defined.

The RBA also considered that it is not necessary to examine in detail the extent of

substitutability between different payment instruments, preferring instead to rely on

some observations about the features of credit and debit cards and concluding that

obtaining reliable data to formally estimate elasticities would be too difficult.

Despite the difficulty in identifying the relevant market, the Australian Competition

and Consumer Commission (“ACCC”) has made efforts to identify the EFTPOS

payments market and possible substitutes. Similarly the AMPF has conducted

customer surveys that include data relevant to the question of market substitutes.

6

The issue of market definition and substitution in the context of the EFTPOS payment

was difficulty in accurately defining the relevant market for the EFTPOS payment

system because of the extent to which financial services are bundled and the extent to

which consumers did not pay fees for the use of their EFTPOS debit cards.

In its draft determination to deny the authorisation of a multi-lateral price fixing

agreement for the EFTPOS payment system, the ACCC noted that:

On the question of substitutability, the ACCC also made the point:

Contrary to the approach adopted by the ACCC, the RBA concluded that there is

“strong evidence that credit and debit cards are highly substitutable for many

2003, ACCC Determination in relation to the collective setting of EFTPOS interchange fees, 11

December 2003

6 ACCC Determination at 6.24

7

relies heavily on price being a key determinant of substitutability, something that the

ACCC had earlier cautioned.

that whilst there was a clear trend amongst Swedish card users to favour debit cards

over credit cards this was not the case in Anglo-Saxon countries. They concluded that

cultural differences might therefore account for the differential preferences between

In its decision to reject a proposal for a multi-lateral price fixing agreement for

EFTPOS, the Australian Competition Tribunal also expressed its surprise that no

evidence had been provided to the Tribunal about the attitudes of consumers to the

use of credit or debit cards, given the reliance the banks had placed on substitutability

of credit cards and debit cards to seek to establish the net public benefit of their

The Australian Merchant Payments Forum did however commission a customer

there are a wide range of factors that influence customer choice of payment method.

Consistent with the findings of the ACCC, it found that price ranked fairly low in the

of consumers using credit cards cited price as a reason.

CML submits that there is no “strong evidence” to support any degree of

substitutability between credit and debit cards and there is no evidence at all to

support a conclusion that they are “highly substitutable to many people”. Such a

conclusion in our view is unreasaonable.

First, a change to substitution patterns will be dependent on the extent and form of

pass through of changes in interchange fees. There is no basis for the RBA’s view that

pass through will be either significant or reflected in per transaction prices.

Second, substitution patterns are also dependent on the cardholders own financial

circumstances ie availability of cash funds versus availability of credit.

Even if the reduction in interchange fees were passed on to cardholders in the form of

lower transaction fees, this would affect less than 18% of EFTPOS transactions that

attract fees. The limited effect that such a diluted reduction might have on those

EFTPOS customers is dependent on:

8

connection with the use of their credit card (for example, whether they are

transactors or revolvers);

(c) whether they were previously incurring fees in connection with the use of

their debit card; and

their credit and debit cards in comparison with the prices of using them.

It seems therefore surprising that little regard is had to this issue in the Consultation

Document given the reliance the RBA has placed on possible substitution effects as a

consequence of their proposed EFTPOS interchange standard.

Before examining the proposed EFTPOS standard, it is worth considering the

approach taken by the RBA with respect to the credit card reforms. In October 2000

the RBA and the ACCC jointly published a study on interchange fees and access. The

object of the Joint Study was to assess whether interchange fees were encouraging

efficient provision of debit and credit card services.

The RBA was concerned that the user-pays principle was not operative in the credit

card system. The resource cost of using credit cards were not being borne by

transactors” in the total prices they faced, because they paid no transaction fees or

other charges such as interest. Instead the resource costs were being borne by

“revolvers” and, more significantly, the general public. This was a result of a prima

system were being pushed onto merchants who had no choice but to pass the costs

onto the general public.

The irony of this is that the RBA is now proposing to impose a uniform interchange

fee with respect to EFTPOS, the effect of which merchants will face higher costs and

have little choice but to pass these higher costs on to the general public.

price signals facing customers using credit cards were not established on the same

basis as other payment instruments. It concluded:

card schemes was conducted by the Enforcement Division of the ACCC. Following that investigation,

the ACCC wrote to various financial institutions and to the three credit card schemes in Australia

informing them that, in its view, the joint setting of credit card interchange fees was a likely breach of

section 45 of the Trade Practices Act. The ACCC later instituted proceedings under that Act against

one major bank. The proceedings were later discontinued, without any finding by the court, when the

RBA reached a decision to designate the credit card payment systems, and impose a standard

regulating interchange fees.

Impact Statement, 27 August 2002

9

In clear contrast to credit cards, the RBA found no imbalance in EFTPOS transaction

prices and costs when it published its final consultation paper on credit card reforms

in August 2002. The RBA observed:

The position has only improved since then, in that per transaction fees (for those

cardholders who face transactions fees above a fee free threshold) have fallen from 50

The RBA made the point that reform of credit card interchange was needed as

financial institutions actively promoted credit cards because it was the payment

instrument for which they received the highest return. Despite it being a costly

instrument for financial institutions to provide, the interchange pricing arrangements

for credit cards, which were collectively set by the members of each scheme,

encouraged the use of a relatively high-cost payment instrument over lower cost

alternatives.

The credit card standard established a cost based benchmark based only on issuers’

eligible costs. These included issuers processing, authorisation, fraud and interest free

funding costs.

Whilst the new benchmark led to a significant reduction in average interchange fees,

the standard still allows issuers to recover a significant part of their costs from

acquirers and merchants rather than from their cardholder customers.

In other words, the distortion that the RBA was seeking to remove still remains.

Credit card issuers have not altered their fee structures to impose transaction fees for

credit card transactions, although they are free to do so. Credit card issuers benefit

from greater use of credit cards and transaction fees would act as a disincentive to

their use.

For many customers a credit card still remains a subsidised method of payment. If the

balance is paid off by the due date, the cardholder receives a subsidy equal to the

value of the interest free period. The issuers’ costs of offering this subsidy are paid for

by a combination of annual fees on cardholders, a typically high interest margin on

It also remains the case, based on data published in the Joint Study, that even with

lower interchange fees, credit cards provide the highest return, and are more

profitable, for issuing banks than debit cards. There is no reason to expect issuing

10

banks to suddenly commence promoting debit cards over credit card, and issuing

banks have never suggested that this would occur. Designation of the EFTPOS

payment system and regulation of interchange fees will not alter this.

The reality is that banks will continue to offer many cardholders a subsidy to use

credit cards and banks will continue to promote their use ahead of debit cards.

Consistent with the approach taken with respect to the credit card reforms, and the

conclusions it reached with respect to EFTPOS debit cards, there is simply no case for

the introduction of any form of regulatory intervention. To the extent that there is

concern that this subsidy leads to over-use of credit cards relative to the use of

EFTPOS, the more appropriate approach would be to address this concern by further

reforming credit cards. For example as originally proposed, the RBA could disallow

the cost of providing the interest free period as an eligible cost in the credit card

standard.

The RBA is now taking a different approach to justify the need for a standard for

EFTPOS interchange fees than it did with respect to credit cards. In justifying its

proposed EFTPOS interchange standards, it has not compared the average cost of

providing debit card services with the fees typically faced by consumers, (which the

RBA noted were broadly in line with respect to debit cards but not credit cards).

Instead, the RBA justifies regulatory intervention to impose EFTPOS interchange

standards by comparing relative fees for debit and credit cards.

The RBA claim that users of the EFTPOS system face either a zero or positive price

for each transaction, whereas users of credit cards typically face either a zero or

negative price, and that a narrowing of this differential would promote the efficiency

of the overall payments system.

CML submits that the RBA’s proposed approach is inconsistent with the efficiency

framework adopted with respect to the credit card interchange standard, where it

sought to bring credit card prices in line with costs, which with respect to EFTPOS

the RBA has conceded are already broadly in line. Further it does not have a sound

economic basis and is unreasonable.

CML submits that this conclusion is not supported by the facts, and is based on a

flawed analysis of cost and price.

11

In its analysis in relation to credit cards, the RBA ignores annual fees, late payment

fees, over limit fees, interest charges, merchant surcharges and the cost and value of

benefits obtained through loyalty programs. It excludes the fact that consumers may

regard interest as part of the price of using a credit card and that it is unavoidable for

many people. With respect to debit cards, it dismisses the fact that the number of debit

card transactions that attract a fee is now a minor and dwindling category and also

ignores the fact that debit cards are often bundled with other products and no fees are

charged for use of such debit cards.

Banks that issue credit cards have chosen, not to charge transaction fees and instead

charge a range of other fees including annual fees and late payment fees. There is no

suggestion that credit card issuing is other than a highly profitable business for banks,

as shown in the Joint Study. The largest burden of credit card pricing falls on

revolvers who must meet high interest charges and late payment fees. RBA data

Accordingly, a large proportion of credit card users are paying a substantial price in

connection with the use of their credit card. The terms and conditions generally

offered by banks in connection with a credit card provide that for a cardholder to

benefit from an interest free period, the cardholder must hold a particular type of card

and must repay the whole of the balance of the credit card account within each

statement period. If this condition is not satisfied, the cardholder must pay interest on

the outstanding balance.

The RBA’s concerns with respect to the relative pricing of credit cards and debit cards

is also at odds with the RBA’s own standard for credit card interchange, which allows

the issuer to recover a range of eligible costs including interest costs and fraud costs

from the acquirer/merchant rather than forcing them to recover these costs directly

from the credit card holder.

Conversely, banks that issue debit cards have chosen, again for their own reasons, to

charge fees on some debit transactions. However, since 1999, banks have been

steadily reducing their reliance on debit transaction fees. The RBA’s Bulletin dated

May 2004 noted that fee income from account servicing charges grew more strongly

than transaction fees in 2003; some banks had recently moved towards more

simplified fee structures that offered unlimited free electronic transactions in

exchange for a fixed monthly account-servicing fee.

The Bulletin also noted that most banks offered fee exemptions to various customer

groups such as pensioners, social security recipients and under 18s and also typically

offered fee discounts or waivers for customers who have multiple products with the

bank eg a home loan, or who maintain a sufficiently high account balance.

This trend has continued as reported more recently. In May 2005, the RBA reported

12

In summary, CML believes that the relative pricing analysis is inappropriate, is based

on flawed analysis, does not recognise the deliberate pricing practices of the banks

and is at odds with the RBA’s own standard for credit card interchange.

It is CML’s position that the user-pays principle is generally necessary and broadly

sufficient for economic efficiency, and that any public policy decision that, unless

evidence to the contrary demonstrated it, worked against the user-principle would

prima facie be a departure from, not a move towards, economic efficiency. The RBA

has not provided any evidence to suggest that departure from user-pays in this

instance would increase economic efficiency.

In its decision to designate and impose a standard to reduce the credit card

interchange fees, the RBA sought to advance the user-pays principle as a means of

promoting efficiency. Similarly we would argue that the proposed standards with

respect to Visa Debit cards seek to achieve similar goals.

However in proposing a standard for EFTPOS interchange with the express aim of

reducing the EFTPOS interchange fee for the purpose of bringing about a reduction in

the price paid by cardholders, the RBA is consciously transferring costs away from

the users of the EFTPOS system and onto the general public, and thereby acting

contrary to the user-pays principle.

Reducing the EFTPOS interchange fee does not reduce costs. It simply transfers costs

away from issuing banks and imposes those costs on merchants. As found by the

Australian Competition Tribunal, to the extent possible, merchants can be expected to

pass on the higher costs in a general increase in the price of goods and services.

Accordingly, the net effect of the RBA’s proposed EFTPOS interchange standard will

be to transfer costs associated with the use of a bank debit card away from debit

cardholders and the issuing bank and impose those costs on all consumers in the form

of a general increase in the price for goods and services.

The proposal would see more cross-subsidised transactions, paid for through a general

rise in the price of goods and services, which is inimical to ‘transparent’ prices for

payment services. Given that the RBA established transparency as one of the practical

benchmarks to assess competition and efficiency, the RBA’s position on EFTPOS is

hard to fathom.

The RBA states that it is not concerned about transferring costs to the general public

for two reasons. First, it states that if as a result of the change to interchange fees there

However the RBA is unable to provide any evidence to support that this will be the

outcome of imposing an EFTPOS interchange standard.

13

In CML’s view, this does not however justify acting contrary to the user-pays

principle. As outlined above there is no evidence to support the likelihood of such

substitution, indeed the AMPF Customer survey indicates such substitution is

unlikely.

The RBA has not undertaken any modeling on the likely rate of substitution

(particularly having regard to the low level of EFTPOS cardholders who currently pay

transaction fees), and the rate that would be required in order for the switch to credit

cards to outweigh the increased costs to merchants from the reduction in the

interchange fee.

CML’s own modeling shows that we would require a very significant shift in credit to

debit card transactions, to offset the additional costs that would flow from the

proposed debit card reforms (see Confidential Annexure A). There seems no

likelihood that such a significant shift would occur.

The second reason given by the RBA for ignoring the principle of user-pays is that

merchants have benefited from the change to the level of interchange fees in credit

package of reforms, where merchants benefit from credit card reforms but bear the

burden of the debit reforms. This is an indefensible proposition.

If the credit card reforms were necessary to improve efficiency and competition in the

credit card payment system (which CML accepts although much of the distortion

identified by the RBA remains), then the merchants were entitled to any benefits that

flowed through to them, particularly in light of the concerns regarding possible

breaches of the Trade Practices Act. This does not justify the current proposed

EFTPOS interchange standard. It has nothing to do with competition or efficiency in

relation to the EFTPOS system, or the principle of user-pays. It also disregards the

RBA’s observation that those benefits have already been passed through to

The RBA has never suggested or argued that the lowering of the credit card

interchange fees resulted in merchants increasing their profits. This is based upon the

competitiveness of the retail sector where, fee reductions received by merchants have

been passed onto the general public in the form of lower prices for goods and

services. Indeed, the RBA undertook the regulation of the credit card interchange fees

for that very reason.

There is no efficiency justification for the proposition that the benefit received by the

general public from the credit card reforms, based on the user-pays principle, should

be unwound or offset by the proposed regulation of the EFTPOS interchange fee. The

effect of the reduction in the EFTPOS interchange fee will be precisely the opposite

of the effect of the reduction in the credit card fee: it will increase costs to merchants

and thereby increase costs to the general public.

14

The validity of the assumption that lowering EFTPOS interchange fees would

increase competition and efficiency was directly challenged in the proceedings before

the Australian Competition Tribunal (“Tribunal”) in respect of which the RBA was

granted leave to intervene.

The Tribunal handed down its decision on 25 May 2004 and dismissed a proposal to

introduce a lowering of EFTPOS interchange fees to zero, stating that it did not agree

with the ACCC that the public benefits and detriments of the proposed agreement

The banks seeking to introduce zero EFTPOS interchange fees claimed that the lower

fees would result in public benefits such as:

• Reducing the overall cost of the Australian payments system by decreasing the

cost of EFTPOS, thereby encouraging its use in preference to credit cards and

charge cards.

• Increasing the flexibility in setting future fees.

• Reducing barriers to entry for new market participants.

In responding to these claimed benefits CML presented evidence to show that zero

EFTPOS interchange fees would not result in a public benefit but in fact would have

the opposite effect, a view adopted by the Tribunal, for the following reasons:

• Reducing interchange fees does not reduce the overall cost of the Australian

payment system, it simply shifts costs from issuers to merchants, increases

general prices for goods and services and does not give rise to public benefits.

• There is no evidence that zero interchange fees would result in reduced

cardholder fees.

• There is no evidence that zero interchange fees would lead to increased

EFTPOS usage.

• Financial institutions will still have an incentive to promote credit cards as

against debit cards.

• Lower returns on investment on EFTPOS infrastructure would impact on

future innovation and network upgrades or enhancements.

The RBA dismisses the findings of the Tribunal, but provides little, by way of

explanation as to how it has reached a different view to that of the Tribunal.

15

On the issue of pass through, the RBA expresses its confidence that the

competitiveness of retail banking in Australia, in the event of lower EFTPOS

interchange fees, would lead to more attractive EFTPOS pricing for cardholders or

more favourable promotion of EFTPOS by financial institutions.

No evidence has been provided to support this opinion. Given the Tribunal’s finding,

and the evidence contradicting the RBA’s view, CML finds the RBA’s position

unsustainable.

The likely response of the banks to a reduction in the EFTPOS interchange fee is

evidenced by their public statements in connection with their application for

authorisation of the Zero Interchange Fees Agreement advanced in 2003. The issuing

banks advised the ACCC that the cost reduction resulting from the removal of

interchange fees was likely to be passed on to cardholders in some form – such as

lower retail banking fees and/or through enhanced services and/or higher transaction

account deposit interest rates.

ACCC, the banks were putting the prospect of “pass through” as high as they

possibly could.

The banks relied on these statements before the Tribunal, but did not introduce

evidence as to what savings would be passed on, and in what form. The Tribunal

observed that the banks who were parties to the Zero Interchange Fees Agreement had

given only vague commitments to pass on the cost reduction.

The Tribunal also considered whether, assuming card issuers passed on the cost

reduction to cardholders, this would be in the form of reduced transaction fees. The

Tribunal concluded:

16

The Tribunal observed that even if the issuing banks raised the number of fee-free

transactions, this may not have any effect on cardholder demand for EFTPOS. The

Tribunal noted that there was a high level of EFTPOS users who pay no fees, as they

are within the fee-free threshold. If a cardholder usually had five transactions a month

with a fee-free level of seven, their decision whether to go to a sixth or seventh

transaction, or substitute use of debit over use of their credit card, was not likely to be

The Tribunal also observed that no evidence had been provided about the attitudes of

Another important factor that the Tribunal relied on was the fact that the major banks

make far more substantial profits from credit cards than debit cards even following

the RBA’s credit card interchange reforms. The Tribunal concluded

This view was later supported in an article published in the Australian Financial

Review, which reported that internal National Australia Bank analysis of the RBA

reforms had identified the threat to the banks as not just being credit card interchange

fee reductions and more expensive loyalty programs but also the impact of increased

In final submissions before the Tribunal, CML summarised the position as follows:

Whilst it was accepted that this increase in costs to merchants would likely discourage

some merchants from accepting EFTPOS for low value transactions or to reduce the

functionality of EFTPOS to cardholders in other ways, such as surcharging or

minimum purchase requirements, the Tribunal found that the most likely consequence

17

(without excluding the possibility of other consequences) would be a general increase

in prices.

The Tribunal concluded that the likelihood of a flow on of costs to consumers would

Rather than sending more transparent price signals, this is in fact contrary to the

principle of ‘user-pays’. The effect of transferring this $170 million cost would be to

“bury” the costs of EFTPOS transactions in higher retail prices charged by retailers to

CML believes that there has been insufficient consideration of the effect of the

proposed EFTPOS interchange standard on investment by merchants in the EFTPOS

payment system, and CML believes that the conclusion it has reached is unreasonable

in light of the evidence given on this issue.

In the Consultation Document, the RBA stated that it gave little weight to the

argument that a reduction in EFTPOS interchange fees would result in reduced

investment in the EFTPOS system. The reason given by the RBA for according the

argument little weight was that internationally, EFTPOS debit card systems operate

Further, the RBA’s opinion is at odds with the conclusion of the Australian

Competition Tribunal. On the evidence before it, the Tribunal concluded that the

increased cost for merchants arising from the Zero Interchange Fees Agreement was

likely to operate as a disincentive to undertaking future investment in upgrading the

For example, Caltex gave evidence before the Tribunal that it had decided that it

would not proceed with the introduction of EFTPOS readers at petrol pumps in a zero

interchange fee environment.

CML also gave sworn evidence before the Tribunal, and more recently before the

Federal Court, that the reduction or removal of interchange fees will have an adverse

impact on CML’s investment in EFTPOS infrastructure and technology

improvements over time.

The RBA dismisses this evidence and instead relies on an assertion about investment

incentives in other countries in circumstances where the validity of any such

comparison is unknown and has not been investigated. The Australian Competition

Tribunal cautioned that there was not a great deal of value in such generalised

overseas comparisons, because the way a banking system operates in a given country

is a result of a complex mix of historical, geographical, political, cultural and socioeconomic

18

In the second half of the 1980’s CML developed its EFTPOS strategy. This centered

on our decision to invest directly in our own EFTPOS infrastructure. Our decision to

invest in this infrastructure was predicated on reaching acceptable terms with card

providers to reimburse CML for the cost of generating and delivering transactions to

the providers. That is, it was dependent on the negotiation of acceptable interchange

fees.

awareness, the RBA has consistently disregarded the costs incurred by merchants in

providing and operating infrastructure to facilitate the provision of EFTPOS services

in its consideration of the resource costs of the EFTPOS payment system. It did so

For the purposes of the Joint Study, the RBA did not seek or obtain any information

concerning costs incurred by CML (which is also an acquirer) or any other merchants

in facilitating the provision of the EFTPOS system. The information sought and

obtained by the RBA was confined to costs incurred only by issuing and acquiring

It is CML’s view that we have a commercial right to negotiate with card issuers to

seek recovery of the costs we incur in processing their cardholder transactions. We

have invested and established our own network and we seek an appropriate return on

our investment in that network from those who wish to access it. Details of CML’s

EFTPOS operating costs are outlined in Confidential Annexure B, together with

details of our EFTPOS fee income which is considerably less than our total costs.

Put simply, third parties who benefit from the EFTPOS system should not be entitled

to get a free ride. CML is not aware of any other industry where a participant is

required to provide its own network for use by others and be denied the opportunity to

charge a fee to recover the cost of its use.

It is not reasonable for the banks to be given the opportunity to recover costs and

profit from cardholders and merchants, but CML, as a merchant principal, is denied

the opportunity to charge banks for use of its network, particularly in light of the

substantial investment and ongoing operating costs CML has committed to incur.

19

CML’s participation in the EFTPOS payment system has resulted in competitive

pressure being imposed on the level of interchange fees being paid. The fees payable

by issuing banks to CML are generally lower than the level of fees payable by issuing

banks to acquiring banks. This is significant given that we account for approximately

16% of all EFTPOS debit transactions. By cutting out the intermediary (the acquiring

bank), CML has been able to share the cost saving between the issuing bank and

itself. The ability to negotiate these fees with issuing banks has been key to our entry

to the market.

In CML’s view, the variations in the fees negotiated between issuers, acquirers and

merchants can only be explained as the product of competitive negotiations, where

different parties place different valuations on the costs and benefits to themselves of

participating in the EFTPOS payment system. The Joint Study acknowledged that this

was the case. It concluded its discussion of debit card fees with the following

observation:

The Joint Study also found that the ability of merchants to negotiate fees with banks

already exerted substantial competitive pressure on inter-bank fees in the EFTPOS

payment system. In relation to debit card payment networks, the Joint Study noted

that the difference between average interchange fees per transaction and average

revenues per transaction were much closer in the case of the debit card payment

network than in the case of the credit card payment network. The Joint Study

attributed this feature of debit cards to the competitive discipline imposed by

merchants:

The effect of the RBA’s decision will be to remove, or fundamentally reduce,

competition between issuers and acquirers in the negotiation of the interchange fee.

20

The fee to be agreed between the counter parties would no longer be based on their

individual costs, their individual assessment of benefits or the volume of transactions

the subject of the agreement, all of which would have been relevant considerations in

a competitive market environment. Instead, the negotiations would be subject to a

regulatory cap, which does not properly reflect the true costs of operating and

maintaining the EFTPOS network.

The RBA’s decision will also have a number of consequential anti-competitive

effects, in addition to the direct effect of removing or fundamentally reducing

competition between issuers, acquirers and merchants in the negotiation of the

interchange fee.

Removal or fixing of interchange fees will reduce the likelihood of new competitors

entering the market and will reduce the likelihood of increased competition in the

EFTPOS debit market.

Fundamentally, the decision is likely to raise barriers to entry to the EFTPOS payment

system. As noted above, CML was able to act as an acquirer of EFTPOS payment

services, and deal directly with issuers, by discounting the interchange fee that would

otherwise have been payable by the issuer to an acquiring bank. Absent this ability to

negotiate the fee, it would have been much more difficult for CML to negotiate direct

access agreements. As a consequence, CML believes that new entry would be more

difficult for any potential participant if there is no ability to negotiate the level of

interchange fees. Consequently competition would be further reduced. CML also

believes that this will not be mitigated by APCA’s proposed access regime.

The sole reason given by the RBA for its conclusion that fees are subject to little

competitive pressure is a theoretical analysis, which does not bear out practical

experience. The RBA posits that neither issuers nor acquirers are willing, or able, to

initiate a process of competition over interchange fees; and this is because an issuer

cannot credibly threaten to terminate an arrangement, and an acquirer cannot agree to

a lower fee because if it receives lower revenues from issuers it would be unable to

In the Consultation Document, the RBA refers to the “hurt” that an issuer or acquirer

might suffer if it were the first to move:

21

Promoting competition means promoting a situation in which individual issuers or

acquirers take risks that they will win or lose business when they negotiate different

fee levels. Competition is the antithesis of the comfortable situation where the banks

know that they will only adjust prices in unison. We believe there appears to be a

misconception between damage to particular competitors and the promotion of

competition.

Far from not reflecting normal competitive pressures, as the RBA suggests at pages

19 and 20 of the Consultation Document, the risk that an acquirer or issuer may hurt

its competitive position if it breaks ranks with the other banks and negotiates a more

competitive interchange fee is the very stuff of competition. CML contends that the

fear of breaking ranks shows that the operations of major acquiring and issuing banks

are highly concentrated and oligopolistic in nature, and ought not to be shielded from

The Australian Competition Tribunal rejected the RBA’s line of reasoning. It

concluded that merely because fees were paid upstream in a two-sided market did not

mean that the fees were exempt from competitive pressure. It pointed to the concern

exhibited by all issuing and acquiring banks about protecting the confidentiality of

their bilateral agreements as evidence the very real competition to which they are

subject in the negotiation of interchange fees. Knowledge of the fees payable by other

banks would give a very real competitive advantage.

For example in defending the confidentiality of the Bank of Queensland’s bilateral

agreements with the ANZ and NAB, senior counsel for the banks said:

Further, because all acquiring banks are issuing banks (ie they perform both

functions), they have the potential to trade off any reduction in fees. For example, the

acquiring division may have reduced its costs by reason of technological advances, or

economies of scale and may be willing to negotiate the receipt of lower fees so that

the issuing side of its business will pay lower fees. The issuing side may then be in a

position to invest the savings in improved services to its customers.

accounting for over 90% of debit card transactions

22

Competition is based on the concept that individual traders are free to make decisions

about prices, services offered and investments and take risks. In a free market

environment, competition will produce winners and losers. Risk takers may be

rewarded by competitive advantage, or may be hurt or may fail.

Protecting market participants from the forces of competition by regulation is the

antithesis of competition,. There is simply no sound reason why as a matter of public

policy why banks should be protected from the pressures of competition.

For the reasoning we have outlined above, CML and others do not accept that a

standard for EFTPOS interchange is necessary, desirable, defensible or in the public

interest. Notwithstanding should the RBA decide to impose a standard, we believe a

standard ought to be based on the following principles.

Observing the flow of money to determine who provides services to whom is a

standard part of business theory. In the case of retail banking, customers provide both

rule, Barry Nalebuff and Adam Brandenburger urge readers to ‘follow the dollar’ to

determine who are suppliers and who are customers, and state:

Applying this principle in the case of EFTPOS interchange fees, it is clear that

services are being provided by acquirers to issuers. It is clear from the terms of our

own agreements with issuers and is also clear from the terms of the interchange

agreements between issuers and acquirers, as described by Counsel for the AMPF in

the Federal Court in the cross-examination of witnesses and submissions. Moreover,

the flow of fees also shows that some large merchants provide services to acquirers

and/or issuers, since a payment is made reflecting the provision of services by the

merchant that would otherwise be required to have been provided by the acquirer.

Consistency with the RBA’s standards on credit card interchange fees would require

an interchange fee that was based on costs incurred by acquirers, rather than issuers.

This is because:

revenues incurred by issuers and acquirers in providing debit card services,

which is a concept the RBA has previously accepted;

pp. 15-16.

23

challenge in its standards on credit card interchange fees; and

debit card payment mechanism

The principles that the RBA used in determining which costs would be included in

credit card interchange fees, and which costs would be excluded was to:

and for which costs are recovered through interchange fees; and

considerations, and are therefore not relevant to interchange fee calculations.

Applying these principles to a possible EFTPOS interchange standard requires that

the following costs be included:

(i) acquirers' and merchants' costs incurred in processing debit card

transactions, including the costs of receiving, verifying, reconciling and

settling such transactions, the cost of installing and maintaining PINpad

terminals, line encryptors and host security modules which are necessary

to ensure the security and integrity of cardholders PIN data, APCA fees;

and

(ii) acquirers' and merchants' costs incurred providing authorisation of debit

card transactions; including network communication costs required to

support online real time authorisations.

It is proposed that data be collected from institutions who account for at least 90% of

the EFTPOS debit transaction acquired in the EFTPOS system. The RBA anticipates

that data will be collected from around 5 institutions. The proposed standard however

proposes only to use the eligible costs of the three ‘nominated EFTPOS acquirers’

with the lowest costs, to provide “efficiency incentives”.

In our view all acquirers/merchant principal costs (including those acquiring costs

borne by merchants) should be included not just those of the three lowest. Efficiency

incentives are still achieved by using an average of all participants’ surveyed costs.

Further it would be inconsistent with the current credit card interchange standard and

the proposed Visa Debit standard where all issuers’ costs are included and averaged.

The RBA has recently announced a possible change to the current credit card

schemes eligible costs in order to establish one credit card benchmark. An alternative

proposal which the RBA does not support, is to adopt the lowest cost schemes costs.

If the RBA does not adopt the proposal to use the lowest cost of the three credit card

schemes, in line with its own recommendation, then consistency with the proposed

EFTPOS interchange standard should demand that all nominated acquirers costs be

considered and averaged not just the three lowest cost acquirers.

24

The Joint Study highlighted concerns with respect to Visa Debit cards, stating:

These concerns have also been highlighted in a number of submissions made

by the AMPF, and CML supports the arguments presented in these submissions.

Fundamentally, Visa Debit is a debit card and there is no justification for the

imposition of credit card interchange fees. The current interchange arrangements that

apply to Visa Debit significantly increase the costs of processing debit card

transactions for merchants through higher merchant service fees, and as they are non-

PIN based, expose both merchants and cardholders to greater risks of fraud.

There is no justification for applying the credit card interchange standard to a debit

card. Debit card interchange standards should be based on a consistent basis. Of

course making this task difficult is the fact that Visa Debit interchange currently flows

in the opposite direction to EFTPOS debit.

We also note the same user-pays principle concerns in relation to Visa Debit as there

are with credit cards. Unlike the position with EFTPOS debit, the costs of providing

Visa Debit services are not broadly in line with the fees faced by cardholders.

In CML’s view as a debit card, Visa Debit should have interchange arrangements

consistent with EFTPOS Debit.

If the scheme and its members are unwilling to adopt interchange arrangements

consistent the arrangements for EFTPOS Debit, then a standard should be adopted

that brings interchange fees on Visa Debit into line with EFTPOS interchange fees.

This standard should incorporate the cost components inherent in the current EFTPOS

interchange fees namely those as described under sub points (i) and (ii) on page 23 of

this submission.

Should the RBA decide that as an “evolutionary” step it is necessary to apply the

credit card interchange standard to Visa Debit then only those relevant eligible costs

should be included, ie the eligible costs referred to in paragraphs 11(i) and 11(iii).

Further there should not be any consideration given to including fraud costs. As it

would be unconscionable to compensate issuers for the costs associated with adopting

fraud prone signature based authorisations as against the secure PIN based

authorisations offered by EFTPOS debit.

25

As previously argued we support the abolition of the HACR as proposed in Standard

5, paragraph 10. Visa Debit ought to compete with other payment systems on its own

merits, and its acceptance should not be tied to Visa credit acceptance.

We believe that the effect of this rule has been to unjustly force merchants to accept

this expensive debit card product.

Similar concerns have been addressed in other markets notably in the US and in the

UK. We also support the separate identification of Visa Debit cards proposed in

paragraph 11, which will be necessary to give merchants that choice in practice as

well as in theory.

Finally in relation to the proposed “no surcharge rule” there is simply no logical

reason for this rule to continue to apply to Visa Debit cards given that the rule was

abolished for credit cards nearly three years ago. We have no objections to the

proposed wording of paragraphs 8 and 9.