Australian Prudential Regulation Authority. Tyro is Australia’s independent provider

of acquiring services for credit, scheme debit and EFTPOS cards and electronic

Medicare processing services for patient paid and bulk-bill claims.

Tyro Payments is responding to the Reserve Bank of Australia’s consultation from

the perspective of the only new entrant into the payment space competing with the

incumbent banks as an acquirer only i.e. an ADI that does not issue cards and

does not take deposits and as a technology innovator.

The RBA announced in March 2012 that it considered a new designation was

required in respect of EFTPOS due to recent changes in this payment system. The

two options put forward by the RBA for such new designation are:

In the consultation material the RBA also made reference to the possibility that:

It is Tyro’s submission that:

1. The RBA must continue to designate EFTPOS and use its statutory powers to issue appropriate standards in the public interest that will control risk and promote efficiency and competition in the EFTPOS debit card system.

2. The EFTPOS system should not be defined by reference to ePAL and its

rules but rather by a broader definition that recognizes the interests and

roles of participants and users of EFTPOS that are not members of ePAL.

These are discussed in more detail below.

20 April 2012

Payments Policy Department

Tony Richards

Reserve Bank of Australia

GPO Box 3947

SYDNEY NSW 2001

Dear Tony

Page 2

The Payment Systems Board is charged with ensuring the safety, efficiency and competitiveness of payment systems such as EFTPOS for the public benefit. It is only the RBA that has such powers and the legal obligation and perspective to act solely in the public interest.

An entity such as ePAL which is owned and controlled by companies, who are

otherwise legally obliged to act in the interests of their own shareholders, cannot

satisfy these fundamental thresholds.

The fact is that the Australian payment system is dominated by the four major retail

banks. There is no countervailing power, except for government and regulator. The

two payment industry bodies APCA and ePAL are controlled by the dominant quartet.

As a consequence, while proprietary innovations recently flourish providing value to

the respective institution’s customers and locking out competition, the innovation

and investment into the core and openness of the Australian payment system has

been excruciatingly slow. Australia, once perceived as leading in payment solutions

has thus been falling behind.

Faith was put into the banks to foster innovation and invest securing the required

resilience and performance of the nation’s payment systems, but they have not

delivered. The online payment project Mambo has been abandoned. Interbank

settlement processes remain overnight batch processes. The legacy retail payment

systems have collapsed under outages, failures and glitches.

The lack of investment by the major retail banks has put the resilience, security and

performance of the Australian payment system at risk.

The inertia and coordination failure in this oligopoly can only be overcome by the

designation and ensuing stringent regulation setting goals, standards and timelines.

Then the overdue investments are not anymore doomed with each institution’s

“business case not stacking up at the time”. Mandatory project delivering reliable

and fast electronic transfers at retail level are finally given the priority they require.

If new entrants, innovators and or non-banks, were to contribute their part to the

efficiency, risk mitigation and competitive tension in the payment system, the fact

that only one new entrant has dared to enter the market reflects poorly on the

factual and perceived openness and fairness of the Australian payment space.

The move to the cash-less society and new mobile technologies will result in

dramatically increased transaction volumes putting further stress on the failing

legacy core payment systems.

Despite the complex networked nature of the payment system, the global schemes

have successfully shown that the only way to maintain a level of innovation

commensurate with the changing requirements of consumers is the ability to

Page 3

mandate binding decisions and to enforce deadlines of mandates with significant

financial incentives or penalties. The mandating dispenses of the business case

and forced the dominant banks to upgrade security and functionality.

As far as the domestic debit card system is concerned, nobody but the Reserve

Bank of Australia should mandate the outcomes, standards and access of the

payment system. Eftpos Payment Australia Limited (ePAL) is unsuited to be

entrusted with this role, since it is

It is of significance that the RBA designated EFTPOS after the Australian Competition Tribunal had found that the zero interchange fees for EFTPOS proposed by the banks and financial institutions was contrary to the public interest.

(See Re EFTPOS Interchange Fees Agreement [2004] ACompT 7 25 May 2004).

This decision of the Australian Competition Tribunal underlined the importance of

weighing up the interests of all participants and users in the EFTPOS payment

system, including merchants, card holders and general consumers. The position

that the banks arrived at on zero interchange fees was opposed by merchants and

the Tribunal agreed that any proposed public benefit was outweighed by the public

detriment of the banks’ proposal.

Unlike ePAL, the global organisations Visa and MasterCard are governed by

boards reflecting a broad diversity1. However, even with such different controls the

RBA has and continues to designate these schemes (and extracts undertakings

from other charge card or credit card operators) so as to be able to implement

appropriate standards to ensure safety, efficiency and competition in the card

payment systems in Australia.

Again, Tyro notes that the designation of the MasterCard and Visa schemes

eventuated after litigation was commenced by the ACCC alleging anti-competitive

conduct in respect of the setting of rules and fees within those schemes.

Given the networked nature, the two-sidedness of issuing and acquiring and the

high concentration of the Australian payment space, new entrants will only trust to

enter, if they see a strong regulatory framework and an engaged regulator as

arbiter instead of being dependent on their competitors’ goodwill.

How would ePAL be able to fairly balance its major shareholders’ interest with

those of the community and those of new entrants bringing disruptive innovation to

the payment space? No business will invest with its competitors in charge of its

destiny.

http://investorrelations.mastercardintl.com/phoenix.zhtml?c=148835&p=irol-govboard

http://www.eftposaustralia.com.au/corporate/board/board-of-directors/bruce-rathie

Page 4

Thus the designation as the result of the current consultation is of critical

importance to the likelihood of enabling innovation and competition through new

entrants participating in the Australian payment system.

The type of innovation that Tyro brought to the market, for example non-stop

acquiring (100 per cent availability) or non-exposure of sensitive data (PCI PADSS)

will only happen, if investors into new payment solutions can believe in fair

access and a level playing field.

Innovation through new entrants will only happen, if innovators and investors can

believe in a strong regulatory environment that delivers the following pre-requisites:

1. A new entrant needs a commercially competitive access to the credit, debit

and charge card schemes and the clearing and settlement systems. The

access has to be comprehensive, since a new entrant on the acquiring side

can only compete, if he can offer all credit, debit and charge cards. The

current EFTPOS access regime is impractical and broken.

2. A competitor operating on only one side of the payment system (acquirer-only)

depends on a cost based transfer price (interchange fee) between the two

sides of the payment system to compete with the dominant issuer-acquirers.

The experience in the payment industry, in Australia and worldwide, is that with

the industry left to itself, interchange fees and particularly multilateral interchange

fees are driven up to the benefit of the issuing side of the payment system. The

most recent example was eftpos Payment Australia Limited (ePAL) decision to

reverse and increase the domestic debit card interchange fee to satisfy their major

shareholders’ issuer interests.

It is the existence and activities of acquirer-only participants that lead to more

transparency and tension around interchange fee settings. An acquirer-only

participant brings to the table the interests of the merchants in the payment

system.

The setting of an interchange fee is complex and possibly imprecise. That being,

the regulator delivered a cost benchmark in the past and one-sided competitors

depend on a cost based interchange fee as a pre-requisite for a level playing field

in the future.

Tyro has as an industry initiative supported the establishment of eftpos Payments

Australia Limited (ePAL) so as to create a body that is focused on of promoting,

coordinating and marketing the domestic debit card system. Tyro is not against a

coordinated approach to strengthening EFTPOS as a payment system. However

that coordinating body, ePAL, cannot also be left to self-regulate and determine

critical matters such as interchange fees and access to EFTPOS.

Page 5

Tyro is not a member of ePAL. There are various other participants in the current

EFTPOS system who are not members of ePAL. There are also the users or

participants in the payment system generally such as merchants and the public

who are not members of ePAL.

These non-members and other participants do not have any say in the shaping,

interpretation, and possible amendment of such ePAL rules.

Designating EFTPOS by reference to rules that are not

Any definition of EFTPOS must be broad enough to encompass the roles and

interests of non-members of ePAL and other participants. Further the RBA’s

designation should not be defined by reference to rules that are not set by the RBA.

It is problematic to have a designation defined by reference to rules that can be

amended at the election of ePAL and the RBA would have no power to stop or

otherwise be involved in such amendments. This means that the RBA would not be

able to control the definition of its own designation.

Another major concern in using ePAL as a definition of designation is that contrary

to the global schemes’ shareholding and governance, ePAL’s is made up

predominantly of banking/financial institutions. ePAL is de facto dominated by the

four Australian major retail banks. The only non banking representation on ePAL

are Australia’s two dominant retailers, who must necessarily act in their own

corporate interests.

That has severe repercussions for new entrants and other competitors of the major

banks, because they are now vulnerable to one all decisive body. Looking at

historic industry behavior:

four major retail banks and American Express. Of the five counterparties, two

finally granted access against significant initial funding and ongoing fees.

switched the flow of interchange fees in favour of issuers. The rationale for

this decision of ePAL was not explained, did not involve the considerations or

input of any non-members of ePAL and is not open to fair and appropriate

scrutiny such as the decision of a public agency would be.

Australian Payment and Clearing Association (APCA), an industry body

dominated by the four major retail banks, implemented the EFTPOS access

code in a way that is impractical and was to our knowledge never used. The

result is a broken EFTPOS access regime

Page 6

This is a good example of how the industry body was able to negate the

clearly regulated outcome of the eftpos access standard, by implementing the

technical details of the EFTPOS access in such a way that it practically bars

access.

While the RBA would legitimately not be involved in the details on how its

mandated outcomes are delivered, it needs to maintain sufficient involvement and

oversight to counter effectively behaviors driven by strong proprietary interests of

the dominant banks to undermine the regulatory goals at the technical

implementation level.

Against the background of failing industry behavior, using ePAL membership as

definition for the designation, Tyro then would be in the hand of another industry

body that is again controlled by Tyro’s major competitors.

Inherent in the ePAL power structure is the capability and incentive to restrain

competition. As such ePAL is in no way comparable to the global schemes which

are accountable to a broad investor base, serving thousands of banks and being

supervised by dozens of regulators across the globe.

It is a big risk to expect smaller competitors, innovators, investors and new entrants

to entrust their destiny into the hands of those dominant competitors that they are

supposed to dare and endeavor to compete with.

In the past and in the bilateral world, Tyro pushed its requests directly with the

individual banking institutions. Again and again, Tyro only advanced in becoming a

participant of the payment system by seeking and obtaining guidance and support

from the regulator.

The RBA and APRA have indeed created the Specialist Credit Card Institution

(SCCI) regime with the intention to induce innovation and competition by attracting

new entrants into the payment space.

It was the trust in the regulator assuring access and equal playing field rules that

encouraged Tyro investors to fund the development and deployment of an

innovative acquiring technology that in its fifth year of operation now serves 6,000

merchants and transacts $3 billion per annum.

If Tyro had to deal in all the issues of competitive survival only with the one or two

organizations (APCA and ePAL) dominated by its four competitors, significant

safeguards and a strong regulatory oversight would need to be credibly in place.

In order for ePAL to satisfy the uniqueness of the new entrant and the acquirer-only

model, there would need to be a

based and flowing to the acquirer) and

Given how the major Australian banks and the industry bodies have dealt in the

past with the one and only new entrant, frustrating access and limiting growth,

Page 7

there is a significant credibility gap when considering ePAL or APCA as a fair

industry body accommodating the legitimate interests of small and new payment

participants.

Forcing EFTPOS participants to join ePAL is not in the interest of the payment

system or otherwise fair. If this was going to happen and ePAL membership

became compulsory on order to participate in the domestic debit card system, the

industry would still require a strong regulator to protect and ensure that there is

access, level playing field, competition and efficiencies in the system. This

regulator should be the RBA who understand payment systems and the many

complexities involved in this industry.

The role of this skilled regulator will always be critical for small or new participants.

Adopting a broader definition of the EFTPOS system outside the scope of the ePAL

membership would maintain a more transparent and trusted regulated space that

would allow affording protection to new entrants, who are typically one-sided

participants such as the acquirer-only model adopted by Tyro.

These participants could thus be covered by rules that are not covered by the ePAL scheme and reflect the specificities of those smaller participants pursuing a specific role that is clearly in the public interest.

It would mean that all participants have clarity as to what the EFTPOS standards

require, how they are formed and implemented and how they can be varied or

queried.

Critically the designation of EFTPOS must be framed in a way that allows all

participants whether a member of ePAL or not to have a genuine ability to

contribute and consult in respect of the terms and setting of standards.

Ideally, an acquirer-only would stay within a regime similar to the current regulated

bilateral fee regime benefitting from a set cost-based interchange fee or from a

non-discriminatory protection affording to the acquirer-only the same terms as selfacquirers

can obtain through their sheer commercial purchasing power.

Certainly, the EFTPOS access regime has to be revised so that it becomes

practical and effective.

The Reserve Bank of Australia needs to reinforce its setting and monitoring of

outcomes, standards, access and target dates. It also needs to maintain a level of

involvement that allows the RBA to remain a skillful arbiter, certainly for new

entrants, smaller specialized participants and innovators who otherwise would be

delivered without recourse to the industry bodies controlled by dominant

competitors.

The details of coordinating and executing the mandated changes can very well

remain with further empowered industry bodies such as APCA and/or ePAL, but

under continued oversight.

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