STRATEGIC PARTNERS
The topic of ATM interchange is a hot one Down Under, as evidenced by a panel discussion at the recent Pacific ATMs conference sponsored by the ATM Industry Association.
June 20, 2002
Change is coming to the interchange system in Australia, and banks and independent deployers are ready to react with changes in their ATM networks.
Interchange rates and the government's anticipated actions dominated a panel discussion at the recent ATM Industry Association (ATMIA) Pacific ATMs conference.
While reforms in credit cards have taken center stage in recent years, the time has come for Australia to consider ATM surcharging. That was the premise in the panel discussion, titled "Surcharging and Interchange Fees: Prospects for the Australian Market," chaired by Greg Baker, chief executive of Cashcard Australia.
ATM surcharges are common in the United States and Canada and beginning to make inroads into Europe, but they're not yet accepted in Australia. This is due partly to the interchange agreements between the financial institutions, which to some extent restrict surcharging.
As a result of the Reserve Bank of Australia's (RBA) current review of the payment system (including ATMs, EFT/POS and credit cards), ATM surcharges may be introduced into the Australian market in the near future.
Under examination
The joint study by the Australian Competition and Consumer Commission (ACCC) and the RBA, released in October 2000, highlighted the rigidity in the current system. While the report didn't make an explicit recommendation for ATM surcharges, the authors suggested banks consider that option.
The report said that Australia had nearly 60 bilateral ATM interchange agreements, and that the fees varied greatly. It also said that non-customers of bank-owned ATMs make 30 percent of ATM transactions, and that that little change has occurred since ATM interchange fees were introduced in the 1980s.
In theory, the authors suggested the substantial margin between ATM interchange fees and costs could be expected to attract new entrants into the market. Despite added competition, however, there has been little downward pressure on interchange fees.
In practice, bilateral price setting has not helped issuers increase market share.
The report said interchange fees are the international standard, adding "there are no impediments to direct charging in Australia but it is not used for ATM services. The attractions of a direct charging regime are that it may encourage transaction fees more in line with costs, and promote transparency."
Based on the principle of getting rid of interchange fees and encouraging competition, a Working Group of industry representatives from various banks was established after the report's release.
Group member Cameron Howell, senior manager of Alternative Banking Solutions, Westpac Banking Corporation, said it's a question "of when not if" changes would be implemented.
Two models
The Working Group was asked to evaluate six models which were proposed during the initial industry meeting last July. Of those, the Independent Dual Pricing (IDP) and Coordinated Single Pricing (CSP) models were seen to best meet eight identified reform objectives. Among the objectives: the promotion of retail price competition, a high level of customer acceptance and providing customers with clear and appropriate price signals.
Additionally, Howell said, "The models avoid reducing unduly the universal access that cardholders now enjoy, are practical to implement, maintain the integrity of the ATM system and ensure there is no weakening of competition amongst industry participants."
Finally, the models also satisfied public policy requirements.
In the second industry meeting in February, participants indicated a preference for further investigation into the implementation of an IDP model. The main identified weakness with CSP was the imposition of a centrally set "issuer recovery fee," in other words, the fee a card issuer would receive from an ATM operator.
The IDP model is different to the U.S. model, Howell said, as there are no interchange fees.
"Under IDP, the card issuer would be free to set a fee for 'foreign' ATM usage and the ATM operator would be free to levy a direct charge," he said. "The IDP removes bilateral negotiation of fees -- the key cause of apparent price 'stickiness' identified by the RBA/ACCC report."
The direct approach
Fellow panellist Ian Perkes, director of ATM consultancy International Products Australia, called for "clarity in fee charging" and suggested "the current system is not transparent."
Perkes prefers "a direct charge model whereby the customer is told the fee for using the ATM and it is just one fee that is then divided up between the parties involved."
However, "particular parties may not be happy with their share," Perkes noted, "and not accept certain transactions which would reduce the current level of service as all ATMs are 'open' to all cards. This is why the ACCC and RBA are involved to protect the consumer and also to ensure competition exists to reduce costs. Reduced costs to somebody often mean reduced profits to somebody else," he says.
A fellow panelist from an independent deployer also called for a direct charge.
Mark Schnitzerling, National Business Development Manager, Electronic Banking Solutions, opined that a direct charge should be introduced to "let the market dictate rates."
In order for a deployer to commence a business, Schnitzerling explained, they must have a sponsorship arrangement with an acquirer, either a financial institution or a switch who has arrangements in place with a bank.
Schnitzerling called for greater involvement by deployers in the payment system to acquire and settle, where the banks retain a percentage of interchange.
"The current arrangement lacks flexible pricing arrangements, as there is a fixed pricing range from x to y," he said. "Due to this inflexibility we are restrained and it is sometimes difficult to sell the value proposition, inhibiting growth."
Schnitzerling predicted an outcome will be reached soon, with the model defined in three months and implemented in 18.
The introduction of surcharging to the Australian ATM market, Schnitzerling concluded, would give independents greater control of their own destinies. "In a free market, the shackles that tie our business back to the banks need to be removed and this will occur with direct charge," he said.
"Direct charge will allow independents and banks (if they so wish) to provide a greater service to customers that doesn't exist today. From our perspective, we are not a card issuer, purely an ATM operator and we do not discriminate with customers whichever bank they are aligned with."
