The Australian Government has released the Final Report of the Productivity Commission Inquiry, Competition in the Australian Financial System
The Report considers and makes recommendations on a wide variety of payment issues – including interchange fees, merchant routing for dual-network cards and reviewing the regulation of purchased payment facilities.
While the Government has not issued a formal response, many of the proposed Recommendation are already being progressed.
Source: Productivity Commission
Point of View
On 3 August 2018, the Australian Government released the Final Report of the Productivity Commission Inquiry, Competition in the Australian Financial System (the Report).
The twelve-month inquiry arose out of a recommendation of the 2014 Financial Systems Inquiry (the Murray Review), which called for a triennial review of the state of the competition in the financial system.
At almost 700 pages, the Report is broad and deep, covering matters from home loan pricing, vertical integration, the state of competition, among others.
Two areas are of particular interest to the payments industry: the regulatory structure of the Australian financial system and the payments system.
The Role of the Regulators
The Report found that Australian financial sector regulators have emphasised stability over competition. It recommends that there is a need to ‘realign the regulatory balance towards competition, without losing sight of the need for stability’.
The Report recommends the designation of a ‘competition champion’ within financial services that would be able to:
After deliberation, the PC has recommended that Australia’s current competition watchdog, the ACCC, take on this role. In making this recommendation, the PC considered the ACCC along with Australia’s three financial sector regulators – APRA, ASIC and the RBA.
The PC’s view was that APRA and the RBA were appropriately focused on prudential and financial market stability. While ASIC was a potential candidate for this role, the PC ultimately found that the ACCC was better suited. The Report noted that the ACCC has the expertise to assess competition issues and growing knowledge of the financial sector.
This expanding knowledge was driven by the Government’s initiative (announced in the 2017/18 Budget) to provide $13.2m to the ACCC to establish a dedicated financial services unit.
The Payments System
The PC was positive about the level of innovation and competition in payments, noting that providers compete both “within and between payment methods”. Meaning a credit card scheme has to compete not only with other card schemes for market share – but also with cash and other payment methods.
The PC makes several recommendations for reform within the payment system:
A ban on interchange fees
An analysis and assessment of the need for regulatory intervention in three-party schemes
Mandating merchant default routing
Review the transparency of fees on foreign transactions
A review of the regulatory framework for Purchased Payment Facilties (PPFs)
Review and mandating the ePayments Code
Imposing an access regime on the NPP, and adding additional functionality (such as the ability to send and receive recurring bank transfers, direct debits and card payments)
Unfortunately, despite corrections offered by industry, the Report repeated misunderstandings relating to device approval and overnight batch settlements.
The Report makes reference to international PCI security standards as belonging to AusPayNet. In addition, the Report repeated the erroneous view that financial institutions can earn interest on funds in overnight settlements. In Australia, the benefit always accrues to the sender or recipient.
AusPayNet was pleased to make submissions to the PC inquiry at both the Issues Paper and Draft Report stage.
AusPayNet supported a number of the draft recommendations – noting that clarity in the PPF framework would be welcome, and agreeing within mandating and updating the ePayments Code.
On interchange fees, AusPayNet stated that this should be left to the Payments System Board (PSB) and RBA to determine as part of their ongoing role of responsibilities.
AusPayNet noted that there had only recently been a significant review of card payment interchange fees by the RBA. This review introduced a number of reforms – including a reduction in the weighted-average debit interchange fee benchmark, and changes to compliance monitoring (moving from three-yearly to quarterly monitoring).