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  • pg 1
									Payment cards
      Phil Alves
   15 October 2010

   Payment card interchange   1
1.   The credit card market in South Africa
2.   What is interchange?
3.   What are the concerns?
4.   The Enquiry Panel’s view
5.   What can be done?
6.   Conclusion

                    Payment card interchange   2
Credit card market by card scheme
  October 2006, Submission to the Banking Enquiry

                                               Diners Club
                                  Total number of credit cards in
                                  circulation is roughly 6 million
                  Payment card interchange                      3
Credit card market by issuing bank
   April 2007, Submission to the Banking Enquiry

                                             Standard Bank

                  Payment card interchange              4
          What is interchange?
• Two-sided platforms/markets
  – Newspapers, shopping malls, video gaming platforms,
    payment cards
• Interchange balances demand on either side
• Aim: to optimise total demand for network usage
  – And to overcome chicken and egg problem (usage and
• Not necessarily to redistribute costs between
  issuers and acquirers, although issuing is more
                    Payment card interchange              5
       Three-party scheme


P minus                                      P plus card
merchant                                     usage fee (or
service                                      minus
charge                                       rebate)
              at price P
   Merchant                                Cardholder
                Payment card interchange                     6
                 Four-party scheme

         Network fee                                 Network fee

        Acquirer                                     Issuer
P minus
merchant                                                 P plus card usage
service charge                                           fee (or minus
                       Good/services                     rebate)
                       at price P
        Merchant                                    Cardholder
                         Payment card interchange                            7
   Concern 1 – consumer welfare
• Central concern of the European Commission and
  UK’s OFT
• Merchants pay merchant service fees
   – Interchange sets the floor of merchant service fees
   – Multilateral interchange may restrict competition among
   – Merchants are also consumers themselves
• Merchants pass on higher costs through retail prices
• Issuing banks with market power do not pass on
  interchange receipts sufficiently to cardholders
• Inter-platform competition drives up interchange
                       Payment card interchange                8
   Concern 2 – payment efficiency
• Stated concern of the Reserve Bank of Australia
• (Social) efficiency related to the payment system
• High interchange on credit cards encourage
  ‘excessive’ usage
• Credit cards are more costly than debit cards to the
  society (but not to the cardholder) – but credit cards
  are far more prevalent
• Market failure: competition leads to inefficiency

                      Payment card interchange             9
       Concern 3 – cashless society?
• What are the relevant policy priorities here?
• Card penetration (debit and credit) is low in SA
• Less cash is good for just about everyone
   –   Consumers (security)
   –   Merchants
   –   Banks
   –   Non-bank payment firms
   –   SARB
   –   SARS and Treasury
• Can interchange influence this situation?

                      Payment card interchange       10
        CC’s view since Enquiry
• Action on interchange must include policy
  input from NT and SARB, because financial
  inclusion and payment system efficiency are
  important considerations
• But the options still boil down to:
  – Regulation
  – Competition law enforcement

                  Payment card interchange      11
• Can be tailored to a sector
• Can be forward looking and flexible
• But must be clearly justified (cumulative):
   – Clear policy objectives
   – Identification of market failure with theory supported by
     empirical evidence
   – Benefits outweighs potential distortions
   – Implementable with low information requirement
   – Vision of the likely, not desired outcome
• In a sense, burden of proof lies with the authority

                        Payment card interchange                 12
   Competition law enforcement
• Market definition is crucial (two-sidedness)
  – EC cases looked at the acquiring side only
• Backward-looking in nature
• Remedy (cartel fine, cessation of price-fixing)
  may not actually address the concerns
• As in EU, inability to shoulder the burden of
  proof may determine the outcome, which may
  then be arbitrary
• Constant litigation or monitoring is required –
  competition agencies are not regulators
                    Payment card interchange     13
    Regulation - lessons from RBA
• RBA is the pioneer of interchange regulation
   – Statutory power given by Payment System Act
• RBA has a very clear objective
   – Payment system efficiency
   – Death of EFTPOS?
• Anticipated outcome
   – Reduced credit card usage relative to debit card
   – Lower merchant fees; merchants start to surcharge
   – Credit card holders should pay more for usage
• RBA proposes stepped back from regulation in late

                       Payment card interchange          14
            Enquiry Panel’s view
• Multilateral interchange is probably necessary for
  cards, maybe necessary for non-card electronic
  payment streams, especially at startup
• But subject to abuse by banks and card schemes
• Current methodology is unsatisfactory
• Interchange needs to be kept ‘as low as is reasonably
• Adopt (Australian-type) regulation
• If regulation is not adopted, may initiate an
  investigation under sections 4(1)(a) or 4(1)(b)

                     Payment card interchange         15
    The Panel’s recommendations
• Devise an independent, objective and transparent
  interchange-setting mechanism
• Determine necessity of interchange in each stream
• Set up Interchange Forum to regulate payment
  streams in which interchange is deemed necessary
   –   South African Reserve Bank
   –   Banks and payment schemes
   –   Merchant and consumer groups
   –   Third-party cost and demand studies

                         Payment card interchange     16
             CC’s response (1)
• On pure competition grounds, the CC argued
  for the following changes
  1. Interchange must not be set collectively by
     issuers – this is a cartel
  2. Card schemes to take interchange decisions
  3. Authorities must devise rules of engagement
     such that inter-scheme competition doesn’t
     perpetually drive up interchange

                    Payment card interchange       17
                    CC response (2)
• Interchange Forum not practical
   – Information requirement is enormous
   – Consensus nature means that the final decisions are likely to be
   – Regulator would have no vision of the outcome
   – Results would not improve consumer welfare, and may even
     harm efficiency
• CC concluded that an authority must either:
   – Regulate outright, or
   – Devise suitable rules
• And at the same time all efforts must be made to
  intensify competition on both sides of the market
                             Payment card interchange               18
1. Payment card systems operate in two-sided markets and
   interchange is a necessary balancing mechanism

2. Competition law enforcement on two-sided markets as if
   they are normal markets may lead to undesirable outcomes

3. Regulation is difficult, and unlikely to improve consumer
   welfare if banks retain market power, especially in issuing

4. Regulation is nevertheless ‘easier’ than competition law
   enforcement, and carries fewer risks

5. At the very least, we must and have ensured the
   independence of card schemes from issuing banks

                         Payment card interchange                19

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