Limitations of a Domestic Network: Case Study Eftpos Australia

Australia’s domestic debit card network Eftpos has been trying to reinvent itself to compete with the international operators since 2009 to stop its declining share of card payments. By total debit card payment value, Eftpos total share of transactions declined from 83% in 2005 to 77% in 2011.  Australia generated US$446 billion in total card payments in 2012, making it the 9th largest market globally. In 2009 the Australia’s leading card issuers and merchants formed “Eftpos Payments Australia Ltd (ePal)” to manage and promote the limited domestic Eftpos system.  Whether the network can compete with the more widely known international operators will depend on its ability to establish online and international card acceptance over the forecast period.

Eftpos Payments Australia Market Share of Debit Cards in Circulation and Payment Value in Australia 2005-11

Eftpos Payments Australia Market Share of Debit Cards in Circulation and Payment Value in Australia 2005-2011

Eftpos background

The original creation of Eftpos in Australia was unique to other domestic payment systems in that the original partners were the largest banks as well as the largest merchants. This gave the merchants of Australia significant say in the interchange rates the banks collected from transactions.  This created a network that was comparatively cheap for merchants, but was also continuously under-invested in. The processing infrastructure of Eftpos remained largely unchanged until the group established ePal. The increased pressure from international operators led the network to change its organizational structure that would allow it more freedom in setting rates to reinvest in the network and brand. Eftpos has not developed contactless technology and lacks acceptance online or internationally.

With the creation of ePal, the network has been able to appoint a managing director for the first time since its creation. The first managing director was previously Visa’s VP of its New Zealand and Australia operations, suggesting the network has a pretty good idea of what they need to do to regain share. At the POS terminals in Australia, if a consumer selects the debit or check buttons, the transaction is run on the ePal network. However, if the card has a different operator and the consumer selects the credit button, the transaction is routed through the other network. With consumers selecting credit, they are able to benefit from reward programs that their issuing bank can offer because of higher interchange levels charged to merchants.  Until March of 2013, merchants were able to surcharge consumers for using credit products more than the amount they were being charged by the operators and issuers. Fees for credit purchases were becoming additional revenue for merchants due to the lack of regulation. The Reserve Bank of Australia found this to be unfair, and now limits the surcharge fee to that of what the merchant is charged. For Visa and MasterCard the average is .86% of a transaction and for American Express and Diners Club it is 2%. Much of the excessive fees were from online purchases, of which the ePal system was not even able to be used.

Results of Restructuring

The rebranded ePal has positioned itself in Australia as the responsible choice for consumers, claiming that credit spending is less responsible than if consumers use a debit card because debit is linked to a checking account and therefore consumers can’t go into debt using the network. This proposition is unlikely to deter certain consumers that prefer rewards for spending that often accompany credit products. And perhaps more obvious is that there are no requirements tied to a credit products that require a consumer to go into debt by not paying off monthly balances. In this regard, ePal’s value proposition to consumers is less clear, leaving additional room for international operators to gain share of the market.

ePal increased the rate they charged merchants in 2012, from a penny per transaction, to up to A$.05 per transactions over A$15.  This modest increase was met with hostility from merchants, and further increases will prove difficult to approve. With the increased fees, the company has created programs that reward consumers spending, increased invested in technology upgrades and launched the systems first marketing campaign. Despite these advances, ePal is still not accepted in any non-store locations; either over the phone or online. Non-store retail sales in Australia were 3.7% of all retail transactions in 2012, and this is expected to increase to 5.1% by 2017. This equates to US$14.4 billion in total retail transaction value that the domestic operator does not have access to.

Non-Store Retail Sales in Australia 2002-17
Non-Store Retail Sales in Australia 2002-17

In absolute terms ePal has been steadily increasing card payment value; however this is more likely reflective of the global consumer trend to debit products than effective ePal marketing. Since consumers are unable to use their cards outside of the country or online, they will continue to carry cards that do. With international operators increasing their debit products in the Australian market, and with excessive merchant surcharging for consumers who select the credit button at the POS, ePal may need to form partnerships to boost its international and online acceptance or continue to lose card payment share. For ePal to effectively compete against international operators with much stronger brands and technology infrastructure it will eventually have to increase funding further.  Recently