A Consumer Council research study is critical of the lack of competition between members of the consortium of banks - the Electronic Payment Services Company (Hong Kong) Limited (EPSCO) - that operates the Easy Pay System (EPS) debit card network.
In response to complaints by users of the EPS service and also considering the information provided to the Council by EPSCO, the study cites the incident of the recent unilateral price increase of the EPS service to particular merchants as a prima facie indication that EPSCO does not face significant competitive pressure in the way it sets the price for supply of debit card network services.
As a matter of principle, the Council is calling for the introduction of competition enabling EPSCO member banks to individually set their own appropriate level of transaction fees, and to offer competitive choices to merchants.
The Council is also pressing for transparency and accountability in the development and operation of network payment systems. In the absence of a general competition law, which is the Council's first preference, this could be achieved by a code of practice developed by the network members, with government support and oversight.
Releasing the study today (August 10), the Chairman of the Council's Competition Policy Committee, Prof. TSANG Shu-ki stressed that the intention behind the report is not to consider the quantum of what a reasonable transaction fee should be, as the Council does not have access to the commercially sensitive information and data to do so.
"Its intention is to consider, on the basis of prima facie evidence provided to the Council by the complainants and EPSCO, the question of whether there has been a lack of competition arising from market failure in the delivery of debit card network payment services to merchants, and the implications for the economy and ultimate consumer welfare," he said.
"In effect, the merchants are the intermediate 'consumers' in this matter and the issue is whether they have viable competitive choices available to them."
Prof. Tsang added that the Council's ultimate concern is that increased fees paid by merchants will eventually find their way into retail prices for goods and services, and will be borne by consumers.
The Council's study was initiated due to complaints against EPSCO raising the transaction fee for some merchants from a flat fee of $2 per transaction to a maximum of 0.75% on the value per transaction. The increase was, according to some users, as much as 11 times the fee under the former charging scale.
In the study, the Council identified a number of important issues that need to be addressed to enhance economic efficiency and safeguard consumer welfare.
First and foremost, it was observed that the aggregation of major Hong Kong banks into the one single debit card network supplier has denied merchants the opportunity to take advantage of the rivalry that would be expected to arise between those banks, for the competitive supply of debit card services. As such, competition between the member banks does not play a part in determining appropriate fee levels and choices as to fee calculation.
This aggregation has resulted in a situation where EPSCO does not face pressure from other existing or potential competitors in the price levels that it sets for the supply of debit card network services to merchants.
The fact that EPSCO was in a position where it could seek to impose a substantial fee increase on merchants, particularly small to medium enterprises that rely on the service, is a strong indication that it is not facing the discipline of a competitive market.
Second, there is little likelihood of a viable competitor emerging as a separate supplier of a debit card network payment system, to compete against the major banks who are in the EPSCO consortium.
Experience from overseas indicates that the incumbency of an established network payment system is a substantial hurdle for new entrants to overcome. This barrier to entry is generally known as the 'network effect' of an incumbent supplier.
Third, there were suggestions made that various other payment options such as cash, cheques and credit cards were direct substitutes for the EPS service. In the report, the Council noted the distinguishing features of the EPS service as a means of electronic payment, in particular the direct debiting of a relatively large amount of money that eliminates credit risk.
Notwithstanding there was only limited information provided to the Council by EPSCO and the affected merchants, the Council did not consider the degree of substitutability into those other payment methods, which were also supplied to varying degrees by EPSCO members, offered significant competitive pressure on the levels at which merchant transaction fees for using the EPS service were set.
In the study, the Council also examined similar network payment systems operated in comparable advanced economies overseas - in the US, Canada, the UK and Australia.
In those jurisdictions, because the networks are cooperative arrangements between competitors, they are, in the first instance, under the scrutiny of competition authorities that administer general competition law.
Different approaches are adopted to recover costs and apply fees that utilize competition between network members. In Australia, for example, where transaction fees are paid by merchants for accepting debit cards issued by network members, they are almost always 'flat fees' i.e. there are very few percentage transaction fees paid by merchants.
Equally significant in the Australian example, is the fact that for a number of large merchants, such as retail chains, network members actually compete to pay those merchants to use the payment system, rather than the reverse.
In the absence of competition law administered by a competition authority in Hong Kong, and in the face of clear market power through the aggregation of competitors, barriers to entry and the low degree of substitutability in the provision of the EPS service, the Consumer Council has put forward these recommendations:
(1) There should be competition between network members.
The Council considers that as a matter of principle, competition between service providers should be utilized as much as possible to determine an appropriate level of fees in payment networks, and to offer competitive choices to merchants. Accordingly, it considers that if merchants are to be charged network transaction fees, EPSCO's rules should allow for member banks to compete with each other (in the same way they compete in the provision of credit card services to merchants) on the quantum of merchant transaction fees and the method by which the fees can be calculated.
(2) There is a need for transparency and accountability.
Given the strong indication of market power through the aggregation of competitors in the provision of the EPS network payment system, the Council considers there should be an appropriate degree of accountability in the operation of the system. In the absence of general competition laws, which is the Council's first preference, and in view of the Government's previous decision not to introduce such a law, a code of practice developed by the network members, with government support and oversight, would seem to be an appropriate model to consider. In view of the importance of having efficient online network payment systems to the economy, and Hong Kong's ambitions to fully embrace innovative electronic information technology, consideration should also be given to providing a similar degree of accountability for other network payment systems.
During the course of conducting the study, the Council held discussions with the Hong Kong Monetary Authority (HKMA) and provided a preliminary draft for its consideration.
The HKMA subsequently announced on 1 August 2000 that it would conduct a comprehensive review of retail payment services in Hong Kong. Among the terms of reference for the review was that the HKMA would "consider the degree of competition that exists in the provision of retail payment services and to assess whether any deficiencies in competition that are identified operate significantly against the public interest". The Council welcomes the HKMA's initiative and trusts this study will assist it in its task.