The Reserve Bank has told the ACCC that the proposed merger of Prosegur and Armaguard could be in the national interest because it may contribute to a more viable economic structure for the domestic cash-in-transit sector.
In its submission to the competition regulator’s public consultation on the impact of the proposed merger, the RBA argues that “some form of change” is required to reduce excess capacity in the banknote distribution market and to ensure it can withstand expected structural decline in cash usage.
“The Reserve Bank notes that the proposed transaction is one option that may achieve a more viable industry structure and the appropriate path forward will depend on a range of factors, including how various concerns arising from increased concentration can be addressed,” the RBA told the ACCC in its submission.
“It is also important to avoid any significant, abrupt and/or prolonged reduction in the timely availability of good quality banknotes across the country.
“In the Reserve Bank’s view, it is in the national interest that the industry be put on a more sustainable footing.
“If this is not done, access and availability to cash will decline, damaging the efficiency of the economy, particularly in regional Australia.”
The profitability of Armaguard’s and Prosegur’s cash-in-transit operations have been severely eroded by the decline of cash usage in the Australian economy and the RBA appears to be telling the ACCC that the industry must restructure for it to continue serving a national interest requirement.
That argument will likely disappoint a string of banks and independent ATM deployers that depend on either Armaguard or Prosegur to move cash throughout their national networks.
In a detailed submission to the ACCC, Commonwealth Bank of Australia raises a raft of concerns regarding the likely impact on competition in the cash-in-transit (CIT) industry if the proposed merger is approved.
CBA relies mainly on Armaguard for cash delivery and collection across its large ATM network but also contracts with Prosegur to move banknotes between branches.
“Prosegur is important for CBA as a fall-over supplier as it allows for critical Business Continuity services to continue in the event of Armaguard industrial action, emergencies or natural disasters,” the bank tells the ACCC in its submission.
CBA says in its submission that Prosegur and Armaguard offer “unique” services in the CIT industry largely because they are the only full service suppliers operating at a national level.
“Should the proposed transaction proceed, and in the circumstances that the applicants describe in their submission (ie, each losing money) a combined Armaguard/Prosegur would not be incentivised to discount prices or offer increased service levels beyond those that are currently offered,” the bank says.
“However, CBA expects that it would be forced to continue to acquire most services from the combined entity because of CBA’s national requirements and breadth of services required.”
CBA’s concerns about the planned merger are shared by independent ATM operators such as Next Payments, and NCR - the owner of the Allpoint ATM network.
Next and NCR rely on Armaguard and Prosegur to replenish their machines with banknotes across the country. They also compete against ATM networks owned by the merger partners.
NCR and Next are concerned that their businesses would be exposed to business risks if the merger candidates were allowed to combine their ATM and CIT operations.
In its submission, Next Payments asserts that the combination of Armaguard and Prosegur would create a monopoly in the CIT sector that could not be constrained by smaller competitors.
Next Payments is calling for the merger partners to be forced to divest their ATM networks as a pre-condition for approving a merger of their CIT operations.
“The applicants could merge their upstream CIT businesses while divesting their respective downstream ATM networks,” Next Payments tells the ACCC in its submission.
“This would achieve the efficiencies and cost synergies suggested by the applicants in relation to the supply of CIT services, while removing the risk of the vertical foreclosure effects.”
Big national retail groups such as Wesfarmers have also submitted arguments against the merger.
“If the merger proceeds, it is likely to have a very significant impact on the competitive dynamics in the market for CIT services,” Wesfarmers tells the ACCC.
“The merged firm will have significantly more bargaining power in negotiations with users of CIT services.
“This has the potential to affect both pricing and service levels.”