Building to last
This quarter, I borrow a theme from Jim Collins, the management researcher and writer. His two best-known works, Built to Last and Good to Great, are evidence-based studies of what makes commercial organisations outperform over the long term. APCA’s own core principles – our values, purpose, unique positioning, member benefit proposition and vision – were developed using the Collins framework. You can find them on our website.

Collins has the luxury of something to measure: he looks at relative increase in total shareholder value of listed companies against competitive peers over long periods of time. Then he tries to work out how the top performers got there in the first place, and how they stay on top. These days there is plenty of debate over the validity of this method but its influence on corporate strategic thinking is undeniable.

Unfortunately, neat quantitative measures of achievement are not generally available for payment systems. But the long-term, structural orientation of Collins’ work aligns well with broader payments system evolution: how does the industry build a payments system that will stand the test of time, and respond to the unknowable challenges of the future? It’s not about any one strategy or programme, but the overall structure, culture and orientation.

APCA’s Low Value Payments Roadmap takes a 10-year horizon for exploring future evolution of the payment system, and we are now a year in. It’s time for a stocktake.

Let’s start with the good news: universal payments connectivity, which was proposed in the 2008 Roadmap as one of three core components of basic payments infrastructure, is close to reality. Last month we celebrated the official commencement of the payments COIN (Community of Interest Network). Using communications technology supplied by Telstra, the COIN will allow single-point secure access to the entire payments community. You can read more about it here.

In a parallel development, the Reserve Bank of Australia (RBA) is establishing a clearing interconnector service which will enable transmission of payments files and messages between participants on different networks. The initial use of the interconnector will be to manage interchanges between COIN participants and SWIFT users, so that payments system participants can, if they choose, use SWIFT for connectivity as an alternative to the COIN. If other network service providers want to offer competing services, there is no reason in principle why they could not be connected too.

The industry has also been working on the other two elements of basic network infrastructure, although these are longer term exercises. These are flexible settlement through the RBA, and a globally aligned standard message library for payment and related transactions.

On settlement, the RBA has announced its intention to provide more flexible settlement arrangements through a settlement interconnector. Exchanged payment messages will be able to be settled more or less on demand, or in defined batch cycles. Here at APCA, members are working on the implications of more flexible settlement for the existing direct entry system. 

The standard message library is even more challenging. The global evolution is towards ISO20022 messaging, and we are currently engaged in mapping Australia’s existing and anticipated future needs onto a message set that works for a range of Australian payment needs, but aligns with the global standard. As might be expected, this is not a trivial exercise. 

These arrangements are designed to enhance access, reduce costs and increase efficiency in the payment system. But they are also ‘built to last’ – that is, the infrastructure layer should provide a platform for future evolution and competitive development, whatever the future holds in terms of technological advancement and new customer needs. Utility-style payment systems designed for a particular context and customer set will give way to a diversity of competing payments instruments, operating on common basic infrastructure for reliability and accessibility. As new payment needs evolve, existing payment methods can more easily be adapted, and new ones can more easily emerge.

As we review overall progress under the Roadmap, it is pleasing to see some runs on the board.

APCA’s newly established Community of Interest Network (COIN) started carrying ‘live’ payments traffic in February 2010. It is designed to provide network and connectivity services for the domestic EFTPOS and ATM, direct debit and direct credit and cheque payment systems and the BPAY bill payments service which together represent around 98% by value of Australia’s non-cash retail payments.

The COIN is next generation connectivity for Australian payments – a network ‘cloud’ using IP to transfer payment files and messages between payments participants. It replaces the legacy bilateral links using x.25 protocol, which are costly for participants to establish and maintain. Telstra provides the IP-based virtual private network for the COIN.

A major component of APCA’s work has been to develop governance arrangements for the COIN. The COIN operates independently from APCA’s clearing systems and is open to all participants in the payments system. It has its own governance framework including technical rules and membership criteria. The industry will manage the evolution of the COIN through a newly established management committee comprising COIN members. 

APCA’s current focus is to ensure a smooth transition to the COIN. The APCA working group established for this purpose has developed a migration timetable and testing strategy to provide guidance to COIN members. Already 12 of Australia’s largest payments services providers are transitioning payments traffic. Migration of all bilateral links is scheduled to conclude by the end of 2011.

Following an unprecedented spate of skimming attacks in Australia, the card payments industry has strengthened its focus on initiatives to combat fraud at EFTPOS terminals.

The recent attacks, although involving a comparatively small number of EFTPOS terminals, have targeted stores with high customer traffic. This has allowed criminals to capture a significant number of card details and PINs before fraudulent activity was detected. Criminals have used the data to create counterfeit cards and withdraw cash from customers’ accounts at ATMs in Australia and overseas. 

Law enforcement agencies and financial institutions have acted quickly to limit the extent of this fraud. Police have made a series of arrests and are continuing investigations. Merchants have been warned to be alert and acquirers and the card schemes are working with those considered to be at ‘high risk’ on measures to secure EFTPOS terminals on their premises. APCA has issued a set of guidelines to assist acquirers’ efforts which provide merchants with tips on how to enhance the security around terminals.

In addition to reimbursing victims of the skimming fraud as swiftly as possible, the priority for issuers is to minimise fraud losses while limiting the impact on their customers. Replacement cards have been issued where necessary and PIN changes enforced for cards that may have been compromised. Many issuers have expanded their card fraud detection tools to cover debit card transactions, an initiative not previously considered necessary due to Australia’s low rates of debit card fraud. 

While Australia had largely been free from such attacks, other countries (such as the UK and Canada) have experienced skimming fraud for some years. Australia’s card fraud rate has historically been about a third of the UK’s; however, as a result of the recent attacks APCA expects to see a significant spike in the figures for the 12 months to 31 December 2009, which are due for issue in May 2010. 

Fraud protection needs to be approached from every level – industry, acquirer and issuer, merchant, and consumer. APCA is working with financial institutions and the card schemes on a number of long and short-term initiatives including the roll-out of chip and PIN technology, merchant and consumer education and information sharing. A consumer campaign to raise awareness about the importance of PIN protection was launched by APCA on 31 March 2010.

Regulator rejects request for restructure of Canadian domestic debit scheme
The Canadian Competition Bureau has rejected a request from Interac, Canada’s domestic debit card service, to have a Consent Order removed that would have enabled Interac to become a for-profit entity. The regulator rejected the requested change partially on Interac's current dominant position in the market. Concerns were expressed by the regulator that acting on the requested change would remove safeguards that have proven effective in protecting consumers from potentially anti-competitive activity.

Interac expressed disappointment with the decision but remains optimistic that it could explore other changes to its governance in further discussions with the regulator.

More information can be found on the Competition Bureau and Interac websites.

Interchange fee regulation off agenda for US House Committee in 2010
At the US Credit Union National Association's Governmental Affairs Conference in Washington on 24 February 2010, Representative Barney Frank, Chair of the powerful House Financial Services Committee, announced that interchange fee regulation would not be on the Committee’s agenda for the coming year. 

Rep. Frank has been a vocal advocate of the need for greater consumer protection. In the light of recent Government studies raising questions about the benefits of interchange fee regulation (see Federal Reserve and GAO), an interventionist approach to interchange fee regulation in the US appears unlikely in the immediate future.

European Payments Council and GSMA consult on mobile payments in SEPA
The European Payments Council (EPC) and telecommunications standards-body GSMA have released the public consultation paper TSM Service Management Requirements and Specifications. This document describes the different roles and processes involved in the provision and lifecycle management of banks' mobile contactless payment applications integrated into a mobile phone. The paper seeks to establish a European-wide approach to promote the adoption of proximity payments using mobile phones.

Click here for more information.

In the Second Quarter 2009 edition of Payments Monitor, a number of short-term trends were identified as a result of ATM Direct Charging, introduced in March 2009. These included a significant rise in the number of ATMs in the lead up to direct charging and a significant move towards use of own ATMs.

On the first anniversary of ATM Direct Charging, and with statistics for 2009 now available, what are the longer-term effects of direct charging on consumer behaviours?

Consumer shift towards own ATMs stabilises in 2009
As noted in the Second Quarter 2009 Payments Monitor article, Reserve Bank of Australia (RBA) figures from the period immediately after the introduction of direct charging suggest consumers responded to the changing price signals.

The most noticeable change has been the shift towards the use of own ATMs from March 2009 onwards. In recent years, own ATM transaction volume as a percentage of overall ATM transactions has consistently been around 52% of all ATM volumes. In March 2009, this figure rose dramatically to 60%. Similarly own ATM transaction value as a percentage of overall ATM value rose from just below 60% to 65%. Throughout 2009, these ratios have remained strikingly stable, suggesting the strong behavioural shift seen in March 2009 is significant and resilient.

Monthly Figure	Transactions at Own ATM (%)	Values at Own ATM (%)
March 2008	52.2	59.6
June 2008	52.8	60.0
September 2008	52.7	59.7
December 2008	52.6	59.6
March 2009	60.0	65.8
June 2009	60.9	66.1
September 2009	59.3	64.5
December 2009	59.8	65.3

Pre-Direct Charging      Post Direct Charging

Source: RBA

Cash-out value rises significantly in 2009
Another behavioural response from consumers appears to be a rise in cash-out at point-of-sale. The value of cash-out transactions through debit cards at point-of-sale is $12.1 billion for the 10 months from March to December 2009. This represents a 10 per cent jump from the same time period in 2008. Previous annual increases have been between 2 and 5 per cent, suggesting a significant shift by consumers. This coincides with a flatlining of ATM withdrawal values for the same time period ($127.8 billion for both March to December 2008 and March to December 2009), suggesting consumers shifted approximately a half of billion worth of cash withdrawals from ATMs to cash-out at point-of-sale.

Year	Value of cash-out ($billions)	Rise in cash-out value from previous year (%)
March – Dec 2005	9.8	–
March – Dec 2006	10.0	2.0
March – Dec 2007	10.5	5.0
March – Dec 2008	11.0	4.8
March – Dec 2009	12.1	10.0

Source: RBA

Conclusion
One of the policy goals of ATM direct charging has been to provide consumers with price transparency, on the assumption that consumers will change their behaviour in response to such signals. The numbers are now in and ATM direct charging is a striking example of how consumer payments behaviour can change in response to new price signals and how resilient these changed behaviours can be.

APCA is developing a Code of Conduct and Good Practice Guide to assist financial institutions in the remote event of a ‘retail run’ in Australia. A retail run is a panic or loss of confidence in a financial institution by its depositors that leads to a rush to withdraw deposits.

While the Australian finance system remained comparatively strong during the global financial crisis, some advanced economies witnessed retail runs of a scale not seen since the Great Depression, most notably the United Kingdom’s Northern Rock in 2007.

APCA’s project emerged from research and discussions involving the Australian Prudential Regulation Authority (APRA) and industry stakeholders on the benefits of an industry-developed approach to mitigating such an event were it to occur in Australia.

As explained by Charles Littrell, APRA’s Executive General Manager, Policy, Research and Statistics, “In light of international experience over the past few years, possessing an effective plan for dealing with a retail run is necessary for any authorised deposit-taking institution with substantial retail liabilities. APRA’s intent is to codify this requirement in the upcoming improvements to the liquidity prudential standard, but without imposing details on what constitutes a complying retail run policy. We are hopeful that APCA can develop a suitable industry guide to good practice, which defines the necessary details attaching to a good retail run response plan. This will necessarily expand beyond simple cash handling, to internal and external communications, and to electronic as well as branch distribution channels. Like many risks in the financial sector, a retail run is a remote but not outlandish possibility, and addressing this particular risk will require more than cursory thinking and preparation to develop an appropriate risk management plan.”

APCA’s Code of Conduct will establish agreed protocols for managing a retail run and for promoting industry and public confidence in the banking system. The accompanying Good Practice Guide will provide a practical reference tool for financial institutions when designing or benchmarking their individual business continuity plans and includes an industry crisis communications plan. Both will be available by the end of 2010.

In December 2009, some 350 years after the world’s oldest surviving cheque was written in London, the UK Payments Council agreed to phase out cheques completely in the United Kingdom by 2018.

The decision was the culmination of nearly two years of preparatory work involving extensive independent market surveys on cheque use and consumer attitudes to cheques as well as wide consultation with the community. The independent research showed that the key drivers behind the continued use of cheques were habit, tradition and inertia, combined with a lack of awareness and confidence in other payment methods.

In the lead up to the 2018 deadline, the UK Payments Council has undertaken to continue to monitor cheque usage and to enhance the provision of alternative payment methods. A final decision would take place in 2016.

However, in February 2010, the UK’s Treasury Select Committee announced an inquiry into the Payments Council decision. The Committee advised that it would be seeking submissions and evidence on trends over time in the use of cheques as a payment mechanism, the advantages and disadvantages of abolition, and the development of alternative payment mechanisms.

This recent development is in line with what is happening in other countries: governments are playing a crucial role in monitoring the treatment of cheques.

Developments in other countries

USA
In January 2010, the US Federal Reserve announced it had commissioned a 2010 Federal Reserve Payments Study which will provide aggregate estimates and current trends in the use of non-cash payment instruments by US consumers and businesses. Previous studies have revealed significant changes in the US payments system over time, including a continuing decline in the use of cheques and growing use of electronic payments, such as Automated Clearing House, electronic banking transactions, credit cards, debit cards and stored value cards. Preliminary results of this study should be released by late 2010.

Canada
In Canada, some 70-80% of all commercial payments are initiated as cheques, a practice predominantly supported by mid-sized businesses. This makes Canada’s cheque use one of the highest rates in the world. Large corporations already see the advantages of automation and are increasingly adopting electronic payments. However, the need for integrated remittance and payment data is still strong and an essential element in providing a tighter and more cost effective method of payment reconciliation.

The Canadian Payments Association (CPA) plans to promote the migration of paper payments to electronic payments by researching viable alternatives to cheques, enhancing the existing electronic payments framework, and facilitating new and emerging electronic payment instruments in its framework as part of its Payments Strategy Vision 2020 paper. A more detailed proposal will be put to CPA members in 2010.

Ireland
Cheque use in Ireland is one of the highest in Europe, representing 75% of all non-cash payments as compared to the European average of 4%. The short term strategy of the Irish Payments Services Organisation (IPSO) is to reduce cheque use to bring it in line with the European average, but one of the clear goals of IPSO’s National Payments Strategy is to eliminate cheques completely, with no date identified as yet. As part of its National Payments Implementation Plan, Ireland increased stamp duty on cheques in 2009 to meet its short term aims (reducing a similar tax on payment cards).

Other Countries
Both the Netherlands and Sweden have effectively ceased cheque use through government mandate after the introduction of the Euro in the Netherlands, and by the actions of Swedish financial institutions to price cheques out of the market.

Cheque use in Australia
The 1997 Wallis Inquiry Report showed that in Australia, cheques were the most expensive form of payment across the whole economy, followed by cash, ATMs and EFTPOS. Direct credit was viewed as being the cheapest.¹

For the last ten years, the use of cheques in Australia has been declining steadily as consumers have access to a greater range of more convenient payment options. In fact in the last three years alone, the total number of cheques in use in Australia has dropped from 437 million to 356 million, a drop of nearly 20 per cent.²

The marked decline in cheque use strongly suggests the future direction of cheques will need to be managed. A first step could involve gaining an understanding of the payments industry position and an appreciation of why those that write and accept cheques do so and whether alternative methods of payments would sufficiently replace the cheque. This work forms part of APCA’s Low Value Payments Roadmap.

¹  “Exploration of Future Electronic Payments Markets”, Centre for International Economics and Edgar Dunn & Co., June 2006
²  RBA Bulletin, November 2009 at S33.