Not m-payments again!

Mobile payments must be the most heralded innovation of all time.  We have been talking about it for 10 years or more, and still don’t have a reliable definition, let alone a clear, widely-accepted process flow. 

'Mobile payments' can be:

• A text/SMS direction to a stored value service;
• A transfer or top-up of airtime (air minutes) between mobile accounts;
• A charge on your phone bill;
• A contactless (near field communication or NFC) card transaction initiated from a mobile device, either by a chip that resides inside the phone or a sticker attached to the outside;
• An internet payment executed from the mobile using any number of web-based services; or
• An app-driven service for 3- and 4-G phones using a range of wireless connections.

All of these are in operation, somewhere in the world. Do we need them all here in Australia? Probably not, but in the vibrant world of retail payment innovations, that's probably the wrong question. Rather, we might ask "which one(s) can win in an open, competitive marketplace?"

Payments providers have a natural competitive desire to get a jump on the market. This battles with the need for a critical mass of network participants to offer the service at the same time, as this maximizes its attraction for customers. Mobile payments have an added complexity: not only must payment service competitors collaborate to get a ubiquitous product, but telecoms competitors may need to do so as well and at the same time. This turns out to be a tall order, based on a quick global survey.

When it comes to mobile payments, countries generally fall into two categories: those with a significant "un-banked" population and those that are "well-banked".

Where a significant proportion of the population is un-banked or at least under-served by existing payment products, the mobile offers a rapid-implementation, low-outlay opportunity for significantly enhancing consumer payments. Simple consumer mobile payments solutions (text- or airtime-based) often grow fast in such green-fields environments. The widely celebrated M-PESA from Kenya is a good example.

But where consumers and small merchants are already well-banked and well-served for payments, mobile payments are a tougher sell. The incremental improvement from existing, well-established products like cards and bill payments is smaller, and the mere delivery of another payment channel is unlikely to cut it with customers – there needs to be a new angle. This is, of course, where Australia sits, along with the US, the UK and Canada, to name a few.

The payments bodies in the US, the UK, South Africa, and Canada have either introduced rules or are considering policy implications for mobile payments. Many industry participants see mobile payments as a highly competitive space, and therefore not yet ready for general collaboration. There is an evolutionary cycle to such developments. Trails are blazed competitively and in multiple directions, but at some stage there needs to be some standardisation to get ubiquity, economy and efficiency. It is often hard to pick when it's the right time to start talking about industry standards: too early and competitive development may be stifled; too late and structural inefficiencies and incompatibilities become entrenched.

When regulators get interested, it is generally a sign that industry needs to look at its own approach. In a recent discussion paper from the Federal Reserve Bank of Boston, the regulatory framework, business models and standards to promote mobile payments were identified as potential areas for further policy investigation by the US Federal Reserve.

There may be a loose analogy to the development of ATM networks and debit card schemes in big markets like the US. Initial rollouts were institution-specific, then, financial institutions grouped themselves into progressively fewer, larger networks, ultimately achieving something like ubiquity. But this is only possible when standards and formats are largely compatible – hence the standardisation timing issue above.

At APCA, our role is to promote collaborative enhancement of the payments system. This leads us towards sponsoring the standardisation debate even as competitors are aggressively developing their own offerings, and tending to hold their cards (no pun intended) close to their chests. While network ubiquity may still be quite a way off, the debate itself may encourage greater compatibility to support future evolution.

The Reserve Bank of Australia (RBA) announced on 28 May 2010 that the Payments System Board (PSB) would undertake a strategic review of innovation in the Australian payments system. A consultation document is to be released by mid-2011 with conclusions finalised by the end of 2011.

Taking a medium-term perspective, the review will investigate trends and developments overseas as well as identify potential gaps in innovation within the Australian payments system. This process will include a stock take of domestic and overseas payments innovation.

The impending review aligns well with collaborative research and debate that has been going on for some time in Australia, more recently under the auspices of the Australian Payments Forum (APF). The APF, a venue for industry debate on payment system policy and direction, considered the topic of innovation in Australian payments back in March 2009. For this session, APCA commissioned global research on payments innovation and competitive evolution from Edgar Dunn.

The work of the APF gives Australia good marks for payment product innovation in a competitive marketplace. It also highlights the challenges of structural innovation where competing industry providers need to engage on developments that improve the overall system. APCA will share the findings of this work with the PSB as part of its review.

More information can be found at RBA and APCA.

The Australian Payments Forum (APF) (formerly the Card Payments Forum) met in Sydney on 29 March 2010 specifically to consider a collaborative approach to fraud prevention across the payments industry.

The sixty-six attendees from major stakeholder groups heard:

• Dr Russell Smith, Principal Criminologist from the Australian Institute of Criminology, provide an overview of global trends in fraud and future challenges for the industry;
• Ms Kalyani Pillay, CEO of the South African Banking Risk Information Centre (SABRIC), speak about the South African banking industry's response to this challenge through the formation of the SABRIC; and
• Mr Alastair MacGibbon, Managing Partner of the Surete Group, provide his vision for industry collaboration in Australia in the form of a central data sharing body.

Following discussion on the upward trend of domestic fraud figures and the increasing threat of fraud in the global environment, participants agreed that there was a need for greater central coordination across the industry as a whole and with law enforcement agencies.

In general, there was support from APF attendees for the development of a proposal for a financial fraud risk centre of excellence. Such a body could enhance the industry's current fraud prevention activities through the collection and dissemination of data, research and other material relating to fraud prevention. The proposal is being jointly developed by the Australian Bankers' Association, Abacus and APCA for consideration by the three industry bodies later this year.

The meeting's communiqué and presentations are available on the Australian Payments Forum website.

L to R: Russell Smith; Kalyani Pillay; Alastair MacGibbon

Canadian Government finalises Credit and Debit Card 'Code of Conduct'

The Government of Canada released its Code of Conduct for the Credit and Debit Card Industry in Canada on 16 April 2010. The Government states the Code promotes fair business practices and ensures that merchants and consumers understand the costs and benefits associated with credit and debit cards.

The Code requires payment card networks to provide merchants with:

• prescribed and standardised information on fees within merchant agreements and monthly statements; and
• minimum time frames and advance notice on changes to fees and rates.

Merchants will be able to:

• cancel contracts without penalty should fees rise or new fees be introduced;
• reject debit products even if they accept credit products from the same network;
• reject new products and services introduced by payment card networks; and
• apply differential discounting based on payment method.

Cards having both credit and debit functionality will be prohibited as will be debit cards with competing applications from different networks. Co-badged cards will require logos to be equally branded with brand logos being similarly colour or black and white, same size and located on same side of card.

Most of the Code's provisions are effective in August 2010, with a one year transitional period for certain provisions. The payment card networks, major issuer and payment processors have now agreed to the Code. The Canadian Government had previously indicated it was prepared to legislate without such agreement. Legislation is also before the Canadian Parliament which will empower the Financial Consumer Agency of Canada to monitor compliance and enforce the Code.

More information can be found here.

Congress agrees on Card Scheme practice regulation

In late June 2010, the US Congress agreed on amendments to the financial sector reform package that impact on credit and debit card interchange fees and merchant practices. These are based on amendments initially introduced by Senator Dick Durbin in May 2010.

The measures would enable merchants to offer discounts to consumers wishing to use cash or other payment alternatives as well as set a minimum threshold of up to $10 for accepting credit cards. Interchange fees are also to be regulated by the US Federal Reserve which will issue rules to ensure that fees charged to merchants by credit card companies for credit or debit card transactions are reasonable and proportional to the cost of processing those transactions. There are exemptions from the interchange fees regulations covering smaller issuers and government-administered programs that use debit cards.

The measures passed Congress in July 2010 and will become law by the end of this year.

More information is available here

UK Payments Council releases'The Way We Pay 2010'
The UK Payments Council released its report "The Way We Pay 2010" on 14 April 2010. The report investigates developments in UK retail payments over the past decade and predicts where UK retail payments will be in 2018. It predicts that:

• Only 1 in 50 (as opposed to 1 in 20 in 2009) workers will be paid in cash;
• Only 45% of all retail transactions (as opposed to 59% in 2009) will be in cash;
• 1 in 4 retail transactions will be by debit card (as opposed to merely 1 in 20 in 1999); and
• Cheques will only comprise 0.8% of retail transactions (compared to 2% in 2009 and 6% in 1999).

More information is available here.

Canadian Government launches 'root and branch' review of Payments System

The Canadian Minister of Finance, the Hon Jim Flaherty, launched the Task Force for the Payments System Review on 18 June 2010 at the Canadian Payments Association's Payments Panorama conference in Vancouver.

The Task Force will investigate the public policy objectives of the Canadian payments system and the regulatory and institutional structures needed to achieve those public policy objectives. It will focus on issues including safety, soundness, competition, innovation and benefit to end users, including consumers and merchants.

The Task Force will provide recommendations to the Canadian Minister of Finance by the end of 2011. The Task Force will be chaired by Dr Patricia Meredith, who previously worked for the Canadian Imperial Bank of Commerce and is currently a consultant.

More information is available here.

Two-year progress report on UK National Payments Plan

On 18 June 2010, the UK Payments Council released a two-year progress report on its 2008 National Payments Plan.

The progress report highlights the on-going research and consultations associated with the setting of a target date of 31 October 2018 for the closure of cheque clearing in Great Britain and Northern Ireland. The Payments Council noted the need to respond to numerous inquiries from the public about the target date. They also noted on-going consultations with charities and other not-for-profit organisations with particular interests regarding the future of cheques.

The Payments Council noted it will be taking a more active role in contactless and pre-paid payments. Its focus will be on standards and interoperability, consumer education and engagement with consumer organisations and other interested stakeholders.

The Payments Council is continuing its work on financial inclusion, mobile payments, e-invoicing and payment reference information. During 2009 and 2010, new groups were established to investigate issues such as fraud, use of cash and online payments.

More information is available here.

APCA's Retail Run Implementation Steering Committee and associated Working Groups have made solid progress in developing initial drafts of the Code of Conduct - Retail Run (the Code) and the Good Practice Guide - Retail Run (the Guide). As mentioned in the last Payments Monitor, the purpose of the Code and Guide is to assist financial institutions respond to panic cash withdrawals in the remote event of a 'retail run' in Australia.

The Steering Committee and Working Groups have broad member representation, including representatives from the large banks, some regional banks and building societies, as well as the Australian Bankers' Association, Cuscal and Indue. Additionally, the Reserve Bank is represented on both groups, and provides valuable input on the structure and content of the Code and Guide from a regulator perspective.

APCA has also consulted widely among members to ensure that the Code and Guide represent best industry practice. The aim is to provide ADIs with a thorough guide to help them plan for a retail run, without imposing onerous and prescriptive requirements. Moreover, it is important to strike a balance where cooperation between industry participants is encouraged while not impinging on individual business interests.

The next step in the development phase of the project is to liaise with representatives from the Australian Prudential Regulation Authority (APRA) to gain feedback on the approach taken so far. The project is on track for completion by the end of 2010.

APCA's latest release of payments fraud data shows that in 2009 card fraud of all kinds (debit card, credit card and charge card) has stabilised at around 33 cents in every $1,000. Debit card fraud (POS and ATM PIN-only card transactions) increased from 5.8 cents to 9.4 cents in every $1,000 spent. Credit and charge card fraud (signature-permitted debit and credit card, and CNP transactions) dropped from 60.4 cents to 57.2 cents in every $1,000 spent. Within this total, PIN-only debit cards were hardest hit by skimming attacks and signature-permitted debit and credit cards by card not present (CNP) fraud.

Total rate of fraud on payment cards (cents fraud for every $1,000 spent)

Skimming fraud on PIN-only debit cards increased from around $5m to $17.5m. This gives a clear picture of the early financial impact of some well-publicised skimming attacks. As covered in the last Payments Monitor, in 2009 financial institutions and merchants responded to a number of well-organised skimming attacks on ATMs and POS terminals and the industry has acted quickly to limit the extent of the frauds. With recent successes in earlier detection, some arrests, and EPAL's announcement that chip technology would begin to be rolled out on PIN-only debit cards from 2011, the situation is expected to improve over time.

The data also shows that skimming fraud on Australian-issued credit cards (and signature-permitted debit cards) has dropped for the first time ever - from $50.1m to $37.5m. This suggests that Australia's progressive roll-out of chip technology is starting to bite against skimming fraud, which should continue to drop as the use of chip becomes more widespread.

Skimming Fraud

Against this, card-not -present (CNP) fraud on signature-permitted cards increased from $72.7m to $88.6m. CNP is where the consumer is not physically present for the transaction such as over the internet, phone and mail purchases. The trend towards CNP fraud and away from skimming fraud is consistent with what happened in the UK in the transition to chip. CNP fraud is now dropping in the UK, largely because of the growing use of industry countermeasures by merchants and consumers.

Fraud on Credit Cards (Skimming vs CNP)

More information on APCA's latest fraud data release is available here. APCA's fraud data collection is published on its website.