Payments system self-regulation is under scrutiny in the UK as HM Treasury veers towards public oversight.
Last month, the UK government published a consultation paper on “Opening up UK payments”. According to the paper, “the self-regulation of financial services…has been discredited.” Say what? The world over, payments systems have been almost entirely self-regulated, so this is a big call. The evidence cited in the paper for this includes the LIBOR-rate fixing scandal and the failed attempt to eliminate UK cheque clearing. And of course, there is enduring rancor over the public bailout of UK banks during the global financial crisis.
The paper makes clear that the UK Government does not think the industry-led UK Payments Council is up to delivering good strategic direction for the UK payments system. It proposes a new public regulator, with the future of the Payments Council left uncertain.
Initial reaction from the UK Payments Council expresses dismay, as might be expected. But as uncomfortable as this is for UK banks, better outcomes for industry and for the broader community might conceivably be achieved. Everything depends on how the new framework is set up. To the extent that the UK policymakers think that public oversight can “replace” self-regulation, I think they have the wrong end of the stick: both are needed, and the challenge is effective alignment.
The Australian payments community has done reasonably well at effective debate and collaboration on policy and self-regulatory issues. I should declare the obvious bias here: a big part of APCA’s job is to promote effective alignment on policy issues so I am keen to see evidence of it working.
In 1998, Australian financial institutions had a similar wake-up call on self-regulation, when the Wallis committee recommended a new Australian regulator for payments. This became the Payments System Board (PSB) within the Reserve Bank of Australia (RBA). At the time, there was undoubtedly some hand-wringing about what the new regulator would get up to, and how the industry would fare.
In the early days, there certainly was plenty of controversy, and even a few court cases, as interchange fee regulation was forced through against rooted opposition from the card schemes. But in recent years, the Australian payments community has learned to work pretty well with each other, and with a “light-touch” public regulator, on payment system enhancement.
Exhibit A is the RBA’s Innovation Review. In June last year, the RBA published Conclusions to its two-year Innovation Review that included five strategic objectives for Australian payments. The RBA asked industry to work out how to deliver against the five goals. Industry (through APCA) was able to quickly adopt all of them, partly because the alignment with industry’s own thinking was already there, thanks to extensive consultation.
The first objective, intraday settlement of direct entry payments, is on track for delivery by the end of 2013. The remaining four are covered in the Real-time Payments Proposal lodged by industry and accepted by the RBA in February this year – see report in this Monitor. The important point is that the regulator asked the big questions, but the industry supplied the answers in its own way.
There have been several other effective debates in the last five years: a balanced, sensible approach to the decline of cheques, a negotiated outcome on account switching and collaborative policy reform of the ATM system, for example. Industry and regulator do not see eye to eye on many issues – far from it! Yet we seem to have been able to negotiate solutions when we need to.
So what is it about the Australian approach that seems to be working? From my own experience, there are three steps for getting a good outcome:
In Australia, the PSB is the independent public body with clear authority and responsibility for the payments system. It has the power to regulate, but has only done so on a few controversial issues. Instead, the PSB has used consultation, debate and policy announcement to seek an effective engagement with industry. In recent times, this has worked well. I think the absence of an equivalent body is a weakness in the UK system – but still better than a heavy-handed “black-letter” regulator.
It is just as important that industry knows how to bring all the competing business agendas together and work out a sensible collective position on the payments system. That is the explicit function of bodies like APCA and the UK Payments Council, but can happen in many ways. This process can often be messy and time-consuming. Business people have to grapple with political and policy issues; aggressive competitors have to try to find some common ground (without breaking the competition laws).
Only after all that can the industry and the regulator negotiate an outcome that sustainably serves the broader community. It’s to be hoped that the UK consultation will yield this kind of framework.
In December 2012, the Real-Time Payments Committee (RTPC), a group of senior decision-makers from Australian financial institutions, lodged a proposal for new low-value payments infrastructure in Australia. The Payments System Board announced its acceptance of the Proposal on 20 February 2013.
Since then, the RTPC has been overseeing the next steps and initiation activities for the Real-Time-Payments Programme. The RTPC met on 18 March 2013 to review progress.
An initial priority is establishing appropriate governance arrangements for the Programme covering industry engagement, decision-making structures and funding arrangements. The RTPC anticipates establishing a Participant Group to provide funding and expertise for the Programme, and the Real-Time-Payments Steering Committee with powers to oversee the Programme. As contemplated in the Proposal, the initial members of the Steering Committee will be the existing RTPC members and Reserve Bank officers.
The RTPC is also overseeing the process of appointing a PMSO including a Programme Director to advance the Proposal under the eventual oversight of the Steering Committee.
Programme Management Services Organisation (PMSO)
The PMSO will develop the business requirements, functional specifications, programme plan and budget for implementing the Proposal’s basic infrastructure and the initial overlay service.
The PMSO will be selected through a Request for Tender process supported by APCA. This will involve a short-list of suitable professional service firms put together by the RTPC. APCA expects to issue invitations to tender in late April 2013 with responses due in May 2013.
The RTPC expects to establish the Steering Committee in June 2013. Once in place, the Steering Committee will finalise the tender process by appointing the PMSO.
One aspect of the February 2013 Real-Time Payments Proposal that has generated significant interest and raised some questions is the “overlay services”. This is not a term ordinarily found in payments, though similar terms have been used within both funds management and information technology.
In order to understand the role and purpose of the proposed overlay services (and they should be thought of in the plural rather than singular), one needs to have in sharp focus the splitting of service and infrastructure that sits at the heart of the Proposal.
In this layered approach, the basic infrastructure will include enhanced settlement (provided by the Reserve Bank), and switch, network and addressing solutions provided through an industry utility. The overlay services will use this basic infrastructure. This will involve an operational agreement between an overlay service and the industry utility.
Essentially, the utility will be a supplier of “wholesale” services to financial institutions and service providers whereas the overlay services will provide “retail” services through ADIs aimed at consumers. Once implemented, the utility is unlikely to require signifant development in order to facilitate delivery of new consumer services. As user payment needs continue to evolve and change, the overlay services should be able to respond without requiring any reworking of the existing infrastructure.
Importantly, overlay services will also be commercially-focussed – they may involve all ADIs or be taken-up by certain ADIs only; they will develop their own user propositions; and set their own pricing to incentivise usage.
Furthermore, these overlay services may compete with each other – just as buses, taxis and private cars all compete with each other to move passengers on the same roads. At its simplest, an overlay service might be a brand and a rulebook.
A key part of the Proposal is that the first overlay service will be an “initial convenience service” to make a fast payments solution available to users by the end of 2016.
While “overlay services” may be a newly introduced term in the Australian payments landscape, as the Proposal is developed and implemented it will likely become commonplace!
More information about the RTP Proposal can be found here.
A new Australian Securities and Investments Commission (ASIC) ePayments Code came into effect on 20 March 2013. This is a voluntary Code that almost every financial institution in Australia subscribes to and agrees to be bound by.
APCA worked closely with ASIC on revisions to the EFT Code of Conduct, now known as the ePayments Code, to simplify the process for recovering mistaken internet payments. These typically occur when customers make an error in entering the BSB or account number when using internet-based facilities such as “pay anyone”.
The new Code requires that financial institutions:
The new Code also details how a financial institution should go about recovering funds and within what timeframes once it is satisfied that its customer has made a mistaken internet payment.
APCA has amended the Bulk Electronic Clearing System Procedures, which provide rules for exchanging direct electronic payments between financial institutions, to mirror the provisions set out in the new Code. These rules also came into effect on 20 March 2013.
APCA began the New Year with a number of changes to the Board of Directors. Following the resignation of director and deputy chairman David Heine, Adrian Lovney was appointed new director and long-serving director Stuart Woodward was appointed deputy chairman.
APCA farewelled to director David Heine (Cuscal Limited) following his resignation from the Board on 31 December 2012. Mr Heine was appointed by the Credit Unions Owner Member Electoral Group as a director in January 2007, serving as deputy chairman from December 2009. At the time of his resignation he was also chairman of the Audit, Risk & Finance Committee, the Payments Policy Committee and the Consumer Payments Committee. During his six-year tenure as director, Mr Heine also served on the Remuneration Committee as well as various ad-hoc board committees and working groups.
We thank Mr Heine for his valuable contribution to APCA and wish him well in all future endeavours.
APCA welcomed Adrian Lovney to the Board in February 2013, replacing Mr Heine. Mr Lovney is General Manager Strategy and Projects, Cuscal Limited.
Stuart Woodward was appointed deputy chairman at the Board’s March 2013 meeting. Mr Woodward is General Manager, Representation, Credit Cards, Payments and Retail Strategy Services at the Commonwealth Bank of Australia. He has been an APCA director since February 2005.
On 1 April 2013, APCA became one of the three first organisations to join the PCI Security Standards Council (PCI SSC) as an affiliate member.
The PCI SSC is an open global forum that is responsible for developing the PIN Transaction Security Standard and other standards that increase payment data security. It introduced affiliate membership in 2012.
The new membership category is open to regional and national organisations which define standards for protecting cardholder data and influence their constituents to adopt them.
APCA is joined by Cartes Bancaires, an Economic Interest Consortium based in France, and Interac Association, a recognised world leader in debit card services based in Canada, as the inital affiliate members. Together representing a diverse membership base from around the world, the three will actively participate on PCI working groups and play an integral part in the standards process.
In welcoming the three organisations, Bob Russo, General Manager, PCI Security Standards Council commended them for taking the next step in their work with the Council to increase payment security globally through PCI Standards.
A number of changes to the Reserve Bank of Australia's (RBA) standards on merchant surcharging of credit and debit cards took effect on 18 March 2013. These changes enable card schemes (such as MasterCard and Visa) to limit surcharges to “the reasonable cost of acceptance”, addressing instances where merchants are engaged in excessive surcharging.
To assist in the implementation of this policy initiative, the RBA has released a number of FAQs. These provide some plain English guidance that seek to explain the reforms and provide assistance for merchants and consumers on the meaning of the new regime.
Click here for the FAQs.
The Reserve Bank of Australia has recently released two pieces of research relevant to Australian payments; one on currency demand in Australia during the GFC and another on global mobile payments trends.
“Currency Demand during the Global Financial Crisis: Evidence from Australia” by Tom Cusbert and Thomas Rohling was released as a Research Discussion Paper in January 2013.
The paper notes that demand for Australian currency rapidly increased in late 2008. This rise began in mid-October 2008, following the collapse of Lehman Brothers. By the end of 2008, there was an additional $AUD 5 billion (or 12 per cent) of Australian bank notes on issue.
This increase in currency demand did not have any destabilising effect on the banking system and bank deposits actually rose during the period. In seeking to explain the increase, the paper states that traditional methods of currency demand, such as interest rate reductions and the Federal Government stimulus payments, can only account for around 20 per cent of the observed increase in currency holdings. The rest of the rise could be explained by individual concern about financial institutions liquidity or solvency and by financial institutions themselves as a precaution. This suggests that consumer concerns over overseas banking industry developments can affect currency demand at home.
Click here for the full paper .
“Trends in Mobile Payments in Developing and Advanced Economies” by Darren Flood, Tim West and Daniel Wheadon was published in the March 2013 of the RBA Bulletin.
This article explores the growth of mobile phones as a means of making payments, both in Australia and overseas. It identifies adoption of SMS-based mobile payments in developing economies, such as M-Pesa in Kenya, as having outpaced developments in advanced economies, reflecting the particularly large benefits these systems can provide in some economies. While mobile payments have taken longer to get off the ground in mature markets such as Australia, they are now beginning to take hold. However, mobile payments in mature markets have taken a different route, leveraging off contactless NFC technology as well as mobile internet. The paper concludes by recognising the importance of the Real-Time Payments Proposal and its likely association with a fresh round of mobile payments innovation in Australia.
Click here for the full article.
On 31 January 2013, the Australian Bankers Association (ABA) released a revised Code of Banking Practice. The Code is a self-regulatory code that binds subscribing banks to a set of minimum standards in their dealings with personal and small business customers.
The new Code will come into effect on 1 February 2014. Changes to the Code relevant to payments include clarification that chargeback rights exist for disputed transactions on relevant debit cards, including debits under recurrent payment arrangement.
The Code makes a number of other changes including how banks will deal with customers experiencing financial hardship and special provisions for dealing with customers in remote Indigenous communities.
Click here for the new Code.
On 11 March 2013, the UK Payments Council published two reports on Access to Cash in the UK. The reports included findings of a quantitative survey of consumers and small and medium-sized businesses (SMEs) and of qualitative research focussing on groups, such as those on low incomes and living in rural areas, most likely to experience issues in accessing cash.
The quantitative research noted the substantial majority of consumers (81%) found it very easy to get the cash they needed. There were also high levels of satisfaction among those who get cash using branches, ATMs and at point-of-sale.
The qualitative research found that the difficulties experienced in accessing cash included:
Click here for the full research.