Payments industry collaboration for 2015 came to an appropriate climax with the publication of the Australian Payments Plan in early December by the Australian Payments Council. As an industry, this is our first attempt at a long-term, holistic view of payment systemic evolution. It is in the nature of such efforts that success is measured by how many conversations are prompted, rather than how many questions are resolved.
The key themes are here and now but they are also enduring: security and trust, managing the payments mix and enabling technology innovation. There is more about the Plan below, and of course the real work of payments system improvement under the Plan starts in 2016. Thanks are due to the senior payments executives who gave up much time to contribute, led by the independent Chairs, first Christine McLoughlin and now Mark Birrell.
I wanted to acknowledge great collaboration in another area: the payment card system. Australia’s issuers, acquirers and network operators have done great things this year, from the contactless revolution through eftpos’ new domestic hub to ambitious work to tackle online fraud. 2016 will see a continuing challenge to keep up with rapid fire technology.
The other big ticket item for 2016 will be the New Payments Platform, which will see progressive delivery and testing throughout the year. I remain deeply impressed with the ”above and beyond” collaboration of so many payments professionals, and want to acknowledge the outstanding efforts of Paul Lahiff as independent chair and the team at KPMG led by Oliver Kirby Johnson, Dan Houseman and Ron Gardoll.
Finally, I can’t let the year go by without re-emphasising my thanks and appreciation for the outstanding work of the APCA team, each and every one. They are the often the linchpin of diverse initiatives – quiet achievers of industry collaboration. My (virtual) hat is off. We have a new, expanded team for this year and big plans, but I know they will continue to deliver.
So: roll on 2016! Expect to be talking about shared ledgers, NPP, digital wallets, digital identity and APIs. All in a year’s work in the most vibrant payments market in the world!
The Australian Payments Council published the Australia Payments Plan on 4 December 2015. The plan provides strategic direction to the payments industry for the next ten years. It was developed in consultation with a wide range of users of the payments system – from government and corporate bodies to individuals.
To ensure that the payments system continues to meet the desired characteristics of resilience, efficiency, accessibility and adaptability as it evolves, the plan has identified a number of initiatives for industry to collaborate on.
The plan is set in the context of the economy and digital disruption. As such, it considers that environmental change will be driven by the progression of three interdependent trends:
As this more connected future unfolds, the challenge for the payments system is twofold:
The Australian Payments Plan outlines three overlapping phases that characterise how the way we pay will evolve as payments become more digital, integrated and embedded.
Digital Payments - Australians are well and truly advanced in this phase, evidenced by high contactless payment adoption and rapid e-commerce growth.
Integrated Payments - High smartphone penetration and the proliferation of mobile apps will help drive the closer integration of payments with the retail experience. Increasingly, the experience will dominate and payments will happen “under the hood”.
Embedded Payments – Greater levels of automation and the combination of multiple sets of data will see payments more tightly embedded in economic activity.
As the payments system evolves, industry recognises the need to work collaboratively across three key areas:
Accordingly, the Australian Payments Plan identifies a number of initiatives that the payments community will work on together.
The consultation process also identified a number of current initiatives that are already playing an important role in ensuring the fit-for-purpose development of the payments system.
The Payments Council is in the process of organising working groups to deliver the new initiatives. Organisations interested in becoming involved are invited to contact email@example.com.
More information about the Australian Payments Plan is available here.
The interim payments fraud data released by APCA in mid-December 2015 reflect the trends reported in ‘Australian Payments Fraud – Details and Data for 2014’ released in June 2015. Fraud on Australian payment cards continues to increase in the card-not-present (CNP) space, reflecting a global trend in online card fraud.
The latest figures for the 12 months to 30 June 2015 show that the rate of fraud on Australian payment cards increased from 53.6 cents to 60.3 cents in every $1,000 dollars spent. CNP fraud accounted for 80% of all Australian card fraud having increased from $256.5 million to $322.7 million over this period. Australians spent a total of $672.5 billion on their cards over that time.
In line with global patterns, increased CNP fraud can be explained by three main factors:
The interim release shows that:
The industry has been working to limit CNP fraud through various measures including enforcing standards to protect card data, stronger cardholder authentication techniques and enhancing real-time fraud detection tools.
A new measure recently introduced is ’tokenisation’ which replaces card details with a non-sensitive equivalent, making it much more difficult for criminals to steal information to use fraudulently. Financial institutions are also taking steps to extend the authentication techniques used for online banking to the CNP space. The challenge remains to encourage widespread adoption of the security measures by all providers and users of online card payments.
The interim fraud data release is available at www.apca.com.au. Comprehensive payments fraud data for 2015 will be released in mid-2016.
The Reserve Bank of Australia commenced consultation on card payments regulation in December 2015, focussing on the regulation of interchange fees. This follows an earlier RBA consultation held during March and April 2015.
In the December 2015 Consultation Paper, the RBA outlines its preferred approach to future regulation.
Aspects of the RBA’s preferred option, in particular retaining the weighted average for credit card interchange fees, align with the views expressed by APCA and other key stakeholders during the March-April 2015 consultation.
APCA is currently developing a response to the December 2015 Paper in consultation with its members. Submissions are due to the RBA by 3 February 2016.
For more information click here.
On Wednesday 16 December, the Senate Economics References Committee released its final report "Interest rates and informed choice in the Australian credit card market".
APCA made a submission to the Inquiry in August 2015 and APCA’s arguments against reducing interchange fee caps are quoted on page 87 of the final Committee Report.
Overall, the report makes 11 Recommendations, three of which have systemic implications for credit cards.
Cost transparency on credit card usage is a new proposal for Australia and will require further analysis. While enhanced transparency of the costs can support competition, any change needs to be weighed up against implementation and on-going compliance costs. Understanding costs is critical for achieving an efficient mix of payments, which is a key theme within the Australian Payments Council’s Australian Payments Plan.
Account switching, in particular account number portability, has been a long standing issue. APCA proposed and implemented the transaction account switching service in July 2012, in response to the 2011 Fraser Review on Account Number Portability. However, switching of credit card accounts remains beyond the scope of the APCA service. Issuers and card schemes would need to be closely consulted if this issue is to be further investigated.
This new proposal provides an opportunity for further research and discussion among key stakeholders on the role of regulation within an increasingly dynamic payments marketplace.
These recommendations currently sit with Government and a response is expected in the first half of 2016. APCA will undertake further analysis of the Recommendations and engage with members through forums such as the Issuers and Acquirers Community over the coming months.
For APCA’s submission click here.
Here is a selection of opinion articles from the APCA blog during the past quarter:
Cloudsurfing and Payments
by Chris Hamilton, CEO
Australia providing ideas to help bring digital payments to the poor
by Dr. Brad Pragnell, Head of Industry Policy
To read more articles, click here.
To receive notification of all new articles, click here to sign up to the APCA blog RSS feed.
Welcome to the somewhat belated third issue of Payments Monitor for the year. There is no shortage of change in the world of payments – keeping up is more of a challenge than ever. We have been attempting to provide a timelier source of news and views through our payments blog.
The personnel changes I explored in the last issue have now come to pass. I am delighted to welcome our two new general managers – Victoria Richardson, responsible for Payments Direction, and Andrew White, responsible for Payments Community. These two outstanding individuals are, I believe, going to add a whole new dimension to the great skills and people we already have. Meanwhile, the Reserve Bank has been doing some reorganising of its own, with the happy result that Michele Bullock returns to mainstream payments as Assistant Governor , Business Services. Michele has already more than earned her stripes in payments as a Head of Payments Policy. It’s great to see her back.
One of the things we are keen to do more of is collaborative thought leadership - exploring opportunities for beneficial collaboration across the full range of payments issues. A small step forward was made with APCA’s inaugural “Year in Australian Payments 2015” annual conference. A great line-up of speakers drew great attendance from our membership and friends. We are already looking forward to the 2016 event.
I hope you enjoy the Monitor, and please feel free to check out the blog as well.
APCA held its "Year in Australian Payments 2015" Conference on 21 October 2015 at the Intercontinental Hotel in Sydney. The half-day event brought together over 100 attendees from across the payments landscape including financial institutions, card schemes and service providers.
Attendees heard from industry experts on current payments topics including public policy and industry agendas, the New Payments Platform, what’s driving innovation and cards payments challenges.
Much was covered in just three hours – an overview follows:
APCA Chair Rob Craig brought to a close on a very positive note, commenting that strong themes of innovation and collaboration dominated discussion throughout the afternoon.
APCA will hold this event on an annual basis. Please get in touch if you would like more information about the conference.
NPP Australia Limited recently announced that it reached agreement with Australia’s premier bill payment system provider - BPAY - to design, build and operate the first overlay service to use the New Payments Platform (NPP).
BPAY was selected to provide what the industry has termed the “initial convenience service” following a highly competitive process to identify an innovative, compelling proposition to launch when the NPP becomes operational in 2017.
The BPAY service will be the first of many NPP overlay services - specially tailored services which individual financial institutions may choose to offer their customers.
BPAY will work with NPP participants on an end-to-end convenience service that will let consumers immediately transfer funds to and from their bank account via their mobile phone, tablet, or via the internet.
The NPP is being developed collaboratively by authorised deposit-taking institutions (ADIs). The intention is that all ADIs, and through them businesses and consumers, will connect to the NPP basic infrastructure to make fast, versatile, data-rich payments. Subject to technical requirements, ADIs can choose to join the NPP at any point in its development and operation.
The NPP Australia media release is available here.
More information about the initial convenience service can be found on the BPAY website.
A comprehensive list of ADIs is available on the APRA website.
The Australian Payments Council’s first major initiative, the development of the Australian Payments Plan (APP), is due for release in December 2015. Through the APP, the Payments Council will establish its vision and strategy to ensure the Australian payments system continues to meet the changing needs of the economy as it evolves over the next ten years.
The Payments Council is the strategic coordination body for the Australian payments industry with APCA supporting its work.
In order to ensure that the Payments System continues to meet the needs of all users, the Payments Council consulted widely during the preparation of the plan.
Engagement and consultation
Public consultation kicked-off on 25 May 2015 with the release of the APP Consultation Paper. A range of private and public sector organisations were consulted, representing the interests of government, business and consumers, with engagement of around 70 organisations. Over twenty written submissions were received from individuals, academics, community groups and users, as well as providers of payment services. The Council also held forums during September and October.
Importantly, a dedicated Council sub-committee was established to interpret the output of the consultation and to shape the plan.
During the consultation process, the Payments Council also convened its first formal meeting with the Payment Systems Board (PSB) in August 2015. Under a Memorandum of Understanding, the PSB and The Council will meet regularly. The main topic of discussion for this meeting was the consultation process for the development of the APP.
The thorough consultation and industry wide collaborative provides strong evidence of the payments community’s ability to work together on delivering a robust payments system, fit for the future.
The FSI was the Commonwealth’s “root and branch” review of Australia’s financial system, chaired by David Murray. APCA has been an active participant throughout the FSI process making two rounds of submissions to the FSI, engaging directly with the FSI panel and secretariat and responding to the FSI’s Final Report. This process, which began in late 2013, drew to a close with the release of the Government’s October 2015 response to the FSI Final Report.
In this response, the Government accepted all but one of the FSI’s 44 Recommendations. However, in respect to some FSI Recommendations that have been accepted, the Government has chosen a different implementation path than that specified in the FSI Final Report.
Most notable, and of particular relevance to payments, has been the Government’s response to the card payment surcharging. This has been a controversial issue throughout the FSI, with a high-profile public campaign mounted against the practice of surcharging.
The FSI Final Report recommendation was for a three-tiered approach, where certain card products would be categorised as having low, medium or high costs. This categorisation would then permit different levels of acceptable surcharging. APCA, in its submission to Government on the FSI Final Report, noted this approach was complex and potentially difficult to implement. This was echoed in a number of other submissions and, in the end, the Government decided to not proceed with the three-tiered approach, but rather phase in a legislated ban on surcharges that exceed the reasonable costs of acceptance. As well the Government will ensure that the ACCC has the necessary powers to enforce the ban on excessive surcharging. This has been identified as a priority for the Government by the new Prime Minister Malcolm Turnbull and we should expect to see legislation soon.
Beyond surcharging, there are a number of other issues emerging from the Government response to the FSI Final Report response that will impact payments. These include the development of a clearer graduated payments regulation and work on trusted digital identity framework. Both should be subject to further consultation with industry in 2016.
APCA’s submissions to the FSI can be found here.
The RBA’s Review of Card Payments Regulation has been a high profile policy review. In October 2015, the RBA announced that it would designate a number of system including eftpos, MasterCard, Visa prepaid, American Express companion cards, and MasterCard debit.
On 20 November 2015, the RBA announced that it would be consulting on proposed changes to the standards applied to designated card systems. This consultation is expected to commence in early December and would be coordinated to coincide with consultation on the Government's proposed legislation to ban excessive surcharging (see above).
APCA has been, and will remain, an active participant in the current RBA review. In the April 2015 submission to the RBA Review, APCA recognised the need to address the concerns of higher costs faced by small merchants. However, it believes the current approach to regulating interchange fees is not sustainable as the payments system is increasingly subject to significant technological and commercial change.
APCA’s submission to the RBA Review of Card Payments Regulation can be found here.
APCA made a submission to the current Senate Inquiry into Credit Card Interest Rates, being undertaken by the Senate Economics References Committee. APCA’s written submission focussed on the regulation of interchange and ATM fees, reiterating the benefits of market and self-regulatory solutions to the challenging issues of fees.
The Inquiry hearings has been wide-ranging, examining a number of business and regulatory practices associated with credit cards, including the setting of interest rates, cardholder fees, interchange, surcharging, school-based banking and the regulatory role of the RBA. The Senate Inquiry is scheduled to report in early December 2015.
APCA’s submission can be found here.
In September 2015, the Canadian Payments Association (CPA) in collaboration with the Bank of Canada, released “Public Policy Objectives and the Next Generation of CPA Systems: An Analytical Framework” providing an analytical framework for thinking about the trade-offs involved in developing a new core payment system.
The Paper begins by outlining the Public Policy Objectives that the Canadian payment system should strive to meet. These include safety and soundness, efficiency, and meeting the needs of Canadians and protecting their interests.
The public policy objectives are mapped against five key Attributes of an individual core payments system, which are Access, Functionality, Interoperability, Timeliness of Payment, and Risk Management.
The Discussion Paper outlines where the attributes are assessed in terms of them achieving or not achieving the public policy objectives.
The analysis finds that a system with rich functionality and access contributes the most towards achieving the public policy objectives. These features enable value added services that can evolve with changing technology, thus promoting greater innovation and efficiency.
Somewhat more controversially, the Discussion Paper identifies timeliness as being somewhat less important to achieving the public policy objectives, particularly given that the demand for real-time finality amongst Canadian users is unclear and therefore design should be flexible to accommodate different levels of finality.
While the paper provides an insight into the trade-offs involved in designing a new payments system, the model does leave a few issues important issues, such as cost, largely unresolved.
Despite these shortcomings, the paper does provide a framework that should enable a robust discussion within Canada as to the preferred design of any new system.
In November 2015, the Canadian Payments Association (CPA) released research on the economic benefits of adopting the ISO 20022 payment message standard. The CPA has already identified the adoption of ISO 20022 as a critical component of any payments system modernisation in Canada.
The research paper undertakes a discounted cash flow analysis to estimate the economic benefits derived from the adoption of ISO 20022. The paper estimates that the economic benefit to Canadians could be in the neighbourhood of $4.5 billion over a 5 year period, primarily as a result of cost-savings derived from cheque elimination.
The paper works through a number of scenarios on the possible impact of ISO 20022- based payments displacing cheques within Canada. While $4.5 billion is at the upper end, the average cost-savings to Canadians across a number of alternative projections is still estimated to be $1.2 billion. These cost savings are distributed across all stakeholders, including consumers, businesses, governments and financial institutions. However, the major beneficiaries would be Canadian businesses, that as the largest sender and receiver of cheques, bear the brunt of the costs associated with handling cheques.
Cheque displacement, however, is only the tip of the iceberg. The report notes that these estimates of the economic benefit are conservative and ISO 20022 adoption could provide even greater benefit through improved efficiency in payments processing, enhanced domestic and global interoperability and opportunity for innovation throughout the payments value chain.
Have you seen the 2015 Annual Review yet? Click on the image to find out more about APCA's activities during the past year.
Apple Pay in Australia
by Chris Hamilton, CEO
Our mission has been, and will continue to be, industry stakeholders working together to improve the Australian payments system. But in service of that mission, APCA is undertaking its most extensive reorganisation in ten years, representing a significant new direction.
A feature of the reorganisation is the creation of two new general manager roles, currently in recruitment. The need for this new, senior accountability has emerged as APCA’s role in payment systems improvement has evolved, and as our community of stakeholders has expanded. APCA’s existing team has done an outstanding job coping with greatly expanded responsibilities, getting extra value out of much the same resources. But we now need to build on their expertise and capabilities.
A new Payments Direction unit will support the Australian Payments Council in charting the future evolution of the payments system and ensure the best possible relations with government, media and the end users of the payments system – Australian businesses and consumers. A new Payments Community unit will take a “whole of relationship” approach to supporting our extended community of payments organisations: banks, other financial institutions, specialist payments companies and system operators. Other units will be responsible for delivering our specialist skills and expertise in payments operations (particularly standards and system technology), payments regulation and governance.
In this way, we intend to continue doing our “day job” of collaboratively administering a number of critical pieces of Australian payments infrastructure, such as the High Value Clearing System and the Bulk Electronic Clearing System, while ensuring capacity and capability for new challenges. In the next 12 months, these new challenges are likely to include:
There does not appear to be any shortage of meaty issues against which to test our new capabilities.
The Australian Payments Council, the strategic coordination body for the Australian payments industry, announced in June 2015 the appointment of Mark Birrell (pictured) as independent non-executive Chairman.
Payments Monitor recently caught up with Mr Birrell for a brief Q and A session.
Mark, tell us a bit about your background?
I am a Melbournian by birth and a lawyer by profession and have had a career spanning the corporate and public sectors. Today I’m a full-time company director, working in Sydney and Melbourne.
Currently, I am the chairman of a number of boards including Infrastructure Australia, Regis Healthcare Limited, the Port of Melbourne Corporation and PostSuper. I am also the President of the VECCI, which is the main employer body in Victoria.
Previously, I was the national leader of the infrastructure practice at Minter Ellison Lawyers, and have served on boards like Australia Post. I was also a long-serving member of the Victorian Parliament and a Cabinet member in the Kennett Government - in the Major Projects portfolio, then as Industry, Science and Technology Minister.
What is it about the Payments Council’s role that you find appealing?
I have always had an interest in fostering economic development – it has probably been the thread that has run through my career. The payments system operates in the background but is clearly vital for the functioning of a modern economy. I know that an efficient and effective payments system can have a strong ripple effect throughout the economy. This is a dynamic period for payments, given the opportunities for positive change. Being able to shape the future of the payments system through Council initiatives such as the Australian Payments Plan is both important and challenging.
Do you see any connections between the Council and your other roles?
I have always been attracted to areas where significant reform can be brought about by bringing together key stakeholders. It is a critical success factor in my other roles, such as Infrastructure Australia where we are bringing together a wide range of public and private interests for mutual, long-term benefit. Improving payments infrastructure, like improving any infrastructure, has the potential to create significant benefits for the economy and the wider community.
The sixth APCA Stakeholder Forum was held in Sydney on 27 May 2015. Chaired by Paul Lahiff (pictured), there were over 30 attendees from a range of payments industry stakeholders.
The Forum focussed on the Reserve Bank of Australia’s (RBA) review of card payments regulation, the New Payments Platform (NPP) and the Australian Payments Council’s consultation on the Australian Payments Plan.
Forum participants heard from Dr Tony Richards, Head of Payments Policy at the RBA who provided a brief update on the developments in payments since the release of the RBA’s Strategic Review of Innovation. Dr Richards acknowledged progress on the development of the NPP and the establishment of the Australian Payments Council indicating that the Bank was pleased with the extent of industry collaboration to date. Dr Richards also acknowledged the recent Financial System Inquiry Final Report and the RBA Review of Card Payments Regulation, where the regulation of interchange fees and surcharging regulation were being examined.
Following on from Dr Richards’s overview, Dr Brad Pragnell, Head of Industry Policy at APCA provided a presentation on the RBA Card Payments Review, outlining the Review’s background and the issues under consideration by the RBA. Dr Pragnell also summarised APCA’s response to the Review, which focussed on the need to promote competition rather than regulate fees.
The Forum discussed the Australian Payments Council’s consultation on the development of an Australian Payments Plan. Lance Blockley, Managing Director at RFi Consulting, led a workshop on issues that should be considered as part of the Plan including the impact of technology and competition, user demands for convenience and security, globalisation, regulation, the future of the cheque system and digital identity.
To wrap up, Paul Lahiff, also chair of NPP Australia, provided a brief update on the NPP, noting progress during the current “design and elaborate” phase and the target date of 2017. Mr Lahiff noted that industry commitment to the NPP remained high and that an announcement on the Initial Convenience Service, the first of the overlay services, was imminent.
With the new Issuers and Acquirers Community commencing operations on 1 July 2015, it seems timely to reflect on the history of its predecessor, the Consumer Electronic Clearing System (CECS) - APCA’s framework for domestic debit card transactions.
CECS has been ensuring the efficiency, integrity and security of transactions within Australia’s ATM and POS networks since December 2000. Over the last 15 years, both networks have grown by around 140% to more than 31,000 ATMs and 850,000 POS terminals. In fact, Australia now has one of the highest penetrations of POS and contactless terminals in the world.
CECS has played an important role in initiatives and industry-wide reforms that have changed the card payments landscape - here are just a few of the many achievements:
Changes within CECS have required the involvement and support of a wide range of participants, operators, service providers and other stakeholders in the cards industry. APCA thanks all who have contributed to CECS’s success over the last 15 years – and particularly those who gave their time and expertise on the CECS Management Committee, Advisory Council and the many various sub-committees and working groups.
A new era has now begun as the Issuers and Acquirers Community takes over. It will operate side by side with CECS during a transition period of up to six months.
More information on the Issuers and Acquirers Community is available here.
A comprehensive report released by APCA in June 2015 reveals that fraud on Australian payment cards continues to increase in the online environment reflecting a global trend towards increasing cybercrime risks.
New data contained in “Australia Payments Fraud–Details and Data 2015” shows that in 2014 the rate of fraud on Australian payment cards increased to 59c in every $1,000 spent – up from 47c in 2013. Card-not-present (CNP) fraud, occurring mainly online, by phone or by mail, accounted for 94 per cent of this increase.
The data further shows that:
The Report discusses increasing CNP fraud in the context of:
Fraud prevention measures being rolled out by industry to tackle rising CNP fraud are highlighted in the Report including the “tokenisation" initiative and existing measures such as enforcing standards to protect card data, stronger cardholder authentication techniques and enhancing real-time fraud detection tools.
“Australia Payments Fraud–Details and Data 2015” is available here.
The Reserve Bank of Australia (RBA) commenced its review of card payments regulation in March 2015 with the release of an Issues Paper. The RBA Review is focussed on the regulation of interchange fees, surcharging and a number of related policy issues.
In particular, the Issues Paper identifies declining transparency of end user costs, scope for further falls in interchange, excessive surcharging, network choice and treatment of companion and pre-paid cards as issues worth examining. The number and complexity of interchange fee rates and lack of transparency faced by merchants as well as the overall higher per transaction interchange rates paid by smaller merchants are called out as a particular concern.
APCA made its submission to the RBA review on 24 April 2015. The APCA submission noted no clear case existed for reducing the overall level of interchange fees and that changes within the marketplace brought into question the long-term sustainability of interchange fee regulation.
The APCA submission did recognise the need to address the current concerns of smaller merchants over their own costs and transparency, and to address a number of other issues, such as clarity on the regulatory perimeter and surcharging. To this end, APCA recommended:
It is expected that the Payments System Board will consider these issues at its August 2015 meeting and that the RBA will provide a public response to the consultation afterwards.
More information on the RBA Review is available here.
More information on the APCA submission is available here.
In April 2015, the Canadian Government updated the Code of Conduct for the Credit and Debit Card Industry in Canada. The Code was introduced in 2010 and established a regulatory framework for a number of card payment issues. Most notably, the 2010 version provided information and rights to merchants regarding their relations with acquirers and regulated the overall branding and operation of cards with both debit and credit functions. The Code is “voluntary” – however it is widely subscribed to and underpins card payments regulation in Canada.
The 2015 update of the Code extends its coverage to include mobile payments and seeks to further enhance transparency and flexibility for merchants and consumers, particularly in relation to premium payment options. Changes include:
A related consultation paper, Balancing Oversight and Innovation in the Ways We Pay: A Consultation Paper, was also released by the federal government, with a focus on extending oversight beyond “systemically important” and “prominent” payment system to include “National Retail Payment Systems”. The Canadian Payments Association response can be found here. In late 2014, Visa and MasterCard also agreed to a five year commitment effective April 2015 to reduce their effective (average) interchange fee rates to 150 basis points. There was also commitment on new lower rates for charities and independent businesses such as newsagents and pharmacies. This voluntary commitment has been incorporated into the Canadian Code of Conduct changes.
More information is available here.
NACHA announced on 19 May 2015 that its voting membership approved same day settlement within the US Automated Clearing House (ACH) system. This will result in an amendment to the NACHA Operating Rules which will make US electronic payments faster.
Same Day ACH will build upon the existing ACH network capabilities and establish a new option for same day clearing and settlement. Under the rule, two new same-day settlement windows will be added to the ACH Network, increasing the movement of funds between financial institutions from once each day to three times each day. The rule also requires that all receiving institutions accept the new same day transactions and provide faster funds availability to customers. Receiving institutions will be able to recover some of the costs associated with mandatory receipt of same day ACH transactions from the sending financial institution.
Same Day ACH will be implemented over three phases. Phase 1 is scheduled to begin on 23 September 2016.
More information about the Same Day ACH Rule is available here.
A new industry body, Payments UK, was launched on 29 June 2015 to provide a single, authoritative voice for the UK payments industry. Payments UK succeeds the Payments Council, which delivered world-leading innovations such as Paym, the Current Account Switch Service and Faster Payments. Unlike the Payments Council, Payments UK has no quasi-regulatory role for strategy setting and will act more as a “trade association”. However, it will work closely with the Payment Systems Regulator (PSR) to promote competition and innovation across the sector.
Payments UK has also launched a new information hub on gaining access to payment systems. Aimed at smaller entities and new entrants, the site provides information about existing payments systems as well as information about access options.
Why does it take up to a day to process my internet payment?
by Chris Hamilton, CEO
New Research Highlights an Increasingly “Banked” World
by Dr. Brad Pragnell, Head of Industry Policy
The other day, a payments consultant who works extensively overseas observed to me that everyone is talking about overlay services.
A little background: in payments terms, the phrase “overlay service” was first coined in the original concept document which led to the New Payments Platform (NPP). This was the Real-Time Payments Committee’s Proposal to the Payments System Board in early 2013. In the context of the NPP, an “overlay” is an end to end customer service proposition for payers and payees. An instant consumer mobile payment service might be one example.
Crucially, the overlay uses communications, messaging and settlement provided by a separate infrastructure entity (NPP Australia). The idea is that the infrastructure can be used for many different overlays, thereby maximising efficiency and resilience; conversely, each overlay faces a much lower set up and operation cost because it does not have to build an entire new network – it leverages off the basic infrastructure, which serves it as well as other services.
A railway analogy might help here. The infrastructure service is like a network of train tracks connecting towns and cities. It is used by a range of different “overlay” train services – intercity expresses, local commuter trains and freight trains.
At any rate, the idea seems to have caught on. In the United Kingdom, new payment services being developed using the Faster Payments system, such as the Paym mobile service, are being called overlays. There is an underlying truth here, it seems to me, that technology and market forces are conspiring to segregate the customer value proposition from the underlying “rails”.
Why is this? In my view, it has to do with the way “digital disruption” is affecting payment systems. Most authorities, like the recent FSI report, think digital disruption is the big issue in future evolution of financial services. When it comes to payments, there is a tendency to think entire payment networks will be swept away by a digital currency – unlikely, with all due respect. Nearly everyone over the age of 15 in Australia has a banking account denominated in Australian dollars – are we all really going to take a leap into the unknown together?
Instead, customers will increasingly expect payments to be “embedded” in underlying commerce. When I buy something online, I don’t want to fill out my details and go through multiple checks – I just want to press the buy button. When I buy a car, I want the car yard to be paid automatically – but only after the car’s registration has been transferred to my name. This embedding is not just a matter of your bank or other service provider giving you good service – it has a network element, whereby all payments organisations agree to process certain transactions in certain ways. The trick is, there will be lots of different types of transactions, all automated in different ways.
Now, if that diversity means we have to maintain hundreds of different payments systems, that will be pretty inefficient. But it doesn’t, because of the “overlay” concept. All those different systems can have the same basic mechanics of messaging, connectivity and settlement, while delivering the full range of overlay customer value propositions – the best of both worlds.
If an overlay makes the payments system a layer cake, the overlay concept allows us to have our cake, and eat it.
In late March 2015, APCA made its submission to the Commonwealth Treasury on the FSI Final Report which was released in December 2014. APCA noted that a number of issues it had raised through the FSI process - notably the need for more streamlined payments regulation, the benefits of collaboration and the need for technology neutrality in regulation - have all been adopted in the Final Report.
A number of APCA’s recommendations, however, were not taken up - notably a more robust form of payments co-regulation and promoting scheme competition rather than regulating interchange fees.
In respect to payments regulation, the FSI Final Report recommended a “graduated framework” for payments regulation. In its March 2015 submission, APCA broadly welcomed this. In particular, APCA welcomed the FSI Final Report recommendations for clearer guidance from regulators and a widening of the coverage of the ePayments Code.
In respect to the FSI Final Report recommendations for the purchased payment facilities and non-cash payment facilities regimes, APCA has suggested care be taken to ensure existing consumer protections were not eroded as a result.
In respect to interchange fee and surcharging regulation, APCA expressed concern that the proposed three-tiered model for surcharging outlined in the FSI Final Report was complex and untested. APCA further noted in its March 2015 submission that it would focus its engagement on interchange and surcharging through the recently announced RBA policy review process.
The APCA submission to the FSI is available here.
The latest Milestones Report released by APCA in March 2015 confirms that Australian consumers are continuing to move away from cheques and cash in favour of cards and other electronic payments.
Cheque use in Australia dropped by 13.9 per cent in 2014 and the number of ATM cash withdrawals dropped by 4.8 per cent. Over the same period, the use of payment cards increased by 8.8 per cent and the number of direct entry payments by 7.5 per cent.
Cheques values however remain in flux with a slight increase of 0.7 per cent seen in 2014. Against the significant drop in cheque numbers, this value increase suggests that the majority of cheques still being used are for high value business transactions and for property settlement. An irreversible downward turn in cheque values is expected once a number of initiatives currently underway come into effect. These include:
The latest Milestones Report and more information about the decline of cheques can be found here.
The Australian Payments Council met for the second time on 31 March 2015 chaired by APCA CEO Chris Hamilton on an interim basis. A search is underway for a new independent chair following the resignation of Ms Christine McLoughlin in February 2015.
The Council discussed matters of strategic importance to the Australian payments system and the payments community including the development of an Australian Payments Plan. This high-level strategic Plan will articulate a ten year vision and establish the focus for future industry collaboration to ensure the payments system continues to meet the changing needs of Australians and the economy.
In developing the Plan, the Council will conduct a public consultation process in the coming months. The consultation will focus on four key characteristics of the payments system: resilience, efficiency, equitable access and innovation. The Council will consult with the payments community, bodies representing consumer groups and businesses, government, regulators, policy makers and the broader community. Submissions that embrace the consultation theme will be encouraged, but all submissions will be welcomed for consideration. Further information is expected to be available on the Council website in May/June 2015.
At the March meeting, the Council also reviewed exploratory work in the field of cyber security and digital identity. It noted significant community debate on these challenging issues and adopted a set of cyber security goals to guide further work.
More information about the meeting and the Council can be found here.
APCA is setting up the Issuers and Acquirers Community (IAC) to replace the card system currently managed by APCA – the Consumer Electronic Clearing System (CECS).
This has been brought about, in part, because eftpos Payments Australia Limited has taken over from CECS much of the responsibility of setting and managing rules for the domestic card payment system. As well, the world of card payments has become more complex in recent years and many aspects are increasingly requiring greater industry collaboration.
The IAC will provide the framework to allow for industry co-operation and co-ordination on non-commercial aspects of card payments in Australia. This will be achieved by providing a forum for discussions, by establishing rules, standards and guidelines and by providing services to APCA members and the card industry.
The IAC will differ from CECS in that it will:
The IAC will commence on 1 July 2015 with CECS remaining in place for a transitional period of up to six months.
APCA has been working closely with the International Standards Organisation (ISO) on updating international PIN security standards to support tokenisation. This technology will provide a new layer of security that will help prevent the most prevalent fraud in Australia today - card-not-present (CNP) fraud.
CNP fraud occurs when the primary account number (PAN) and other card details are captured by criminals and then fraudulently used in environments where the physical card is not required such as online and over the phone. Tokenisation is aimed at reducing the opportunities for capturing card details. It does so by replacing the PAN with a different number for example, in face to face transactions made using a smart device or digital wallet application. If captured, the token itself cannot be used for normal CNP transactions and as such is of no value to criminals.
At meetings held in December 2014 and March 2015, APCA participated in work to amend the ISO standard 9564.1 - PIN Security for Retail Banking so that tokens can be used when forming encrypted PIN blocks rather than the PAN. This amendment is currently being reviewed by national standards bodies and is expected to be published in early 2016. EMVCo, PCI SSC and Visa also separately released new information on tokenisation during the first quarter of 2015.
APCA actively engages with ISO and PCI to ensure the Australian payments industry is represented in the development of payments-related standards.
Following its submission to the Senate Economics References Committee Inquiry into Digital Currency, APCA was called to give evidence before the Senate Inquiry on 7 April 2015.
APCA’s submission outlined that the “private” and “digital” nature of digital currencies were not particularly new, though the “block chain” / open ledger technology was a noteworthy innovation. The submission further identified the need for a considered regulatory response that maintains a balance between stability, efficiency and competition-driven innovation while ensuring confidence and integrity.
At the hearing, APCA representatives explained the features of the mainstream payments system and recent industry initiatives such as same day settlement in direct entry and the New Payments Platform. It was highlighted that Australia has a highly developed payments system and there appeared to be few gaps that a digital currency could fill. The APCA representatives noted that better data on the use of digital currency is crucial for informing any regulatory response.
More information about the Senate Inquiry can be found here.
The APCA submission to the Senate Inquiry into Digital Currency is available here.
On 4 March 2015, the Reserve Bank of Australia (RBA) released an Issues Paper to commence a review of the regulatory framework for card payments – with a particular focus on the regulation of interchange fees and surcharging. The review follows on from recommendations in the FSI Final Report that the Payments System Board considers the regulation of interchange fees and surcharging.
The Issues Paper, entitled “Review of Card Payments Regulation”, seeks industry and stakeholder views on the regulation of card payments.
The Review Paper is broad – exploring the rationale for previous interventions and the history of recent reforms. Importantly, the Paper catalogues regulator concerns over how the intent of previous reforms have been eroded by particular industry practices, including an inference that these concerns must be properly addressed to avoid more drastic regulatory intervention (possibly lowering the weighted average cap from 50 to 30 basis points or even a hard cap).
Issues explored in detail include the number and complexity of interchange fee rates and lack of transparency faced by merchants, as well as the overall higher per transaction interchange rates paid by smaller merchants.
Submissions to the Review are due by 24 April 2015. APCA will be making a submission and looks forward to engaging with the RBA.
As well, the RBA announced that the Payments System Board waived the recalculation of the benchmarks that would otherwise be required by 30 September 2015. As a result, the obligation to comply with the Bank's interchange fee standards as of 1 November 2015 will be based on the current benchmark levels.
More information can be found on the RBA website.
The new UK Payment Systems Regulator (PSR) became operational on 1 April 2015. The PSR is housed within the Financial Conduct Authority but is an independent body with its own governance, management and mandate.
In March 2015, the PSR released its first major policy statement, entitled “A new regulatory framework for the payment systems in the UK”.
The policy statement confirms that the PSR will establish a new “Payments Strategy Forum”. This body will include a wide range of industry and user stakeholders and develop an agreed collaborative industry strategy. The Forum will have an independent chair and be tasked with strategy as opposed to delivery or implementation.
The policy statement also confirmed that the PSR will undertake two major market reviews: one on ownership, governance and control of payment systems and the other on direct access to payment systems. The PSR will designate existing systems such as BACS, CHAPS and Faster Payments (called “Interbank Operators”) and will closely examine these systems as well as VocaLink (called a “Central Infrastructure Provider”).
In respect to ownership, governance and control, the Interbank Operators noted above will be required to reform their governance to include directors who represent the interests of system users (consumers and businesses). Further, individuals will not be able to sit on the boards of both an Interbank Operator and a Central Infrastructure Provider. Interbank Operators will also be required to publish their minutes, including details of votes. Lastly, the policy statement confirmed that the agreements between the Payments Council and the Interbank Operators, which enabled the Council to direct the Operators, have been terminated. Though designated, the above requirements will not be extended to the international card schemes at this stage.
In respect to direct access to payment systems, requirements will be placed on the four main Sponsor Banks (Barclays, HSBC, Lloyds and RBS) to publish information about the agency services provided to other financial institutions – including contact details, description of the services provided, and fees and charges. This information will also be made available through an industry-developed “Information Hub” and a Sponsor Bank Code of Conduct will also be developed to provide a framework to govern agency relationships.
The PSR has also indicated that it will monitor interchange fee regulation in Europe as well as ATM interchange fees, account switching / account number portability and the progress of cheque imaging.
More information about the PSR can be found here.
Having sponsored a debate since 2013 on the improvement of the US payments system, on 26 January 2015 the US Federal Reserve released “Strategies for Improving the US Payment System”. This paper outlines a number of desired outcomes and strategies for the US system.
In the Strategies paper, the Federal Reserve outlines the final desired outcomes for the US payments system as being enhanced speed, security and efficiency of payments; better choices for making cross-border payments; and enhanced industry collaboration.
The Federal Reserve further outlines the strategies it would adopt to help achieve these outcomes including:
To act on these strategies and achieve the desired outcomes the Federal Reserve will, in the first instance, act as a “leader, convenor and catalyst” to gain commitment. If this is not forthcoming from the private sector in a timely manner, it will consider enhancing its own services.
The Federal Reserve has already commenced its next stage with its establishment of a task force for action.
In early 2015, APCA had the pleasure of hosting a delegation from the Chicago Federal Reserve that has been working on the Payment System Improvement initiative. The visitors were keen to learn about the Australian experience, particularly the New Payments Platform.
More information about the US Federal Reserve’s Payment System Improvement initiative can be found here.
The times they are a ’changin’…
by Chris Hamilton, CEO
RBA data suggests 40% of credit card values in Australia are now card-not-present
by Dr. Brad Pragnell, Head of Industry Policy
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