New payments infrastructure: Caution, generational change ahead!

Chris Hamilton APCA CEOThe Real-Time Payments Committee, a group of senior decision-makers for Australian financial institutions, is developing a proposal for Australia’s next-generation low value payments infrastructure. This CEO’s corner looks at the challenging work of the committee.

The RTPC is on a mission. It has promised to deliver a proposal for new payments infrastructure to the Payments System Board at the Reserve Bank by the end of 2012, so that requirements, design and build can begin in earnest in 2013. The last time the industry did anything like this was in the early 90’s, when financial institutions worked with the Reserve Bank to set up the new infrastructure for high value payments in Australia:
The Reserve Bank Information and Transfer System (RITS) and its feeder system, the High Value Clearing System.

Historically, low value non-cash payments were either cheques - now in terminal decline - or direct entry, which is industry jargon for electronic account to account credits and debits. Direct entry is still growing healthily and meets the basic needs of millions of customers every day. In fact the payment types that the direct entry routinely supports - like internet pay anyone and mobile app payments - were unimaginable when the system was first conceived. That is surely a benchmark for good infrastructure - that it can be adapted to future and unforeseen needs as they emerge and evolve.

But as flexible and valuable as direct entry has been it does not meet all the anticipated needs of Australian businesses and consumers in the 21st century. Key unmet needs are very fast settlement, rich data integration and simple, flexible addressing of payments. These were the conclusions reached by the Reserve Bank in June, when it fired the starting gun for developing a new low value payments infrastructure. Since then, we have been exploring how customers might use new infrastructure that, unlike direct entry, has these characteristics.

There is a fair bit at stake here: millions of people and organisations arrange their affairs to use the basic low value payments infrastructure for uncounted numbers of different purposes. The economy grows organically around it. So adding to or changing the central plumbing is a major step. It affects nearly everyone.

In this kind of work, the public interest and the common interest of financial institutions unavoidably collide. It is neither feasible nor desirable to address one to the exclusion of the other. Both ultimately seek to serve the interests of Australian businesses and consumers, but from different perspectives. We need to recognise them both.

The public interest seeks the greater economic good of Australia. As the public regulator of the payments system, the Reserve Bank wants to promote integrity, efficiency and competitiveness so that Australia’s economy has the plumbing it needs to grow.

Financial institutions want this as well but also seek to offer products that customers want and will pay for - a market view of community interests. Payments services that are sustainably value-adding for customers over the long term are the only ones you can sell for a profit.

It is relatively easy to conceive of a new piece of infrastructure that ticks all the public regulator’s boxes - especially now that the Reserve Bank has clearly articulated what those boxes are. It is a little more challenging to conceive of a system that meets unmet needs in way that ensures sustainable, profitable payment services being provided by financial institutions to their customers. This is in part what BPAY was attempting in the MAMBO project.

But the real challenge is to conceive of a system which covers all the bases: public interest requirements PLUS sustainable, competitive service provision. Right now, we have an opportunity to harness the energy from the collision of interests to generate a better long-term outcome for everyone. I think we are well on the way to achieving this.

The RTPC is keeping the community informed of its progress through regular updates posted on APCA’s website.

Chris Hamilton is a member of the RTPC. The views expressed in the article are his own, and not those of the RTPC, APCA, or any APCA member.

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Small retailers can Get Smart About Card Fraud Online

Get Smart about card fraud onlineAPCA launched a new industry education program on 19 September 2012 to help combat Australia’s online card fraud.

The program - Get Smart About Card Fraud Online - is specifically designed for small merchants who are selling online or are thinking of doing so in the near future.

Criminals are increasingly targeting small retailers in the hope that they don’t have the resources large retailers do to focus on card fraud prevention. The industry has launched the new program to raise awareness among small retailers about the real risk of online card fraud and to provide them with simple steps to help protect their business from criminal attacks.

Get Smart About Card Fraud Online was developed by an APCA working group of financial institution, card scheme and law enforcement representatives. The publicly available web-based program contains tips, information, advice and video case studies in a format that is easily accessible for time-poor business owners.

APCA is currently working with financial institutions, retail associations and forums and government departments to get word out about the program. A number of organisations are already actively supporting the program by providing links to it from their website, facebook and twitter pages.

You can help spread the word. If you have an acquaintance, friend or family member who takes payments online, tell them about Get Smart About Card Fraud Online.

The Get Smart program can be accessed at

Click here for Media Release.

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Enhancing the direct entry system

Direct entryAPCA has adopted an industry policy on the evolution of settlement for low value payments in Australia. Originally identified in APCA's Low Value Payments Roadmap, the new model envisages five same-day settlements in the direct entry system. This reform will enhance a critical element of the Australian payments system. Moving value during the day will mitigate counterparty and operational risks as well as create a platform for innovation.

View the video by Chris Hamilton for a simple explanation of the direct entry system and what the changes mean for consumers.


Cheque “values” join cheque “volumes” in their decline

Decline of chequesThe latest APCA statistics on cheques usage highlighted a strong decline in daily cheque values. Between May 2011 and May 2012 daily cheque values fell by 20% from $6.0 billion to $4.7 billion.

Over the same period, cheque volumes continued their steady decline, dropping by 9% from 1.1 million to 1 million cheques a day.

As noted by APCA in The Decline of Cheques: Building a Bridge to the Digital Economy released in May 2012, cheque volumes have been steadily declining in Australia over many years. Between 2003 and 2011, the daily volume of cheques dropped by 52% from 2.3 million to 1.1 million. However, overall cheque values in Australia remained reasonably steady. Between 2003 and 2007 the daily value of cheques hovered between $7.2 billion and $7.0 billion then gradually declining to $6.0 billion by 2011.

This year’s 20% drop in daily cheque values, when viewed alongside the steady drops in volume in recent years, suggests significant underlying changes in cheque usage. This will be examined in closer detail when APCA releases its first Cheques / Digital Economy Milestones Report in early 2013.

Click here to view cheques statistics.

Click here to read the Digital Economy report

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New research on why US small businesses still use cheques

ChequeCheques remain a heavily used payment instrument in the USA. The US National Association of Automated Clearing Houses (NACHA) has released new research on the use of cheques by small business.

Co-sponsored by FIS, the Research Brief, entitled “Still Paying with Paper: Small Business Continue to Write and Receive Cheques” was released on 18 October 2012 and found that nearly half of all cheques written in the US (exclusive of government cheques) were written by small businesses. This amounts to 2.7 billion cheques per year of which 24% are B2B payments, 12% are small businesses paying their staff and 10% are consumer to small business payments.

Two-thirds of US small businesses do not offer direct deposit of salaries and wages into employee’s bank accounts. The reasons given by US small businesses for this include perceptions about cost, employee preference and not being approached to offer the service.

Click here to view the full research.

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UK Payments Council releases research on older payments users

International paymentsThe UK Payments Council has released new research on consumers aged over 80 and people with cognitive, sensory and physical disabilities.

Undertaken by Toynbee Hall and Policis and funded by the Payments Council, this research found significant diversity within these groups. In particular the research found some older and disabled users were able to use technology such as internet banking and smartphones to enable payments, but generally this was done with the assistance of supportive family members. However those living alone, the poor and digitally excluded had a more difficult time, experiencing limited access to goods and services as a result of the everyday payment barriers they face.

The research found that older and disabled users, their families and carers often adopted coping strategies and workarounds such as sharing cards, PINs, or passwords for online financial services. While a practical response, these strategies carried risks of financial abuse and fraud, as well as compromising consumer protections premised on safeguarding of cards PINs and passwords.

The research suggested that the payments industry should examine creative ways to find the appropriate balance between security and convenience for older and disabled users. This could include:

  • Addressing physical barriers to the use of ATMs and bank branches;
  • Enhanced visual presentation and standardisation of ATMs;
  • Adapting payments terminals and internet and online banking to address the dexterity and memory challenges associated with their use; and
  • Options for limited delegation of payments to others, enabling access to cash and the undertaking of shopping while maintaining privacy and security.

Click here to view the full research.

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Payments System Board releases 2012 Annual Report

Reserve Bank of AustraliaThe Payments System Board released its 2012 Annual Report in September 2012. The report provides an update on international and domestic payment developments.

This includes comparative statistics on payments usage. Statistics from 2010 demonstrate that Australia is among one of the most advanced payment markets in the world. In a list of 23 developed and developing countries, Australia ranked as the fourth highest number of per capita non-cash retail payments (282), with only the United States (347), Sweden (330) and the Netherlands (312) registering higher per capita numbers.

The PSB Annual Report also provides an update on the Conclusions of the Innovation Review, including Real Time Payments Hub and Industry Governance, as well as other industry and regulatory developments.

Click here to view the full report.

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RBA announces that Australian bank notes will be upgraded

Australian cashThe Reserve Bank of Australia (RBA) is the issuer of bank notes in Australia. One feature of Australian bank notes has been the relatively low levels of counterfeiting due to the introduction of polymer technology and other anti-counterfeit technologies in the 1990s.

The RBA has recently announced that it will begin a program for upgrading Australia’s banknotes. While the banknotes will retain many of the key design elements of the current banknote series, such as the colour, size and portraits, some design changes will be necessary to accommodate the new security features.

The RBA has announced that it will consult widely to ensure the upgrade meets community needs. The program of upgrading banknotes will take place over the coming years and the RBA will announce further details as they become available.

Click here for more information.

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PSB considers ATM reforms and multifunction cards

At its meeting on 17 August, the Payments System Board (PSB) decided to vary the Access Regime for the ATM System, to extend the RBA’s powers to grant exemptions for ATM arrangements that would otherwise be counter to the interchange provisions in the Access Regime.

Following this decision, the PSB also decided to grant an exemption to an arrangement proposed by ATM industry participants for reducing the high ATM fees currently incurred by residents of selected very remote Indigenous communities. This arrangement will provide fee free transactions at 76 ATMs in very remote Indigenous communities, as announced by the Government in May of this year.

At the August meeting, the PSB also considered the public policy issues relating to multi-network debit cards. The PSB previously indicated its support for the long-standing practice of issuing “combo” cards in Australia, because they are convenient for cardholders and allow stronger competition between networks at the point of sale.

At the meeting, the PSB discussed relevant cross-scheme issues regarding data handling, branding and the arrangements for contactless debit cards - all of which impact competition, consumer choice and costs.

As a result, the PSB asked RBA staff to meet with the parties and work towards a voluntary agreement. If an acceptable outcome cannot be reached in an expeditious manner, the PSB has authorised a public consultation on the case for regulatory action.

Click here for more information about access regime for the ATM system.

Click here for more information about multi-network debit cards.

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High value banknotes: are they really under the beds of older Australians?

High value banknotesIn September of this year, Peter Mair’s submission to the RBA Innovation Review Conclusions created a surprising media splash. Mr Mair, a former RBA official and current finance media commentator, suggested significant and widespread hoarding of $50 and $100 banknotes by older Australians. In the media frenzy that followed, Mr Mair further suggested that “the average pensioner couple could hold up to $50,000 in undeclared $50 and $100 notes to get access to the pension.”

Not surprisingly, these comments set off a media firestorm. The Minister of Finance Penny Wong commented, responding, somewhat tongue in cheek, that she hadn’t been looking under any pensioner’s bed for cash!

The coverage raises the issue of high denomination banknotes in Australia. Are we awash in high denomination banknotes in Australia? Is Australia out of line with its international peers? Where are all those $100 notes and what are they being used for?

According to the CPSS “Red Book”, the 2011 value of currency (both banknotes and coins) in circulation per inhabitant in Australia is $US 2685, above the CPSS international average of $USD 1624 and well above countries such as Canada and South Africa. However Australia is well below a number of jurisdictions including the US, Euro area, Hong Kong and Singapore.


Source: CPSS – Red Book Statistical Update

Other statistics used to determine the amount of currency in circulation, such as currency as a per cent of narrow money or as a percentage of GDP, actually places Australia below the relevant international average.

As well, Australia’s use of $100 as the value of the highest banknote is not out of line with international practice, being close in value to the US ($100), New Zealand ($100), UK (50 pounds), Canada ($100) and Japan (10,000 yen).

Indeed it is the Euro area, with its 500 Euro note (equivalent to about 620 Australian dollars) and Switzerland, with its 1000 Swiss franc note (equivalent to about 1050 Australian dollars) that have notes of very high value.

While Australia is not out of line with international practice, the specific location and use of higher denomination banknotes in Australia remains perplexing.

Tracking cash use is notoriously difficult and statistics about cash use remain spongy, particularly when compared to the more precise statistics available on cheques, card and electronic payment use.

In a study of banknote quality, the RBA suggests that larger value notes, in particular $100 banknotes, are not used regularly in transactions but rather used as a store of value. Despite Mr Mair’s interesting hypothesis of cash hoarding by age pensioners, actual research by the RBA on cash holding by Australian individuals finds that, on average, Australian individuals have closer to $90 in cash on hand at any one time. Even Australians aged 60 and over have an average cash holding of $130, a far cry from $50,000.

It could be argued that these survey results disguise larger cash holdings by a minority or that the respondents methodically lied in the surveys, given the deception and criminality involved. Indeed, cash at hand is not exempt from the age pension means test and not reporting these assets is potentially a criminal offence.

While larger denomination notes are not heavily used in retail transactions, $50 bills are now very common in ATM withdrawals. As well and somewhat surprisingly, the average over the counter cash withdrawal from a branch in Australia is a whopping $1400.

Though many of us don’t see or use $100 notes in an everyday retail environment, RBA statistics do state that cash is still used in one-third of face to face transactions over $100.

Overall these statistics suggest an infrequent but significant use of $100 notes in particular face-to-face purchases. Indeed one of Australia’s leading appliance and electronic retailers was using, until recently, the tagline of “Pay Less, Pay Cash”, suggesting the sectors where such cash purchases may occur. Overseas research does identify the persisting use of cash for electronic goods, white goods and used vehicles, likely driven by a desire for “delivery versus payment” and the perceived high costs of card acceptance.

In addition there is the issue of the use of large notes in the grey and illegal economies, itself a very challenging issue to measure. Recent research from Harb and Bhattacharya at Deakin University suggests the illegal economy is equal to about 2 to 3 per cent of gross domestic product. Widespread cash hoarding by age pensioners could be part of this, but Centrelink statistics identify underreporting of income and false reporting of personal arrangements, rather than asset hiding, as the vast majority of Centrelink fraud. Mr Mair’s comments remain, at best, an interesting but untested hypothesis.

Without much firmer evidence, phasing out high denomination notes would be of questionable value in policy terms. The other alternative put forward by Mr Mair, of maintaining high denomination banknotes but discounting their value based on their age, would create a compliance burden of unfathomable complexity for Australian consumers and businesses.

Further exploration into who holds or uses $100 banknotes and why, would help us understand the resilience around cash usage. But the solutions to their continuing use will be less about making it harder to hold or use cash but more about making available the digital alternatives that can address both unmet existing and possible future payment needs.

The views expressed in this article are those of the author, Dr Brad Pragnell, APCA Head of Industry Policy and not necessarily those of APCA or APCA members.

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Have you seen the 2012 Annual Review yet?

APCA annual review
Click on the image to view a summary of APCA’s activities during the year and short videos by our Chairman Russell Rechner and CEO Chris Hamilton.