A health plan for the payment system

Chris Hamilton APCA CEORecent data shows Australian non-cash activity overtaking cash transactions for the first time. These days almost every economic act other than a small consumer purchase requires an electronic transfer of value through the payment system by card, direct credit, direct debit, BPAY or some other method. This means that the payment system has become to the economy what your arteries and veins are to you – critical for economic health. One might think, then, that keeping the payment system “fit” (that is, secure, efficient and competitive) would be the subject of a well-developed “health plan”. Curiously, in many countries this has not been the case.

Around the world, payment systems have developed organically as coalitions of bankers build networks to serve their customers, with central banks gradually developing wider responsibilities. Australia was one of the first countries in the world to have a dedicated industry payments association – APCA was founded in 1992 – and the Reserve Bank of Australia was one of the first central banks to be given statutory responsibility for the payments system – when the Payments System Board was formed in 1998. In many other countries, there is still no clear focus of thinking about overall payments system health and evolution. But things are changing.

In many of our Commonwealth counterparts, the idea of coordinated planning for the payments system has certainly taken hold. Payments planning bodies have been created, like the Payments Council in the UK or the Payments Consultative Committee created by the Department of Finance in Canada. There have also been a number of new plans and roadmaps for national payment systems. The UK, Canada, South Africa and New Zealand have all taken steps down this path, the most recent effort coming from the UK Payments Council in June with an initial report on their Payments Roadmap. In Australia, the RBA has been the main protagonist in relation to the cards system through a decade-long series of reforms following on from the Wallis Financial System Review in 1998, and in non-card payments APCA made an attempt in 2008 with its Low Value Payments Roadmap.

In many ways, all this coordinated planning activity can be seen as a planning cycle. When the system is stable and market activity is vibrant with plenty of competition and service innovation, coordinated planning seems unnecessary – and the chance of getting industry competitors to collaborate on centralised plans is fairly remote. This was our situation in Australian payments through the nineties and naughties – the system was expanding, people were happy to buy new payment services, so the regulator concentrated on identifying what it saw as market failure – e.g. card scheme competition reform - and did not attempt a comprehensive plan for the payments system.

But it was clear that sooner or later the underlying platform for competitive Australian payments would need renovation. We would need to replan. Market forces struggle to deliver platform renovation, because it requires collaboration amongst network users. So in the last five years or so (since the 2008 roadmap), we have had an industry focus on collaborative platform renovation – on health planning for payments, if you will. This includes the establishment of the COIN as an all-purpose TCP/IP communications backbone for payments, retooling by RBA of its payments settlement infrastructure, and now, the New Payments Platform (NPP) to be built by the industry in response to RBA’s Strategic Review of Innovation.

This highlights the central concept behind the NPP: it is NOT a payment service or payments scheme, but a piece of infrastructure, a platform for payment services and schemes. Below is an infographic that covers the key elements of the proposal.

New Payments Platform

All this renovation is going to keep us all busy for the next couple of years. But the really interesting part is what happens once it’s built. Here’s my prediction, based on past cycles: this versatile new platform will open up new vistas of competition and innovation, as all the clever people in Australian financial services work out how to offer new services and products using it.

So to my way of thinking, the health plan for the Australian payments system is more of a fitness programme than a rest cure: stand by for interesting times.

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Australian Payments Forum meeting

Lance Blockley“Innovation and real-time payments” was the focus of the Australian Payments Forum’s (APF) meeting held in Sydney on 15 April 2013.

This ninth meeting of the APF brought together 47 participants from 29 organisations including merchants, financial institutions, card schemes, and industry associations. The half-day session was dedicated to exploring the Real-Time Payments Committee Proposal endorsed by the Reserve Bank of Australia (RBA) in February 2013.

Following opening remarks from convenor Professor Ian Harper, participants heard from invited speakers Dr Malcolm Edey, Assistant Governor (Financial System) RBA, Mr David Brown, RBA Program Director, Fast Payments (SPRINT), Ms Shannon Lewis, APCA Industry Policy and Mr Lance Blockley (pictured), from RFi Consulting.

Throughout the meeting, participants engaged in discussions on the possible implications of real-time payments for the future of the Australian payments system. Participants considered the need to marry public interest and sustainability, which means providing services that customers value and want to pay for.

For more information on the recent APF meeting click here.

For more information about the APF click here.

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Cheque decline and the emerging digital economy

Australian chequeOn 30 April 2013, APCA released the first in a series of planned reports entitled “Towards the Digital Economy: Milestones Report”. The report reviews progress on the transition of Australian payments to the digital economy against the action plan released by APCA in May 2012 in “The Decline of Cheques: Building a Bridge to the Digital Economy”.

The first Milestones Report notes that the decline of cheque use in Australia is continuing at a rate that could see cheques become a rarity by 2018. It highlights initiatives and actions being undertaken by financial institutions, government and other stakeholders to provide alternatives to cheques and improve access to the digital economy. These include:

  • roll-out of the National Broadband Network and associated education programmes
  • implementation of a nationwide electronic and property settlement system through National E-Conveyancing Development Limited
  • industry development of new real-time payments infrastructure
  • education programmes to promote online banking and use of mobile phones for payments
  • review of legislation that refers specifically to payment by cheque or cash only.

The Report concludes good progress is being made in implementing the industry action plan of May 2012. APCA plans to release the next milestones report towards the end of 2013.

“Towards the Digital Economy: Milestones Report” is available here.

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Card fraud in Australia declines in 2012

Australian credit cardThe latest payments fraud figures released by APCA on 6 June 2013 show a year-on-year drop in card fraud for the first time since 2006.

The new figures, which are for the 2012 calendar year, show that the total amount of fraud on all Australian payment cards dropped by 11% to $261m over the past year. When calculated as a proportion of the total amount transacted by Australians on cards, fraud dropped from 51.5c to 43.5c in every $1,000 transacted. Within this total:

  • Scheme credit, debit and charge card fraud dropped from 96.4c to 79.3c in every $1,000 transacted.
  • Proprietary debit card fraud increased from 4.9c to 5.4c in every $1,000 transacted.

A breakdown of the 2012 fraud figures shows that on Australian-issued scheme credit, debit and charge cards:

  • Counterfeit and skimming fraud dropped by 53% over the past year to $27.6m, the lowest level since 2006.
  • CNP fraud (occurring mainly online) dropped by 8% to $183m. This is against an increase of more than 20% in internet shopping over the same period.

Over the same period, the total amount of fraud on proprietary debit cards remained low at $16m. This is despite a 30% increase to $9.5m in counterfeit and skimming fraud.

The 2012 payment cards fraud statistics are available here.

The APCA media release on the 2012 payment fraud statistics is available here.

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APCA welcomes new Stakeholder Forum Chair

Paul LahiffAPCA is pleased to announce the appointment of Mr Paul Lahiff as the new independent chair of the APCA Stakeholder Forum.

Mr Lahiff brings a depth of experience to the role. He is Chairman of Smartline Personal Mortgage Advisers and LIXI. He is also non-executive director of ASX-listed Thorn Group Australia, and the Cancer Council NSW.

Mr Lahiff has over 30 years’ experience in the financial services industry including most recently as Managing Director of Mortgage Choice. He holds a BSc from Sydney University and is a Fellow of the Financial Services Institute of Australia (FINSIA) and a member of the Australian Institute of Company Directors.

APCA convened its first Stakeholder Forum in 2011. It plans to host the next Stakeholder Forum in July 2013 to discuss the Real-Time Payments proposal.

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Changes to the Payments System Board

Reserve Bank of AustraliaOn 3 April 2013, the Deputy Prime Minister and Treasurer, the Hon. Wayne Swan MP, appointed Mr Paul Costello and Ms Gina Cass-Gottlieb to the Payments System Board of the Reserve Bank. They have been appointed for a five-year term from 15 July 2013.

Mr Costello was previously the General Manager of the Future Fund and has extensive experience in the financial sector, currently serving as Chair of the Blackstone Group in Australia.

Ms Cass-Gottlieb, a senior partner at Gilbert + Tobin, is a highly regarded competition lawyer with expertise in Australian payments system regulation.

Mr Joseph Gersh AM, one of the founding members of the Payments System Board, will retire from the Payments System Board in mid-July 2013.

The Payments System Board will meet four times in 2013 - February, May, August and November.

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European Commission Publishes Directive Proposal

International paymentsOn 8 May 2013, the European Commission published its proposal for a Directive on the transparency and comparability of payment account fees, payment account switching and access to a basic payment account.

Account fees

The proposed Directive would require all payment service providers in the EU to provide consumers with the following information:

  • a fee information document listing the most common services provided and the fees charged for each of them;
  • a statement of fees charged by the payment service provider during the previous twelve months for the services provided on the payment account;
  • upon request, a glossary of terms used in relation to payment accounts.

These documents would be drafted using standardised terminology and standard formats, to facilitate comparison. As well, each Member State would be expected to maintain a website which is operationally independent from payment service providers. This would make it easy for consumers to compare prices and conditions for payment accounts offered on the market.

Account switching

The proposed Directive will also make it easier to switch accounts, enabling a consumer to request the transfer of all or part of their recurring payment orders from one account to another. This procedure must be completed within 15 days (30 days, if the switch is made between payment service providers located in different EU countries) and the service must be provided free of charge.

Basic payment account

Lastly, the Directive would require Member States to ensure that at least one payment service provider in their jurisdiction offers an account with basic features. This account must be open to all consumers that do not already have an account in the jurisdiction. The payment service provider cannot refuse an account due to the financial situation of the applicant.

Currently, the Directive is a proposal. Once accepted, Directives are legislative instruments that EU member states are expected to adopt. The Directive follows a previous Recommendation made by the European Commission in 2011 for self-regulatory initiatives on basic bank accounts.

More information can be found here.

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RBNZ Explores Strengthening Payments Oversight

The Reserve Bank of New Zealand released a consultation paper in March 2013 looking to strengthen their payment system oversight powers. The proposals include:

  • formally recognising systemically important payment and settlement systems and subjecting them to increased oversight;
  • giving the Reserve Bank powers to impose conditions and give directions to system operators; and
  • setting up a tailored statutory management regime for such systems.

In particular, the RBNZ proposes to bring the “Settlement Before Interchange” system, which handles cheques, direct entry and ATM transactions in New Zealand and is currently overseen by the Payments NZ, within formal regulation.

The industry self-regulatory body, Payments NZ, responded in May 2013 – outlining the benefits of industry self-regulation and seeking greater clarity on the proposal.

The Payments NZ submission is available here.

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and Views

Australia and the Electronic Payments Leagues Table

Electronic paymentsToday electronic payments are the norm in Australia. In the direct entry system, there are about 7 million items per day equal to about $45 billion. Employers and governments use direct entry to pay wages and benefits, while individuals use direct entry to pay for goods and services through direct debits and internet banking.

These direct entry payments, which include direct credit and direct debit, account for 96 per cent of non-cash value (excluding high value payments) and about one-third of the number of non-cash payments.

From these figures, one would suspect that Australians are reasonably prolific users of electronic payments, which stands in contrast to some commentary that Australia is somehow “lagging behind” other countries in this respect.

So what does the data say? Where do Australians rank when compared to other countries in their use of electronic payments?

Until recently, this type of ranking was done by looking at volume and value figures produced by central banks and breaking it down on a per capita basis. From this one could get an overall picture of payments usage, though obviously it lacked granularity in terms of how widespread non-cash payments were being used in the economy.

Recently available data goes some way in addressing this. The World Bank Global Financial Inclusion Database (“Findex”) provides new data on financial inclusion and as a result new insights into the use of various payment instruments. It is based on a survey of 150,000 people in 148 countries throughout 2011, and despite its focus on financial inclusion, goes beyond developing countries to include data on developed economies such as Australia.

The Findex provides a new and interesting insight into global payment usage. For example, when looking at the proportion of the population (aged 15 +) that made an electronic payment during 2011, Australia ranks in a rather esteemed group, with nearly 80% of Australian adults having made an electronic payment. (See graph below.)

Australia is closer to Nordic countries such as Finland, Denmark and Sweden (as is New Zealand and the Netherlands), all with proportions in the high 70s to high 80s. In other developed economies, such as Canada, UK, US, France and Germany, the proportion of the population who made an electronic payment was lower, more in the high 60s.

Debates on the development of electronic payments in Australia have tended to gravitate to large English-speaking countries such as the UK and US. However, it may be that smaller, developed economies such as the Nordic countries, the Netherlands and our near neighbour across the Tasman provide more appropriate and aspirational models for us to consider. More insights from the Findex will be coming in future editions.

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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