Australia, South Africa and mobile payments

Chris Hamilton APCA CEOWhen it comes to consumer payments, the future is obviously mobile. But the "how" of mobile payments turns out to be rather complicated.

I recently had the opportunity to participate in the Annual Conference of the Payments Association of South Africa. Systemic comparison is one key benefit of such an experience. Here we have two resource-driven economies of roughly similar size, similarly large physical distances but markedly different population demographics. The retail payments systems are diverging, rather than converging. This highlights the obvious point that payment systems are shaped by people's habits, not by economics.

Consider, for example, some simple comparisons between bank account ownership and mobile phone ownership. According to the World Bank, Australia is one of the most heavily banked populations on earth, with a 99% banking rate in 2012 - that is, 99 out of 100 Australians over the age of 15 had a bank account in 2012. South Africa, by contrast, has a 54% banking rate, and therefore a large community that is still cash-based. Now let's look at mobile phones: the "phoned" rate in Australia is a healthy 106%; in South Africa, 135%. Yes, every person in South Africa has a mobile phone subscription, and every third person has two. If you suspect the interaction of these two comparison pairs leads to different payment evolutions, you would be right.

In Australia, developments have all centred around putting mainstream payment products - cards, BPAY, direct entry and, once the New Payments Platform commences, real-time payments - conveniently on to the mobile through banking apps, evolving towards "virtual wallets". goMoney (ANZ), Kaching (CBA) or the newly announced flik from NAB are all examples.

In South Africa, there is a particular focus on alternative solutions that reach the entire "phoned" community. The mobile is being used to supplant cash. Villagers run transaction accounts with their mobile network operator, paying each other in air minutes. A number of instant payment remittance services have sprung up, including a very successful one run by a bank. There is a debate about linking up the various closed loop networks. An SMS service can supply a real-time virtual token to draw cash from an ATM without needing a bank account. All these solutions use the mobile without needing a banking account at both ends.

It may be that these two schools of mobile payment products will converge over time. One can certainly imagine mobile wallets holding virtual cash products as well as account-based products: but if the phone owner has no prior relationship with a bank, who provides the wallet? Nevertheless, the comparison highlights the sheer breadth of alternatives made possible by the mobile platform.

In fact, we can identify a third school of mobile payment products, alongside account-based and cash-based solutions: the merchant-based solutions. In a merchant-based solution, the payment process is integrated into whatever purchase activity is going on between a store and a customer through the mobile. For example, the Starbucks coffee app allows patrons to use Starbucks cash to scan and pay, keeping track of award points at the same time. It is, I expect, only a matter of time before you can order your coffee from your phone: all the technology is there, and such systems are being trialled now. The merchant has the opportunity to enrich the service provided on the mobile way beyond providing super convenient payments.

It is certainly true that merchant solutions can be account-based, such as using card networks to execute the payment element. The intriguing question is how the remarkable breadth of possibilities offered by mobile will converge in the future, and who will have the opportunity to add value, and therefore derive revenue, in the reformed value chain.

So if you have been strategising on retail payments and concluded that mobile is the answer, I am sure you are right. Now we need to work out what the questions are. I can't help thinking that merchant-based solutions are rich with possibilities for customers, although it may be that merchants will need plenty of help from payment professionals to realise the potential.

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New Payments Platform Program

New Payments PlatformAPCA is administering the New Payments Platform (NPP) Program – a major industry initiative to develop new, fast, flexible and data-rich payments infrastructure for Australia.

The Program commenced with the first meeting of the NPP Steering Committee on 20 June 2013. This peak body comprises senior representatives from the Australian banking and mutual sector, an alternative payments provider and APCA. An independent chair, Mr Paul Lahiff, was appointed on 26 September 2013.

The NPP is being developed collaboratively by Australia’s authorised deposit-taking institutions. All participants in the Program have the opportunity to review plans, budgeting, business requirements and technical concepts for the NPP as they develop, get involved in working groups and other forums and provide input to NPP decision-making.

Currently the Program has 17 participants: Australia and New Zealand Banking Group Limited; Australian Settlements Limited; Bank of America Merrill Lynch; Bank of Queensland Limited; Bendigo and Adelaide Bank Limited; Citigroup Pty Ltd; Commonwealth Bank of Australia; Cuscal Limited; HSBC Bank Australia Limited; Indue Ltd; ING Bank (Australia) Limited; Macquarie Bank Limited; National Australia Bank Limited; PayPal Pte Ltd; Reserve Bank of Australia; Suncorp Bank; and Westpac Banking Corporation.

Executives from these leading organisations first came together for an initial two-day plenary workshop on 26 and 27 August 2013. The Program’s initial define and plan phase is due for completion by the end of 2013.

More information is available on the NPP web page.

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South Africa 2013 - PASA Conference and ICPACE

PASAThe Payments Association of South Africa (PASA) hosted the annual meeting of the International Council of Payment Association Chief Executives (ICPACE) on 18 and 19 July. In addition to PASA, ICPACE attendees included representatives from APCA, Canadian Payments Association, Irish Payments Services Organisation, NACHA (US), Payments New Zealand and the UK Payments Council.

The on-going fallout from the GFC on banking regulation and payments self-regulation in particular, was the main topic of discussion at ICPACE. Government engagement, national payment plans and the challenge of systemic innovation were specific issues discussed over the two days.

In the days prior to ICPACE, APCA participated in PASA’s own Payments Conference in Sandton, near Johannesburg. APCA CEO Chris Hamilton joined other ICPACE CEOs on a panel discussing international payment developments. The PASA Conference had a strong regional flavour, with a particular focus on the potential for mobile payments to address the needs of the large unbanked population in sub-Saharan Africa.

While in South Africa, Chris Hamilton and Dr Brad Pragnell, APCA Head of Industry Policy, also met with the South African Reserve Bank in Pretoria and were briefed on local issues such as the launch of the phase one of South African Development Community cross-border payments in July 2013.

More information about ICPACE can be found here.

More information about SADC cross-border payments can be found here.

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Changes to the APCA board

John MurphyIn August 2013, APCA farewelled director John Murphy (General Manager, eChannels and Group Payments, Working Capital Services, National Australia Bank Limited) following his resignation from the board. Mr Murphy (pictured) was appointed by NAB as a director in May 2011. During his time on the board, he served as member of the Audit, Risk and Finance Committee, the Consumer Payments Committee, the Remuneration Committee and the Payments Policy Committee. We thank Mr Murphy for his valuable contribution.

New directors

Steve Baric was appointed to the board in August 2013, replacing Mr Murphy. Mr Baric is General Manager, Transaction Payments and Products, Everyday Banking and Payments, Products and Markets, National Australia Bank Limited. He is serving as a member of the Consumer Payments Committee and the Payments Policy Committee.

The Reserve Bank of Australia (RBA) has a right of representation on the APCA board. In June 2013, it decided to rejoin the board and appointed Lindsay Boulton as a director. Mr Boulton is Head of Banking at the RBA. He is serving as a member of the Audit, Risk and Finance Committee.

APCA extends a warm welcome to both new directors.

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RBA releases outcome on dual-network debit cards

Australian debit cardOn 21 August 2013, the Reserve Bank of Australia (RBA) announced the outcome of discussions with three debit card networks (eftpos, MasterCard and Visa) over “dual-network debit cards”. Also known as “combo cards”, dual-network debit cards are cards issued by financial institutions with point-of-sale debit functionality from two different payment networks.

The Payments System Board has previously indicated its support for combo cards in the Australian market because such cards are both convenient for cardholders as well as a driver for competition at the point-of-sale.

The three schemes struck a voluntary agreement whereby they will not prevent issuers from including applications from two networks on the same card/chip nor will they prevent merchants from exercising choice in the networks they accept. This includes an assurance that merchants will be able to determine routing priorities, when there are two contactless debit applications on the one card.

More information can found here.

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RBA provides update on Payments Council and payments innovation

Reserve Bank of AustraliaDr Tony Richards, Head of Payments Policy at the Reserve Bank of Australia (RBA), spoke at the Future of Digital Payments Conference in Sydney on Wednesday 28 August and updated attendees on a number of payments policy issues.

In his speech, Dr Richards outlined that the RBA and APCA would soon be consulting on the proposed Australian Payments Council. In addition to working with the RBA on the joint consultation, APCA will be administering the Australian Payments Council once it is established.

The Australian Payments Council is a high-level industry co-ordination body recommended by the Payments System Board in its 2012 Innovation Review Conclusions. In the speech, Dr Richards noted that the Council would likely include representation from financial institutions, as well as payment system operators, non-bank institutions with their own payments processing facilities and newer industry players.

Dr Richards further noted that end-users will not be represented on the Council. Rather, the RBA would establish a separate consultation group for payment system end users including consumer, business and government representatives. According to Dr Richards, “this group will help inform the Bank's assessment of how well the payments system is meeting public-interest objectives”.

Dr Richards also provided a brief update on work towards same day settlement in direct entry and the New Payments Platform. He noted that the Reserve Bank welcomed the progress to date and that, if successful, the New Payments Platform would see the “Australian retail payments system essentially at the global frontier by the end of 2016”.

Dr Richards speech can be found here.

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Competition Tribunal dismisses case against Visa and MasterCard

Reserve Bank of AustraliaOn 23 July 2013, the Canadian Competition Tribunal dismissed the application made by the Competition Bureau of Canada that VISA and MasterCard had engaged in resale price maintenance through prohibitions on merchant surcharging. The issue of merchant surcharging has been brewing in Canada for many years. With the Tribunal’s decision, existing card scheme restrictions on merchant surcharging remain, a move welcomed by the schemes and consumer groups but criticised by Canadian merchants.

The Canadian Minister for Finance Jim Flaherty said the Government would be monitoring any potential appeal and the decision would be discussed in the “FinPay”, the Government’s peak payments consultative forum.

In a statement, Minister Flaherty said, “As job creators and drivers of economic growth, Canada’s small business owners and entrepreneurs - along with consumers - deserve clear information and fair and transparent rules on the type of payment system they use.”

Additional information on the Tribunal can be found here.

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Judge Richard Leon throws out US Fed debit card interchange rule

International paymentsUS District Judge Richard Leon ruled on 31 July 2013 that the US Federal Reserve had incorrectly implemented the debit card interchange requirements set down in the Dodd-Frank Act, striking down the existing debit card interchange fee cap.

In 2011, the US Federal Reserve capped US debit card interchange fees at 21 cents per transaction plus 0.05% of purchase price to cover the costs of fraud protection. With the US Fed previously considering a 12 cent per transaction cap, the 2011 decision was welcomed at the time by financial institutions and card schemes.

Judge Leon struck down the 2011 rule, finding that the US Federal Reserve had incorrectly included expenses that should not have been included as well as incorrectly interpreting the merchant routing requirements. Commentary on the decision suggests a correct interpretation would have seen a lower interchange fee cap.

In September 2013, Judge Leon agreed that the rules could remain pending an appeal by the US Federal Reserve.

Judge Richard Leon’s decision is available here.

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US Federal Reserve Banks consult on payment system improvement

US Federal ReserveOn 10 September 2013, the US Federal Reserve Banks released the “Payment System Improvement – Public Consultation Paper.” The consultation document shares Federal Reserve perspectives on the key gaps and opportunities in the current US payment system. These are succinctly brought together in the following problem statement:

End users of payment services are increasingly demanding real-time transaction and information features with global commerce capabilities. Legacy payment systems provide a solid foundation for payment services: however, some of these systems (e.g. check and ACH) rely on paper-based and / or batch processes, which are not universally fast or efficient from an end-user perspective by today’s standards. The challenge for industry is to provide a payment system for the future that combines the valued attributes of legacy payment methods – convenience, safety, and universal reach at low cost to end user – with new technology that enables faster processing, enhanced convenience, and the extraction and use of valuable information that accompanies payments.

The Paper also identifies a number of desired outcomes that would close the gaps and capture the opportunities.

The desired outcomes are not too dissimilar to those identified by the Payments System Board in its Innovation Review including collectively identified enhancements embraced by key participants, ubiquitous near real-time payments, simpler addressing and richer data. Interestingly, the desired outcomes further express a desire for enhanced cross-border payments and the promotion of payment system security.

The Federal Reserve Banks are seeking feedback from payment providers and end users by 13 December 2013. The Federal Reserve Banks intend to publish a white paper on improvement initiatives in the second half of 2014.

More information is available here.

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