Fast payments – the difference a year makes

Chris Hamilton APCA CEOThis time last year, I reported on the lodgement of an industry proposal to develop new real-time payments architecture for Australia. Rashly, I suggested that:

  • The Payments System Board would back the industry proposal (they did);
  • APCA would publish the proposal in full, so everyone knew what we were on about (we did); and
  • Industry collaboration on the new architecture would need to get going quickly if we were to have a shot at meeting the challenging timeframes set by RBA (and that happened too!)

The initial proposal has grown in less than a year to a New Payments Platform (NPP) Program, jointly funded and directed by 17 leading Australian institutions and managed by KPMG. KPMG’s appointment has allowed us to harness their global experience of comparable overseas developments, particularly in the UK.

My last prediction for 2013 was that it would be an interesting year - and so it has proved. The first deliverables are already in the bag: just before Christmas, the NPP Steering Committee signed off on business requirements, a more detailed concept paper and a full implementation plan through to 2016. Work is already well advanced on a competitive tender for technical partners to happen early in 2014.

The commitment and collaboration from busy industry professionals has been outstanding. We are on track to delivering that rare thing, a genuine innovation in payment systems. We can all take a bow (if, that is, we can be bothered getting up from our holiday deckchairs).

I want to extend my personal thanks and appreciation to the many people from APCA, KPMG and all 17 financial institutions who have put in the hours – sometimes long hours – to get us to where we are. More will be required of you in 2014, but we have started well.

But there is another group I need to acknowledge. In order for some APCA and member staff to do what was needed for NPP, others had to step up and make sure we met all our other commitments. Their contribution was no less critical.

For instance, in November 2013 we moved the Direct Entry system from a single next-day settlement of all credits and debits to five same-day settlement cycles. This reduces risk and increases product flexibility for members. In any other year, this would have been a headline project, but amongst the excitement of the NPP, it was barely noticed, despite going off seamlessly. We also finalised and adopted a new constitution for APCA, allowing for broader membership and more representative industry decision-making. We pushed forward on other significant efforts that should come to fruition in 2014, like a proposed Payments Council and a new self-regulatory framework for card payments. And of course, APCA staff did their day jobs – operational support for five clearing systems and the COIN infrastructure system, administrative support for their respective governance bodies; hundreds of mentions in the media, dozens of reports in industry journals. The list goes on.

Thanks and deep appreciation to all of you, too. I think we will look back on 2013 as a watershed year in Australian payments.

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Industry completes NPP first phase

New Payments PlatformThe New Payments Platform (NPP) Program is a collaborative industry initiative to develop new, fast, flexible and data-rich payments infrastructure for Australia.

In December 2013, development work for the initial “Define and Plan” phase of the Program was successfully completed. Business requirements and a conceptual architecture for the proposed platform have been adopted, together with a detailed plan and indicative budget for future phases of development.

High-level decisions about vendor engagement have also been agreed:

  • Sourcing for the Basic Infrastructure will be as complete services (including design, establishment and operation) for Switch, Addressing and Network.
  • Vendors may bid for one, two or all three complete services. Any industry partnerships required for service delivery will need to be formed by the bidding vendor.
  • Sourcing will involve an initial prequalification process commencing in February 2014 during which vendors can assess their suitability against key evaluation criteria.
  • The prequalification process will be followed by a Request for Tender process in March 2014.

Further details about vendor sourcing processes will be available in late January 2014.

More information on the New Payments Platform Program is available here.

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Intraday settlement for direct entry payments

Intraday SettlementThe Bulk Electronic Clearing System (for direct entry) achieved same-day settlement on 25 November 2013 paving the way for the future evolution of low-value payments in Australia.

The move to same-day settlement was coordinated by APCA working closely with direct entry participating institutions and the Reserve Bank of Australia. The industry project, which included operational and system changes, testing and amendments to the direct entry procedures, was completed within the scheduled time-frame.

Direct entry is the workhorse of the Australian payments system carrying average daily values in excess of $40 billion. The system is used to make recurring, automated payments to and from everyday transaction accounts including salary and welfare payments (direct credits), insurance premiums (direct debits) and for internet (Pay Anyone) banking services.

Direct entry payments are exchanged between financial institutions at six official times a day (10.00am, 1.00pm, 4.00pm, 6.30pm, 8.45pm and 10.30pm). Previously all exchanges were settled at 9.00am the next business day. As of 25 November 2013, settlement occurs on the same-day after each of the first five official exchanges.

Same-day settlement is an important development for the direct entry system. In addition to reducing counterparty and operational risk, it gives financial institutions flexibility in developing products to suit customers needs.

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APCA adopts new Constitution

APCA ConstitutionAt the Annual General Meeting held on 24 October 2013, APCA members voted in favour of major reforms to the Constitution.

As part of the reforms, APCA’s traditional clearing system participant membership will be opened up to all participants in the Australian payments system, including operators of non-APCA payment systems. The objective is to provide all participants with the opportunity to actively influence the development of industry strategy and policy.

The way in which directors will be selected and the number of votes they each hold will more accurately reflect levels of participation across the various payment systems. Moreover, three independent directors with voting rights will be appointed. This will ensure public interest and broader community benefits are effectively considered in Board decision-making.

The reforms are designed to recognise the diversity of interests in payments arising from structural and technological change. The new framework will bring APCA into line with best practice corporate governance. APCA will also be better positioned to support whole-of-industry initiatives while increasing regulator confidence and enabling industry self-determination.

The new Constitution came into effect on 1 January 2014. A six-month transitional period is underway during which certain formalities and requirements will be completed.

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The Australian Payments Council

APCA and the Reserve Bank of Australia (RBA) initiated a joint consultation in October 2013 on the establishment of a new payments industry coordination body, the Australian Payments Council.

At the end of the consultation in November 2013, a total of 20 submissions had been received from stakeholders including financial institutions, payment schemes and alternative payments providers. With the exception of those that have requested confidentiality, all submissions are available on the APCA website.

The Payments Council was a decision announced by the Payments System Board (PSB) in its June 2012 Strategic Review of Innovations in the Payments System: Conclusions. The new senior-level body of industry stakeholders will engage directly with the PSB. It will coordinate dialogue between the industry and the PSB on strategic objectives and work to generate common industry positions for action and adoption by the industry.

The main purpose of the consultation was to seek views on the proposed governance framework developed jointly by APCA and the RBA. This comprises a Council made up of representatives of diverse parties and a broader Payments Community of interested parties, from which the Council is drawn.

Broadly, all responses to the consultation supported the establishment of the new Council and the Payments Community, and the proposed membership and voting arrangements. A number of respondents also made suggestions for improvements.

Over the coming weeks, APCA and the RBA will hold meetings with those respondents who indicated that they would like to further discuss their submissions with a view to finalising a Participation Agreement during the first quarter of 2014.

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From cheques to the digital economy

Australian ChequeThe second Milestones Report on Australia’s transition from cheques to the digital economy, released by APCA in December 2013, indicated that the rapid decline in cheque use is continuing as electronic alternatives are embraced by payment users.

Over the 12 months to June 2013, cheque volumes dropped by 13.3% to 209 million – down from 241 million the previous year. Cheque values remained more resilient (with a 3.6% drop over the same period), suggesting that higher value business cheques are more persistent than lower value personal cheques.

APCA releases six-monthly Milestones Reports as part of an industry action plan to manage the decline of cheques. These reports highlight the initiatives financial institutions and Government are taking to ensure a smooth transition to electronic alternatives for those consumers and businesses that still rely on cheques.

The latest Milestones Report notes that:

  • Same-day settlement for direct entry payments supports faster movement of value in routine electronic payments.
  • The use of mobile phones for payments, in particular for online banking, is growing.
  • APCA is coordinating a digital cheque clearing strategy to increase efficiencies in the cheque processing system.
  • The industry is developing new real-time payments infrastructure which will improve electronic payments and provide another alternative to cheques.
  • Initiatives such as SuperStream for superannuation payments and PEXA for electronic property exchange, have made significant advances in automating paper-based processes.
  • “Towards the Digital Economy: Milestones Report” – Second Report is available at

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No regulatory change recommended by credit card surcharging study

Credit Card swipeOn 7 November 2013, the Commonwealth Government released the Commonwealth Consumer Affairs Advisory Council (CCAAC) study on “Credit card surcharges and non-transparent transaction fees”. The CCAAC undertook the study following a referral from the previous Assistant Treasurer, the Hon David Bradbury MP.

The study acknowledges issues raised in the APCA submission, including the view that the RBA reforms, while not ideal, represented a pragmatic and flexible approach and that it is likely too soon to assess the efficacy of the RBA reforms.

The CCAAC study focusses on the consumer experience of surcharging. The Study's establishment in late May 2013 quickly followed the March 2013 commencement of the Reserve Bank of Australia’s (RBA) surcharging standard changes. These changes enabled the card schemes to restrict merchant surcharges to the “reasonable cost of acceptance”. The RBA reforms were designed to restrict excessive surcharging by some merchants, where surcharges appeared out of proportion to the cost of card acceptance.

The study also acknowledges concerns raised by card schemes over their lack of visibility over merchant practices and by acquirers over their difficulty in policing merchants.

The study examines in detail where consumers experience “excessive surcharging”, such as online airline tickets and taxicabs, and how consumers can become confused by unbundled pricing.

Despite these concerns, the study does not recommend any regulatory changes. Rather it suggests the Australian Competition and Consumer Commission act as an appropriate agency for consumer complaints concerning surcharging and that public enforcement of card surcharging obligations be facilitated through existing consumer laws. The study also provides suggestions as to how merchants could provide greater visibility and transparency of their surcharges, and surcharge-free payment options, particularly in the online environment.

Click here for the CCAAC study.

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Payments and new technology in the mix of FSI

Prime Minister Tony Abbott and Commonwealth Treasurer Joe Hockey announced the commencement of the Financial System Inquiry (FSI) on 20 November 2013. Colloquially known as the “son of Wallis”, former CBA CEO and Future Fund chair David Murray has been announced as the Inquiry chair. On 20 December 2013, the four other panellists were announced – Professor Kevin Davis, Mr Craig Dunn, Ms Carolyn Hewson AO and Dr Brian McNamee AO.

Following a brief consultation period, the final terms of reference were also released on 20 December 2013. Developments in the payment system receive a specific mention in the terms of reference as does "balancing competition, innovation, efficiency, stability and consumer protection". Other considerations include the effectiveness and need of regulation and the role of Government and financial regulators. The Inquiry is also specifically directed to consider the impact of new technology as a driver for change.

The Inquiry will run throughout 2014, with submissions due at the end of March 2014, an interim report released in mid- 2014 and final report to Government by November 2014.

APCA intends to be an active participant in the Inquiry throughout 2014.

Click here for more information about the Inquiry.

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Payments System Board releases 2013 Annual Report

Payments System BoardThe Payments System Board released its annual report on 24 October 2013. The report summarises the activities of the PSB as well as providing statistics and insights into Australian payments.

The report identifies the declining use of cash in Australian retail payments. The value of cash withdrawals has been flat since 2009, despite household consumption rising at 5% per year over the same period. As well, the volume of ATM withdrawals has declined by 4% between 2011-12 and 2012-13, while values similarly declined by about 3%.

Conversely, the report identifies 8% growth between 2011-12 and 2012-13 in the volume of non-cash payments, with most significant growth in the number of debit card transactions. However, the average value of non-cash payments has declined, likely reflecting the growing use of cards and electronic channels (such as contactless cards) for making of very low value payments.

The report also notes significant growth in online payment methods. Table A1, reproduced below, notes significant growth in all major forms of online payments. It also highlights the significance of “internet banking-initiated credit transfers”, which include “pay anyone” payments between financial institutions which would ordinarily use the direct entry system.

Table A1: Online Payment Methods
Australians' domestic payments

2012/13 Per cent of total 2012/13 Growth, per cent Average annual growth, 2010/11–2012/13 Per cent
Number Value Number Value Number Value
Internet banking-initiated credit transfers 47.8 87.8 8.0 9.2 9.8 10.6
BPAY 22.1 10.2 6.9 11.6 8.0 12.4
Credit cards, debit cards, and specialised payments providers 30.2 2.0 20.8 13.2 24.2 16.0
Total online payments 100.0 100.0 11.3 9.5 13.2 10.9

Sources: BPAY; RBA; specialised payments providers

In addition to the statistical information, the report explores regulatory and industry development both in Australia and overseas. A chapter is devoted to the Responses to the Strategic Review of Innovation, including the formation of the Australian Payments Council, changes to the direct entry system and the New Payments Platform.

The chapter concludes with the following observation from the PSB.

“The Board welcomes the industry’s willing response to the strategic objectives outlined in 2012. The industry’s progress towards achieving same-day settlement of DE payments this calendar year and its commitment to providing a cutting-edge retail payments system that address key gaps identified in existing systems by 2016 are both landmark achievements. They suggest a renewed capacity for the industry to cooperate in the interests of providing a better payments system. The Board is hopeful that the creation of the Australian Payments Council in the coming year will help to maintain that progress in the years to come.”

Click here for the Payments System Board Annual Report.

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Fraud on Australian payment cards

Fraud on Australia payment cardsPayments fraud data released by APCA in mid-December 2013 for the 12 months to 30 June 2013 show that the rate of fraud on all Australian payment cards decreased slightly, as overall card activity continued to grow.

  • The rate of payments card fraud dropped from 47.4c to 46.1c in every $1,000 transacted.
  • The overall amount of payments card fraud increased by 1% to $280.5 million. This is against an increase of 4% to $607.9 billion on the total amount spent by Australians on their cards.

A breakdown by fraud categories show that over this 12 month period:

  • Card-not-present fraud (occurring mainly online) continued to represent the bulk of fraud on Australian-issued cards.
  • CNP fraud increased by 5% to $198.9 million. This is against a reported increase of more than 14% in internet shopping over the same period.
  • Counterfeit and skimming fraud dropped by 29% to $37.8 million.
  • Lost and stolen card fraud increased by 33% to $30.4 million.

The payments fraud data is available here.
APCA’s media release on the payments fraud data is available here.

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2013 Annual Review: Collaboration for a better payments system

APCA Annual Review
Have you seen the 2013 Annual Review yet? Click on the image to see what APCA has been up to during the previous year.