Payments Monitor


Payments World USA

Chris HamiltonIn April, I took a quick trip to Disney World...well, kind of. The annual conference of NACHA, APCA's equivalent body in the USA, was held at Disney World's home: Orlando, Florida. Around 2,200 bankers turned up to hear three days of presentations on the state of US payments - and possibly catch a few rides. I hope they had some fun amongst the work, because these are stressful times for US payment providers. Having weathered the GFC with tightened budgets, US bankers are acutely conscious of new payments system developments in other countries and pressure from the US Federal Reserve to follow suit or be left behind; but they are a long way from agreeing amongst themselves what is to be done, and who will pay. My small contribution was to outline the policy logic behind Australia's New Payments Platform (NPP) proposal as a comparative example. There was much interest.

To an Australian visitor, there was at times a Mary Poppins quality to proceedings (remember Mr Banks of the Dawes Tomes Mousley Grubbs Fidelity Fiduciary Bank?). Some bankers seemed to be arguing that there was no need for systemic change to US payments, despite the fact that one third of non-cash payments are still by cheque. The most talked about new product in the US is remote mobile cheque capture. You receive payment with a paper cheque, but then use your smartphone to take a picture of the cheque and upload it to your bank for collection. Thus, state-of-the-art technology is used to perpetuate an 800-year-old payment method. The Australian mobile payment apps that enable person-to-person payment instantly between accounts at the same bank, or perhaps intraday between financial institutions, are still a rarity in the US. To be fair, there is another new product, ClearXchange, which offers account-based mobile payment services but it is yet to gain traction amongst banks.

At the other end of the spectrum, the apostles of BitCoin and other cyber-currencies were out in force, asserting that the payments system had already changed fundamentally - banks just haven't noticed yet, and would eventually go the way of the dinosaur. To my mind, this falls victim to the common fallacy that because something becomes technologically possible, it will definitely come to pass.

There clearly is a policy case for payment systems to take advantage of new technologies to serve the emerging digital economy, but there is room for much debate about how to do it, how much it will cost and what the best evolutionary path is. These are decisions the Australian industry is already facing up to in the NPP program. One useful insight is that the two opposing perspectives noted above are mutually reinforcing. The relative slowness of mainstream payment methods and providers to adapt to the demands of ecommerce and m-commerce encourages the emergence of radical alternatives, and in turn the radical (read risky) nature of such alternatives fuels mainstream debate about the need to ensure stability, safety and reliability. Clearly, a middle path is most likely.

Both NACHA and the Federal Reserve are doing their best to promote sensible debate on this important systemic issue. Consistent with APCA's efforts here, the key is self-interested collaboration. For a new payments system to emerge, payment providers need to form the view that their longer term best interests are served by having a better platform on which they can sustainably compete for digital economy business not only against traditional rivals but also against payment service newcomers and radical alternatives like cyber-currencies. They need to believe that failure to act eventually puts revenue and market share at risk. Such new systemic platforms are best built collaboratively by the competitors who will use them - both traditional and newcomer. If this is done well, it will also meet the public policy goals of the regulator. It's simple to say, but notoriously hard to do.

A couple of years ago, a public perception seemed to develop in Australia that our payment services were "falling behind". But a great deal has happened and my visit to the home of Disney World suggests that is now well wide of the mark. Putting aside the progress we have made as an industry on the New Payments Platform, Australian product development has already outstripped the US in numerous areas - such as chip and contactless cards, mobile apps, bill payments, intraday bulk payments and cheque replacement. In any one of these areas, you can usually find another country that is ahead of us - but there are not too many who can claim to be leading edge across the whole spectrum. As APCA said to the Murray Inquiry, the Australian payments system is building on all round competitiveness and innovation. NPP aims to keep it that way.

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APCA responds to Financial System Inquiry

FSIOn 30 January 2014, the Commonwealth Government invited submissions to the Financial System Inquiry (FSI). This is the promised “root and branch” review of the Australian financial system chaired by former Commonwealth Bank CEO and Future Fund chair David Murray. APCA made its submission to the FSI on 31 March 2014.

The APCA submission highlights the changes to Australian payments since 1997 and the overall effectiveness of a co-regulatory approach to payments system enhancement. It identifies the ongoing New Payments Platform (NPP) initiative and the proposed new Australian Payments Council as recent examples of this.

The submission also notes that Australia has one of the most dynamic and developed payments systems in the world. Australian consumers and businesses have enthusiastically embraced mobile, online and contactless payments and are among the heaviest users of electronic and card payments in the world.

Emerging challenges identified in the APCA submission include technological change, new entrants and enhanced competition between payment schemes and networks. The submission identifies the co-regulatory approach as a proven way for addressing these emerging challenges.

The submission includes a number of specific recommendations relating to a reaffirmation of the principle of “functional regulation” (regulating what you do, not who you are), support for a co-regulatory response to emerging challenges in the payments system and promoting of the use of electronic payments.

The FSI will report on developments in the Australian financial system since 1997 and refresh the system’s regulatory philosophy. In doing so, the FSI will consider how best to balance competition, innovation, efficiency, stability and consumer protection; the allocation of financial risk; the effectiveness of regulation; and the role of Government and regulators. The FSI will be forward looking on challenges such as new technologies, changing industry and organisational structures and developments in the payment system.

The FSI will follow a two stage process. Initial submissions, due at the end of March 2014, will inform an FSI Interim Report, to be released in mid-2014. The Interim Report will provide an assessment of the recent past and identify emerging trends and challenges. Following this, there will then be a second round of submissions and a Final Report, with policy recommendations, provided to Government by 1 November 2014.

More information on the FSI can be found here.

APCA’s submission to the FSI is available here.

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NPP Program well into second phase

New Payments PlatformThe New Payments Platform (NPP) Program, the major industry initiative to collaboratively develop new fast, data-rich infrastructure for Australian payments, is now well into the second phase and progressing on track.

Through a pre-qualification process, vendors with the experience and capability to potentially deliver the basic infrastructure have been identified. These vendors have been issued with a Request for Proposal with responses due on 24 April 2014. Vendor interest has been strong and the Program is confident that the industry will secure excellent services at competitive prices.

A pre-qualification process to identify payments providers with innovative concepts for the initial convenience service (ICS) is also underway. This will be the first of many commercial overlay services to use the basic infrastructure once it is operational at the end of 2016. It is anticipated that the ICS will be an exciting, new payment service which financial institutions can tailor to meet their customers’ needs.

Alongside this work, the participants have also been working closely with KPMG, to develop the utility company work plan and a detailed plan for the next phase. The utility company will be a new mutual organisation set up to administer the ongoing operation of the basic infrastructure.

This “Source, Plan and Mobilise” phase is due for completion in August 2014. The initial “Design and Plan” phase was completed at the end of December 2013. All 17 participants in the initial phase have continued their commitment to participate in, and fund, the Program’s current phase.

For more information on the NPP click here.

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Transitioning to the new APCA

The new APCAAs reported in the last edition of Payments Monitor, APCA adopted a new constitution on 1 January 2014. APCA is working to implement the new governance arrangements by 30 June 2014, the end of the transition period.

The new Constitution has opened APCA membership to participants in, and operators of, recognised Australian payment systems. It has introduced new voting entitlements for a broader range of system participants and provides for three independent directors with substantial voting power.

For more on the new APCA click here.


APCA Stakeholder Forum

Paul LahiffThe fourth meeting of the APCA Stakeholder Forum (ASF) was held in Sydney on 26 February 2014 with 50 attendees.

The main topic of discussion was the Financial System Inquiry (FSI). In his welcoming remarks, ASF Chair Mr Paul Lahiff (pictured) said that the meeting presented an excellent opportunity for APCA to engage with non-member stakeholders on the industry response to the FSI.

Chris Hamilton, CEO of APCA provided an overview of the FSI, highlighting funding the economy, the effects of new technology on the financial system and balancing stability, competition and efficiency as dominant themes for the FSI. He noted that finding the right balance between policy objectives and the impact of new technology was particularly relevant to payments.

The FSI discussion featured a panel consisting of Steve Munchenberg, CEO of the Australian Bankers’ Association, Louise Petschler, CEO of Community-Owned Banking Association and Brad Pragnell, Head of Industry Policy APCA. The panellists noted that the current payments system was operating efficiently and major changes to payments system regulation were not necessary, though competition, new entrants and new technologies all represented emerging challenges.

A feedback session of attendees confirmed the need for “light touch” regulation and for flexible standards to meet emerging technologies, as well as the importance of a level playing field.

Following the FSI segment, the ASF attendees were provided updates on the New Payments Platform and the Australian Payments Council.

More information about the APCA Stakeholder Forum can be found here.

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New APCA chair

Rob CraigThe APCA Board appointed Robert Craig as the company’s new independent chair effective 1 January 2014, following the resignation of Russell Rechner.

Mr Craig (pictured) brings a wealth of skills and senior level payments experience to the Board gained both in Australia and overseas. Prior to 2008, his 25-year career in financial services included senior roles at Westpac Banking Corporation, National Australia Bank, Bank of New Zealand and National Westminster Bank. In 2008, Mr Craig left banking to pursue alternative interests, including private equity and start-up investment. Since 2010 he has also been working with international consulting firms KR Strategy and ICG (where he is currently Practice Leader - Transformation) specialising in leading large scale organisational transformation programmes.

Mr Craig chaired his first meeting of the APCA Board on 6 February 2014.

Farewell to Mr Russell Rechner

Russell Rechner resigned as chair of APCA in December 2013. Board and staff events honoured his significant contribution to the company’s development during his six years of service.

Mr Rechner presided over a period of steady expansion in APCA’s workload and increased value to the payments industry and its participants. This culminated in members voting for major constitutional changes to enhance industry governance in his last general meeting as Chair.

APCA thanks him – we wish him all the best.

Resignation of director

Steve Baric resigned as director on 21 February 2014. Mr Baric was appointed to the APCA board in August 2013 by the National Australia Bank. His replacement will be appointed shortly.

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Australian Payments Council

APCA is working jointly with the Reserve Bank of Australia to establish the proposed Australian Payments Council. This new senior-level body will engage directly with the Payments System Board to foster ongoing improvements to the Australian payments system. The Council will be drawn from a Payments Community, comprising a broader group of organisations with a significant interest in the Australian payments system.

A public consultation on the Council’s proposed framework was completed in late 2013. Over recent months, APCA and the RBA have conducted meetings with the respondents to further discuss issues raised in their submissions. A key area of discussion was ensuring the right level of interaction between the broader Payments Community and the Council including how to best provide appropriate, relevant input to the Council’s activities.

With the round of follow-up meetings now completed, APCA and the RBA are in the process of finalising the Participation Agreement, which incorporates the engagement framework for both the Council and the Payments Community. The next steps will include selecting a Chair for the Council and seeking subscription to the Participation Agreement.

More on the Australian Payments Council is available here.

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US Federal Reserve’s Consultation on System Improvement

Federal ReserveIn September 2013, the US Federal Reserve Banks began a public consultation on payments system improvement in the United States. More details about this can be found in Payments Monitor, Third Quarter 2013. In March 2014, a summary of the consultation responses as well as new research were released.

Summary responses

The Federal Reserve received nearly two hundred submissions, with just over 30% coming from financial institutions, 22% from merchants and the rest from a mix of technology providers, consultants, academics and other stakeholders.

Three quarters of all respondents agreed with the gaps, opportunities and desires identified in the consultation paper, notably including the need for near real-time payments and richer data. Many respondents thought business case support for near real-time payments was important while others thought this should not be the sole focus as it is difficult to measure the relevance of broad public benefits brought about by improved infrastructure to an individual organisation. There was also a consensus among respondents on the features of a near real-time offering including the need for ubiquitous participation, confirmation to the payee that funds are available in their account, fast settlement and delivery of data. Enhanced industry coordination on fraud data and adoption of enhanced security standards were also suggested by a number of respondents.

However, while there was broad support for improving the payments system, there were divergent views on the approach the Federal Reserve should take in propelling the industry – ranging from encouraging full private sector ownership and leadership of payments system improvements to mandating solutions.

Research results

The Federal Reserve also undertook research on the views of individual consumers and businesses on near real-time payments. These users identified attractive attributes for any new system to include ubiquity, speed, notification, ability to send payments without having account details and confirmation to the payee of available funds.

There were few differences between individual consumer and business users except for willingness to pay for a new near real-time service. Thirty-three per cent of individual consumers, compared with 75 per cent of businesses, were willing to pay for a new near real-time payments service.

The Federal Reserve Banks have said they will release their decisions on future improvement initiatives in second half of 2014. More information can be found here.

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FAST Launched in Singapore

FAST SingaporeOn 17 March 2014, the new FAST (Fast and Secure Transfers) payments service began operation in Singapore. Previously known as “G3 Immediate Payments”, this is a new electronic funds transfer service that enables customers to transfer Singaporean dollars almost immediately from one participating bank to another.

Fourteen banks are participating in FAST, including the largest domestic banks, DBS Bank/ POSB, OCBC and United Overseas Bank, as well as a number of smaller domestic and overseas banks.

FAST operates on a 24x7, 365 day basis. Payments can be initiated through online, mobile banking or ATM channels and require the recipient’s account number information. There is a cap of $SGD10,000 (approximately $AUD 8600) per transaction subject to daily or monthly limits set by individual institutions.

A payment will be completed and confirmed “within minutes”, with the service being promoted as “almost instant”.

More information on FAST can be found here.

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Steve Wiggins New CEO for Payments NZ

Payments NZ announced the appointment of Steve Wiggins as its new Chief Executive Officer effective 23 January 2014. Steve has over 25 years of leadership experience in a range of sectors including financial, energy and consulting services.

Steve Wiggins replaces Payments NZ’s first Chief Executive Officer Steve Nichols who was influential in building the organisation from its commencement in 2010.

APCA regularly liaises with Payments New Zealand and both organisations participate in the International Council of Payment Association Chief Executives (ICPACE). APCA congratulates Steve on his appointment and welcomes him to the ICPACE community.

More information can be found here.


RBA Confirms Changes to Payment Card Access Regime

RBAOn 7 March 2014, the Payments System Board of the Reserve Bank of Australia announced that it had decided in principle to vary the Access Regimes applying to MasterCard and VISA systems in Australia and to seek removal of the current specialist credit card institution (SCCI) framework, which subjects SCCIs to prudential regulation by APRA. These provisions currently require issuers and acquirers in the MasterCard and VISA systems to be prudentially-regulated by APRA. Currently there are two SCCIs in Australia, GE Capital Finance Australia and Tyro Payments Limited.

The decision followed two rounds of public consultation during 2013 and 2014, where payments system stakeholders, including APCA, made submissions.

The RBA has proposed a new framework that will shift decision-making on who can become an issuer and/or acquirer in their systems over to VISA and MasterCard. The systems will be required to have transparent eligibility and assessment criteria and to report information about membership and applications to the RBA.

The RBA has highlighted that Regulation 4 of the Banking Regulations 1966, which identifies credit card issuing and acquiring as “banking business”, must be repealed for the changes to become effective. These changes are expected later in 2014.

For more information on the proposed change can be found here.

The APCA submissions on the payment card access regime can be found here.

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and News

The Prospects for Mobile Contactless Payments in Australia

Mobile Payment Many Australians believe their smartphone might one day replace their contactless cards. Research by Lonergan Research, on behalf of CBA, found that 73% of Australians believed their smartphone would replace their wallet by 2021. Australian financial institutions have, to date, met the demand for mobile payments through the use of NFC-enabled stickers and cases. The February 2014 announcement by VISA and MasterCard on “host card emulation”, where the secure element for a contactless payment can live in the cloud rather than in the phone, has reignited global interest in use of mobiles at point-of-sale, with a local trial being announced in Australia in March 2014. With consumer sentiment and facilitating technology shifting in its favour, what are the prospects for wide-scale embrace of mobile contactless payments in Australia?

Globally, the mobile payments market is small but growing rapidly. The World Payments Report forecasts mobile payment transactions will reach $US 30 billion for 2014 – representing a 55% Compound Annual Growth Rate for bank-based offerings between 2010 and 2014.

As well, mobile payments are diverse – with use of the mobile for contactless purchases sitting alongside a plethora of other offerings - ranging from SMS-based systems to use of a smartphone to initiate an online purchase or transaction, to in-store “beacons” that link to a smartphone via Bluetooth.

In developing markets, such as Kenya with M-Pesa, domestic SMS-based remittance services have been most successful, while in Brazil, India and the Philippines, cross-border remittance offerings from telcos, banks and new entrants have emerged.

Mobile payment developments in developed economies, such as Australia, might appear comparatively less spectacular than, for instance, the success of M-Pesa. Yet the satisfaction of users with existing offerings plus a more complex ecosystem can create a tougher path for such developments. Despite these challenges, there is significant interest amongst consumers in mature markets, particularly amongst the urban, young and tech savvy. However, research from HP-RFi (see below) as well as Ernst & Young suggest a strong polarisation in the Australian market between those who are keen to use mobile payments and those who are indifferent.

How comfortable would be you be in buying a coffee using a mobile phone?
Comfortable (answered at least 6 out of 10) – All consumers – By age

Contactless Mobile Phone Payments Comfort Level
Source: HP-RFi Payments Report, September 2013

This polarisation is quite common in developed economies. While it may reflect concern about, or indifference to, mobile payments by older users, it may just be that we are at the start of the Rogers’ innovation adoption curve, with younger users representing the early adopters in these developed markets.

Rogers Innovation Adoption Cycle
Source: Rogers 1962

In his article “Mobile Payments: What’s in It for Consumers?”, Federal Reserve Bank economist Fumiko Hiyashi identified the main benefits to consumers of mobile payments as being convenience and the opportunity to track purchases and expenditures. One would think these benefits would apply to most age groups, be they Americans or Australians. Further, Hiyashi believes the main barrier to mobile payments growth is not consumer concerns over security but rather merchant acceptance. This is somewhat contradicted by survey evidence from the Federal Reserve which claims 63 per cent of non-users don’t use mobile payments due to security concerns.

If Australian consumers are keen to use mobile contactless payments and merchant acceptance, as opposed to security concerns, is the main barrier to adoption, then Australia is well placed to embrace mobile contactless. September 2013 data from RFi found that 69 per cent of Australians owned a contactless card. Visa estimates that there are now 100,000 contactless terminals with merchants and over 1 million contactless transactions made per day. It has also been noted that Australia has one of the highest per capita uses of contactless cards in the world. And according to Google-commissioned research, Australia has the second highest smartphone take up in the world, following Singapore.

Taken together, one should expect the ability to use a smartphone for a contactless payment is something Australian consumers would readily embrace. This suggests the stars may be aligning for mobile contactless in Australia and the Lonergan/CBA predictions for next decade may come true.

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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