Payments Monitor


Of payment regulators and payments councils

Chris HamiltonTry Googling "Payments Council", at least from Australia, and the first entry you get is the UK Payments Council home page, trumpeting its Faster Payments service, its mobile to mobile payments facility "Paym" and its automated account switching service. The next four entries relate to the joint RBA/APCA consultation on, and establishment of, an Australian Payments Council, which is approaching completion with an inaugural meeting later this year. One might be forgiven for assuming that Australia is in the process of establishing the same kind of body that already exists, and appears to be doing quite a good job, in the UK.

Now try Googling "Payment Systems Regulator". The first four entries relate to the UK development of a new regulator with extensive powers over retail payment systems. The fifth entry is the home page of RBA's Payments System Board, established more than 15 years ago with (rather less extensive) powers to regulate Australian payment systems. Again, one might be forgiven for assuming that the UK was in the process of establishing a regulatory framework on the long-standing and, according to the Financial System Inquiry (FSI), successful Australian model.

Both these assumptions would be wrong. Beware the besetting sin of an information-rich age: analysis by search engine.

To be blunt, the UK Payments Council is putting a brave face on a very difficult time. Back in October 2013, HM Treasury cited the Government's "considerable concerns" about lack of competition, lack of innovation and lack of consumer responsiveness in UK payments as the rationale for imposing a new regulator, although of course it is far from clear how to regulate for innovation. There is a hard edge to the Government's action which contrasts with the explicit Australian philosophy of encouraging collective action and using regulatory force as a last resort. The future role of the UK Payments Council is unclear, but the chief executive has stepped down and there have been unconfirmed reports of "merger" discussions with the British Bankers Association. And all this despite what looks like a respectable record of collaborative achievement to improve the UK payments system.

So what is Australia doing adopting a model that seems to be struggling in the UK? We are not, of course. The logic of our Council rests on a mutual desire for the most effective possible two-way consultation between the industry and its regulator, the Payments System Board (PSB). It is being set up a time when there is large-scale, and very promising, industry collaboration on payment systems enhancement which has been explicitly blessed by the PSB. If one views the interim report of the FSI as a yardstick, there is no sense of "considerable concern" about competition, innovation or consumer responsiveness - quite the reverse, in fact. We are trying to make a reasonably effective system work better.

So let me express a personal view: in Australia, 15 plus years of formal payments regulation has taught the Government regulator AND the industry that "guided collaboration" works a lot better than black-letter law. In the UK, it rather looks as if the lesson is yet to be learned, although there is still time. Much now turns on how the new Payment System Regulator sets its initial course, and how the British industry responds. Having extensive regulatory powers does not mean the best thing to do is use them a lot - on the contrary, such powers work best when used seldom. And by the way, bodies like the UK Payments Council remain vital to the long term health of any payments system - in networks, there simply is no substitute for cooperation.

We will watch, and learn.

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APCA releases new report on payments fraud

FSIAPCA recently released a new report entitled “Australian Payments Fraud – Details and Data” to inform businesses about payment fraud trends and effective measures and practices to help combat fraud. It was released with new payments fraud figures for 2013.

The report shows that payments fraud in Australia is increasing as part of a global trend, but that detection and prevention measures employed by the industry are showing promising results in putting downward pressure on fraud.

In 2013, the rate of fraud on Australian payments cards increased from 43.6c to 48.7c in every $1,000 spent, down from the peak of 51.5c in 2011. The increase in 2013 was largely due to a rise in card-not-present fraud with the report showing that trends seen in recent years continued over the year:

  • Card-not-present fraud increased from $183.1 million to $219.7 million. This needs to be seen in the context of the strong growth in online spending by Australians: in the four years to December 2013 online purchases increased by an estimated 140%. This compares to a 67% increase in card-not-present fraud over the same period.
  • Counterfeit / skimming fraud remained at $37.2 million, well down from its peak of $66.0 million in 2011. The use of chip technology is continuing to prove effective in countering this type of fraud.
  • Lost and stolen fraud increased from $27.0 million to $34.0 million. This suggests that as enhanced fraud detection tools and chip technology make it more difficult for criminals, they are reverting to simple theft and deception to obtain cards.

In addition to the latest figures, the new report provides a graphical overview of payments fraud trends from 2008 to 2013. APCA plans to release “Australian Payments Fraud – Details and Data” on an annual basis.

For the full report click here.

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Changes to the APCA Board

APCA adopted a new Constitution in January 2014. With the transition to the new arrangements ending in June 2014, APCA welcomed a number of new directors to the Board meeting held that month.

New appointed independent directors

The new Constitution provides for three independent directors with substantial voting power. APCA’s independent Chair, Robert Craig, was appointed in February 2014. He has now been joined by two new independent directors:

  • Jennifer Clark is currently a Member of the Boards of the National ICT Australia Ltd (NICTA) and the Australian Maritime Safety Authority (AMSA). Ms Clark is also an independent member of a number of Audit and Risk Committees.
  • Kate Mulligan is currently a Non-Executive Director of Netwealth and its subsidiaries, and is the Chair of Netwealth's Group Audit Committee. Ms Mulligan is also Managing Director of King Irving Consulting Group which specialises in financial services, and is a practicing solicitor.

Directors elected by members

The new Constitution significantly revised voting and director election arrangements to promote fair representation of interests across the payments system. APCA held its first election for member directors with the following two directors elected as a result:

  • Paul Apolony is the Deputy General Manager – Operations at the Bank of Tokyo – Mitsubishi UFJ, Ltd. Mr Apolony is a long-serving director of APCA having been initially appointed to the board in June 2007.
  • David Carter is Executive General Manager, Customer Development, Suncorp-Metway Limited accountable for the payment streams, product management, segment and channel strategy, and marketing functions.

New director appointed by NAB

Brett Watson was appointed to the board by the National Australia Bank in April 2014, replacing Mr Baric. Mr Watson is General Manager, Transaction Products and Payments, Everyday Banking and Payments, Products and Markets, National Australia Bank Limited. He is Chairman of the Australian Paper Clearing System Management Committee, a member of the Consumer Payments Committee and a member of the Payments Policy Committee.

Further information on the APCA board is available here

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Predictions for less cash, but not a cashless Australian society

The latest Milestones Report released by APCA in August 2014 shows that, as with cheques, Australian consumers are increasingly giving up cash in favour of cards, mobiles and online solutions. But unlike cheques, cash will not disappear in the digital economy, remaining as a default payment method if nothing else is available.

APCA regularly releases Milestones Reports to track progress on transitioning payments to the digital economy. The latest Report is a special edition on cash use in Australia. It draws from APCA-commissioned research on the evolution of cash developed by RFi Consulting.

The research predicts that as the economy grows, cash needs will decline as digital methods dominate new activity, but there will always be a need for cash. Some key findings include:

  • The number of cash payments in Australia has declined 5% since 2005 – down to an estimated 11.7 billion in 2013.
  • The decline in cash use is predicted to accelerate over the next few years, dropping a further 20% before it plateaus in 2018.
  • Reserve Bank of Australia figures show that the number of cash withdrawals from ATMs in the month of February decreased from 60.0 million in 2013 to 57.3 million in 2013.

The Milestones Report is available here.

The Evolution of Cash: An Investigative Study is available here.

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RBA releases new research on consumer payments use

The new APCAThe Reserve Bank of Australia's third Survey of Consumers' Use of Payment Methods was conducted in November 2013 and released in June 2014. The survey used a diary and questionnaire to collect data on the use of cash, cards and a range of other payment methods, both at the point of sale and via remote channels (online, mail and telephone).

The 2013 data found that cash and cheque use has continued to fall. The use of cash as a means of payment has declined significantly. In 2010, 62% of all payments were made by cash. By 2013, this had declined to 47%.

Conversely, the use of cards has risen significantly between 2010 and 2013. Cards use increased from 31% (2010) to 43% (2013) of all payments.

The RBA notes that the growth in the use of cards and the reduction in cash use are evident across households in all age and household income groups. Though the strong growth in remote payments is one contributor to the observed change, the main contribution is from the increased use of cards (including contactless cards) at the point-of-sale.

In the 2014 June Quarter Bulletin, the RBA has also released a more detailed examination on the use of cash. The report notes that cash is most commonly used for low value payments, particularly those less than $50. The use of cash is declining for both low value and higher value face-to-face transactions. The research further notes that card surcharging by a merchant is the common reason cited by people as to why they use cash, with "speed or ease" and "preference in using own funds", the second and third most commonly cited reason. The research also finds that cash use is more favoured by older, rather than younger, Australians and that lower income Australians are more likely to use cash than those on higher incomes.

The RBA’s “The Changing Way We Pay: Trends in Consumer Payments” is available here.

The RBA’s “Cash Use in Australia” from the June 2014 Bulletin is available here.

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FSI interim report released

FSIOn 15 July 2014, the Financial System Inquiry (FSI) Interim Report was released. The FSI, chaired by David Murray, was established by the Government in late 2013 to review the Australian financial system and to make recommendations to Government by November 2014. The 460 page Interim Report summarises available data and submissions made – as well as making a number of observations, seeking more information and positing a range of potential policy responses.

Though the overall regulatory structure and approach in the financial system is identified as sound, the Interim Report makes a number of suggestions about refining the “regulatory perimeter” to better capture new payment offerings as well as enhance coordination between regulators. This is in line with APCA’s first submission to the FSI in March 2014. The Interim Report also notes that market and self-regulatory solutions are preferred over regulation.

On more specific issues, the Interim Report notes that the addressing service of the industry’s New Payments Platform (NPP) may provide a long-term solution to account switching. The NPP is also identified as potentially reducing barriers to entry as well as promoting competition in the payments environment. It is also identified as a possible model for Government and other industries to promote systemic innovation.

The Interim Report examines interchange fee caps and surcharging. The Inquiry suggests that interchange fee caps have reduced merchant service fees and that further reductions in interchange fee caps and an extension of fee cap to other systems may be of further benefit.

The Interim Report, again in line with APCA’s first submission to the FSI, notes the importance of technology neutrality in regulation but also the important role government can play in terms of promoting more efficient forms of payment. The Report also identifies issues such as digital identity and cyber-security as worthy of further examination.

Overall, the FSI Interim Report has picked up on a number of issues and themes raised in the first APCA submission, in particular the changing nature of payments, the impact of new technology and the challenge of regulating in a rapidly evolving environment. Second round submissions to the FSI are due on 26 August 2014. APCA plans to make a second submission and looks forward to engaging with the Inquiry over the coming months.

More information can be found here.

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and News

“Big Ideas in a Little Province”: Payments Panorama 2014

ConferenceI had the honour and pleasure of recently attending and participating in the Canadian Payment Association’s Payments Panorama 2014, held this year in beautiful Charlottetown, Prince Edward Island. Prince Edward Island is Canada’s smallest province, with a mere 0.5% of the Canadian population and a total area only twice that of the Australian Capital Territory. Yet on this postage stamp gem in the Gulf of St Lawrence, some big ideas concerning the future of Canadian payments were being discussed.

By way of background, Canada and Australia share many features and our payment landscapes have some similarities. Both have a long-standing national payments body and a competitive national domestic debit card scheme. Australians and Canadians are enthusiastically embracing new ways of paying, including mobile and contactless. The Government and regulators in both countries have intervened on the fractious issue of interchange fees, though Canada has adopted a more disclosure-based approach than the harder caps found in Australia.

And both countries had major payment system reviews recently - the 2011 Canadian Task Force and the Reserve Bank of Australia’s (RBA) 2012 Innovation Review. The Canadian Task Force proposed a broad and radical redrawing of payments regulation yet it failed to gain traction once the contentious issue of interchange had been addressed. The Canadian example sits in contrast to the RBA’s Innovation Review, which has spawned same day settlement in direct entry, the Australian Payments Council and the New Payments Platform. Canadian stakeholders are, not surprisingly, keen to understand why progress has been made in Australia.

To this end, the Bank of Canada Deputy Governor Lawrence Schembri gave a speech at Payments Panorama outlining the central bank’s views on payment system renewal. He outlined the benefits of expanded central bank oversight of prominent payment systems, the need for a shared vision for systemic innovation and a coordinated means of achieving the shared vision. In terms of the benefits, the Bank of Canada is seeking a system that is high speed, low cost, open, and ubiquitous; has cross-border functionality; and is reliable and secure. CPA CEO Gerry Gaetz echoed many of the Deputy Governor's sentiments, suggesting an emerging consensus on the need for systemic reform.

In rebooting the systemic reform debate in Canada, there was significant interest in the Australian experience at Payments Panorama. Why has Australia made progress since 2012? In the panel session following the Deputy Governor’s speech, the panellists, including myself, picked up on the theme of how best to structure the industry and regulator relationship. In outlining the Australian experience with NPP, I noted how each needs to play their respective role – the regulator in setting the high-level objectives but then leaving it to industry to decide how those objectives would be met.

Canada is at the start of its own journey. However as we have learnt in Australia, while it is important to appreciate overseas experiences, any solutions need to be crafted to meet the particular needs of the local environment, including local industry participants and local payment users.

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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Global update from ICPACE 2014

APCA attended the 2014 meeting of the International Council of Payment Association Chief Executives (ICPACE) in June. Hosted by the Irish Payment Standards Organisation (IPSO) this year, attendees included CEOs and senior managers from national payment associations of the UK, USA, South Africa, Ireland, Canada and New Zealand.

ICPACE meetings bring together national payment associations and provide a great opportunity to share experiences and explore issues. Coming out of the GFC, there appears to be rising member and stakeholder expectations for national payment associations to manage risk and drive systemic innovation.

The members of ICPACE have adopted a number of responses to deal with these new challenges including:

  • Openness and inclusivity – practically all the associations have reformed or are reforming their governance, membership, funding and stakeholder engagement.
  • Innovation agenda - a number of associations have been facilitating new collaboration, most notably the UK with PAYM and the new Account Switching Service.
  • Negotiated co-regulation – a number of associations, such as those in the UK and NZ, are dealing with pro-active regulators and are working hard to develop good relations and retain robust self-regulation.

APCA’s own response on openness (governance reform), innovation (New Payments Platform) and co-regulation (Payments Council) are well developed and broadly in line with developments seen overseas.

A final observation from ICPACE is that the post-GFC fog appears to be lifting. Northern hemisphere payment associations are finding their feet again, post-crisis, and are grappling with the issue of balancing competition and innovation with efficiency, ubiquity and security in a rapidly changing environment.

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New UK payments regulator opens doors

Federal ReserveThe UK government is pushing ahead with its reform of payments regulation. This includes creating a new utility-style regulator, the Payment Systems Regulator (PSR) to be hosted within the Financial Conduct Authority (FCA). The PSR is to be a competition-focused, utility-style regulator, similar to other economic regulators such as those in the electricity, gas and telecommunication industries.

The new PSR has three objectives:

  • to promote effective competition in the markets for payment systems and the services they provide;
  • to promote development and innovation in payment systems; and
  • to ensure payment systems are operated and developed in a way that takes account of and promotes the interests of service users.

The PSR officially opened its doors in April 2014 and has commenced a consultation process to develop its own strategy, priorities and regulatory approach. It aims to be fully operational by April 2015. The PSR Board and Managing Director Ms Hannah Nixon, formerly of Ofgen (the UK gas and electricity regulator), have also been appointed.

More information about PSR and UK payments regulation can be found here.

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