Payments Monitor


Towards a sensible dialogue on cybercurrencies

Chris HamiltonIf you work in payments, you will for sure have been part of a Bitcoin debate in the last 12 months. Until recently, such discussions usually took one of two forms: they were either pep rallies or exorcisms. Actually, the most entertaining events in my memory happened when participants turned up expecting one, and got the other.

A brief terminological note: “cybercurrencies” in this context means any open protocol for the retention and transfer of value where the attribution of value, and the recognition of ownership, does not derive from or rely on a national currency. There are many ways of doing this, including open loyalty schemes, game currency platforms and algorithmic currencies, but the best known is Bitcoin.

Emotions have been running high on this topic. True believers gather together to reinforce their preconception that Bitcoin is to payments what Napster was to the music industry, so that world domination is only a few clicks away. Conversely, traditionalists meet and mutter darkly about “fads” and illegal online activity, reminding each other of the long list of “next big things” in payments, that weren’t.

It’s high time to get past these reactions. Last month’s SIBOS (the world’s largest payments conference, hosted by Swift in Boston) devoted a strand of the conference agenda to cybercurrencies. I had the sense that the echo chamber problem – true believers and traditionalists listening only to their own kind, and not to each other – was dissipating, and a more balanced understanding was emerging.

The first point to make is that the underlying technology is seriously innovative. This is the block chain. For the first time, an open and constantly evolving community of networked servers can reach community agreement on how many units of an asset exist at a given time (how many Bitcoin have been “mined”), who owns them and when ownership has moved from one “person” to another. This is indeed revolutionary in its implications: it frees value and ownership from the need to rely on a single register. This overturns a couple of hundred years of economic orthodoxy: value and ownership of financial assets must rest on promises by reliable economic “persons” – in the case of money, this meant governments and regulated banking entities. Now, we are being asked to trust the cloud – or the technology, if you will. This is exhilarating, or terrifying, or both, depending on your perspective.

The second point is that for everybody other than cyber-anarchists, removing the relationship of trust at the root of fiat currency looks like a solution is search of a problem. Whatever view you hold of the efficiency of the world’s payments systems, their biggest challenges or limitations are generally NOT the relationships of trust they rest on. The “bang for buck” challenges are always about improving network efficiency, both static (reach, reliability, security) and dynamic (innovation and competition). Bitcoin’s legitimate efficiency agenda is mixed in with a much more dubious cyber anarchic agenda.

The path forward is to try and put aside the bias against central banking and banks in general and think about the potential of the block chain to become incorporated into and transform a wide range of existing financial activities. As the Bank of England recently observed, most financial assets (securities, derivatives and other financial instruments) already exist only in virtual form. So, the potential to facilitate their design, manufacture, distribution, transfer and risk management using block chain technology appears significant, and well worth deeper analysis.

In the world of payments, Ripple’s idea of using the block chain for real-time, cross-border payments looks like an example of this thinking. There is no focus on a new currency, but plenty of disruptive challenging of legacy networks and processing methods. I have no view on whether this will work, but the disruption is healthy. If the idea has potential, it is likely to take off if and when it is backed by big existing brands and networks. Trust still matters.

Far from being a banker’s nemesis, the block chain might just be her new best friend.

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APCA makes second submission to FSI

FSIWith spring carnival season upon us, the Financial System Inquiry (FSI) is entering its own “home stretch” with the Final Report to be delivered to the Commonwealth Treasurer in November 2014. Chaired by David Murray, the Inquiry began in late 2013. The FSI released an Interim Report on 15 July 2014 (see Payments Monitor Q2 2014), which was followed by a second round of submissions during July and August 2014.

APCA's second submission, reiterated the principles laid out in the first submission – notably that the Inquiry should:

  • Affirm the principle of functional equivalence, first articulated in the Wallis Report.
  • Recognise and support co-regulatory responses to emerging challenges in the payments system.
  • Recommend that the government work with industry and other stakeholders to actively promote the use of electronic payments.

In addition, APCA’s second submission provided new recommendations relevant to some of the issues raised in the Interim Report, including regarding:

  • Interchange fee regulation: APCA recommended promoting competition between schemes over direct regulation. In the context of on-going Reserve Bank of Australia (RBA) responsibility for payments policy, APCA further recommended RBA involvement in policy decisions about interchange fee regulation and that the newly established Australian Payments Council could play a role in focussing any industry debate.
  • Cyber-security: APCA indicated support for industry and government coordination on cyber-security and sees value in, and indicated a desire to be involved with, strategic work on this issue. APCA further noted the importance of avoiding unnecessary overlap in undertaking any such strategic work.
  • Digital identity: APCA indicated support for the exploration of a national digital identity strategy and suggested that, together with the Australian Payments Council, it is well placed to help develop industry-wide views on digital identity that balance security concerns with the need for competition, innovation and efficiency.

APCA’s second submission to the FSI is available here.

More information, including other submissions, can be found here.

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ICPACE ISO 20022 Research Now Available

The International Council of Payment Association Chief Executives (ICPACE) has released a new report that examines best practices for implementing ISO 20022. This includes the advantages and disadvantages of adopting the standard, as well as lessons learned by systems and organisations that have implemented or are in the process of implementing ISO 20022.

ICPACE provides a forum where the national payment associations of Australia, the UK, USA, South Africa, Ireland, Canada and New Zealand collaborate with each other.

At its 2013 meeting, ICPACE participants identified ISO 20022, the global framework for developing messaging standards, as an issue of mutual interest. To address this, Lipis Advisors were commissioned to undertake a study of ISO 20022 implementation.

In the course of the research, global interoperability and the ability to produce rich remittance data were identified by industry participants as key advantages of ISO 20022. The main difficulty associated with ISO 20022 was building a business case.

The report provides a list of recommendations for payment stakeholders implementing ISO 20022 including to:

  • focus on the long-term strategy, not the short-term business case;
  • use ISO 20022 for new systems;
  • create generic business processes to cover most use cases; and
  • engage with like-minded payment communities to create uniform, reusable message sets.

The ICPACE ISO 20022 Research by Lipis Advisors is available here.

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Improving the efficiencies of cheque clearing

chequesWith cheque use in Australia continuing to decline, APCA has been investigating ways to improve the efficiencies of cheque processing to help reduce the inevitable increase in margin costs as cheque volumes continue to drop.

Recently, participants of Australia’s cheques system agreed to progress “digital cheque clearing”, with completion expected in May 2015. This industry initiative will provide the capability to capture images of cheques at branches or centralised processing areas and transmit electronically, removing the need to physically transport cheques for processing.

Cheque clearing in Australia is mostly based on the exchange of electronic presentment data between financial institutions. This data is created from the Magnetic Ink Character Recognition (MICR) data on cheques. Currently, after electronic presentment data has been exchanged, cheques are physically transported to the financial institution that they are drawn on. Financial institutions store the returned cheques for a minimum of seven years.

Once digital cheque clearing is introduced, in addition to MICR data, the cheque's image will be created at the point of capture and exchanged electronically. The physical cheque will then be kept until shortly after settlement, when it will be securely destroyed.

APCA is currently developing standards and a rules framework to allow for digital cheque clearing from May 2015.

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The Australian Payments Council – a new strategic body

Australian Payments CouncilAPCA has been working jointly with the Reserve Bank of Australia (RBA) to create an Australian Payments Council. Its formation was announced in August 2014 with the appointment of Christine McLoughlin as its inaugural independent chairman.

Ms McLoughlin leads a Council comprising senior executives drawn from a range of key organisations in the Payments Community including financial institutions, card schemes, major retailers and other payment service providers as well as APCA and the RBA.

Ms McLoughlin also serves as Chairman of the Payments Community. As at October 2014, the Payments Community has 33 member organisations, the RBA and APCA. Membership continues to be open to any organisation with a significant interest in the Australian payments system.

The Council will engage directly with the Payments System Board and is intended to take a higher-level, more strategic view of the payments system.

The Council will work to generate common industry positions for action and adoption by the industry, with endorsement by the Payments System Board, through APCA and other industry vehicles. The Council held its first meeting on 30 October 2014.

APCA is providing secretariat and support services to the Council and the Payments Community.

More information on the Australian Payments Council is available here.

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Chip-reading at ATMs

ATMAPCA has begun work to move the Australian ATM system away from magnetic stripe to EMV chip technology.

Australia progressive migration to chip technology and the extensive use of PINs is having a significant impact on reducing counterfeit / skimming fraud. With the majority of Australian cards and merchant terminals now upgraded to chip, counterfeit / skimming fraud is 33% below the level of 2008. Migrating to chip-reading ATMs, will help further reduce this type of fraud.

APCA will be working closely with financial institutions and ATM deployers to implement this significant security enhancement across Australia’s ATM network.



RBA GovernorAPCA was delighted to have the Governor of the Reserve Bank of Australia, Glenn Stevens, address members and special guests at a breakfast event prior to the Annual General Meeting held in Sydney on 23 October 2014 at the Hilton Hotel Sydney.

The AGM event celebrated APCA’s evolution as a more inclusive, industry body with the capability to drive future industry collaborative efforts, with the adoption of a new Constitution on 1 January 2014.

Speeches by the Governor, APCA chair Rob Craig, and CEO Chris Hamilton highlighted payments system developments during the year and acknowledged the industry collaboration:

  • to chart the future evolution of the payments system and its regulatory framework, particularly the creation of the Australian Payments Council; and
  • to develop reliable, secure and ubiquitous operational platforms for Australian payments to support future innovation in payment services, particularly the proposed New Payments Platform

For more information click here.

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Round Up

Australia’s “Best Practice” Payments Governance

ConferenceNew US research from Bruce Summers and Kirstin Wells provides some insight into the relative strengths of payments governance in Australia. Summers and Wells are both affiliated with the Federal Reserve Bank of Chicago, though the research reflects their personal views.

In their research, Summers and Wells examine payment system governance in six jurisdictions – Australia, the UK, Europe, US, Canada and Japan. They then assess the public policy governance of each jurisdiction on the basis of six criteria:

  • Explicit objectives that reflect public policy considerations
  • A means for measuring whether each of the major payments schemes meets the needs of end-users
  • Broad stakeholder participation in key decisions, including strategy, design and rules
  • Arrangements that provide clear responsibility and accountability for outcomes
  • Incentives that promote the policy objectives, including fair and efficient enforcement
  • Openness and transparency

In their assessment, Australia, the European Union and the UK are identified as having met the six criteria while Japan, US and Canada are identified as lacking – most notably due to an absence of broad stakeholder participation, lack of clear responsibility for outcomes and lack of incentives for promoting policy objectives. In examining Australia, Summers and Wells identified the Payment Systems (Regulation) Act, the role of the Payments System Board and establishment of the Australian Payments Council and the RBA’s User Consultation Forum, as key indicators of the robustness of Australia’s public policy governance of payments.

The paper is here.

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Round Up

New Irish Organisation Merges Banking and Payment Bodies

Banking & Payments Federation IrelandIreland is part of the Single European Payments Area (SEPA) and the Irish Payment Services Organisation (IPSO) has existed since 1997 to support the Irish payments system. IPSO has also been an active participant within ICPACE (see previous story).

In September 2014, IPSO merged with the Irish Banking Federation to form a new body the Banking & Payments Federation of Ireland (BPFI). The new body will continue many of the activities undertaken by IPSO including member representation, stakeholder engagement and public education. BPFI will be opening an office in Brussels to enhance its engagement with European Union policy-makers, which is important given Ireland is in the Eurozone and SEPA. Noel Brett has been appointed as CEO of the BPFI, having previously been CEO of the Irish Banking Federation.

More information about the BPFI can be found here

Round Up

Request for Information on Automated Transfer System

Federal ReserveThe Central Bank of Samoa, Central Bank of Solomon Islands, National Reserve Bank of Tonga and Reserve Bank of Vanuatu have released a Request for Information (RFI) document for the identification of potential solutions for an Automated Transfer System (ATS+).

The initiative seeks to reform the payment system infrastructure of the four countries involved. Its aim is to implement a sound, reliable, efficient payment system in the four countries, increasing the stability of the local economies, providing the private sector with modern tools to perform their business and widening the opportunities for financial inclusion for the overall population.

More information including Request for Information document can be found here.

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Payments System Board Annual Report Released

Payments Systems BoardThe Payments System Board (PSB) Annual Report was released on 2 October 2014. The Report summarises progress made against the Board’s Strategic Review of Innovation in the Payments System Conclusions, which were released in 2012. In particular, the Report calls out formation of the Australian Payments Council, implementation of same day-settlement for direct entry payments in November 2013, and the “substantial progress” made on the New Payments Platform (NPP).

The Report, drawing upon recent RBA research of payments usage as well as ATM withdrawal statistics, identifies declining cash usage, in particular its noticeable decline between 2010 and 2013. The Report notes that cash “accounted for 47 per cent of the number and 18 per cent of the value of all payments in 2013, down from 62 per cent and 29 per cent respectively in 2010”.

Conversely, the total number of non-cash payments increased by around 9 per cent in 2013-14, slightly stronger than the average growth rate seen over the past five years. The Report notes that on average, Australians made almost 380 non-cash transactions per person in 2013-14, up from 210 a decade earlier. When compared with other jurisdictions, card use as a share of non-cash payments is slightly higher in Australia than the average seen in other countries, while our cheque usage remains slightly below average. Countries such as Canada, France and the United States continue to display high cheque use.

The Report also notes changes identified as a result of same-day settlement of direct entry including higher value being settled through the direct entry system (due to an inability to net against other low value systems) as well as increased liquidity and shorter queue times for RTGS payments.

APCA’s role in the establishment of the Australian Payments Council and the NPP Program are called out in the Report and APCA’s fraud statistics are used in the RBA’s discussion on fraud trends.

The Report also pays tribute to Dr John Laker, who retired from the PSB effective 30 June 2014. The PSB members note Dr Laker’s “professionalism and dedication and his active and probing role as a Board member throughout his term”.

APCA similarly acknowledges Dr Laker’s contribution to payment policy in Australia and wishes him well in the future.

The annual report can be viewed here.

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2014 Annual Review: Breaking ground

APCA Annual Review
Have you seen the 2014 Annual Review yet? Click on the image to find out more about APCA's activities during the past year.