The return of collaboration

Chris Hamilton APCA CEOAs I think about payments developments in 2014, what strikes me is that the payments world is now in a phase of collaborative systemic innovation, the like of which we have not seen in 20 years.

I have written about the cyclical nature of network evolution before. It’s all about network effects - ie the reality that, in payments as in other network industries, the net value of a service is proportional to the number of other people using the service. Wherever there are large network effects, an evolutionary balance must be struck continuously between service innovation based on the existing network, and systemic innovation to enhance the network itself. The former uses new technology and/or new business thinking to improve services to end users without trying to change the network itself - because this is expensive and hard to do. Service innovation tends to be competitive in nature. A good example is Square, which innovates in the merchant/customer interaction by riding the rails of the existing card schemes.

The latter - systemic innovation - seeks to upgrade the underlying network so that new and better services can ultimately be delivered to end users. The current global enthusiasm for real-time payments is largely in this category - building new networks to (eventually) deliver better services. Because this needs a large number of existing participants to coordinate in upgrading their technology and operations at the same time, it is typically collaborative more than competitive, and government often has an important role to play.

What is interesting - and to payments tragics like me, exciting - is the interplay between the two. There is no theoretical reason why both types of innovation can’t happen at the same time, and at any given moment there is likely to be some of both. But history suggests a pendulum effect: when a network is relatively young, its full service potential is still to be explored commercially and competitively, and at such times the industry’s focus of effort swings towards service innovation and competition. In the 90’s we saw this with fully automated card networks, as their footprint and services expanded rapidly, first in credit cards and then in debit cards. Eventually, however, such a process reaches saturation - there are fewer new customers, and innovations that deliver a competitive edge over everybody else who uses the same basic system become rare.

Then, we see a swing back to collaborative systemic innovation - the focus moves to upgrading or replacing the underlying network, which (if done well) opens up new potential for future service innovation and competition. All around the world, we see effort to upgrade, modernise or replace ACH and other automated payments systems. Now that the United States has signalled a major project in this area, nearly all the developed economies and many of the developing ones are seriously engaged in systemic enhancement. While service innovation must go on in parallel, as demanded by the competitive market for payment services, it is much harder to take a competitive bet on new services when the underlying network is changing. The risks of disruption are all the greater.

For those developing payments strategy for industries or for individual competitors, one important observation is that the pendulum seems to be swinging ever faster. Cheques were the stable network platform for service innovation by banks for over a hundred years; ACH for maybe 40 and cards for only around 25 years. We are already seeing service innovation on top of real-time platforms - but it is going to be very important for us to form a view on the longevity of the new networks. So far as possible, we want to make the new networks future-proof - by which I mean capable of supporting a large amount of future service innovation without major network change. By this means, we are likely to maximise network efficiency and leverage the large investment that is always necessary in a new network. In the Australian New Payments Platform, this idea is embodied in the layered architecture.

So it is encouraging to see that in many places around the world, including Australia, the new era of collaborative network development includes a strong element of strategic planning, as well as network upgrade. This can be seen in the proliferation of national payment plans and national payment councils. The more we think about how the competitive market might use proposed new network infrastructure, the more likely we are to get the most out of our collective network investment.

Clearly, we have our work cut out for us!

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NPP Program kicks-off “design, build and test” phase

NPP Australia The New Payments Platform, the major industry initiative to develop new infrastructure for fast, flexible, data rich payments in Australia, reached a historic milestone on 2 December 2014 when it entered Phase 3 of the Program.

At a stakeholder launch event held in Sydney, the Program announced that 12 leading payment organisations had committed funding for the build and operation of the NPP.

These organisations - ANZ, ASL, Bendigo and Adelaide Bank, Citigroup, CBA, Cuscal, Indue, ING Direct, Macquarie Bank, NAB, RBA and Westpac – are the founding members of NPP Australia Limited, a new industry mutual company set up by APCA to steer the Program going forward.

Also at the event, NPP Australia signed a 12-year contract with global provider of secure financial messaging services SWIFT, to design, build and operate the basic infrastructure. SWIFT was appointed the successful vendor by the Program following a highly competitive global tender process.

The event was hosted by APCA and drew more than 100 attendees. Speakers included Paul Lahiff, Chair of NPP Australia and formerly the NPP Steering Committee, SWIFT CEO Gottfried Leibbrandt, ANZ CEO Australia Phil Chronican, Cuscal Managing Director Craig Kennedy and APCA CEO Chris Hamilton.

The establishment of NPP Australia and the appointment of SWIFT marked the launch of the third Phase, "design, build and test". During its first six months, NPP Australia members will work with SWIFT to detail the central solution as well as the system developments needed for each member.

The NPP is expected to be operational in second half 2017. Australian authorised deposit-taking institutions can choose to join the NPP at any point in its development and operation.

For further information on the New Payments Platform, click here.

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Payments fraud on Australian cards occurring mainly online

An interim release of payment fraud data issued by APCA in December 2014 reflects the trends shown in the June 2014 publication Australian Payments Fraud – Details and Data for 2013. The new data is for the 12 months to June 2014 - complete payments fraud data for 2014 will be available in mid-2015.

The interim release shows that compared to figures for the 12 months to June 2013, the total rate of fraud on Australian cards and cheques increased from 16.1 cents to 18.7 cents per $1,000 spent. This increase is largely due to a rise in card-not-present fraud mainly occurring online. Card-not-present fraud on Australian cards increased from $199.2 million to $256.1 million. The majority of this fraud (66%) occurred overseas.

The trend of increasing card-not-present fraud reflects 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.

The interim release also shows that:

  • Counterfeit / skimming fraud increased from $37.9 million to $42.0 million, well down from its peak of $66.0 million in 2011.
  • Lost and Stolen fraud on Australian cards increased from $30.5 million to $33.1 million. This comprises a slight drop (-1.5%) to $20.5 million in the fraud occurring in Australia, but an increase (30.2%) to $12.5 million in fraud occurring overseas.

APCA’s next comprehensive payments fraud report “Australian Payments Fraud – Details and Data for 2014” will be released in June 2015.

Further information on fraud stats can be found here.

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APCA Stakeholder Forum considers digital currencies

Digital CurrencyThe theme of the December 2014 APCA Stakeholder Forum meeting was the rapid development of new technology and payment alternatives, with a particular focus on digital currency.

The meeting was held in Sydney at the Sheraton-on-the-Park Hotel on 2 December 2014 and chaired by Paul Lahiff. Over 50 attendees from a range of key non-member stakeholders participated.

Special guest speaker Ron Tucker, Chair of the Australian Digital Currency Commerce Association (ADCCA), provided an overview of how digital currencies such as Bitcoin work and outlined the efforts of the ADCCA to develop a self-regulatory framework for digital currencies.

Following the presentation, Mr Tucker was joined in a panel session by David Carter, Executive General Manager, Customer Development, Suncorp; Phil Gomm, Senior Executive, Capgemini; and Chris Hamilton, CEO APCA

The lively panel discussion centred on the need for the payments industry to better understand the implications of digital currency. Panellists recognised the possibilities offered by the underlying “block chain” technology, though it was noted that confidence in digital currencies remained a concern among both payment system participants and users. The panellists recognised that government regulation often played an important role in promoting confidence.

At the meeting, ASF participants also discussed the challenges and opportunities facing the payments industry over the coming year. The development of overlay services for the New Payments Platform (NPP), the growth of mobile payments and digital currencies, the future of legacy payments and the potential impact of the Financial System Inquiry (FSI) were all called out as important issues for industry.

More information about the APCA Stakeholder Forum can be obtained by contacting

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Australian Payments Council to develop Payments Plan

Australian Payments CouncilAt its inaugural meeting on 30 October 2014, the Australian Payments Council considered a wide range of topics and reaffirmed its role in the collaborative space to promote trust and confidence and to create efficiency in the payments system.

Dr Malcolm Edey, Assistant Governor of the Reserve Bank of Australia (RBA), addressed the meeting and reiterated the support and encouragement of RBA Governor Glenn Stevens in the Payments Council, an important industry initiative.

The Australian Payments Council was established in mid-2014 to provide a forum for key industry stakeholders to address issues requiring a cooperative industry approach and to engage with the Payments System Board. Its members are drawn from a broader group of leading payment organisations known as the Payments Community.

Two main areas of work were identified by the Council at its meeting:

  • the development of an “Australian Payments Plan”, a high level collaborative plan for the payments industry; and
  • the development of a high-level industry position on the management of cyber-security.

Work on these areas will be progressed in 2015, with the next Council meeting scheduled to take place in March 2015.

More information about the Payments Council meeting can be found here.

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The Payments Community comes together for first meeting

The Payments Community held its first meeting on 4 December 2014 at the Intercontinental Hotel in Sydney. Participants included financial institutions, card schemes, major retailers and other payments service providers, APCA and the RBA.

The Community members heard presentations from Dr Tony Richards (Reserve Bank of Australia), Oliver Kirby-Johnson (KPMG), Paul Lahiff (NPP Australia Limited) and Richard Miller (Deloitte) on a range of industry issues including the changing payments ecosystem, UK regulatory developments and the New Payments Platform (NPP).

The Payments Council’s proposal to develop an “Australian Payments Plan” was discussed by a panel that included Rachel Slade (Westpac), Chris Hamilton (APCA), Oliver Kirby-Johnson (KPMG), Dr Richards and Mike Aston (Accenture). The panellists identified maintaining customer trust and confidence in a stable, reliable and secure payment system as a key objective for any plan and identified the following as topics to be considered or addressed in future industry planning:

  • The importance of enabling inclusion and ease of access for new entrants;
  • The importance of customer demand in driving change;
  • The need to deal with “legacy” payment systems in a coordinated fashion; and
  • The need to consider the impact of global standards.

The Payments Community provides a mechanism for wider stakeholder views to inform the deliberations of the Australian Payments Council. Membership is open to any organisation with a significant interest in the Australian payments system.

The next Payments Community meeting will be held in mid-2015.

More information about the Payments Community can be found here.

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Release of Financial System Inquiry Final Report

FSI Final ReportOn 7 December 2014, the Commonwealth Treasurer, Joe Hockey, and FSI Chair, David Murray, released the FSI Final Report. The 340 page document includes 44 recommendations for Government and regulators.

APCA welcomes the FSI Final Report and notes that a number of issues initially raised by APCA – notably the need for more streamlined payments regulation, benefits of collaboration and need for technology neutrality in regulation - have all been adopted in the Final Report.

At the time of the release, the Treasurer announced the Government will consult further on the Inquiry’s recommendations before making any decisions and is calling for written submissions by 31 March 2015. A number of the Inquiry’s recommendations are the responsibility of the financial regulators – the Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia – and Government has indicated that it would also welcome submissions on these Recommendations.

APCA will be making a submission to the Commonwealth Treasury on the FSI Final Report and looks forward to further engaging with industry and government stakeholders.

Below is a summary of the payments-related recommendations.

Recommendation 14 - Collaboration to enable innovation:
  • Establish a permanent public–private sector collaborative committee, the ‘Innovation Collaboration’, to facilitate financial system innovation and enable timely and coordinated policy and regulatory responses.
Recommendation 15 - Digital identity:
  • Develop a national strategy for a federated-style model of trusted digital identities.
Recommendation 16 - Clearer graduated payments regulation:
  • Enhance graduation of retail payments regulation by clarifying thresholds for regulation by ASIC and APRA.
  • Strengthen consumer protection by mandating the ePayments Code.
  • Introduce a separate prudential regime with two tiers for purchased payment facilities.
Recommendation 17 - Interchange fees and customer surcharging:
  • Improve interchange fee regulation by clarifying thresholds for when they apply, broadening the range of fees and payments they apply to, and lowering interchange fees.
  • Improve surcharging regulation by expanding its application and ensuring customers using lower-cost payment methods cannot be over-surcharged by allowing more prescriptive limits on surcharging.
Recommendation 27 - Regulator accountability:
  • Create a new Financial Regulator Assessment Board to advise Government annually on how financial regulators have implemented their mandates.
  • Provide clearer guidance to regulators in Statements of Expectation and increase the use of performance indicators for regulator performance.
Recommendation 30 - Strengthening the focus on competition in the financial system:
  • Review the state of competition in the sector every three years, improve reporting of how regulators balance competition against their core objectives, identify barriers to cross-border provision of financial services and include consideration of competition in ASIC’s mandate.
Recommendation 31 - Compliance costs and policy processes:
  • Increase the time available for industry to implement complex regulatory change.
  • Conduct post-implementation reviews of major regulatory changes more frequently.
Recommendation 38 - Cyber security:
  • Update the 2009 Cyber Security Strategy to reflect changes in the threat environment, improve cohesion in policy implementation, and progress public–private sector and cross-industry collaboration.
  • Establish a formal framework for cyber security information sharing and response to cyber threats.
Recommendation 39 - Technology neutrality:
  • Identify, in consultation with the financial sector, and amend priority areas of regulation to be technology neutral.
  • Embed consideration of the principle of technology neutrality into development processes for future regulation.
  • Ensure regulation allows individuals to select alternative methods to access services to maintain fair treatment for all consumer segments.

More information about the FSI Final Report can be found here.

The previous APCA submissions to the FSI can be found here.

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APCA Makes Submission to Senate Inquiry into Digital Currency

Digital CurrencyOn 2 October 2014, the Australian Senate referred an inquiry into digital currency to the Senate Economics References Committee. The terms of reference for the Inquiry are to examine how to develop an effective regulatory system for digital currency, the potential impact of digital currency technology on the Australian economy, and how Australia can take advantage of digital currency technology. The Committee will report to the Senate by 2 March 2015.

Forty-four submissions have been made to the Inquiry from a range of organisations. APCA made a submission which outlines the private nature of digital currencies, the existence of a wide range of digital payment alternatives in Australia and the potential of the technologies that underpin digital currencies, in particular the “block chain”. The APCA submission identifies the need for a considered regulatory response that maintains a balance between stability, efficiency and competition-driven innovation while ensuring confidence and integrity. Further, APCA notes the Senate Inquiry, in making recommendations, should take into account the FSI Final Report Recommendations.

More information about the Senate Inquiry can be found here.

The APCA submission to the Senate Inquiry into Digital Currency can be found here.

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RBA Payment Card Access Regimes

Reserve Bank of AustraliaThe Reserve Bank of Australia (RBA) has varied the Access Regimes for the MasterCard and Visa credit card systems and revoked the Access Regime for the Visa Debit system, effective from 1 January 2015.

This implements the March 2014 decision of the Payments System Board to modify the card scheme Access Regimes. The amended framework effectively removes the requirement for an issuer or acquirer to be prudentially regulated and provides the card systems with greater flexibility to expand membership beyond existing participants.

In addition to the RBA changes to the Access Regimes, amendments to the Banking Regulations have been introduced that mean that credit card issuing and acquiring will no longer be considered “banking business”. These changes, as well as supporting changes made by APCA to the system for direct entry - BECS, similarly came into force on 1 January 2015.

More information about the changes to the Access Regimes can be found here.

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US Working Towards Same Day ACH

NACHAIn the United States, bulk electronic payments are processed through the Automated Clearing House (ACH) system. In this highly complex system, the coordinating body is NACHA - The Electronic Payments Association. Currently, ACH payments in the US settle on the next business day and previous attempts to reform this have not been successful.

On 9 December 2014, NACHA released a new Request for Comment (RFC) on Same Day ACH. The RFC is seeking industry feedback and outlines a proposal which would introduce two new same-day settlement windows, for a total of three ACH Network settlements each day.

Under NACHA’s proposal, all Receiving Depository Financial Institutions (RDFIs) will be mandated to receive Same Day ACH files and to make funds available to their customers by the end of the work day. These requirements ensure certainty and value for consumers, businesses and government agencies who want the option to send Same Day ACH payments to any bank account in the U.S.

To support this ubiquity, the RFC also proposed an interbank fee be paid from the sending to the receiving institution to enable recovery of costs.

The proposal includes a built-in “checks and balances” methodology to measure the effectiveness of the interbank fee at defined intervals, with opportunities to reduce the fee if actual same-day ACH volume exceeds projections.

The NACHA Same Day RFC is open until February 6, 2015. More information is available here.

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Canada Reforms Payments Regulation

International payments On 19 December 2014, amendments to the Canadian Payments Act and the Canadian Payments Clearing and Settlement Act became law. These changes enhance the role of the Bank of Canada (Canada’s central bank) and impact the governance and oversight of the Canadian Payments Association (CPA) (Canada’s national payments body).

The Bank of Canada’s previous power to designate and impose standards on systemically important financial market infrastructure has been enhanced. Notably, the type of risk that the Bank of Canada is able to control for now includes risk posed by prominent payment systems, thus enabling the designation of retail payment systems in Canada.

Further, the Canadian Payments Act has been amended to change the governance of the CPA in particular:

  • A smaller, majority independent Board of Directors, reducing the size of the Board from 16 to 13 members;
  • The Bank of Canada to no longer sit on the Board;
  • Two classes of directors to be elected by all CPA members including:
    • seven independent directors (eligibility criteria would be determined in forthcoming regulations); and,
    • five member directors (three of whom must be direct participants in CPA systems with a minimum number of Domestic Systemically Important Banks to be represented on the Board);
  • The Chief Executive Officer of the CPA would become an ex officio member of the Board;
  • The chairperson and deputy chair of the Board would be selected from among the independent directors; and
  • Volume-based voting would be replaced with a one-member, one-vote basis.

The Bank of Canada and Canadian Payments Association changes will come into effect on 1 July 2015. Further information can be found at the CPA website.

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