Australia's New Payments Platform - Odecee

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Australia’s New Payments Platform Opportunities for Innovation By Mark Hume-Cook

APRIL 2015

Confidential Information & Copyright This document contains information that is proprietary to Odecee Pty Ltd. All information within this document relating to the business of Odecee is the property of Odecee Pty Ltd and deemed to be confidential information of Odecee Pty Ltd. Unauthorised disclosure of this information will be considered Australia’s new payment platform a breach of confidentiality resulting in material damage to Odecee Pty Ltd.

© Copyright Odecee Pty Ltd 2014 (ACN 126 302 869)

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The Australian Payments Industry has long had the benefit of a robust and mature set of national payment clearing and settlement systems, provided and governed by the Reserve Bank

INTRODUCTION

of Australia (RBA) and the Australian Payments Clearing Association (APCA). These systems facilitate the movement of money via ͆payment instructions͇ and the eventual exchange of

value between financial institutions in Australia. It is these payment and settlement systems that provide the pistons of the engine powering Australia̓s economy.

The maturity of these systems means they provide a widely used and very reliable service; at the same time, the very fact that the technology underlying them was at the forefront of global competition in past decades means the Payments Industry is now suffering from this maturity. In the decades since the systems were first implemented, global standards have evolved, consumer and business expectations have emerged above the conceptual line the systems can attain, and threats of disruption are forcing industry participants to consider both self-preservation and cooperative innovation. Thus, the second decade of the twenty-first century provides motivation and incentive for the Australian Payments Industry to create, promote and operate a new platform for electronic payments. The goals of this New Payments Platform are quite specific, and the achievement of these goals will open the payments landscape to a host of service providers and innovators, providing opportunities to participate in the proposal and provision of new services for business and consumer segments. This paper provides an overview of what the New Payments Platform (NPP) is, and what it proposes to achieve. The various players in the creation and governance of the NPP are introduced, and some opinion on the implications for the Australian payments landscape is offered. Finally, it is proposed that a rich field of opportunity is now to be presented to third parties in the industry, and potential avenues for innovation are discussed.

Australia’s new payment platform

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WHAT IS THE NEW PAYMENTS PLATFORM AND WHY NEW PAYMENTS PLATFORM

DO WE NEED IT? To begin with, it may be worthwhile to offer an overview of the “old payments platform” - an understanding of the current state may

well assist in developing an appreciation for the target state. The movement of monetary value through the Australian payments landscape as at early 2015 occurs via one of five systems, or “streams”, all of which are governed by the Australian Payments Clearing Association (APCA). These streams could be described as the five pistons of the engine underlying the Australian economy. The five systems or streams are known by a number of names, acronyms and initialisms. These are presented as follows:

Table 1 - Clearing Systems (Streams) in the Australian Payments Landscape

When a transaction is executed, the payment part of the transaction is conducted and transmitted using whichever of the above systems is designated as the carrier of the chosen payment instrument. These systems provide the payment clearing mechanism for


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the payment element of a transaction. ‘Settlement’ of the payment refers to the actual transfer of ownership of monetary value by the financial institutions; this generally takes place after the fact, and is operated and governed by the Reserve Bank of Australia (RBA). The following diagram shows the separation of payment types through the various clearing systems and how they interact with the RBA settlement process.

Figure 1 – Clearing and Settlement of Australian Payments*

* Please note that Figure 1 presents a simplified representation of clearing and settlement. In actuality, there are many more information flows than are shown here. Diagram 1 shows that while clearing (which is the exchange of payment instructions) occurs via a number of different mechanisms, the settlement of exchanged value typically goes through the RBA settlement environment. It is worth making note of two significant points here.


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1.

Financial Institutions have accounts at the RBA known as Exchange Settlement Accounts (ESAs). The RBA is effectively the banks’ bank. Individuals, businesses and governments have what can generically be named “product accounts” with the Financial Institutions. Value is necessarily settled between ESAs before it is settled to our product accounts; it is only after value is settled to our account that we get to make our own use of that value.

2.

Two types of settlement are used between ESAs: •

Deferred Net Settlement – some time after the clearing instruction is received, the value is transferred across ESAs. Time periods in the deferred net settlement will vary from CS to CS.

•

Real Time Gross Settlement – ESAs are debited and credited at the time of clearing.

Most of the time, product account holders will participate in a payment method that uses deferred net settlement. This is why it takes a while for the receiver of value to get full access it - the banks don’t get their value for some time, and we don’t get access to it until some time after that.

The Australian Payments Clearing Association is overseeing the design, implementation and use of the New Payments Platform.

THE NEW PAYMENTS PLATFORM

One significant goal of that platform is to increase the efficiency of payments, thus reducing the amount of time between when an electronic payment is sent and when the receiver finally gets access to

the value. The goal is to make payments near real time - to reduce the overall time between payment send and value receipt to less than one minute. It must be noted that to achieve this goal, two particular elements of the solution are necessary: 1.

The use of real time gross settlement across financial institutions for this clearing system

2. The financial institutions to ensure that posting to product accounts is done in a timely manner To address the first point, the RBA is undertaking to provide a Fast Settlement Service for the NPP to utilise. This will allow settlement to occur “line-by-line” as clearing instructions


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get processed, rather than requiring human input to settle based on the contents of a batch file. The second point is left as a challenge for the various financial institutions to address, and may well be a defining point in terms of differentiation and competition. The New Payments Platform will consist of “Basic Infrastructure” (BI) and “Overlay Services”.

It has so far been articulated that the BI will consist of the following

components: •

Networking services between platform participants

•

A switch or routing service

•

An addressing service

Towards the end of 2014, it was publicly announced that SWIFT would provide the networking services and switching service, whilst Fiserv would be contracted to undertake the delivery of the addressing service. Overlay services are services that will use the BI to deliver functional value to the users of the NPP. It is at this level that the industry is invited to contribute creativity and innovation. To date, only one overlay service has been proposed: the Initial Convenience Service (ICS). The ICS will be the service that permits the near real time funds availability; that is, the fundamental message set that will send a payment instruction from one customer’s financial institution to another. The ICS will be delivered as part of the initial offering, and a service provider will be selected by the NPP governing body to implement this first service.


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Figure 2 – Overlay Services and the NPP

As at March 2015, little is known regarding the interfaces to the NPP or its implementation. One assumption is that the messaging used for the internal implementation of the overlay services will be ISO20022 (variously pronounced “ISO Two Hundred Twenty-Two”, “ISO Two Double-Oh Double-Two”, “ISO Twenty Thousand and Twenty-Two”). ISO20022 is a global standard for financial services messaging, and is gaining broader acceptance across and within geographic and political boundaries worldwide. Development of overlay services may involve utilising and manipulating the internal message set directly, or it may involve developing or controlling external stimuli that either initiate messages within the BI, or are created as a result of messages from within the BI. Will the NPP be a new clearing stream? Will it replace one or more of the current clearing streams or systems?


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APCA has been quite explicit in stating that the NPP will be a new system, and will not be an upgrade or extension of any existing systems. However, it is not yet clear whether the NPP will be seen as a 6th clearing stream, or whether it will augment or replace one or more of the other clearing streams. As will be discussed later in this paper, it is clear that the introduction of this new platform will displace some of the volume of the current clearing systems. In theory, the introduction of the NPP could facilitate the retirement of the DE environment, but the intention of the industry and regulator - where support of long-standing processes and procedures is seen to be extremely important - has not been yet revealed.

WHY DO WE NEED NPP?

The current payment clearing and settlement environment serves most of us mostly well, if we consider historical expectations and what we have become used to.

In 2012 – as part of the Strategic Review of Innovation in the Payments System - the Payment Systems Board of the RBA identified “gaps” in the Australian payments system that needed to be addressed in order to continue to meet the needs of users over the medium term. The pace of commerce, as well as the pace of social interaction, has been enabled by disruptive forces that allow commercial and social activity to approach the speed of some of the most dynamic industrial environments. Demands on availability and demands for richer information are emerging. The identified gaps were perceived as barriers to being able to meet emerging needs of consumers and businesses. The gaps identified by the RBA in 2012 can be articulated as follows: •

The time taken for electronic transmission of monetary value from party to party is too long

•

Electronic transmission of monetary value out of hours is not possible


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•

Electronic transmission of substantial and meaningful data to accompany monetary value is not possible

•

The addresses currently used for electronic transmission of monetary value (BSB + Bank Account Number) are not ideal for user convenience

We should note the role of the RBA in this landscape. Tony Richards, Head of Payment Policy at the RBA told attendees at the Chicago Payments Symposium in September 2014: “The Reserve Bank … is the principal regulator of the Australian payments system… The Bank has powers with respect to both payment systems and clearing and settlement facilities. In the case of payment systems, it has the power to ‘designate’ a system as being subject to regulation if it is in the public interest to do so. It can then impose an access regime for any designated system or set standards that apply to participants in that system... (the Payments System Board will) only use its powers where it judges it to be necessary to ensure stability, manage risk, or promote efficiency or competition, or where the industry has not been able to reach an acceptable self- or co-regulatory solution”. The RBA has also pointed out that if financial institutions do not provide customers with the services they want, other players are bound to innovate in that space in order to satisfy the market. The RBA can therefore induce industry behaviour based on threat of intervention for public interest. It can provide motivation for compliance (fear of increased competition), or disincentive for non-compliance (potentially financial penalties for non-participation). With the providers of payment services for customers in this landscape, the RBA has decided to foster “coopetition” (cooperative competition) in the industry, drawing on the attraction of innovation in a competitive marketplace while simultaneously requiring the competitors to establish an initially level playing field. So, in order to achieve its strategic objectives, the regulator induces desirable behaviour in the industry participants.


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There are a number of interested parties already playing in this

WHO ARE THE PLAYERS IN THE NPP?

space. I attempt to explain their positions and relevance in the following table.

Table 2 - Interested Parties in the NPP

* NPP Australia Limited is a newly established Australian Public Company, registered with ASIC as of August 2014. The entity is effectively a joint venture company comprised of 12 Australian financial institutions: •

ANZ

•

Australian Settlements Ltd

•

Bendigo and Adelaide Bank

•

Citigroup


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•

Commonwealth Bank of Australia

•

Cuscal

•

Indue

•

ING Bank (Australia)

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Macquarie Bank

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National Australia Bank

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RBA

•

Westpac Banking Corporation

Throughout the earlier stages of the definition of the platform, five other financial institutions were involved, but have since retracted their enthusiasm and commitment to the venture. Those financial institutions are as follows: •

Bank of Queensland

•

Suncorp

•

PayPal

•

Bank of America Merrill Lynch

•

HSBC

Whilst the “founding members” of NPP Australia listed above hold a strong stake in the venture, it must be pointed out that this is not the exclusive list of financial institutions that will eventually participate in the platform usage. The intent of the PSB, APCA and the APC is that all Australian financial institutions will connect to the platform, either directly or via an enabling agent or aggregator. This will ensure absolute

WHAT ARE THE IMPLICATIONS OF THE NPP ON THE AUSTRALIAN PAYMENTS LANDSCAPE?

penetration of the infrastructure to the marketplace.

The introduction of a significant piece of infrastructure and its associated services, governance, marketing and hype is expected to impact the payments landscape in no small fashion. As can be

seen from the previous section and the description of the relevant stakeholders, there is a significant amount of governance and oversight involved.


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IMMEDIATE AND OBVIOUS IMPLICATIONS Faster payments 24/7 Addressing the strategic objectives of the regulator will, in itself, impact consumers and businesses using payments services. A successful and complete implementation will see electronic transfer of monetary value at a faster pace and at times outside standard banking hours. This immediately adds convenience to payers and payees.

Richer payment information A successful and complete implementation will see richer payment information accompany payments transactions. The depth of this richness is not yet fully articulated, but when we consider the current state (a maximum of 18 alphanumeric characters in Direct Entry payments), a significant increase in utility will not be difficult to achieve. We can imagine that both structured and unstructured information may be available to payers and payees, and that perhaps even encoded documents may be able to be transmitted. Structured information will facilitate an increased level of straight-through processing for businesses, while unstructured information will allow for consumer-to-consumer (personto-person, peer-to-peer or P2P) flexibility. The ability to attach encoded documents will bring a significant benefit to end users, but will introduce both technical complexity and issues in “appropriate use” of document transmission.

Easier addressing of payments The final stated strategic objective of the RBA in terms of the NPP is delivering a simpler addressing mechanism for payments. At present, payments are “addressed” to the payee’s bank product account. In order for a payment to be delivered successfully to the intended recipient, the initiator of the payment must have access to the receiver’s BSB and account number, which can be a string of up to 16 characters (coincidentally matching the size of a credit card number).


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Bank account owners rarely commit their own “payment address” to memory, and most do not carry a record of the address on their person. Further, many consumers are reluctant to offer others their bank account details, being extremely conscious of security warnings regarding scams, phishing and other fraud activity. Thus, it can be difficult for a payer to get a payee’s payment address in the first instance. Once the payment address is obtained, the “uncommon format” of the address can lead to transposition errors due to mistyping. The lack of an easily accessible payment address, combined with the complex structure of the address, means the current payment addressing mechanism does not lend itself to customer convenience. The stated objective of the NPP to provide a simpler addressing mechanism means offering customers the opportunity to send payment instructions to a more readily available address that has a simpler structure. Candidate alternative address types have been proposed, which have varying perceived benefits and risks. For example, it has been proposed that a payment could be “sent to an email address”, or a payment could be “sent to a phone number”. Such language has the potential to produce misconception in the customer, and this risk will need to be managed by stakeholders. It should be stressed that “sending a payment to an email address” will not (necessarily) result in your Google wallet being credited, or your Hotmail account being in credit. Sending a payment to your phone number will not (necessarily) reduce your liability to your telecommunications provider. These address types will merely be used as an alias for, or an abstraction of, your plain old BSB plus bank account number - a “lookup-key” to find your bank details. The concept of alternative addresses has already been presented to the payments industry by early innovators with mechanisms to notify intended recipients to “come and collect” a payment from one of their customers.


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It is important to note here that the movement of monetary value for the foreseeable future will ultimately be from bank account to bank account, and disintermediation of financial institutions is not a palatable or feasible suggestion.

FURTHER IMPLICATIONS Financial institution obligations With financial institutions now offering faster, easier electronic payments with more information, customer expectations will likely alter. At the outset, financial institutions will be expected to credit product accounts in near real time. Some financial institutions are already approaching such a capability when processing “on us” payments. An “on us” payment is when a customer of Bank X sends an electronic payment and the recipient is also a customer of Bank X. Bank X systems realise the payment does not have to go through industry clearing and settlement, so the payment can readily be processed using inter-account posting. The speed of such payments can be almost instantaneous; such a service may now be expected by customers when receiving any payment. In the event of mistaken payments (e.g. payments sent to the incorrect address), financial institutions will need to have a mechanism for recovery. It is difficult to imagine that offering speedier payments and simpler addressing will result in the eradication of mistaken payments, and an obligation will exist to assist in the remediation of resulting disputes. Further operational obligations of the financial institutions may extend to a greater depth of customer reporting offerings, extended channel access and greater ease-of-use, as well as added value in terms of payment information management. With the provision of a new service enabled by new national infrastructure, it is to be expected that financial institutions will pass on the costs of establishment and operation to the customers and end users of the platform. The financial model is not yet finalised at the time of publication of this paper, but it only makes good financial sense that the model will


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be expected to contribute to an ongoing sustainable revenue for the owners and operators. It remains to be seen how the costs will be recouped, whether the community at large deems the initial model “fair” and whether that model will sustain regulated readjustment. As has been mentioned, the pace of commerce and the pace of social interaction has increased with the advent of ubiquitous access to “devices”. The expected increases in speed and ease of payments provided by the NPP has the potential to fuel the rate of increase of that pace. Accompanying pace there may be elements of risk - threats aimed at exploiting the rapidity and ease of making payments. The financial institutions and other stakeholders will be responsible for addressing the mitigation of such risks.

Changing payments behaviour – consumers and businesses Once the NPP is established and adopted we might expect to see some alterations in payments behaviour in the Australian populace. This does not necessarily imply more or less monetary value changing hands, but rather a change in the way we as a nation initiate payments and process received payments. Some observations can be made regarding recent innovations in the payment landscape that appear to have altered the payments behaviour of Australians. •

Contactless payments such as Visa payWave and MasterCard Paypass have seen the speed of credit and debit card payments at point of sale increase, with a corresponding increase in the use of credit or debit card as a method of payment.

•

The introduction of “Direct Charging” for ATM fees (where cardholders are charged by ATM operators directly) resulted in a 25% proportional decrease in the overall number of ATM transactions that were charged a fee between 2010 and 2013. This was attributable to cardholders using “home network” ATMs or point of sale cash withdrawals in preference to “foreign” ATMs†. This was not, strictly speaking, innovation; it was industry self-regulation responding to the threat of RBA regulation. Nonetheless, it shows how behaviour can change in response to a small change in the landscape.

†

http://www.rba.gov.au/speeches/2014/sp-so-040614.html

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Contrary to this, it may be interesting to note that other areas of innovation have not had the impact that may have been designed or expected. Technology innovations such as “near-field communications” (NFC) and closed-loop environments (e.g. electronic wallets or mobile wallets) have not significantly impacted payments behaviour or displaced significant payments revenues. An observation of behavioural trends involving cash and cards may be beneficial.

Cash as % of Payments