Australian fintech Tic:Toc, today announced their world first instant home loan platform will be made available to customers purchasing or refinancing properties in Tasmania. We featured the firm in a recent Fintech Spotlight.
The online home loan, which uses a digital decisioning system to assess and approve finance in as little as 22 minutes, launched in July 2017 and initially excluded Tasmanian and Northern Territory properties from being eligible for finance.
The expansion coincides with the latest results from CoreLogic RP Data, which shows Hobart has had the largest increase in home value year on year at 11.49%, ahead of Melbourne (10.10%) and Canberra (5.84%).
Mainlanders have accounted for 23% of sales in Tasmania to date (REIT), with gross value of sales up 22.7% on last year at the end on the September quarter, putting the Tasmanian real estate market on track to for its highest ever accumulated market value of sales.
Tic:Toc CEO Anthony Baum said while the expansion had nothing to do with the buoyant Tasmanian market, he is pleased that Tic:Toc can now help people purchase Tasmanian properties via a faster and more cost effective home loan offering.
“We have had a lot of customer enquiry about purchasing property in Hobart – particularly from investors living in NSW – and we’ve had to turn them away, until today.
“We’re so excited to now be able to assist these customers get a better home loan experience online, with all of the unnecessary costs stripped from the process.
“We wanted to bring Tic:Toc to as many Australians as possible, as soon as possible, which meant not having a solution to verify customers’ identities at settlement in Tasmania at launch. We’ve worked hard to ensure Tasmanians and those investing in Tasmanian property can now benefit from Tic:Toc too.”
The home loans originated by Tic:Toc and backed by Australia’s fifth largest retail bank, Bendigo and Adelaide Bank, are now available throughout Australia at tictochomeloans.com; with variable comparison rates from 3.59% for live-in, principal and interest home loans.
Just five months from launch, Tic:Toc has already processed more than $340M worth of loan submissions Australia wide and were one of only ten Australian companies globally recognised in the recent KPMG and H2 Venture’s Fintech 100.
ANZ today announced it was reducing international money transfer fees from Australia to foreign countries, effective immediately.
Exchange rates have also been reduced for all ANZ offered currencies, including US Dollars, Euros, New Zealand Dollars, Great Britain Pounds, Hong Kong Dollars, Japanese Yen, Philippine Pesos and Indian Rupees.
For Internet Banking there will be no fee1 for all International Money Transfers sent from Australia in a foreign currency above the equivalent of AUD $10,0002. For transfers below that level the fee has been reduced from $18 to $12.
Commenting on the decision, Group Executive Australia Fred Ohlsson said: “Australia is one of the most digitally active nations in the world, and our customers are using electronic payment methods more than ever before.”
“This decision to reduce fees and rates is great news particularly for those who regularly send money to their home countries. We’re pleased to be making these payments more affordable for our customers,” Mr Ohlsson said.
US Net neutrality is dead — at least for now. In a 3-2 vote today, the Federal Communications Commission approved a measure to remove the tough net neutrality rules it put in place just two years ago. Those rules prevented internet providers from blocking and throttling traffic and offering paid fast lanes. They also classified internet providers as Title II common carriers in order to give the measure strong legal backing.
Today’s vote undoes all of that. It removes the Title II designation, preventing the FCC from putting tough net neutrality rules in place even if it wanted to. And, it turns out, the Republicans now in charge of the FCC really don’t want to. The new rules largely don’t prevent internet providers from doing anything. They can block, throttle, and prioritize content if they wish to. The only real rule is that they have to publicly state that they’re going to do it.
Advocates say internet providers will prioritize their own content over their competitors
Opponents of net neutrality argue that the rules were never needed in the first place, because the internet has been doing just fine. “The internet wasn’t broken in 2015. We were not living in some digital dystopia,” commission chairman Ajit Pai said today. “The main problem consumers have with the internet is not and has never been that their internet provider is blocking access to content. It’s been that they don’t have access at all.”
While that may broadly be true, it’s false to say that all of the harms these rules were preventing are imagined: even with the rules in place, we saw companies block their customers from accessing competing apps, and we saw companies implement policies that clearly advantage some internet services over others. Without any rules in place, they’ll have free rein to do that to an even greater extent.
Supporters of net neutrality have long argued that, without these rules, internet providers will be able to control traffic in all kinds of anti-competitive ways. Many internet providers now own content companies (see Comcast and NBCUniversal), and they may seek to advantage their own content in order to get more eyes on it, ultimately making it more valuable. Meanwhile, existing behaviors like zero-rating (where certain services don’t count toward your data cap) already encourage usage of some programs over others. If during the early days of Netflix, you were free to stream your phone carrier’s movie service instead, we might not have the transformational TV and movie company it’s turned into today.
One of the two Democrats on the commission, Jessica Rosenworcel, called today’s vote a “rash decision” that puts the FCC “on the wrong side of history, the wrong side of the law, and the wrong side of the American public.” This vote, Rosenworcel says, gives internet providers the “green light to go ahead” and “discriminate and manipulate your internet traffic,” something she says they have a business incentive to do.
An excellent article from Mckinsey which makes the point that if Digital Transformation this isn’t on your agenda, then you’ve got the wrong agenda! Its not about new shiny tech things. Rather, all value chains will be disrupted, it is revolutionary. The benefits are breathtaking.
Digital transformation is about sweeping change. It changes everything about how products are designed, manufactured, sold, delivered, and serviced—and it forces CEOs to rethink how companies execute, with new business processes, management practices, and information systems, as well as everything about the nature of customer relationships. I’m seeing leaders who get this. They’re all over it: they want to launch five transformation initiatives right now; they’re talking to me and every digital leader they know about where the technology threats are coming from; and they’re hiring the best people to advise them. Yet I’m shocked by—even fearful for—the many CEOs I know who seem to be asleep at the switch. They just don’t see the massive disruption headed their way from digital threats, seen or unseen, and they don’t seem to understand it will happen very quickly.
So when I see CEOs who may be experimenting here and there with AI or the cloud, I tell them that’s not enough. It’s not about shiny objects. Tinkering is insufficient. My advice is that they should be talking about this all the time, with their boards, in the C-suite—and mobilizing the entire company. The threat is existential. For boards, if this isn’t on your agenda, then you’ve got the wrong agenda. If your CEO isn’t talking about how to ensure the survival of the enterprise amid digital disruption, well, maybe you’ve got the wrong person in the job. This may sound extreme, but it’s not.
It’s increasingly clear that we’re entering a highly disruptive extinction event. Many enterprises that fail to transform themselves will disappear. But as in evolutionary speciation, many new and unanticipated enterprises will emerge, and existing ones will be transformed with new business models. The existential threat is exceeded only by the opportunity.
Trade financing deep tech startup, Trade Ledger, has made it onto the APAC CIOoutlook “Top 25 FinTech Companies 2017” list after just 5 months with its unique digital banking platform for business banks and alternative lenders, who were previously unable to address the challenging SME sector without high expected losses. See our Fintech Spotlight Series note on the firm.
The list recognises promising fintech companies in the Asia-Pacific region that have not only demonstrated the use of technological innovation to solve an urgent and sizeable problem, but who have also shown an ability to commercialise their innovation for rapid adoption and scale.
“Trade Ledger was always intended to be a global end-to-end platform. The working capital problem we are solving is common to businesses and banks everywhere in the world,” said Martin McCann, CEO and Co-Founder of Trade Ledger.
“Finance providers have never been able to accurately leverage quality operational supply chain data to determine business lending risk, due to not having digital data access or suitable technology for credit assessment technology.
“As a result, most of the world’s SMEs are considered too risky for credit, when the truth is actually that credit modelling and underwriting processes are simply designed for multinationals and large corporations, not for our smaller SMEs.
“The unfortunate reality is that despite their smaller size, these SMEs represent an enormous chunk of the global lending opportunity: neglecting this important segment has resulted in a business loan undersupply to the tune of AU$90 billion each year in Australia, and AU$2.7 trillion globally.
“This essentially represents the size of the unaddressed opportunity for any business lenders wishing to use the Trade Ledger technology,” concluded Martin McCann.
Over 500 companies were assessed by the APAC CIOoutlook research team for inclusion in the final 25 fintech companies list.
These companies were all considered to be at the forefront of tackling market challenges and building technologies that greatly benefited other firms in the finance industry.
However, those who made the final cut stood out from their peers in terms of technological innovation, the size and urgency of the problem they solved, and their commercial prowess in bringing their technology to market.
The intelligent use of data gathered by our leading financial institutions can result in faster, more detailed economic statistics. Tom Smith describes how a joint event staged by ONS and Barclaycard illustrates the vast statistical potential of anonymised payments data.
“My job at the Data Science Campus brings many fascinating days as we work with organisations across government and the UK to unlock the power of data. One recent event particularly stands out.
Our experts from across ONS joined forces with analysts from one of the world’s biggest financial organisations to explore how commercial payments data could help tackle some of the UK’s biggest economic questions.
Following a successful knowledge sharing day at the ONS Data Science Campus, Barclaycard, which sees nearly half of the nation’s debit and credit card transactions, hosted a ‘hackathon’ at the state-of-the-art fintech innovation centre Rise. This brought together 50 economists, developers, data scientists and analysts to address three challenges:
How could payments data improve our understanding of regional economies?
Where could financial inclusion policies best be targeted?
How could we use payments data to create superfast economic indicators?
Over two days, the ONS and Barclaycard teams worked collaboratively – in some cases right through the night – to identify how the payments data could be used to improve our understanding of the economy. The traditional hackathon finish saw the teams ‘pitching’ their work to a panel of judges from across ONS and Barclaycard.
The winning team focused on building predictors and indicators that provide fine-detail information for trending economic changes. Even at this early stage of development, their work shows how bringing together card spending data and economic data held by ONS could improve the information available for policy & strategy decision makers to make timely economic decisions.
There is much work to be done to turn this demonstration into a working model. But one of the things that stood-out for the judges was the winning team’s roadmap for how to get there, including the development and data architecture needed for a successful prototype.
“We’re really excited to play a key role in helping to support a better understanding of UK economic trends and growth. The hackathon was a great event to harness the excitement and expertise created through our partnership with the ONS, and the winning teams have shown tangible evidence that payments data can indeed be used for public good.” – Jon Hussey, MD Data & Strategic Analytics, Barclaycard International
For the Data Science Campus, collaborations are all about knowledge exchange. They are an opportunity for us to access expertise in tools, technologies and approaches to data science from outside government, evaluate them in a safe environment, and share our learning across ONS and wider government.
It was inspiring to see the level of energy, drive and collaboration, and to pool ONS and Barclaycard skills into understanding how payments data can be used for public good. (And it is worth pointing out that no money changed hands and no personal data were involved. ONS is only interested in producing aggregate statistics and analysis.)
Our work with Barclaycard illustrates perfectly how the rich data held by partners outside government can improve our understanding of the UK’s economy. This is a key part of ONS’ Better Statistics, Better Decisions strategy, enabling ONS to deliver high quality statistics, develop and implement innovative methods, and build data science capability by tapping in to best practices wherever they may be.
Bitcoin is a “speculative mania” according to the governor of the Reserve Bank of Australia. But it’s not so easy to say that Bitcoin is a bubble – we don’t know how to value it.
Recent price rises (close to A$18,000 in the past three months) may be too great and can’t continue. But the Bitcoin market is only just maturing as an investment and as a currency, and so it may still have room to grow.
A bubble is when the price of an asset diverges from its “fundamentals” – the aspects of an asset that investors use to value it. These could be the income that can be earned from a stock over time, a company’s cash flow, the state of a country’s economy, or even the rent from property.
But Bitcoin does not pay out profits (like shares) or rent (like property), and is not attached a national economy (like fiat currencies). This is part of the reason why it is hard to tell what the underlying value of Bitcoin is or should be.
In the search for fundamentals some have suggested we should look at the supply of Bitcoins in the market (which is regulated by the technology itself), the number of Bitcoin transactions through the market, or even the energy consumed by Bitcoin miners (the computers that validate transactions and are rewarded with Bitcoins).
Diverging from fundamentals
If we take a close look, we can see how the price of Bitcoin may be diverging from these fundamentals. For instance, it is becoming less profitable to be a miner, especially as the energy required increases. At some stage the cost may exceed the price of Bitcoin, making the network less worthwhile to both mine and invest.
Bitcoin may be the best known cryptocurrency but it is also losing marketshare to other cryptocurrencies, such as Ethereum and Litecoin. Bitcoin currently accounts for 59.4% of the total global cryptocurrency market, but at the beginning of 2016 it was 91.3%. Many of these other cryptocurrencies have more functionality than Bitcoin (such as Ethereum’s ability to execute smart contracts), or are more efficient and use less energy (such as Litecoin).
Government policy, such as taxation or the establishment of national digital currencies, may also make it riskier or less worthwhile to mine, transact or hold the cryptocurrency. China’s ban on Initial Coin Offerings earlier this year reduced the value of Bitcoin by 20% in 24 hours.
Without these fundamentals the price of Bitcoin largely reflects speculation. And there is some evidence that people are simply buying and holding Bitcoin in the hope it will keep rising in value (also known as Greater Fool investing). Certainly, the cap on the total number (21 million) of Bitcoins that can exist, makes the currency inherently deflationary – the value of the currency relative to goods and services will keep increasing even without speculation and so there is a disincentive to spend it.
There are new financial products being developed, such as futures contracts, that may reduce the risk of holding Bitcoin and allow these institutional investors to get in.
But Bitcoin futures contracts – where people can place bets on the future price of stocks or markets – may also work against the price of Bitcoin. Just like gamblers place bets on horse races rather than buying a horse, investors may simply buy and sell the futures contracts rather than Bitcoin itself (some contracts are even settled in cash, rather than Bitcoin). All of this could lead to less actual Bitcoin changing hands, leading to less demand.
Although the rush to invest is apparently encouraging some people to take out mortgages to buy Bitcoin, traditional banks won’t lend specifically for that purpose as the market is too volatile.
But it’s not just on the finance side that the Bitcoin market is set to expand. More infrastructure to support Bitcoin in the broader economy is rolling out, which should spur demand.
Many companies are accepting Bitcoin as payment. That means that even if the speculation dies down, Bitcoin can still be traded for some goods and services.
And finally, although the fundamentals of Bitcoin are still up for debate, when it comes to transaction volume through the network there appears to be a lot of room for growth.
It’s good to remember that people have been calling Bitcoin a bubble for a long time, even when the price was just US$35 in 2013.
In the end, this is uncharted territory. We don’t know how to value Bitcoin, or what will happen. Historical examples may or may not apply.
What we do know is that the technology behind most cryptocurrencies is enabling new models of value transfer through secure global consensus networks, and that is causing excitement and nervousness. Investors should beware.
Authors: Alicia (Lucy) Cameron, Senior Research Consultant, CSIRO;
Kelly Trinh, Data Scientist, CSIRO
Payments is fast evolving from cash or plastic to digital. But as the universe of potential digitally enabled payment options proliferates, winners and losers will be determined not by simply fulfilling a payment instruction (now taken as given) but by the customer experience, and degree of trust.
New players, new platforms, and new devices. This transformation is discussed in a recent Inc. article, which I recommend. It nicely portrays the quantum of change and the dilemmas faced by incumbents. I reckon the payments revolution is less than 10% done!
For the average consumer living in an age of convenience, missing parts of conversations during dinner with friends is worth the hassle-free experience of ordering a rideshare via our mobile app or pulling up a photo on Instagram as a reference point. Intrinsically, these things aren’t bad, but what it certainly means is that we (as both businesses and consumers) are placing our trust far beyond the locus of personal control, and into the hands of the the brands delivering products and services to us vis-à-vis technology .
Want to stay at a palatial estate off the coast of Italy? You don’t need to know a prince; you just need a profile on Airbnb, a credit card, and a mobile phone.
We need to look no further than the financial technology (FinTech) industry to understand how our collective move toward convenience will translate to a heightened trust for brands that can deliver us products and services in a secure, connected, meaningful way. As consumers require less cash and more credit across devices, payments innovation will evolve to accommodate this convenience-led consumer behavior.
In a recent conversation I had with author, BBC radio/podcast host, and Financial Times writer Tim Harford, he summed it up nicely: “Credit equals trust.” More pointedly: “Over the last one-hundred years, we’ve seen a slow evolution from a particular type of trust that occurred locally, to a broadening out…whereby more and more people are trusted to do more and more things.”
While credit cards were the first trend toward expanding trust beyond your local store or banker, the next several years will reach an entirely new level of trust as mobile-enabled, contactless payment methods reach wide adoption.
Drivers of payments innovation
According to Visa’s recently released “Innovations for a Cashless World” report, four main trends will drive both consumer behavior and brand payment technology decisions over the next several years: Continuation of cashless transformation driven by card to cloud, everything as Point-of-Sale, paying in messaging platforms, transactions without borders, and the rise of the API economy.
“The ideas and findings in the report shine a light on the macro trends that will define commerce in 2018,” said Shiv Singh, senior vice president of innovation and strategic partnerships at Visa. “As innovation continues to outpace itself year after year, the rise of a cashless economy accelerates as more people around the world adopt technology.”
Several findings from the report give keen insight into our future, while simultaneously reminding us that how we pay for things holds far-reaching implications for both consumers and businesses, both of which are being somewhat forced to change old, institutionalized behaviors:
By 2020, 70% of the world (more than 5 billion people) will be connected by mobile devices, facilitating the transition to a cash-free future.
By 2020, more than 20 billion devices will be connected to the Internet; and where there is Internet there is an opportunity to channel it to a point of sale.
With more users than the population of China, messaging platforms like Facebook Messenger will drive peer-to-peer payments forward as significant growth in this area is expected in 2018.
APIs expand the opportunity for innovation by enabling companies to focus on one link in the chain rather than owning an entire value chain.
Customer experience: the ultimate trust test
While technology is one aspect of payments innovation, managing customer expectations and the human aspects of traction and adoption is also a key component. Companies must get this right in order to deliver the right products and services over the right channels at the right price point.
A recently published report by Accenture Consulting, “Driving the future of payments: 10 megatrends,” reinforces several of the salient findings from Visa’s report, while emphasizing customer experience (CX) as one of the main drivers of how payments will either succeed or fail as we move into the next several years:
“As the payments universe expands, customer experience is becoming the prime competitive differentiator. The irony–and the danger–for traditional players is that customer experience is in the spotlight just as they are losing control of customers. Less touchpoints mean less opportunities to shine. So when companies have customers’ attention, they better get it right.”
Luke Williams, Head of CX at Qualtrics, adds: “Companies are being infused with technologies, creating simultaneous potential for internal risk and disruption of their competitors. The trend now is ‘programmable technology layers’ – where the technology is open and customizable.”
According to Williams, this allows a nimble firm to compete how it wants to without being limited by narrow, rigid technologies. The rise of API economy (as cited in “Innovations for a Cashless World”) is a direct result of this trend, where the mindset shifted to interoperability of products and features.
How brands integrate technology with core aspects of the customers’ experience becomes even more relevant, as machine learning and AI replace humans in many cases. This is not necessarily a negative thing, as long as the technology is being utilized to enhance the relationship with a customer: “AI represents the future of frontline customer service.” remarked Todd Clark, President and CEO of CO-OP Financial Services. “AI-driven chatbots (computer programs simulating human conversation) can handle a significant number of basic customer service questions, freeing up resources to focus on issues requiring more significant attention. This type of support also allows for shorter wait times on the phone and with in-person chat, and as the AI system earns more about the nuances of situations, it will gradually increase the accuracy and scope of its support capabilities.”
Williams adds: “Companies that are viewed as trustworthy, while creating delightful, differentiated customer experiences (often driven by technology), will enjoy significant gains.”
As we head toward 2020, what we will lose in personal connection and first-hand decision making we will gain in broader experiences, accessibility, and opportunity. In essence, we will break down borders and (for those fortunate enough to have access) create a self-actualized world whereby simple transactions, coupled with trusting relationships, can enable the most mundane tasks to luxury experiences.
RBA Governor Philip Lowe spoke at the 2017 Australian Payment Summit and explored some of the disruption in the payments system, including falling cash transactions, an eAUD, electronic bank notes and distributed ledger systems. He also said that a convincing case for issuing Australian dollars on the blockchain for use with limited private systems has not yet been made.
A clear lesson from history is that as people’s needs change and technology improves, so too does the form that money takes. Once upon a time, people used clam shells and stones as money. And for a while, right here in the colony of New South Wales, rum was notoriously used. For many hundreds of years, though, metal coins were the main form of money. Then, as printing technology developed, paper banknotes became the norm. The next advance in technology – developed right here in Australia – was the printing of banknotes on polymer.
No doubt, this evolution will continue. Though predicting its exact nature is difficult. But as Australia’s central bank, the RBA has been giving considerable thought as to what the future might look like. We are the issuer of Australia’s banknotes, the provider of exchange settlement accounts for the financial sector, and we have a broad responsibility for the efficiency of the payments system, so this is an important issue for us.
Today I want to share with you some of our thinking about this future and to address a question that I am being asked increasingly frequently: does the RBA intend to issue a digital form of the Australian dollar? Let’s call it an eAUD.
The short answer to this question is that we have no immediate plans to issue an electronic form of Australian dollar banknotes, but we are continuing to look at the pros and cons. At the same time, we are also looking at how settlement arrangements with central bank money might evolve as new technologies emerge.
As we have worked through the issues, we have developed a series of working hypotheses. I would like to use this opportunity to outline these hypotheses and then discuss each of them briefly. As you will see, we have more confidence in some of these than others.
There will be a further significant shift to electronic payments, but there will still be a place for banknotes, although they will be used less frequently.
It is likely that this shift to electronic payments will occur largely through products offered by the banking system. This is not a given, though. It will require financial institutions to offer customers low-cost solutions that meet their needs.
An electronic form of banknotes could coexist with the electronic payment systems operated by the banks, although the case for this new form of money is not yet established. If an electronic form of Australian dollar banknotes was to become a commonly used payment method, it would probably best be issued by the RBA and distributed by financial institutions, just as physical banknotes are today.
Another possibility that is sometimes suggested for encouraging the shift to electronic payments would be for the RBA to offer every Australian an exchange settlement account with easy, low-cost payments functionality. To be clear, we see no case for doing this.
It is possible that the RBA might, in time, issue a new form of digital money – a variation on exchange settlement accounts – perhaps using distributed ledger technology. This money could then be used in specific settlement systems. The case for doing this has not yet been established, but we are open to the idea.
So these are our five working hypotheses. I would now like to expand on each of these.
1. The Shift to Electronic Payments
An appropriate starting point is to recognise that most money is already digital or electronic. Only 3½ per cent of what is known as ‘broad money’ in Australia is in the form of physical currency. The rest is in the form of deposits, which, most of the time, can be accessed electronically. So the vast majority of what we know today as money is a liability of the private sector, and not the central bank, and is already electronic.
With most money available electronically, there has been a substantial shift to electronic forms of payments as well. There are various ways of tracking this shift.
One is the survey of consumers that the RBA conducts every three years. When we first conducted this survey in 2007, we estimated that cash accounted for around 70 per cent of transactions made by households. In the most recent survey, which was conducted last year, this share had fallen to 37 per cent (Graph 1).
A second way of tracking the change is the decline in cash withdrawals from ATMs. The number of withdrawals peaked in 2008 and since then has fallen by around 25 per cent (Graph 2). This trend is likely to continue.
The third area where we can see this shift is the rapid growth in the number of debt and credit card transactions and in transactions using the direct entry system. Since 2005, the number of transactions using these systems has grown at an average annual rate of 10 per cent (Graph 3). This stands in contrast to the decline in the use of cash and cheques.
The overall picture is pretty clear. There has been a significant shift away from people using banknotes to making payments electronically. Most recently, Australia’s enthusiastic adoption of ‘tap-and-go’ payments has added impetus to this shift. In many ways, Australians are ahead of others in the use of electronic payments, although we are not quite in the vanguard. It is also worth pointing out, though, that despite this shift to electronic payments, the value of banknotes on issue is at a 50-year high as a share of GDP (Graph 4). Australians are clearly holding banknotes for purposes other than for making day-to-day payments.
This shift towards electronic payments, and away from the use of banknotes for payments, will surely continue. This will be driven partly by the increased use of mobile payment apps and other innovations. At the same time, though, it is likely that banknotes will continue to play an important role in the Australian payments landscape for many years to come. For many people, and for some types of transactions, banknotes are likely to remain the payment instrument of choice.
2. Banks are likely to remain at the centre of the shift to electronic payments
In Australia, the banking system has provided the infrastructure that has made the shift to electronic payments possible. In some other countries, the banking system has not done this. For example, in China and Kenya non-bank entities have been at the forefront of recent strong growth in electronic payments. A lesson here is that if financial institutions do not respond to customers’ needs, others will.
At this stage, it seems likely that the banking system will continue to provide the infrastructure that Australians use to make electronic payments. This is particularly so given the substantial investment made by Australia’s financial institutions in the NPP. The new system was turned on for ‘live proving’ in late November and the public launch is scheduled for February. It will allow Australians to make payments easily on a 24/7 basis, with recipients having immediate access to their money. The RBA has built a critical part of this infrastructure to ensure interbank settlement occurs in real time. Payments will be able to be made by just knowing somebody’s email address or mobile phone number and plenty of information will be able to be sent with the payment. This system has the potential to be transformational and will allow many transactions that today are conducted with banknotes to be conducted electronically.
Importantly, the new system offers instant settlement and funds availability. It provides this, while at the same time allowing funds to be held in deposit accounts at financial institutions subject to strong prudential regulation and that pay interest. This combination of attributes is not easy to replicate, including by closed-loop systems outside the banking system.
However, the further shift to electronic payments through the banking system is not a given. It requires that the cost to consumers and businesses of using the NPP is low and that the functionality expands over time. If this does not happen, then the experience of other countries suggests that alternative systems or technologies might emerge.
One class of technology that has emerged that can be used for payments is the so-called cryptocurrencies, the most prominent of which is Bitcoin. But in reality these currencies are not being commonly used for everyday payments and, as things currently stand, it is hard to see that changing. The value of Bitcoin is very volatile, the number of payments that can currently be handled is very low, there are governance problems, the transaction cost involved in making a payment with Bitcoin is very high and the estimates of the electricity used in the process of mining the coins are staggering. When thought of purely as a payment instrument, it seems more likely to be attractive to those who want to make transactions in the black or illegal economy, rather than everyday transactions. So the current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment.
This is not to say that other efficient and low-cost electronic payments methods will not emerge. But there is a certain attraction of being able to make payments from funds held in prudentially regulated accounts that can earn interest.
3. Electronic banknotes could coexist with the electronic payment system operated by the banks
In principle, a new form of electronic payment method that could emerge would be some form of electronic banknotes, or electronic cash. The easiest case to think about is a form of electronic Australian dollar banknotes. Such banknotes could coexist with the electronic account-to-account-based payments system operated by the banks, just as polymer banknotes coexist with the electronic systems today.
The technologies for doing this on an economy-wide scale are still developing. It is possible that it could be achieved through a distributed ledger, although there are other possibilities as well. The issuing authority could issue electronic currency in the form of files or ‘tokens’. These tokens could be stored in digital wallets, provided by financial institutions and others. These tokens could then be used for payments in a similar way that physical banknotes are used today.
In thinking about this possibility there are a couple of important questions that I would like to highlight.
The first is that if such a system were to be technologically feasible, who would issue the tokens: the RBA or somebody else?
The second is whether the RBA developing such a system would pass the public interest test.
In terms of the issuing authority, our working hypothesis is that this would best be done by the central bank.
In principle, there is nothing preventing tokenised eAUDs being issued by the private sector. It is conceivable, for example, that eAUD tokens could be issued by banks or even by large non-banks, although it is hard to see them being issued as cryptocurrency tokens under a bitcoin-style protocol, with no central entity standing behind the liability. So, while a privately issued eAUD is conceivable, experience cautions that there are significant difficulties and dangers associated with privately issued fiat money.
The history of private issuance is one of periodic panic and instability. In times of uncertainty and stress, people don’t want to hold privately issued fiat money. This is one reason why today physical banknotes are backed by central banks. It is possible that ways might be found to deal with this financial stability issue – including full collateralisation – but these tend to be expensive. This suggests that if there were to be an electronic form of banknotes that was widely used by the community, it is probably better and more likely for it to be issued by the central bank.
If we were to head in this direction, there would be significant design issues to work through. The tokens could be issued in a way that transactions could be made with complete anonymity, just as is the case with physical banknotes. Alternatively, they might be issued in a way in which transactions were auditable and traceable by relevant authorities. We would also need to deal with the issue of possible counterfeiting. Depending upon the design of any system, we might be very reliant on cryptography and would need to be confident in the ability to resist malicious attacks.
This brings me to the second issue here: is there a public policy case for moving in this direction?
Such a case would need to be built on electronic banknotes offering something that account-to-account transfers through the banking system do not. We would also need to be confident that there were not material downsides from moving in this direction.
Our current working hypothesis is that with the NPP there is likely to be little additional benefit from electronic banknotes. This, of course, presupposes that the NPP provides low-cost efficient payments. One possible benefit of electronic banknotes for some people might be that they could have less of an ‘electronic fingerprint’ than account-to-account transfers, although this would depend upon how the system was designed. But having less of an electronic fingerprint hardly seems the basis for building a public policy case to issue an electronic form of the currency. So there would need to be more than this.
Among the potential downsides, the main one lies in the area of financial stability.
If we were to issue electronic banknotes, it is possible that in times of banking system stress, people might seek to exchange their deposits in commercial banks for these banknotes, which are a claim on the central bank. It is likely that the process of switching from commercial bank deposits to digital banknotes would be easier than switching to physical banknotes. In other words, it might be easier to run on the banking system. This could have adverse implications for financial stability.
Given these various considerations, we do not currently see a public policy case for moving in this direction. We will, however, keep that judgement under review.
4. Exchange settlement accounts for all Australians?
Another possible change that some have suggested would encourage the shift to electronic payments would be for the central bank to issue every person a bank account – for each Australian to have their own exchange settlement account with the RBA. In addition to serving as deposit accounts, these accounts could be used for low-cost electronic payments, in a similar way that third-party payment providers currently use accounts at the RBA to make payments between themselves. Some advocates of this model also suggest that the central bank could pay interest on these accounts or even charge interest if the policy rate was negative.
On this issue, we have reached a conclusion, rather than just develop a hypothesis. The conclusion is that we do not see it as in the public interest to go down this route.
If we did go down this route, the RBA would find itself in direct competition with the private banking sector, both in terms of deposits and payment services. In doing so, the nature of commercial banking as we know it today would be reshaped. The RBA could find itself not just as the nation’s central bank, but as a type of large commercial bank as well. This is not a direction in which we want to head.
A related consideration is the same financial stability issue that I just spoke about in terms of electronic banknotes. In times of stress, it is highly likely that people might want to run from what funds they still hold in commercial bank accounts to their account at the RBA. This would make the remaining private banking system prone to runs.
The point here is that exchange settlement accounts are for settlement of interbank obligations between institutions that operate third-party payment businesses to address systemic risk – something that is central to our mandate. A decision to offer exchange settlement accounts for day-to-day use would be a step into a completely different policy area.
5. New settlement systems based on distributed ledger technology and central bank money?
One final possibility is for the RBA to issue Australian dollars in the form of electronic files or tokens that could be used within specialised payment and settlement systems. The tokens could be exchanged among members of a private, permissioned distributed ledger, separate from the RBA’s Real-time Gross Settlement (RTGS) system, but with mechanisms for the tokens to be exchanged for central bank deposits when required. Such a system might allow the payment and settlement process to become highly integrated with other business processes, generating efficiencies and risk reductions for private business. As part of this, the tokens might also be able to be programmed and sit alongside smart contracts, enabling multi-stage transactions with potentially complex dependencies to take place securely and automatically. This seems to be the general model that some people have in mind when they talk about ‘putting AUD on the blockchain’, although other technologies might be able to achieve similar outcomes.
Whether a strong case for the development of these types of systems emerges remains an open question. We need to better understand the potential efficiencies for private business and why it would be preferable for such a settlement system to be provided by the central bank, rather than the private sector; why privately issued tokens or files could not do the job. We would also need to understand why any efficiency improvement could not be obtained by using the existing Exchange Settlement Accounts and the NPP.
We would also need to understand whether and how risk in the financial system would change as a result of such a system. It remains unclear which way this could go. On the one hand, these types of processes could use a very different technology from the current system, which is based on account-to-account transfers, so they could add to the resilience of the overall payments system. But there would be a whole host of new technology issues to manage as well.
Mastercard has announced a new platform (in the US initially) which issuers can offers to their customers called Assemble. The first product allows millennials to manage money through a digital prepaid account, a mobile app and a payment card (virtual or physical).
Its a great example of the emerging digital tools aimed to build loyalty, by assisting customers with additional money management features, delivered digitally, as predicted in our Banking Innovation Life Life Cycle.
Mastercard is currently developing additional use cases to support prepaid programs for additional segments such as underserved consumers and microbusinesses, and the gig economy. Mastercard Assemble for Millennials is available now in the United States with other markets being targeted within the next year.
In our fast-paced lives, each one of us is juggling a lot – careers, relationships, social events, families, the list is endless. So why should we stress about banking and trying to manage multiple apps? Why not have one centralized, secure account to cover all of our banking needs?
Mastercard has a new platform and product to do just that:
Assemble is a prepaid innovation hub that issuers and partners will offer to customers with holistic money management capabilities including checking balances, budgeting, setting savings goals and making near-real time payments to almost anyone in the U.S. with a valid debit card via a P2P service powered by Mastercard Send.
The first product available from Assemble is geared toward millennials and, along with the features above, offers consumers a simple, smart and safe way to manage money through a digital prepaid account, a mobile app and a payment card (virtual or physical).
“Prepaid is much more than just a way to safely store and use funds. It is a foundation to create new possibilities for consumers,” said Tom Cronin, senior vice president, Global Prepaid Product Development and Innovation, Mastercard. “This technology enables our partners to deliver best-in-class digital experiences today, as we work to address additional segments such as gig economy workers and underserved consumers and micro businesses.”
Mastercard Assemble not only bundles assets and services together but also enables these digital prepaid solutions to promote innovation, increase the speed to market, and provide customers with seamless and secure usage. Issuers and partners can choose to deploy a white-label version of the solution or to integrate specific functions into their current user interfaces through APIs.
While Mastercard Assemble for Millennials will be the first launch, the company is currently developing additional use cases to support prepaid programs for additional segments such as underserved consumers and microbusinesses, and the gig economy. Mastercard Assemble for Millennials is available now in the United States with other markets being targeted within the next year.