The RBA on NPP

From a speech by Michele Bullock RBA Assistant Governor (Financial System) – Address to Seamless Payments 2018.

As you know, the NPP launched to the public in mid February. It is the culmination of more than 5 years’ work from inception to launch. It involved unprecedented cooperation between financial institutions to build the capability to send and receive individual payment messages between themselves in real time, with settlement also occurring transaction-by-transaction through the Reserve Bank’s Fast Settlement Service. But it also required banks to upgrade their internal systems to allow posting to customer accounts within a few seconds. The resources involved in delivering the system as a whole were substantial.

Australia is obviously not the first country to build a fast payments system. FIS in its 2017 report on fast retail payment systems noted that there were some retail payment systems with real-time features as early as the 1970s and 1980s.[1] The report listed 25 countries with live real-time systems in 2017. It listed a further 10 systems under development, at that time including Australia. FIS also provided a useful taxonomy to compare and contrast the various systems – its Faster Payment Innovation Index (FPII). The index rates faster payment systems on the basis of the features they provide. At a basic level, in order to be classified as a fast payment service the system must provide interbank, account-to-account payments in less than one minute end-to-end and be irrevocable. But, the more value-added services and openness to innovation, the higher the rating.

The Australian NPP was not rated in this report since it was not live at the time. But it certainly will offer many of the features that rate highly in the FPII. For example, the taxonomy lists ISO standard and 24/7 availability as being highly desirable features enhancing customer value – the NPP offers both these. It lists fast settlement, the ability to include remittance information with payment and the ability to assign an alias to a bank account as being some of the optional features that maximise customer value. The NPP also delivers these features. There are other capabilities that the NPP does not currently provide – like ‘pull payment’ capability – but the infrastructure will allow other services to be offered in the future.

One of the things that is unique about our NPP is the architecture. There are three facets to this. The first is that the infrastructure for exchanging messages is based on a distributed architecture rather than a centralised hub. Participating institutions implement payment gateways that exchange messages with other payment gateways. There is no centralised infrastructure that processes and switches messages. One key advantage of this architecture is that there is no central point of failure. It also means that many of the functions that might typically be performed in a hub, such as fraud monitoring and exceptions processing, are done by the individual participants. This might be desirable for institutions that want to maintain control over these processes.

The second facet of the architecture that is quite innovative is the separation of the clearing and settlement infrastructure from commercial overlays. The infrastructure has been set up as a utility, and pricing will be on a cost recovery basis. This infrastructure can then be utilised by any number of commercial ‘overlays’ to deliver services that use the NPP’s real-time clearing and settlement capabilities. The first of these is Osko – initially offering person-to-person payments but within a year or so offering payment with document and request to pay. It is also expected that other innovative services will look to leverage the real-time payment capability of the NPP.

The third relatively unusual facet is the real-time transaction-by-transaction settlement of retail payments 24 hours a day, 7 days a week. Australia has had a real-time gross settlement system for high-value payments for weekday settlements for the past 20 years. And this is indeed best practice around the world for high-value payments. But not many countries currently provide real-time settlement of retail payments, and even fewer offer it 24/7. Many fast retail payments services, for example, settle payments in batches through the day or only during business hours. The advantage of utilising real-time settlement in our fast payment service is that it extinguishes settlement risk and removes the need for other controls over settlement risk, such as caps on exposures. The fact that these controls are not required removes some limitations that might otherwise need to be considered by overlay service providers as they design their products.

So now we have this world-class infrastructure, what for the future?

The first point to note is that it is still early days. Given the complexity of the build and the long-term nature of this important piece of infrastructure, the launch was never intended to be a ‘big bang’. While there had been extensive testing ahead of launch, including an extended period of live proving, moving into production always uncovers some issues. A cautious approach to ramping up volumes was therefore an appropriate way to manage the operational risks.

Second, the experience of fast payment systems around the world suggests that volumes will increase quite slowly at first. It took the UK Fast Payment Service around 3½ years to get to 10 transactions per person per annum and Swish, the Swedish system, just under 3 years to get to this level. There are probably a couple of reasons for the initially relatively slow growth in volumes. It will take some time for people to become familiar with the new system – people are typically quite set in their payment habits. Furthermore, like all networks, there are positive externalities the more participants there are. That is, as more financial institutions offer fast payments and the reach of the system grows, it provides greater value to both individuals and businesses. If none of my family and friends can receive payments through the NPP I am less likely to sign up for an alias and use it. But the more people I can pay using the system (and the more people I can receive money from) the higher value I get from the system.

Graph 2
Graph 2: Use of Fast Payments Systems


Third, as noted earlier, the system has been set up to encourage the development of commercial ‘overlays’ using the real-time payment capability to deliver value-added services to consumers and businesses. Aside from the additional Osko services in prospect, possible overlays might include services for superannuation, e-invoicing and motor vehicle sales. I am sure there are many innovative minds turning to the possibilities.

This brings me to an issue that has caused some concern among potential new players in this space – access to the NPP. They observe that the system has been built by the financial institutions and is governed by a board made up of those institutions, including the four major banks. They worry that these institutions will either make participation very difficult or costly or, alternatively, will have the inside running on developing and launching commercial overlay services.

I think there are a few reasons to be optimistic that access will not be an issue. To begin with, as I noted earlier, the NPP is a utility. It is aiming to cover costs, not make a profit. Further, given that many of its costs are fixed, it is in the interests of NPP Australia (NPPA) to get as many payments through the system as possible to lower the per-transaction cost.

The structure of the board and the constitution also provide some protection. The board is comprised of eight participant financial institutions (the four major banks plus four elected representatives of smaller institutions), two independent non-executive directors (of which one is chair) plus a director representing the Reserve Bank. Each director has one vote and the constitution notes that an objective of NPPA is to promote the public interest, including through fair access.

But it is also worth noting that the NPP at its core is an infrastructure that facilitates clearing of payment messages between financial institutions and settlement of those obligations across accounts at the Reserve Bank. In this sense, it is similar to other clearing and settlement systems – cheques, direct entry or payment cards, for example. It is not necessary, or even necessarily efficient, for all financial institutions to participate directly in clearing and settlement. In the NPP, for example, there are three aggregators that provide indirect access to institutions that do not want to incur the cost of participating directly. Indeed, there are already around 50 smaller banks, credit unions and building societies that are able to offer fast payments to their customers using the aggregators.

Similarly, it is not necessary for non-financial institutions that want to use the real-time capability of the NPP to participate directly in clearing and settlement. Just as they use the rails of other payment systems through a financial institution to offer their services to customers, they will be able to use the NPP. NPPA is already engaging with start-ups on how they might utilise the infrastructure. More generally, if a business doesn’t like the price for fast payments it is getting from its bank, there are many other institutions that can offer an alternative.

In the end, though, if it looks as though lack of access is stifling competition, the Reserve Bank has the power to designate and set an access regime. As I said, I am fairly optimistic that we will not have to. But it is always an option.


Crypto Is Not The Future Of Money

Crypto-currencies do not stand up as a new form of money says Mark Carney, Governor of the Bank of England, speaking on “The Future of Money“. That said, the underlying technologies and capabilities, have potential.

The long, charitable answer is that crypto-currencies act as money, at best, only for some people and to a limited extent, and even then only in parallel with the traditional currencies of the users. The short answer is they are failing.

They are poor stores of value, an inefficient media of exchange and are virtually non-existent units of account.

Authorities need to decide whether to isolate, regulate or integrate crypto-assets and their associated activities.

This is probably the strongest statement on the subject so far from a Central Banker.

But, whatever the merits of crypto-currencies as money, authorities should be careful not to stifle innovations which could in the future improve financial stability; support more innovative, efficient and reliable payment services as well as have wider applications.

The underlying technologies and capabilities, have potential, given the right regulatory frameworks.

Their core technology is already having an impact. Bringing crypto-assets into the regulatory tent could potentially catalyse innovations to serve the public better. Indeed, crypto-assets help point the way to the future of money in three respects:

Decentralised peer-to-peer interactions

Crypto-assets are part of a broader reorganisation of the economy and society into a series of distributed peer-to-peer connections across powerful networks.28 People are increasingly forming connections directly, instantaneously and openly, and this is revolutionising how they consume, work, and communicate.

Yet the financial system continues to be arranged around a series of hubs and spokes like banks and payments, clearing and settlement systems. Crypto-assets are an attempt to create the financial architecture for peer-to-peer transactions. Even if the current generation is not the answer, it is throwing down the gauntlet to the existing payment systems. These must now evolve to meet the demands of fully reliable, real-time, distributed transactions.

Underlying technologies offer to transform the efficiency, reliability and flexibility of payments.

The technologies underlying crypto-assets, particularly distributed ledger, can:

  • Increase the efficiency of managing data;
  • Improve resilience by eliminating central points of failure, as multiple parties will share replicated data and functionality;
  • Enhance transparency (and auditability) through the creation of instant, permanent and immutable records of transactions; and
  • Expand the use of straight-through processes, including with “smart contracts” that on receipt of new information, automatically update and if appropriate, pay.

These properties mean distributed ledger technology could transform everything from how people manage of their interactions with public agencies, including their tax and medical records, through to how businesses manage their supply chains.

A Central bank digital currency (CBDC) accessible to all.

Crypto-assets raise the obvious question about whether their infrastructure could be combined with the trust inherent in existing fiat currencies to create a central bank digital currency (CBDC).

Currently only banks can hold central bank money electronically in the form of a settlement account at the Bank of England. To be truly transformative a general purpose CBDC would open access to individuals and firms.

The Bank has an open mind about the eventual development of a CBDC and an active research programme dedicated to it. That said, given current technological shortcomings in distributed ledger technologies and the risks with offering central bank accounts for all, a true, widely available reliable CBDC does not appear to be a near-term prospect.

Moreover whether it is desirable depends on the answers to a series of big policy questions. While these are largely for another speech, I will note that a general purpose CBDC could mean a much greater role for central banks in the financial system. Central banks may find themselves disintermediating commercial banks in normal times and running the risk of destabilising flights to quality in times of stress.

There are also broader societal questions (that others would need to answer) such as how society balances privacy rights with the extent to which the information in a CBDC could be used to fight terrorism and economic crime.

The New Payments Platform may mean faster transactions, but it won’t be safer

From The Conversation.

Australians will finally enjoy the ability to send each other money in “real time”, with the launch of the New Payments Platform (NPP) today. The platform is a mixture of new processes for settling transactions between banks, guided by the Reserve Bank of Australia.

But while this may make payments faster, it could also make them less safe.

And data from the United Kingdom’s real-time payments platform, Faster Payments, show the take-up of Australia’s system may not be that strong. Although it was launched 10 years ago, Faster Payments has not yet become the most popular payment method in the UK. The most popular is still the traditional system, which takes three days to clear.

Research into the Faster Payments platform shows it is rife with fraud and scams. Part of the problem in the UK is that banks have trouble identifying potentially fraudulent transactions.

The New Payments Platform will also change how you transfer money. BSB and account numbers will still exist, but individuals and businesses can create other identifiers, called “PayID”. This means mobile numbers or email addresses can also be used as a way to identify yourself, both to pay and be paid by others.

The platform will also remove the delays caused by weekends and public holidays and mean you can make transfers after business hours.

The impetus for a real-time payment platform came from a 2012 review by the Reserve Bank of Australia. It found that Australia’s payment system lagged behind even less developed nations, such as Mexico.

But not all banks have signed on to the new payments platform. Those taking a wait-and-see approach include Bank of Queensland, Suncorp and Rabobank. Even some of the subsidiaries of one of the big four banks, Westpac (such as Bank of Melbourne and St George), will not be involved in the launch of the New Payments Platform.

Fraud and abuse in real time

Before the New Payments Platform, numerous safeguards were built into Australia’s payment system that limited fraud and abuse. For instance, if you were planning to buy a car, you would likely go into your bank and ask for a bank cheque. This cheque would be made out to the name of the dealership or person selling the car.

A number of protections are built in to this system. The money is guaranteed by your bank and will clear within three days once deposited. If someone with a different name tries to deposit the cheque, then the cheque will not be accepted and hence the payment will be revoked.

Under the terms and conditions issued by one of the participating banks, banks are not liable for losses that are a result of you giving the wrong account information. Furthermore, a transfer instruction given by you, once accepted by your bank, is irrevocable.

This also applies if you were fraudulently induced to make a transfer via the New Payments Platform. In this case your bank might be able to help you recover the funds, but the recipient of the funds (potentially a fraudster) will have to consent to repay your funds. So if you have a dispute with a recipient of your funds transfer, you will need to resolve the dispute directly with that person or organisation under the new scheme.

It is likely that similar terms and conditions will apply to all the institutions that are members of the New Payments Platform.

The problem will only get worse as the “cap” on transactions is lifted. This happened in the United Kingdom once the Faster Payments cap was raised to £250,000 in 2015.

According to the managing director of the UK Payment Systems Regulator, Hannah Nixon: “There is no silver bullet for [authorised push payment] scams and some people will still, unfortunately, lose out.” Nixon added that account holders also need to take “an appropriate level of care” in protecting themselves.

The UK experience shows that the New Payment Platform is likely to speed up transactions. It took two years for Faster Payments to pass 500 million transactions, but it sped up and passed 5 billion transactions in just over seven years.

In June 2017, Faster Payments processed 135.7 million payments, which was a 15% increase on the previous June. These payments amounted to a total of £115 billion for that month.

But Faster Payments is still not the biggest payment platform in the United Kingdom. Although we don’t know exactly why, there are many possible reasons – including customers not wanting to switch from something they are used to and a fear of fraud.

It could also be that British financial institutions are not promoting Faster Payments to their customers as they can charge higher fees on the traditional payment platform.

Above all, the big concern is detecting fraudulent activity in real time – something that will concern banks’ risk management and which may have led to some choosing to hang back. Payments on the New Payments Platform may be faster and easier to make, but will they be safer? It could just make fraud faster and easier for fraudsters, and harder to undo for victims.

Author: Steve Worthington, Adjunct Professor, Swinburne University of Technology

New Payments Platform Launched

Today, the Reserve Bank of Australia and its Payments System Board (PSB) welcome the public launch of the New Payments Platform (NPP). The NPP is an important addition to Australia’s payments infrastructure and it will provide a platform for innovation and competition in the provision of payment services.

The Reserve Bank and the PSB thank the NPP Australia Board, NPP financial institutions and their thousands of staff who have contributed to the development of the platform over a number of years. It has been a highly collaborative industry program, which has involved considerable planning, effort and investment.

Philip Lowe, Governor and Chair of the PSB, said, ‘The public launch of the NPP represents the delivery of a major piece of national infrastructure. I would like to thank everyone who has been involved in the NPP project and I look forward to the payment innovations it will make possible and the benefits this will generate for all Australians.’

The launch of the NPP means that the industry is delivering on the key strategic objectives that were established by the PSB in June 2012 as part of its Strategic Review of Innovation in the Payments System. In particular, the NPP and the initial overlay service, Osko, will allow financial institutions to provide improved services to Australian businesses and consumers, including to:

  • make real-time payments, with close to immediate funds availability to the recipient
  • make and receive payments on a 24/7 basis
  • have the capacity to send more complete remittance information with payments
  • address payments in a relatively simple way.

Around 60 banks, credit unions and building societies will begin rolling out services to their customers from today, with the number of financial institutions and accounts linked to the NPP progressively increasing over the coming months.

The Reserve Bank developed new infrastructure, the RITS Fast Settlement Service, to enable the settlement of NPP transactions between financial institutions in real time on a 24/7 basis across exchange settlement accounts at the Reserve Bank. The Reserve Bank is also an NPP participant with newly developed services utilising the NPP for its government customers.

UK Bank Lloyds Bans Buying Cryptocurrencies with Credit Cards

As Bitcoin crashes below $8,000, more Financial Institutions are banning the use of credit cards to buy the cryptocurrency.

From CNBC.

Lloyds Banking Group said on Monday that it was stopping people buying cryptocurrencies using credit cards, following moves last week from several major U.S. lenders.”Across Lloyds Bank, Bank of Scotland, Halifax and MBNA, we do not accept credit card transactions involving the purchase of cryptocurrencies,” the company told CNBC in a statement.

Concerns have been mounting that people buying digital currencies like bitcoin with credit cards could be getting into debt given wild price swings, particular recently given bitcoin fell below $8,000 for the first time in over two months.

U.K. Prime Minister Theresa May told Bloomberg in a recent interview that the government should consider looking at cryptocurrencies “very seriously.”

Other regulators around the world from China to South Korea have also bought in rules to try to regulate the space.

Why Bitcoin is taken more seriously than Dogecoin

From The Conversation.

As Bitcoin loses value, it may seem like it’s just as useful as the cryptocurrency invented for a joke – Dogecoin.

But there are genuine differences between these cryptocurrencies, and it’s not just because one is “much currency, such volatility”.

There are 1,448 cryptocurrencies around the world, by some counts. For every Bitcoin you have a programmable coin like Ethereum, or a coin that acts like a token for specific services, like Augur.

Some of these coins earn better reputations because of their usefulness, the people who made them, or the tech itself. They are not all taken seriously by investors, researchers and users.

The developers behind these cryptocurrencies are also important as they convince other people to adopt them and write new code for the technology to evolve. This new tech attracts new users into the system.

Different functions

Cryptocurrencies can be divided into several types. Cryptocurrencies like Bitcoin, Litecoin, and Dogecoin only provide basic functions such as transferring value from one party to another.

The next category are smart contract cryptocurrencies like Ethereum, Cardano, NEO, and Waves. These cryptocurrencies can be programmed, and so can become the basis for applications like games and digital markets.

The third type are cryptocurrencies designed to preserve your privacy like Monero and Zcash. These claim to be “untraceable” although transaction records are still available.

Then there are tokens, which are built with smart contracts to serve many purposes. They are often sold to raise funds to build services, and used as tickets for the services (such as Augur and Power Ledger).

Technological differences

The differing technologies in these cryptocurrencies mean that certain coins have more potential than others.

IOTA is used for “Internet of Things” devices (such as a smart kettle). But it has a special kind of blockchain (the technology that tracks transactions) and so can achieve much higher speeds of transaction and quicker confirmation of trades than Bitcoin.

Others like Nxt, and Ardor have built-in features that let users to do other things than just sending coins, such as creating marketplaces and even messaging.

People use cryptocurrencies like Zcash and Monero to settle transactions with “zero-knowledge”. This means the cryptocurrencies hide the information of the real payers and payees, and even the amount of coins transacted.

Monero has largely replaced the use of Bitcoin in exchanges on the dark web.

And smart contracts built with cryptocurrencies like Ethereum have countless potential usecases, from property transactions to digital asset management and fundraising.

The technology also means that one cryptocurrency might use significantly less electricity than another.


The major cryptocurrencies, like Bitcoin and Ethereum, are slow because of their inability to handle massive amount of data being sent by users. The technology used to secure the data are expensive and inefficient.

Bitcoin can only handle a maximum of seven transactions per second; Ethereum can handle 15 transactions per second. Compare this with the VISA payment system, which can process up to 56,000 transactions per second.

But new entrants, such as Red Belly from the University of Sydney, might be able to solve this problem, handling up to 660,000 transactions per second.

Smart contracts can also run into problems if they contain bugs. When a decentralised organisation built on Ethereum was hacked in 2016, US$50 million in Ether was stolen.

When something achieves the success of Bitcoin we’re bound to see competitors entering the market, hoping to grab a share.

This explains the explosion in cryptocurrencies since the Bitcoin source code was released under an open licence. Anyone can copy, modify, and release a modified version of Bitcoin.

By looking at the current trend, we will see more cryptocoins in the near future.

But as we can see, “cryptocurrency” is a term that encompasses a wide range of different technologies, communities and uses. It’s all of these factors that inform whether users, investors, developers and researchers take a coin seriously.

Author: Dimaz Wijaya  PhD Student, Monash University

Digital Drives US Consumer Remote Payments Higher

US consumers are making more “remote” payments according to new payments data collected by the Federal Reserve. Remote general-purpose credit card payments, including online shopping and bill pay; all enabled by digital.

The number of credit card payments grew 10.2 percent in 2016 to 37.3 billion with a total value of $3.27 trillion. The increase in the number of payments compares with an 8.1 percent annual rate from 2012 to 2015 and was boosted by continued strong growth in the number of payments made remotely. Remote general-purpose credit card payments, including online shopping and bill pay, rose at a rate of 16.6 percent in 2016. More broadly, remote payments in 2016 represented 22.2 percent of all general-purpose credit and prepaid debit card payments, up 1.5 percentage points from an estimated 20.7 percent in 2015. By value, remote payments represented 44.0 percent of all general-purpose card payments, a slight increase from an estimated 42.9 percent in 2015.

The 2016 data on trends in card payments, as well as Automated Clearing House (ACH) transactions and checks, are the product of a new annual collection effort that will supplement the Federal Reserve’s triennial payments studies. Information released today compares the annual growth rates for noncash payments between 2015 and 2016 with estimates from previous studies.

Key findings include:

  • Total U.S. card payments reached 111.1 billion in 2016, reflecting 7.4 percent growth since 2015. The value of card payments grew by 5.8 percent and totaled $5.98 trillion in 2016. Growth rates by number and value were each down slightly from the rates recorded from 2012 to 2015.
  • Debit card payment growth slowed by number and value from 2015 to 2016 as compared with 2012 to 2015, growing 6.0 percent by number and 5.3 percent by value compared with a previous annual growth rate of 7.2 percent by number and 6.9 percent by value.
  • Use of computer microchips for in-person general-purpose card payments increased notably from 2015 to 2016, reflecting the coordinated effort to place the technology in cards and card-accepting terminals. By 2016, 19.1 percent of all in-person general-purpose card payments were made by chip (26.9 percent by value), compared with only 2.0 percent (3.4 percent by value) in 2015.
  • Data also reveal a shift in the value of payments fraud using general-purpose cards from predominantly in person, estimated at 53.8 percent in 2015, to predominantly remote, estimated at 58.5 percent in 2016. This shift can also be attributed, in part, to the reduction in counterfeit card fraud, the sort of fraud that cards and card-accepting terminals using computer chips instead of magnetic stripes help to prevent.
  • From 2012 to 2015, ACH network transfers, representing payments over the ACH network, grew at annual rates of 4.9 percent by number and 4.1 percent by value. Growth in both of these measures increased for the 2015 to 2016 period, rising to 5.3 percent by number and 5.1 percent by value. The average value of an ACH network transfer decreased slightly from $2,159 in 2015 to $2,156 in 2016.
  • Data from the largest depository institutions show the number of commercial checks paid, which excludes Treasury checks and postal money orders, declined 3.6 percent between 2015 and 2016. By value, commercial checks are estimated to have declined 3.7 percent during the same period. The steeper decline in value versus volume suggests the average value of a commercial check paid has declined slightly since 2015.

Payment Fraud Is Moving On Line

Data released today from the Australia Payment Network,  shows that in the 12 months to 30 June 2017, fraudulent transactions on Australian cards totalled more than $730.1 billion over the 12-month period – up 3.8% and Card fraud increased by 3.1% to $538.2 million.

Within that:

  • counterfeit and skimming fraud dropped 34%
  • card-not-present fraud increased 10%, now accounting for 82% of all fraud on Australian cards

As chip technology continues to provide strong protection against counterfeit card, fraud is migrating to online channels.

With malware and phishing attacks becoming increasingly sophisticated, we also need to be extremely wary of unsolicited emails and text messages from people we don’t know. Don’t click on the link provided and don’t be tricked into divulging confidential data such as your password

The total fraud on the scheme cards was $516 million.


ANZ reduces international money transfer fees for foreign currencies

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.

The RBA On Least Cost Routing

The RBA’s Tony Richards, Head of Payments Policy spoke at the Australian Payment Summit 2017 and discussed the vexed issue of Least Cost Routing for EFTPOS transactions, especially when using Tap-and-Go. Until very recently, acquirers have indicated reluctance to provide least-cost routing to their merchant customers. This is partly due to the expected systems work, including to reprogram terminals.  But pressure is mounting, as for example, the recent House of Reps report.

He says indications are that all four of the major banks are moving to providing least-cost routing if requested by merchants, though in some cases they have indicated this could occur on a fairly extended timetable.

So, merchants, do yourself a favour, and ask! You may save on your transaction costs!

Given that payment costs are a significant item for merchants, it is not surprising that merchants pay attention to them. Just as merchants are keen to hold down other business costs, they are also keen to hold down their payment costs. Recently, they have drawn attention to a particular issue that is driving up their cost of payments.

The majority of debit cards issued in Australia are now dual-network cards, which means that authorisation of cardholders’ debit transactions can occur through different networks – the domestic eftpos network or the debit networks of the international MasterCard or Visa schemes. If you look at your debit or ATM card, there is a good chance it will have an international scheme logo on one side and the eftpos logo on the other.

Traditionally, cardholders have determined how their debit transactions are processed, by pressing either the CHQ or SAV buttons for eftpos or the CR button for the international network, before entering their PIN. However, with the shift to contactless or ‘tap-and-go’ transactions, the processing of debit transactions has been shifting to the international networks. This initially reflected the fact that contactless payments were only available for the international schemes. Most cards and terminals are now also activated for eftpos contactless functionality. However, when card-issuing banks send out dual-network debit cards they are programmed with the international scheme as the first-priority network for contactless use and the eftpos network as second priority.

Most cardholders are indifferent about which network processes their contactless transactions. Both networks can link to the same debit account and cardholders do not directly bear the costs of the transactions. Moreover, there are typically no rewards programs associated with debit transactions, and customers receive similar protections from fraud and disputed transactions, based on the ePayments Code and the chargeback policies of the three schemes.

However, many merchants have a preference for transactions to be processed via the eftpos network, because it is typically less expensive for them. Accordingly, many merchants have been calling for their acquirer banks to provide them with ‘least-cost routing’, i.e., terminal functionality that sends contactless debit transactions via the lower-cost network. Terminals might be programmed to always send dual-network card transactions via a particular network or they might use dynamic rules which identify the lower-cost network for each transaction.

The Bank has had discussions with consumer organisations and staff from the Australian Competition and Consumer Commission (ACCC) as to how least-cost routing might be implemented. We consider that it would be desirable for a merchant implementing least-cost routing to disclose this to customers. Depending on how terminals were actually programmed, this could be by a sign that the merchant will typically send tap-and-go debit card transactions via a certain network, but noting that customers wishing to send transactions via a different network could insert or dip their cards and push the button or keypad for their preferred network. A sign such as this would provide consumers with the opportunity to override the merchant’s preferred network if they wished. Such a framework would seem to be a reasonable balance between the rights of merchants and consumers, and it is likely that consumers would quickly become used to the idea that their transactions could be sent via different networks at different merchants.

The Reserve Bank has taken an interest in dual-network card issues because of the Payments System Board’s mandate to promote competition and efficiency. As the Bank and other observers of the payments system have frequently noted, the nature of competition in the payment card market is often such that it tends to drive up costs to merchants, as schemes increase their interchange fees to persuade issuers to issue their cards. Merchants have typically had little ability to offset these pressures (in the absence of regulatory intervention to cap interchange fees or remove schemes’ no-surcharge rules). However, dual-network cards can potentially offset the pressures for payment costs to rise, because the merchant may be able to steer the consumer to use the lower-cost of the two networks on a card. Accordingly, the Bank has indicated that it supports the issue of such cards in Australia, because they are convenient for cardholders and allow stronger competition between networks at the point of sale, facilitating both consumer and merchant choice.

Some disputes over dual-network debit cards emerged between the debit schemes in 2012-13. However, after a series of discussions with the Bank, in August 2013 the three debit schemes made voluntary undertakings to the Bank that addressed some policy concerns. These included commitments:

  • to work constructively to allow issuers to include applications from two networks on the same card and chip, where issuers wished to do this;
  • not to prevent merchants from exercising choice in the networks they accept, in both the contact and contactless environments; and
  • not to prevent merchants from exercising their own transaction routing priorities when there are two contactless debit applications on one card.

As noted above, most terminals and eftpos cards are now enabled for tap-and-go eftpos transactions. Given the Bank’s views about the potential competition and efficiency benefits of dual-network cards, as well as the earlier commitments by the three debit schemes, the Bank has been liaising with a range of stakeholders over recent months to encourage the provision of least-cost routing functionality to merchants.

However, until very recently, acquirers have indicated reluctance to provide least-cost routing to their merchant customers. This is partly due to the expected systems work, including to reprogram terminals.

In addition, some merchants have expressed concern to the Bank that the international schemes might resist the implementation of least-cost routing. To the extent that transactions via the international schemes are currently more expensive to merchants, a possible outcome of least-cost routing becoming available would be for the international schemes to reduce scheme or interchange fees so that merchants have little incentive to send transactions via another network. However, some merchants are concerned about other possible responses, including that the international schemes might respond to a merchant’s decision to implement least-cost routing of debit transactions by increasing the interchange rates that apply to the merchant’s credit transactions. They have also noted that the international schemes might try to preclude least-cost routing by attempting to persuade issuers to stop issuing dual-network cards. The ACCC is aware of these concerns, and is closely monitoring the situation. With the passage of the Harper reforms, which came into effect in November this year, the ACCC now has even stronger powers to investigate and take action in relation to conduct by the international schemes that might hinder competitive conduct by a lower-cost provider.

The Payments System Board has discussed issues involving dual-network cards in recent meetings. At its 17 November meeting, the Board strongly supported calls from a range of stakeholders for acquirers to provide merchants with least-cost routing functionality for contactless transactions using dual-network debit cards. It requested the Bank staff to continue to engage with the payments industry on this issue, noting that ‘a prompt industry solution was preferable to regulation’.

More recently, the Review of the Four Major Banks by the House of Representatives Standing Committee on Economics has made the following recommendation:

“The committee recommends that banks be required to give merchants the ability to send tap-and-go payments from dual-network debit cards through the channel of their choice.

Merchants should be able to choose whether to route these transactions through eftpos or another channel, noting that consumers may override this merchant preference if they choose to do so.

If the banks have not facilitated this recommendation by 1 April 2018, the Payments System Board should take regulatory action to require this to occur.”

Recent indications are that all four of the major banks are moving to providing least-cost routing if requested by merchants, though in some cases they have indicated this could occur on a fairly extended timetable. We expect that some of the smaller acquirers may be able to move more quickly.

Accordingly, the Bank expects that by early in 2018 there will be concrete indications that a critical mass of acquirers are moving to provide least-cost routing and that the international schemes are not attempting to prevent this. However, if this expectation is not met, I expect that the Payments System Board will consider consulting on a regulatory solution that deals with all the relevant considerations. While of course the measures that could be consulted on will be determined by the Board, I can imagine that this could involve considering whether some or all of the following measures might be in the public interest:

  • a requirement that acquirers must provide merchants with least-cost routing functionality for contactless dual-network debit card transactions
  • a requirement for enhanced transparency in contractual pricing of acquiring services to merchants
  • requirements that schemes publish explicit criteria for any preferred or strategic interchange fees and that any such criteria may not be related to acceptance decisions relating to other payment systems
  • anti-avoidance provisions that ensure adherence to the spirit, as well as the letter, of any standard.