Earlier today, the Reserve Bank of Australia Payments System Board (PSB) published its Standard which relates to surcharges by merchants when charging customers for the use of a credit or debit card. Surcharges will be excessive where they exceed the permitted cost of acceptance, as defined in the Standard.
“In short, the new provisions will limit the amount businesses can surcharge customers for use of payment methods such as most credit and debit cards. The limit will be linked to the direct costs of the payment method such as bank fees and terminal costs,” ACCC Chairman Rod Sims said.
The Standard defines what businesses are able to include in setting a surcharge and sets out a two-staged implementation, with the ban commencing on 1 September 2016 for ‘large merchants’ and 1 September 2017 for all other merchants.
The Standard defines a ‘large merchant’ to be one that satisfies at least two of the following requirements: it has a consolidated gross revenue of $25 million or more, the value of its consolidated gross assets is $12.5 million or more, or it employs 50 or more employees.
The Standard will apply to six card systems – EFTPOS, Debit MasterCard, MasterCard Credit, Visa Debit, Visa Credit and American Express cards issued by Australian banks.
“The ACCC is finalising online guidance material for consumers and businesses, which will provide further information on the ACCC’s enforcement role, what businesses need to do in order to comply, and how consumers can make complaints if they believe a business has charged a payment surcharge that is excessive,” Mr Sims said.
“We will focus on education and awareness in the early stages but won’t turn a blind eye to possible breaches, particularly for those large businesses clearly on notice of these changes.”
The ban has no effect on businesses that choose not to impose a payment surcharge, such as the many businesses in Australia that incorporate payment system costs into their overall prices.
Material on the RBA’s website provides detailed information for businesses about the Standard, including how businesses can identify and quantify those costs that can be passed on to a consumer as a surcharge.
The Reserve Bank has today released the Conclusions Paper and three new standards which they say will contribute to a more efficient and competitive payments system. As expected the review has focussed on reducing excessive payment surcharges, changes to interchange fee bench-marking and the inclusion of the American Express companion card system. The RBA has not designated UnionPay, JCB, Diners Club, or any other systems. Accordingly the RBA’s new standard does not apply to transactions carried out using those systems.
The banks says the new standard is likely to result in some reductions in the generosity of rewards programs on premium and companion cards for consumers. Some adjustment in annual fees on these cards is also possible. Commercial and corporate card products often provide significant benefits free of charge to the company holding the card. It is possible that there will be changes to either the pricing or services provided by these products. These changes are part of the process of improving price signals to cardholders and creating a more efficient and lower-cost payments system.
Note that the new surcharging framework only applies to payment surcharges – that is, to fees that are specifically related to payments or apply to some payment methods but not others. Some merchants apply fees, such as ‘booking’ or ‘service’ fees, which are unrelated to payment costs and apply regardless of the method of payment (this is for instance common in the ticketing industry). The surcharging framework is not intended to apply to these fees but merchants will be required to meet all provisions of the Australian Consumer Law in terms of disclosure of any such fees.
The Review was initiated with the publication of an Issues Paper in March 2015. After extensive consultation with stakeholders, the Bank published some draft standards in December 2015. The Bank received submissions on the draft standards from more than 40 organisations and the staff have had over 50 meetings with stakeholders since their release. There was significant support for the proposed reforms from end users, including major consumer and merchant organisations.
The new surcharging standard will preserve the right of merchants to surcharge for more expensive payment methods. However, consistent with the Government’s recent amendments to the Competition and Consumer Act 2010, the new standard will ensure that consumers using payment cards from designated systems (eftpos, the debit and credit systems of MasterCard and Visa, and the American Express companion card system) cannot be surcharged in excess of a merchant’s cost of acceptance for that card system. Eligible costs are clearly defined in the standard and new transparency requirements will promote compliance with and enforcement under the new framework. With the cost of acceptance defined in percentage terms, merchants will not be able to impose high fixed-amount surcharges on low-value transactions, as has been typical for airlines. The ACCC will have enforcement powers under the new framework, which will take effect for large merchants on 1 September 2016 and for other merchants on 1 September 2017.
The new interchange standards will result in a reduction in payment costs to merchants, which will place downward pressure on the costs of goods and services for all consumers, regardless of the payment method they use. The weighted-average benchmark for credit cards has been maintained at 0.50 per cent, while the benchmark for debit cards has been reduced from 12 cents to 8 cents. The weighted-average benchmarks will be supplemented by ceilings on individual interchange rates which will reduce payment costs for smaller merchants. Commercial cards will continue to be included in the benchmarks, but the Board has decided for the present against making transactions on foreign-issued cards subject to the same regulation as domestic cards. Schemes will be required to comply with the benchmarks on a quarterly frequency, based on weighted-average interchange fees over the most recent four-quarter period. These tighter compliance requirements will ensure that the regulatory benchmarks are an effective cap on average interchange rates. The new interchange standards will largely take effect from 1 July 2017.
To address issues of competitive neutrality, interchange-like payments to issuers in the American Express companion card system will now become subject to equivalent regulation to that applying to the MasterCard and Visa credit card systems. More broadly, to prevent circumvention of the debit and credit interchange standards, there will be limits on any scheme payments to issuers that are not captured within the interchange benchmarks.
These changes to the regulatory framework are consistent with the direction of reforms suggested in the Final Report of the Financial System Inquiry and endorsed in the Government’s October 2015 response to the Report.
Malcolm Edey RBA Assistant Governor (Financial System) has teased us today with an update on the review currently in hand, and yet to be finalised. He highlighted three specific areas of focus. Companion cards (likely to be caught by the interchange regime) , Interchange fees (probable cut/cap in fees and extended to more cards and payments) and surcharging (probably allowed but on a percentage basis).
It has been just over a decade since the Bank first considered the case for regulating interchange-like payments made by American Express to its partner banks under companion card arrangements.
Since then, issuance of companion cards has grown faster than that for the four-party schemes, and the combined share of credit and charge card transactions accounted for by Diners Club and American Express has noticeably increased. The change largely occurred in two steps coinciding with the introduction of companion cards by the major banks. At the same time, evidence cited in our consultation paper points to a steady increase in the importance of companion cards within the overall American Express card business in Australia. Some merchants have indicated that an increased cardholder base as a result of companion card arrangements has increased the pressure for them to accept American Express cards.
For reasons that I have already outlined, differentials in interchange-like payments can have an important influence on the incentives to use particular payment methods, and these developments in companion card usage suggest that the different regulatory treatments for the two arrangements may have been a factor in shaping the development of the market. In the Bank’s view, an efficient payments system is promoted where the relative prices of different payment methods consistently reflect their relative resource costs.
In reviewing this area, the Bank has indicated that three options have been under consideration. Those options are to retain the current arrangements, to remove regulation of the four-party schemes, and to regulate interchange-like payments for companion cards so that they would be subject to the same cap as the four-party schemes. In its consultation paper released in December last year, the Bank indicated that it favoured the third of those options, and this has formed the basis for further consultation in the period since then.
Interchange fees
The interchange benchmarks set by the Board are the primary instrument for the Bank to anchor credit and debit card interchange fees at a desired level. The current benchmarks of 50 basis points for credit cards and 12 cents for debit have been in place since 2006. As I mentioned earlier, reductions in those benchmarks were considered, but not adopted, at the time of the 2007/08 review.
In the period since then, the Board has remained concerned that interchange benchmarks may still be higher in Australia than is desirable for payments system efficiency. Another concern has been the proliferation of interchange categories over time and the widening dispersion of interchange fees. Often these work to the disadvantage of smaller merchants who do not benefit from preferential strategic rates. As at September last year, the average credit card interchange rate faced by non-preferred merchants was 55 basis points higher than the rate faced by preferred merchants; for debit cards the difference was around 13 cents. At the individual merchant level, these differences can be much bigger.
In its December consultation paper the Bank set out a series of regulatory options in this area. They included retaining the status quo, reducing the weighted average benchmarks, and supplementing those benchmarks with hard caps on individual transactions. A fourth option of removing interchange regulations, while strengthening transparency of these fees to merchants, was also included. The Board’s preliminary assessment was in favour of a mix of the second and third options I just described. This would involve retaining the existing weighted average of 50 basis points for credit cards, supplementing it with a hard cap of 80 basis points on individual transactions, and reducing the debit benchmark to 8 cents. Once again, this was not a final decision but was announced as a basis for the subsequent phase of consultation that is now being completed.
As well as looking at the overall level of interchange fees, the Review is also considering a number of related issues concerning coverage and compliance.
On coverage, the issues discussed in the December paper concern commercial cards, foreign-issued cards and pre-paid cards. Currently commercial cards are included within the scope of the Bank’s interchange standards and hence form part of the calculation for the purposes of compliance with the weighted average benchmark. A number of interested parties have argued that these cards should be exempted, especially in the event that interchange caps were lowered. They argue, for example, that commercial cards typically provide a higher value of associated services than other card types, with fewer non-interchange revenue streams, and that these features could justify higher fees. On the other hand, consultations also suggest that these cards provide significant benefits to both sides of the market, and hence it is not clear that higher interchange fees are needed to promote their use. The Bank has also noted that, since commercial cards typically carry higher interchange fees than consumer cards, their exemption would amount to a de facto loosening of the weighted average cap.
Foreign-issued cards are currently excluded from the benchmark calculations, and the question is whether these should be brought within the scope of domestic regulation for transactions acquired in Australia. Here a key consideration is the possibility of circumvention. Foreign-issued cards used in Australia typically carry a much higher interchange fee than the domestic benchmark, and under current arrangements could be used to circumvent the domestic cap. At this stage, however, the market share of foreign issued cards in Australian card transactions is still relatively small – around 3 per cent. In response to the December consultation document, Mastercard and Visa (among others) have made a number of arguments for retaining the existing treatment of foreign-issued cards, and these are being carefully considered.
For domestic pre-paid cards, the Board is similarly considering whether these should be brought within the scope of the existing standard.
The issue concerning the compliance mechanism can be stated fairly simply. The current mechanism operates on a three-year compliance cycle, such that the weighted average benchmark has to be met in November of every third year. Since the mix of card transactions within any system tends to shift towards the higher cost cards over time, average interchange fees have tended to rise during each three-year period. This in turn has had the paradoxical effect that the actual weighted averages for the Visa and Mastercard schemes have been almost always above the cap. The Board’s intent, however, is that average fees should be below the cap, not above it. That is what a cap means. The review process is consulting on options to tighten the compliance mechanism in keeping with that intent.
A related question on compliance concerns the possible regulation of scheme payments to issuers. These marketing and incentive payments are bilaterally negotiated and can be quite material in value, and the flexibility of such payments means that they can be structured in ways to circumvent interchange regulation. Internationally, regulators have moved to limit these types of payments. Under European regulation, for example, they are treated as if they were interchange payments. As part of its Review, the Board is considering whether a similar treatment should be adopted here. The preliminary position announced in December was in favour of that option.
Surcharging
As I have already mentioned, the Board has long held the view that the ability to surcharge for more expensive payment methods is part of an efficient payment system. The ability to surcharge expands the options available to merchants beyond a binary decision to accept or reject a card, and it allows price signals to pass through to the consumer who decides which payment method to use.
Nonetheless, efficient surcharging should reflect the cost to the merchant. When the Board’s initial surcharging reforms were put in place in 2003 it was expected that market forces would provide a sufficient discipline on surcharging behaviour. Since then, however, evidence of excessive surcharging in some industries has accumulated.
The Board revised its regulation in 2013 to give schemes greater power to prevent excessive surcharging, but those arrangements proved difficult to enforce. This has prompted a further review by the Board as part of its current process. As well as consulting with the full range of interested stakeholders, the Bank has had discussions with the ACCC and Treasury about possible policy approaches. The Board’s proposed response builds on the recent Government measures to strengthen ACCC enforcement powers in this area.
The main elements of the coordinated approach were set out in the December consultation paper. These are, that:
Government legislation bans excessive surcharging, defined as surcharging in excess of the Reserve Bank standard
The Bank’s standard is based on a simple and verifiable measure of the cost of acceptance, with appropriate transparency of costs to merchants
The ACCC has enforcement powers in cases of excessive surcharging by merchants, and
The Bank’s standard continues to stipulate that schemes may not have no-surcharge rules.
Under the Bank’s preferred approach, acquirers would be required to provide merchants with regular statements of the cost of acceptance for each payment method. The cost of acceptance would have to be expressed in percentage terms unless the acquirer fees for that payment method were fixed across all transaction values. As a result, surcharging would normally also have to be percentage based. Among other things, this would rule out the current system of fixed-dollar surcharges in the airline industry, which would appear to result in significant over-recovery of payment costs on low-value fares.
ANZ Banking Group says its recent deal with Apple to provide Apple Pay in Australia has sparked a surge in applications for credit cards and deposit accounts, which has forced the other major banks to re-enter negotiations with the technology giant.
The main sticking point continues to be how to divide up the billions of dollars of fee income banks earn from processing payments.
ANZ chief executive Shayne Elliott said at the bank’s interim results last week that online credit card applications were up 20 per cent since the deal with Apple was announced on April 28.
On that day, online deposit applications were the highest on record – more than double the average – Mr Elliott said and “that higher level [is] continuing”.
It is understood that under strict confidentiality agreements imposed on ANZ by Apple, the bank is not able to disclose how many of its Visa debit and credit cards have been loaded up onto Apple Pay.
But ANZ’s Apple Pay microsite had 61,000 unique visitors over four days, and traffic to the bank’s main anz.com website has been 6 per cent higher than average since the launch.
Mr Elliott said “the vast bulk of this increased activity comes almost purely from social media engagement.”
Of the ANZ customers using goMoney internet banking, 69 per cent have an Apple iPhone, providing “a rich source of existing customers who want Apple Pay,” Mr Elliott said.
“Plus [there is] a vast number of new customers. Whilst it is early days the results have been outstanding.”
ANZ is ramping up its marketing of the deal, using its Apple Pay capability in a television advertising campaign while advertisements are adorning bus shelters around Sydney.
In interviews last week, the chief executives of Westpac Banking Corp, Brian Hartzer, and National Australia Bank, Andrew Thorburn, said negotiations with Apple will continue.
Westpac had struck a deal with Samsung two years ago to offer tap and go on Samsung phones “which is essentially the identical experience” as Apple Pay, Mr Hartzer said.
“It would be nice for us to offer [Apple Pay] in the context of what we are doing but in the end it has to be commercially sustainable. We will continue to talk to [Apple] and other wallet providers and see where we get to.”
Mr Thorburn pointed to NAB Pay, which was launched in January for Android phones and has been enabled by 25,000 customers and processed 100,000 transactions, according to a slide in NAB’s investor pack last week.
“We are going to look at ways to deploy NAB Pay,” Mr Thorburn said.
“We would like to deploy it with Apple. But obviously that is an important conversation that we will have to have with them. We think NAB pay is strong and easily deployable on any device, we just need to work with the providers to get that to be the case.”
Dividing the pie
Apple’s deal with ANZ was reached after the bank agreed to give up some of its interchange fees to Apple, and Apple was willing to compromise and reduce the level of fees it demanded from US banks, but confidentiality agreements imposed prevent discussion of the details.
Australian banks earn around $2 billion a year in interchange fees, which are paid by merchants for use of payments infrastructure.
But the fees are being pushed down by caps that have been imposed by the Reserve Bank of Australia. The major banks reported lower interchange fee income as a result of these measures last week.
The RBA is pushing to lower interchange fees to 30¢ for $100 of transactions, down from 50¢ for $100 of transactions.
In the United States, Apple is believed to earn about US15¢ on every $US100 of transactions. But in the US, the bank interchange fee is $1 for $100 of transactions.
However, given that ANZ debit cards are part of the deal, ANZ may have negotiated a flat fee for each transaction rather than one based on the volume of transactions because debit card interchange fees are flat, in contrast with credit card fees based on transaction volume.
The first major Australian bank to offer Apple Pay, ANZ, today announced it will offer the service to its five million customers in Australia.
ANZ customers in Australia are now able to use Apple Pay to make quick and secure purchases wherever contactless payments are accepted with either an ANZ Visa debit or credit card or an ANZ American Express credit card.
ANZ Chief Executive Officer Shayne Elliott said: “The introduction of Apple Pay is a significant milestone in our strategy to use digital technology to provide our customers with a superior experience and will be a watershed moment in the adoption of mobile payments in Australia.
“I’m proud we’re the first major Australian bank to offer Apple Pay and we are confident the convenience, security and privacy will be well received by our customers.
“With the high adoption rates of contactless payments in Australia, our customers will be world leaders in their ability to use their mobiles to make the vast bulk of essential payments,” Mr Elliott said.
More than 60% of all card transactions in Australia are now contactless and accepted across in excess of 70% contactless merchant payment terminals.
Security and privacy is at the core of Apple Pay, so when used with a credit or debit card, the actual card numbers are not stored on the device, nor on Apple servers. Instead, a unique Device Account Number is assigned, encrypted and securely stored in the Secure Element of the device. Each transaction is authorised with a one-time unique dynamic security code.
Apple Pay is easy to set up and users will continue to receive all of the rewards and benefits offered by credit and debit cards.
In stores, Apple Pay works with iPhone SE, iPhone 6s, iPhone 6s Plus, iPhone 6, iPhone 6 Plus and Apple Watch.
Online shopping in apps accepting Apple Pay is as simple as the touch of a finger with Touch ID, so there’s no need to manually fill out lengthy account forms or repeatedly type in shipping and billing information. When paying for goods and services within apps, Apple Pay is compatible with iPhone 6 and later, as well as iPad Air 2, iPad mini 3 and iPad Pro.
William Milne, Director of the ABS National Centre for Crime and Justice Statistics said even after reimbursements from financial institutions, total out of pocket losses at the time of the survey added up to $84.8 million.
In 2014-15, just over one million people experienced card fraud, compared with 662,300 in 2010-11.
“More broadly, 1.6 million Australians (8.5 per cent of the population) experienced some form of personal fraud (card fraud, identity theft or scams to which they responded), the highest since the survey was first conducted in 2007,” said Mr Milne.
“Just over half (56 per cent) the population aged 15 and over were exposed to at least one scam during 2014-15, an increase from 36 per cent in 2010-11. However, the proportion of people who responded to a scam decreased from 2.9 per cent in 2010-11 to 2.4 per cent in 2014-15.”
Approximately half the people who experienced personal fraud said that their behaviour changed as a result of their experiences. This included becoming more careful or aware, and changing card details.
In recent years, a number of reports have been prepared by organisations on financial inclusion, a topic whose importance is increasingly being recognised. However, few of these reports have addressed what may be called the “payment aspects” of financial inclusion. In cases where the topics of payment systems and payment services have been raised in the context of financial inclusion, discussion has focused only on specific aspects of payments, such as mobile payments, rather than on the payment system in its entirety. Understanding payments in a holistic sense, including how individual elements relate to one other, is crucial to an understanding of financial inclusion and to promoting broader access to and usage of financial services.
The report, published today, provides an analysis of the payment aspects of financial inclusion, on the basis of which it sets out guiding principles designed to assist countries that seek to advance financial inclusion in their markets through payments. The report was first issued in September 2015 as a consultation document. As a result of the comments, we have made changes to the report to strengthen the analysis and sharpen the message. The report has been prepared for the Committee on Payments and Market Infrastructures (CPMI) and the World Bank Group by a task force consisting of representatives from CPMI central banks, non-CPMI central banks active in the area of financial inclusion and international financial institutions.
This report is premised on two key points: (i) efficient, accessible and safe retail payment systems and services are critical for greater financial inclusion; and (ii) a transaction account is an essential financial service in its own right and can also serve as a gateway to other financial services. For the purposes of this report, transaction accounts are defined as accounts (including e-money/prepaid accounts) held with banks or other authorised and/or regulated payment service providers (PSPs), which can be used to make and receive payments and to store value.
The report is structured into five chapters. The first chapter provides an introduction and general overview, including a description of the PAFI Task Force and its mandate, a brief discussion of transaction accounts, and the barriers to the access and usage of such accounts. The second chapter gives an overview of the retail payments landscape from a financial inclusion perspective. The third chapter forms the core analytical portion of the report and outlines a framework for enabling access and usage of payment services by the financially excluded. Each component of this framework is discussed in detail in the report. The fourth chapter of the report describes the key policy objectives when looking at financial inclusion from a payments perspective, and formulates a number of suggestions in the form of guiding principles and key actions for consideration.
In this context, financial inclusion efforts undertaken from a payments angle should be aimed at achieving a number of objectives. Ideally, all individuals and businesses – in particular, micro-sized and small businesses – which are more likely to lack some of the basic financial services or be financially excluded than larger businesses – should be able to have access to and use at least one transaction account operated by a regulated payment service provider:
(i) to perform most, if not all, of their payment needs;
(ii) to safely store some value; and
(iii) to serve as a gateway to other financial services.
The guiding principles for achieving these objectives of improved access to and usage of transaction
accounts are the following:
Commitment from public and private sector organisations to broaden financial inclusion is explicit, strong and sustained over time.
The legal and regulatory framework underpins financial inclusion by effectively addressing all relevant risks and by protecting consumers, while at the same time fostering innovation and competition.
Robust, safe, efficient and widely reachable financial and ICT infrastructures are effective for the provision of transaction accounts services, and also support the provision of broader financial services.
The transaction account and payment product offerings effectively meet a broad range of transaction needs of the target population, at little or no cost.
The usefulness of transaction accounts is augmented with a broad network of access points that also achieves wide geographical coverage, and by offering a variety of interoperable access channels.
Individuals gain knowledge, through awareness and financial literacy efforts, of the benefits of adopting transaction accounts, how to use those accounts effectively for payment and store-of-value purposes, and how to access other financial services.
Large-volume and recurrent payment streams, including remittances, are leveraged to advance financial inclusion objectives, namely by increasing the number of transaction accounts and stimulating the frequent usage of these accounts.
Finally, the fifth chapter of the report addresses a number of issues in connection with measuring the effectiveness of financial inclusion efforts in the context of payments and payment services, with a particular emphasis on transaction account adoption and usage.
National Australia Bank (NAB) says customers have rapidly adopted mobile payments technology with the bank’s new NAB Pay service downloaded more than 18,000 times in just the first month.
The convenience of being able to pay for everyday items like fast food, fuel and groceries using your mobile phone has seen customers make more than 60,000 purchase transactions since the service launched earlier this year.
In just over a month:
· More than 18,000 customers are using NAB Pay to make purchases using their mobile phone.
· More than 150 customers are activating NAB Pay, every day.
· More than 300,000 customers have downloaded the latest version of NAB’s Mobile Internet Banking App, enabling access to NAB Pay.
Compared to Paywave transactions:
· NAB Pay is used more for lunch, coffee and snacks with a higher proportion of transactions at cafes, restaurants fast food and supermarkets (60% of NAB Pay transactions vs 52% of Paywave)
· NAB Pay is used more for lower ticket items ($13 for NAB Pay vs $19 for Paywave)
Top NAB Pay Merchant categories:
Category NAB Pay transactions Paywave transactions Difference
Supermarket 29% 26% 3%
Fast Food 18% 15% 3%
Restaurant 13% 11% 2%
Service Station 10% 11% -1%
Retail 7% 9% -2%
Other 23% 28% -5%
NAB Executive General Manager for Consumer Lending, Angus Gilfillan, said the number of customers using NAB Pay had significantly exceeded expectations.
“Customers love how simple and easy the service is to use, which is why we’re seeing more people using NAB Pay at the register,” Mr Gilfillan said.
“As expected, transactions have mostly been below the $100 mark, with customers using NAB Pay for coffee, lunches, general grocery shopping and petrol.
“Notably, we’ve also seen customers use NAB Pay for larger transactions at electronic retailers, where they purchased the likes of televisions and whitegoods for their homes.”
During the working week, NAB Pay transactions spike at lunchtime, mainly at fast food restaurants, and between 6pm and 7pm, where most spending is done at the supermarket on the way home from work.
Mr Gilfillan said customers were continuing to drive the agenda and we could expect to see more Australians using their mobile phone to make purchases.
“Australians have been fast adopters of contactless payments, with more than 70 per cent of transactions now done in this way,” he said.
“If NAB Pay is anything to go by, it won’t be long before mobile payments become the common payment method for our customers.”
Last week, NAB introduced all consumer Visa Qantas and Velocity Rewards credit cards to the NAB Pay service.
“We’re delighted to bring our most popular credit cards to NAB Pay and will continue acting quickl to make other cards products available as soon as possible,” Mr Gilfillan said.
“We’re focused on delivering the number one cards experience in Australia and look forward to extending our digital wallet offering in the coming months.”
To use NAB Pay, customers will need a compatible Android device, have downloaded the latest NAB Mobile Internet Banking App and have a NAB Visa Debit card and/or eligible Visa Qantas and or Velocity Rewards credit card. NAB Pay is available wherever contactless payments are accepted.
The Australian payments system is evolving, both in terms of some innovative new payment instruments that are on their way and the declining use of some of our older or legacy payment instruments. Tony Richards RBA Head of Payments Policy Department RBA, spoke at the Payments Innovation 2016 Conference on this evolution.
There is a lot happening in the payments industry at present, so my sense is that it would be premature to have a serious discussion about possibly phasing out cheques before the implementation of the New Payments Platform (NPP), which is scheduled to begin operations in late 2017. But if this conference was to revisit this issue in early 2018 with the NPP up and running, it should find significant new payments functionality in place. This will include the ability for end-users to make real-time transfers with immediate availability of funds, to make such transfers on a 24/7 basis, to attach data or documents with payments or payment requests, and to send funds without knowing the recipient’s BSB and account number. These are all aspects that match or exceed particular attributes of cheques.
In addition, by early 2018 another two years will have passed and there will no doubt have been a significant further decline – based on current trends, a further 30 per cent or so – in cheque usage.
By that point, more organisations and individuals will have further reduced their cheque usage. The Bank has recently been doing some liaison with payment system end-users in our Payments Consultation Group and has heard some impressive accounts about how some of the major Commonwealth government departments and some large corporates have largely moved away from the use of cheques. Cheque usage in the superannuation industry has also fallen very significantly as part of the SuperStream reforms.
A shift away from the use of bank cheques is also underway in property settlements. On average, there are around 40 000 property transactions in Australia each month, plus a significant number of refinancings, with most of these requiring at least a couple of cheques for settlement. However, starting in late 2014 and after much preparatory work, electronic conveyancing and settlement is now feasible. This is being arranged by Property Exchange Australia Ltd (an initiative that includes several state governments and a number of financial institutions), with interbank settlement occurring in RITS, the Reserve Bank’s real-time gross settlement system. Volumes have risen steadily and by late 2015 the number of property batches settled in RITS – each batch typically corresponds to a single transaction or refinancing – had reached nearly 4 000 per month. This trend is expected to continue.
In addition, the Bank’s Consumer Use Survey indicates that usage of cheques is falling rapidly for households of all ages. Our survey from late 2013 confirmed that older households continue to use cheques more than younger ones. However, older households are also reducing their use of cheques significantly. And with more and more older households now using the internet, their use of cheques is likely to continue falling. Indeed, I’m sure we all have a story about an older family member or friend who has recently bought or received a tablet or notebook and discovered the benefits of being online.
Graph 8
Graph 9
We will get a further reading on households’ use of cheques and other payment instruments in the Bank’s next Consumer Use Survey, which – if we follow the timetable of recent surveys – will be published in the first half of next year based on data collected late this year.
More broadly, as the industry starts to think about options for the cheque system, it will be important to make sure that those parts of the community that still use cheques are fully consulted so that we can be sure that their payment needs are met by other instruments. This is likely to involve consultations with organisations representing older age groups, the non-profit sector and those in rural Australia.
Cash
Discussions about the declining use of cheques sometimes also touch upon the declining use of cash.
Because transactions involving cash typically do not involve a financial institution, data for the use of cash are actually quite limited. However, one good source of data on the use of cash by individuals is the Bank’s Consumer Use Study. Our most recent study, in late 2013, showed that cash remained the most important payment method for low-value transactions (around 70 per cent of payments under $20). However, it confirmed that the use of cash had declined significantly, with the proportion of all transactions involving cash falling from 70 per cent in the 2007 survey to 47 per cent in 2013.
More recent data on the transactions use of cash are not available, though the ongoing fall in cash withdrawals from ATMs and at the point of sale suggest that it has continued. In addition, the continuing strong growth of contactless transactions and the growing acceptance of cards for low-value transactions are also suggestive of a further decline in the use of cash.
Graph 10
Graph 11
However, that is where the parallels with cheque usage end. While the use of cash in transactions has been declining, the demand to hold cash has continued to grow. This is the case for low denomination banknotes as well as high denomination ones. Indeed, in recent years there has been a modest increase in the rate of growth of banknotes on issue, to an annual rate of around 7 per cent over the past couple of years. More broadly, over the longer term, growth in banknote holdings has been largely in line with nominal growth in the overall economy.
Graph 12
Graph 13
The growing demand for holdings of cash suggest that it continues to have an important role as a store of value and there is some evidence – from demand for larger denomination notes – that this increased following the global financial crisis. So, despite the decline in use in transactions, cash is likely to remain an important part of both the payments system and the economy more broadly for the foreseeable future. In particular, significant parts of the population appear to remain more comfortable with cash than with other payment methods in terms of ease of use for transactions or transfers, as a backup when electronic payment methods may not be available, or as an aide for household budgeting.
Given the important ongoing role of cash in the payments system, the Bank is currently undertaking a major project to upgrade the existing stock of notes. Counterfeiting rates of the current series of banknotes remain low by international standards but have been rising and there are some signs that the counterfeiters are getting a bit better with new and cheaper scanning, printing and image manipulation technology. Accordingly, the program for the next generation of banknotes includes major security upgrades that should ensure that Australia’s banknotes remain some of the world’s most secure. The first release of the new banknotes will occur in September this year, with the release of the new five dollar note.
Australia is not alone in continuing to invest to ensure that the public can continue to have confidence in its banknotes. The United States has also done so recently, and Sweden – which is often cited as being furthest along the path to a cashless or less-cash society – is also in midst of introducing a new series of notes.
Digital currencies and distributed ledgers
As the use of cash and cheques continues to fall, the Bank will – subject to there not being any overriding concerns about risk – be agnostic as to what payment methods replace the legacy systems, consistent with its mandate to promote competition and efficiency.
In the short run, it is likely that we will see further growth in the existing electronic payment methods, including payment cards in their various form factors. In the medium term, it is likely that we will see growth in new payment methods and systems, including those that will be enabled by the NPP.
Let me stress that the Bank has not reached a stage where it is actively considering this, but in the more distant future it is even possible that we may we see a digital version of the Australian dollar. As the Bank has noted in the past, it seems improbable that privately-established virtual currencies like Bitcoin, with its significant price volatility, could ever displace well-established, low-inflation national currencies in terms of usage within individual economies. Bitcoin has, however, served to stimulate interest in the potential offered by distributed ledgers, extending to the possibility of central-bank-issued digital currencies. A plausible model would be that issuance would be by the central bank, with distribution and transaction verification by authorised entities (which might or might not include existing financial institutions). The digital currency would presumably circulate in parallel (and at par) with banknotes and other existing forms of the national currency.
A few countries have explicitly discussed the possibility of digital versions of their existing currency. Both the Bank of England and Bank of Canada have indicated that they are undertaking research in this area. And a recent announcement from the People’s Bank of China indicated that it has plans for digital currency issuance, though few specifics were provided.
The Bank will be interested to see what proves to be possible and what proves to be problematic, as countries consider going down the path of digital currency issuance. Given the various cybersecurity and cryptography risks involved, my personal expectation is that full-scale issuance of digital currency in any country, as opposed to limited trials, is still some time away. And I think it remains to be seen if there is real demand for a digital equivalent of cash and what it might offer end-users relative to what will be offered by the various forms of real-time payments that are being developed in many countries through projects like the NPP.
I should also touch briefly on another potential application of blockchain or distributed ledger technologies, namely in the settlement of equity market transactions. As the overseer of clearing and settlement facilities licensed to operate in Australia, the Bank obviously has a keen interest in the plans of the ASX Group to explore the use of distributed ledgers. Along with the Australian Securities and Investments Commission and other relevant public sector organisations, we will be working closely with ASX as it considers whether a distributed ledger solution might be the best way to replace its existing CHESS infrastructure.
Review of Card Payments Regulation
I will conclude with a few comments on the ongoing Review of Card Payments Regulation.
The Bank issued a consultation paper containing some draft changes to standards in late 2015. It has received substantive submissions from 43 different stakeholders, with a number of parties providing both a public submission and additional confidential information. 33 non-confidential submissions have been published on the Bank’s website.
The submissions indicate that most end-users of the payments system are broadly supportive of the Bank’s reforms over the past decade or more. Some submissions have indeed suggested that the Bank could have gone further in its proposed regulatory changes. Financial institutions and payment schemes have expressed a range of views. For the most part they have recognised the policy concerns that the Bank is responding to. In some cases there is a fair bit of common ground in areas where they have made suggestions for changes to the draft standards, but in others there are conflicting positions that correspond to the different business models of the entities that have responded to consultation.
The Payments System Board discussed the Review at its meeting last Friday, focusing on issues that stakeholders have highlighted in submissions. As we always do when regulatory changes are proposed, Bank staff will be meeting with a wide range of stakeholders to discuss submissions. Indeed, we have already had a significant number of meetings, sometimes multiple meetings with particular firms as they were preparing their submissions.
Some of the issues to be explored in consultation meetings include: the treatment of commercial cards and domestic transactions on foreign-issued cards in the interchange benchmarks; the proposed shift to more frequent compliance to ensure that average interchange rates remain consistent with benchmarks; and the calculation of permissible surcharges for merchants (such as travel agents or ticketing agencies) that are subject to significant chargeback risk when they accept credit or debit cards.
One other issue that I would like to flag ahead of our consultation meetings relates to the proposed reforms to surcharging arrangements. The Bank’s proposed new surcharging standard has been drafted to be consistent with amendments to the Competition and Consumer Act 2010 which were passed by the House of Representatives on 3 February and by the Senate yesterday.
The proposed framework envisages that merchants will retain the right to surcharge for expensive payment methods. However, the permitted surcharge will be defined more narrowly as covering only the merchant service fee and other fees paid to the merchant’s bank or other payments service provider. Acquirers would be required to provide merchants with easy-to-understand information on their cost of acceptance for each payment method, with debit/prepaid and credit cards separately identified. The draft standard would require that merchants would receive an annual statement on their payment costs which they could use in setting any surcharge for the following year. The information in these statements should allow the Australian Competition and Consumer Commission (ACCC) to easily investigate whether a merchant is surcharging excessively.
The objectives of the proposed changes to the regulation of surcharging received widespread support in submissions. However, a number of financial institutions have argued that it would be difficult to provide statements to merchants on their average acceptance costs for each payment system. Some have said that their billing process draws on multiple systems within their organisations (and sometimes from third parties), so that it is not straightforward to provide the average cost information proposed by the Bank. Some have indicated that they do not currently provide annual statements to merchants, so this would be a significant change. Accordingly, a number have suggested that they would prefer a significant implementation delay before they are required to provide merchants with the desired transparency of payment costs. Bank staff will be testing these points in our consultation meetings with acquirers. In doing so, we will be looking to see what might be done to ensure that the standards can take effect as soon as possible, in order to meet community expectations about the elimination of instances of excessive surcharging.
More broadly, the Board also discussed a possible timeline for concluding the Review. The Bank’s expectation is that a final decision on any regulatory changes should be possible at the May meeting. It is too soon to give much guidance on the date when any changes to the Bank’s standards might take effect, but the Board recognises that an implementation period will be necessary for the industry.
In the United Kingdom, Transport for London (TfL) enables people to pay for their tube, train or tram journeys with a tap of their bank cards and this contactless payment now represents 25% of all (TfL) pay-as-you-go transactions. From 2018 New York subway and bus travellers are expected to be able to pay with their contactless bank cards or mobile phones.
And in Australia both the volume and value of cash withdrawals from the ATM network continue to fall from their peak in 2008, despite an ever-increasing number (now over 31,000) of available ATMs. Indeed figures released in February 2016 by the Reserve Bank of Australia (RBA) show consumers withdrew an average of A$11.7 billion a month from ATMs in 2015, down 1.7% from 2014.
Cash not done yet
And yet in other countries, cash is still king. Japan is still heavily reliant on cash for everyday purchases in retail outlets and restaurants. According to the Bank for International Settlements’ statistics on payments for 2014, there is US$6,429 of banknotes and coins in circulation per person in Japan, compared to US$2,459 for Australians and US$1,588 for the British.
Of further interest is that in Australia by 2014, the total volume of notes on issue was A$60.8 billion, with 92% of this total being in the high denomination A$50 and A$100 notes. According to data from Retail Banking Research, global ATM cash withdrawal volumes grew by 7% in 2014 and the upsurge in usage was most evident in the Asia-Pacific, Middle East and Africa regions.
So how to explain this seeming dichotomy between the holding and use of cash and the use of cards or mobile phones to make payments? Well as human beings we seem to have a psychological relationship with cash, that gives it an enduring appeal.
Cash is widely accepted; it is easy to carry; it is untraceable and it is reliable in times of crisis. People may be particularly attracted to notes because of the way they look and feel and because they want to store their wealth in physical objects, as the world around them becomes more unstable. This trust in “real currency” could explain the large increase in demand for cash during the global financial crisis, as people sought the “comfort” of a wad of banknotes.
Cash can also be used to avoid paying taxes; who amongst us has never used the words “Would that be cheaper for cash?”. The use of cash supports the “black” or “grey” economy, where tax evasion requires untraceable transactions. It is also more than useful where illegal activities produce wealth that needs to be kept secret from the authorities. Perhaps this helps to explain the proliferation of A$100 notes in circulation, but often rarely actually seen in circulation?
Despite the growth of card payments; the arrival of Android Pay, Apple Pay and Samsung Pay and the cryptocurrencies such as Bitcoin, cash is still here and here to stay.
Author: Steve Worthington, Adjunct Professor, Swinburne University of Technology
