Payments – Page 16 – Digital Finance Analytics (DFA) Blog

Payments and Financial Inclusion

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.

Australians quick to adopt mobile payments technology – NAB

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 Ongoing Evolution of the Australian Payments System

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.

Digital payment providers yet to win war on cash

From The Conversation.

There is mounting evidence from many countries around the world that the use of cash is declining.

In Sweden, around 80% of all transactions in the retail industry are made by cards.

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

Optus Offers New Mobile Payment Options

Optus have announce you can Visa payWave with your mobile. If you have an Optus mobile service, a compatible mobile and the app, you can get Cash by Optus. Use the Cash by Optus™ app with one of our payment accessories or specially designed SIMs to pay for purchases with just the wave of your hand. Just link the app to your bank account, and you can make payments up to $100 at a time wherever you see Visa payWave.

They are offering a range of payment accessories. A payment accessory is an Optus issued NFC-enabled device which can be used to enable you to make contactless payments. Payment accessories can be in the form of a sticker, band or other device that Optus may issue. You can use it to make contactless payments just as usual. Simply tap the payment accessory to complete the transaction. Cash by Optus NFC SIM and Payment Accessories remain property of Optus.

Once you have download the Cash by Optus™ app and complete the registration process; you can then load up to $500, get access to real-time information and manage payment settings. As it doesn’t come with a PIN Cash by Optus™ can’t be used for contactless transactions $100 and over or for transactions that require a PIN.

It can take 1 to 2 business days for the link deposit, “CashByOptus LINK” to arrive in your bank account. You can only link to Australian banks and most other Australian non-bank financial institutions. It will not work with foreign banks and accounts that don’t allow direct debit payments.

You can access your transaction history electronically via the Cash by Optus app. Your transaction history will be available via the app until the facility is closed
But there is no print feature within the app. They suggest But you could take a screenshot and email it to yourself and print it. As the Cash by Optus™ facility is designed for electronic use, you have agreed that notices, transaction information and communications related to the facility will be available electronically.

Android Smart Phones can now use NAB Pay

NAB has launched its new mobile payment service NAB Pay, enabling customers to use their Android mobile phone to make purchases, without the need for a physical card. Customers with a compatible Android mobile device and a NAB Visa Debit Card can start using NAB Pay from today, available as part of the NAB Mobile Internet Banking App. NAB Executive General Manager for Consumer Lending, Angus Gilfillan, said customers were driving the agenda and increasingly wanted simple and easy digital payment solutions.

“We’re excited to launch our digital wallet and enable customers to make fast and safe purchases with their mobile phone”

NAB will also be the first Australian bank to utilise Visa Token Service in Australia, providing an important extra layer of security for customers. Tokenisation replaces a customer’s credit card number with a unique digital ‘token’ that can be used for digital payments, without revealing sensitive account information.

“Tokenisation improves protection for customers because physical card details are never used in the payments process, reducing the risk of fraud. NAB Pay gives consumers another reason to choose NAB as we continue to focus on delivering the number one cards experience in Australia.”

Last year, NAB announced a ten-year strategic partnership with Visa to collaborate on payments innovation and product development for customers.

“Our partnership with Visa is enabling us to significantly invest in our credit and debit card portfolio and act more quickly to deliver innovative solutions for our customers – as today’s announcement shows. We have a number of exciting initiatives planned this year and look forward to extending the NAB Pay application to support NAB credit cards in 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. NAB Pay is available wherever contactless payments are accepted.

This can see seen as a competitor to Apple Pay. which currently in Australia only works with Amex cards.

Will Australia Be One of the First Countries to Go Cashless?

According to Mastercard, retailers in Denmark could start phasing out cash payments this year, but half of Australians think that the land down under will still be one of first in the world to go cashless. Already paving the way for digital- only payments, the majority of Australians (58%) believe more cash will be removed from general use within the next five years. This is supported by Reserve Bank of Australia figures confirming the decline in cash withdrawals from ATM’s.

Galaxy research commissioned by MasterCard, found that Australians are slowly preparing themselves for the switch, with two-thirds (64%) already reducing the amount of cash they carry on them; more than half (53%) now carry less than $50 in cash. Some Australians would even be happy to see coins phased out sooner than paper (42%), marking them cumbersome and annoying to carry (40%).

While speed and convenience continue to drive the popularity of card payments, the readiness to flip from coin to card could also be a result of increased safety concerns. More than one in three (36%) Australians believe that society would be safer if cash wasn’t around.

Andrew Cartwright, SVP and Country Manager, Australia, MasterCard, believes that the safety advantages associated with cards will play a big role in the adoption of a cashless society.

“Australians have long considered credit and debit cards a fast and convenient way to pay, but what we are starting to see is a real understanding of, and appreciation for, the safety benefits of cards over cash. Australians know that in the instance their wallet is stolen or lost, any cash is as good as gone. However, knowing they’re protected against any unauthorised purchases on their cards provides the peace of mind they need in an already unfortunate scenario.”

As the likelihood of a cashless country increases, businesses are urged to stay ahead of the curve, with one in three Australians (39%) believing retailers need to do more to embrace new payment innovations to help eliminate cash.

Cash-only businesses may have a longer way to go in the eyes of modern shoppers. Most Australians (89%) have negative perceptions of ‘cash-only’ businesses, associating them with being very small (70%), trying to avoid declaring income or paying tax (42%), and being unsophisticated (19%).

About the Research:

The study was conducted online during December 2015 using a sample of 1,005 Australians aged between 18-64 years old across Australia.

Will Virtual Currencies Go Main Stream?

Virtual currencies (VCs) and especially their underlying technologies are a potentially important advance for the financial sector that could increase efficiency and financial inclusion, but can also serve as vehicles for money laundering, terrorism financing, and tax evasion. Achieving a balanced regulatory framework that guards against risks without suffocating innovation is a challenge that will require extensive international cooperation, says a new IMF staff paper, “Virtual Currencies and Beyond: Initial Considerations,” released by the International Monetary Fund (IMF) during the World Economic Forum.

The report provides an overview of virtual currencies, how they work and how they fit into monetary systems, both domestically and internationally. It discusses the potential implications of the technological advances underlying virtual currencies, such as the distributed ledger system, before examining the regulatory and policy challenges posed by VCs, in the areas of consumer protection, financial integrity (money laundering and terrorism financing), taxation, financial stability, exchange and capital controls and monetary policy. The paper also sets out principles for the design of regulatory frameworks for VCs at both the domestic and international levels.

As digital representations of value, VCs fall within the broader category of digital currencies (Figure 1). However, they differ from other digital currencies, such as e-money, which is a digital payment mechanism for (and denominated in) fiat currency. VCs, on the other hand, are not denominated in fiat currency and have their own unit of account.

High price volatility of VCs limits their ability to serve as a reliable store of value. VCs are not liabilities of a state, and most VCs are not liabilities of private entities either. Their prices have been highly unstable (see Figure 2), with volatility that is typically much higher than for national currency pairs. Both prices and volatility appear to be unrelated to economic or financial factors, making them hard to hedge or forecast.

Computing technology has made possible decentralized settlement systems built on distributed ledgers distributed across individual nodes in the payment system. Centralized systems have a master ledger keeping track of transactions maintained by a trusted central counterparty. In a distributed ledger system, multiple copies of the central ledger are maintained across the financial system network by a large number of individual private entities. The network’s distributed ledgers—and hence individual transactions—are validated by using technologies derived from computing and cryptography, most often derived from the so-called blockchain technology. These technologies allow a consensus to be achieved across members of the network regarding the validity of the ledger. This distributed ledger concept underpins decentralized VCs—for example the blockchain technology behind Bitcoin. The distributed ledger provides a complete history of transactions associated with the use of particular units of a decentralized VC. They provide a secure permanent record that cannot be manipulated by a single entity and do not require a central registry.

A key conclusion of the paper is that the distributed ledger concept has the potential to change finance by reducing costs and allowing for deeper financial inclusion in the longer run. This could be especially important for remittances, where transaction costs can be high, around 8 percent. Distributed ledgers can also shorten the time required to settle securities transactions, which currently take up to three days, as well as lower counterparty and settlement risks.

“Virtual currencies and their underlying technologies can provide faster and cheaper financial services, and can become a powerful tool for deepening financial inclusion in the developing world,” said IMF Managing Director Christine Lagarde, who presented the report at the World Economic Forum, in Davos, during the panel Transformation of Finance. “The challenge will be how to reap all these benefits and at the same time prevent illegal uses, such as money laundering, terror financing, fraud, and even circumvention of capital controls.”

Note: Staff Discussion Notes (SDNs) showcase policy-related analysis and research being developed by IMF staff members and are published to elicit comments and to encourage debate. The views expressed in Staff Discussion Notes are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Around the world in 80 payments – global moves to a cashless economy

From The Conversation.

Ever since computers were first introduced into the retail banking system in the late 1950s, there has been the vision of a future world where cash is obsolete. The near death of personal cheques, increase in debit and credit card use, and innovations such as PayPal, Square, Apple Pay and Bitcoin, have led us to believe the cashless society is well within our reach.

But data from Retail Banking Research, one of the most authoritative sources in the area, suggests that even though cashless payments are growing rapidly across the world, hard currency remains resilient. This trend was corroborated by a study commissioned by the ATM Industry Association of a panel of 13 countries. It suggested that global demand for cash grew 4.5% between 2009 and 2013 (when the latest figures were available).

So 50 years into the journey and we are still not there yet. However, a number of innovations have taken place around the world. Here’s how different continents stack up.

Europe

One in ten card payments were contactless for the first time in 2015 in the UK. By making small payments easier and quicker, contactless marks a major threat to cash. London is also fast becoming the world’s fintech capital, despite having substantially fewer resources available for investment than the US.

Next summer Copenhagen will host Money 20/20, the world’s major annual event for emerging payment technology. It will be the first time the forum convenes outside the US, bearing witness to the increasing importance of Europe when it comes to innovation in payments and financial technology. In countries like the Netherlands there are cafes and even supermarkets that no longer accept cash.

Many have pointed to the slow death of cash in Scandinavia, but cash is unlikely to completely die out – few may develop a mobile app suited to the needs of refugee migrants there, for example.

Contactless payments are on the up in Europe. shutterstock.com

North America

Despite playing host to the world’s top technology firms and research centres, the US lags behind when it comes to implementing some of this tech. Chip and pin payment cards were only launched in October 2015 and do not seem to have done well over the Christmas holiday season, with reports of large retailers bypassing card readers and going back to signatures. This might seem backward but it’s important to remember that chip and pin cards are as much a protocol to determine who will bear the cost of fraud as a security feature.

And, while the US has been slow to introduce chip and pin, there have been developments in smartphone payments. The bank JP Morgan Chase and retailer Walmart have both launched rivals to Apple Pay, which shows how retailers, banks and regulators are innovating to bring about faster payments and a potential cashless society.

Africa and the Middle East

The success of the mobile payments system, M-Pesa, in increasing financial inclusion in Kenya is well known, with the majority of the population able to transfer money using their phones, despite not having a bank account. And there has been similar growth of mobile payments in Botswana and South Africa. But Safaricom (the telecom company behind M-Pesa) has failed to replicate its model in neighbouring countries such as Tanzania. The jury is also out regarding the Cash-less Nigeria Project by its central bank, which aims to reduce the the amount of physical cash circulating in the economy.

M-Pesa enables users to complete basic banking transactions through mobile phones. Rosenfeld Media, CC BY

Africa and the Middle East remain the areas with the lowest global numbers of adults with a bank account while MENA countries (as well as China and other Asia Pacific nations) have been and will continue to be the worlds’ growth markets for ATM manufacturers. This suggests the high use of banknotes in the everyday life of people in these regions.

Asia, Latin America and Oceania

In China, the mobile app WeChat is one to watch. WeChat, part of digital behemoth Tencent, has grown from its original service as a messaging app in 2011 to include cab-hailing, food-ordering and money transfers. WeChat ranks as China’s most popular app with 650m users and is used to send both RMB and cryptocurrencies like Bitcoin between users.

Technology as a promoter of financial inclusion is the name of the game in poor economies where the bottom third of the population hardly have any access to the financial sector and mobile money is seen as the potential solution. Chile is a notable example of successful government initiatives in this direction. But the one to watch is the Indian government’s drive to replace money with mobile payments on top of a growing private network made up of 140,000 private business and public sector bank correspondents.

The challenge for mobile money, however, is that it sits at the intersection of finance and telecommunication and so faces regulations from both. On top of that, India and other countries in Asia and Latin America have a significant number of transactions that take place outside the formal financial sector and typically, an over-regulated telecommunications sector. At the same time, those at the “bottom of the pyramid” are fearful of and distrust established financial institutions.

No cash needed. shutterstock.com

Australia offers a much brighter outlook. The introduction of contactless payment cards in 2010 has proven hugely successful and as a result plastic has significantly eroded the use of cash and ATMs. Indeed, a recent study by the Reserve Bank of Australia found that the use of banknotes and coins fell from 69% in 2007 to just 47% in 2013. That decline took place across all age and income groups, with people in rural locations more likely to be using cash than those in major cities.

While some countries have embraced mostly electronic forms of payment, this does not mean that others still using banknotes and coins are less efficient or backward as some might seem to think. Differences between countries and between rich and poor within them remain partly due to custom, culture and regulation. But also because new technology has failed to make its case to users.

There is more innovative technology looking for a market than consumers looking for alternative ways to pay. And there is nothing wrong with existing forms of payment – they, and cash in particular, work well in most countries, for most consumers, 99% of the time. Of course, people change their habits and financial technology start-ups may one day disrupt the status quo.

Authors: Bernardo Batiz-Laz, Professor of Business History and Bank Management, Bangor University; Leonidas Efthymio, Lecturer in Management and Strategy, Intercollege Larnaca; Sophia Michael, Languages Department Coordinator/Lecturer of English, Intercollege Larnaca.

Quest to find bitcoin’s founder highlights currency’s biggest threat: the taxman

From The Conversation.

Bitcoin enthusiasts have recently been roiled by claims that an Australian named Craig Wright and his deceased partner are the mysterious founders behind the cryptocurrency.

Of course, we’ve been down this path before. The New York Times, Fast Company, The New Yorker and Newsweek have all made similar claims about different people, only to be proved wrong. And last month, Wired – the magazine behind the most recent claim – said there are reasons to believe Wright is actually a hoaxer and not “Satoshi Nakamoto,” as the currency’s creator is known.

Regardless of whether the new claims are correct, it has resurrected a worry that has long plagued bitcoin users. Around one million bitcoins were mined early in the currency’s history and have never been transferred. Were they to be sold en masse, bitcoin’s value could drop precipitously, wiping out a lot of wealth and threatening its status as a reliable alternate currency, independent of banks and governments.

However, the reporting about Wright and the bitcoin businesses and trusts he has established – presumably for tax and secrecy purposes – reveals an even bigger threat to bitcoin users and other supporters of virtual currency: how will such currencies be treated for tax purposes?

This is a question I have been exploring for the last decade, both with regard to virtual currencies designed to be used solely online, such as for World of Warcraft, and those designed for use in the real world, such as bitcoin.

Australian tax authorities searched the home of Craig Wright shortly after Wired magazine fingered him as the founder of bitcoin. Coincidence? Reuters

Currency or investment?

Bitcoins are created by a computer algorithm and are initially allocated through a process colloquially referred to as “mining.” Miners collect bitcoins by solving complex mathematical equations used to authenticate transfers and in so doing both bring more of the currency into the world and maintain the system.

Bitcoin users have a public key and a private key associated with the bitcoins they own. To effect a transfer, one must use the private key. However, transfers are recorded on a public “block chain,” which uses the associated public key.

This secure public record-keeping obviates the need for third-party intermediaries, like banks. While the world can see the public key and how many bitcoins are associated with it, the owner of the bitcoin can remain anonymous if he keeps his association with that key secret.

Approximately 15 million bitcoins have been issued to date, and they are currently valued at about US$430 each, for a total of approximately $6.5 billion. The algorithm is designed to generate 21 million bitcoins, and experts anticipate that the last bitcoin will be issued sometime between 2110 and 2140.

Bitcoin is designed to be used as a currency, though some hold it as an investment. The difficulty is that governments have taken a variety of positions on the nature of bitcoin for tax purposes.

For instance, some countries, including those in Europe, have classified bitcoin as a currency for consumption tax purposes, meaning that the various value-added taxes do not apply to bitcoin exchanges, while others, such as Australia, have not. Similarly, the U.K. treats bitcoin as foreign currency for income tax purposes, while the U.S. regards it as property.

Those who “mine” bitcoins will likely be subject to income tax on the value they receive under the theory that they are being compensated for validating bitcoin transactions and maintaining the block chain that records all transfers. But this is true regardless of whether bitcoin is recognized as a currency. In other words, they are not really mining and not subject to the complex rules governing mining operations. Instead, they are being compensated for services.

The difficulty arises when people try to spend their bitcoins, however acquired.

Another man said to be the mysterious Satoshi Nakamoto was Dorian Nakamoto. Reuters

How cash transactions are taxed

Those who spend local currency, such as dollars (U.S. or Australian) or euros, do not report a gain or loss when they do so. For instance, if I buy a hamburger, I don’t have a gain or loss on the currency used, regardless of whether it has changed value relative to other currencies.

As the baseline currency, a dollar is worth a dollar, even though it may fluctuate against other currencies or be affected by inflation.

Foreign currency is different. If I buy a euro for $1 and spend it later, when it is worth $1.10, theoretically I have a $0.10 gain that I should be taxed on. Different countries have different rules, but in the U.S., taxpayers need not pay taxes on such gains if they are under $200 in a given year.

By refusing to classify bitcoin as a currency for income tax purposes (local or otherwise), tax authorities effectively treat bitcoins as any other property, meaning that those who buy items with bitcoins must report any gain on the transaction associated with a change in its value. That is, it is treated like an investment, regardless of how the owner actually uses it.

It is as if they sold their bitcoins for cash and then used that cash to make a purchase. Worse yet, if the bitcoin has gone down in value, taxpayers might not be able to deduct the losses, because they could be considered personal. Thus, anyone using bitcoin as a currency has to keep track of each bitcoin’s cost so that he can accurately calculate gain or loss.

This administrative task, combined with the potential need to pay income taxes, could make bitcoin too difficult to use as an alternate currency.

While bitcoins are a virtual currency, some enthusiasts have minted physical versions. Reuters

Wright’s woes

Wright’s tale of woe with the Australia Tax Authority (ATA) (revealed in a transcript made public as part of the effort to prove that he is Satoshi Nakamoto) shows how the decision not to classify bitcoin as a currency creates problems with a tax on goods and services (GST).

Among other things, Wright sought to create an exchange to buy and sell bitcoin. If bitcoin were considered a currency, such exchanges would be exempt from the GST, and the exchange could operate economically. However, if the GST applied to such transactions, as the ATA claimed, the exchange would be forced to purchase $1 of bitcoin for $1.10 (assuming a 10% rate).

In other words, if you use normal currency, it would cost you $1, but if you use bitcoin, it would cost $1.10. Bitcoin becomes a lot less attractive under those conditions.

To avoid this result, Wright and his lawyers established a number of offshore trusts and argued that, for many of the transactions the ATA was investigating, no bitcoin was actually transferred. Instead, the beneficial interests in the trusts, which were not subject to the GST, were transferred. The bitcoin itself was purportedly held offshore, and any transfer of the bitcoin or rights to it were outside the reach of the ATA.

The problem for tax authorities

It’s not clear whether such arguments would actually succeed, but they illustrate a real problem that intangible assets raise for both consumption and income taxes, especially for countries that use a territorial tax system (that is, one that doesn’t tax foreign income).

If assets are considered to be outside a given country, they will not be subject to that country’s GST or equivalent tax. Moreover, if the asset can be “wrapped” in a trust or other entity whose ownership interests are exempt from the GST, it can potentially escape tax even if it is held locally.

Similarly, if such assets generate income, for instance when they are bought or sold, under a territorial system, that income will be taxed in the country where the sale occurred.

It is not surprising that Wright established at least some of his trusts in known tax havens, such as the Seychelles. Even if his efforts to shield bitcoin from tax through these efforts succeed, they are far too complicated for the average user and will likely further impede bitcoin’s adoption as an alternate currency.

Bitcoin’s challenge

Much of the recent focus has been on whether Wright really created bitcoin and whether he is sitting on a hoard worth close to a half billion dollars, which could potentially destabilize the market.

However, the real threat to bitcoin and other similar products may come from a far more mundane source: the world’s tax authorities. Absent favorable rulings, every bitcoin transaction could generate both income and consumption tax liability, rendering bitcoin impractical as an alternate currency.

Sophisticated tax planning to avoid such outcomes might succeed but would make bitcoin harder to use.

Thus, while bitcoin was developed as a means to free individuals from the need to interact with third parties, including the government, it nonetheless needs governmental cooperation if it is to move from the fringes to the mainstream.

Author: Adam Chodorow, Professor of Law, Arizona State University