Payments – Page 19 – Digital Finance Analytics (DFA) Blog

New report examines payment aspects of financial inclusion

The Committee on Payments and Market Infrastructures (CPMI) and the World Bank Group today issued a consultative report on Payment aspects of financial inclusion. The report examines demand and supply-side factors affecting financial inclusion in the context of payment systems and services, and suggests measures to address these issues.

Financial inclusion efforts – from a payment perspective – should aim at achieving a number of objectives. Ideally, all individuals and businesses should have access to and be able to use at least one transaction account operated by a regulated payment service provider, to: (i) perform most, if not all, of their payment needs; (ii) safely store some value; and (iii) serve as a gateway to other financial services.

Benoît Cœuré, member of the Executive Board of the European Central Bank (ECB) and CPMI Chairman, says that, “With this report, the Committee on Payments and Market Infrastructures and the World Bank Group make an important contribution to improving financial inclusion. Financial inclusion efforts are beneficial not only for those that have no access to financial services, but also for the national payments infrastructure and, ultimately, the economy.”

Gloria M. Grandolini, Senior Director, Finance and Markets Global Practice of the World Bank Group, comments that, “This report will help us better understand how payment systems and services promote access to and effective usage of financial services. It provides an essential tool to meeting our ambitious goal of universal financial access for working-age adults by 2020.”

The report outlines seven guiding principles designed to assist countries that want to advance financial inclusion in their markets through payments: (i) commitment from public and private sector organisations; (ii) a robust legal and regulatory framework underpinning financial inclusion; (iii) safe, efficient and widely reachable financial and ICT infrastructures; (iv) transaction accounts and payment product offerings that effectively meet a broad range of transaction needs; (v) availability of a broad network of access points and interoperable access channels; (vi) effective financial literacy efforts; and (vii) the leveraging of large-volume and recurrent payment streams, including remittances, to advance financial inclusion objectives.

In summary, The CPMI-World Bank Group Task Force on the Payment Aspects of Financial Inclusion (PAFI) started its work in April 2014. The task force was mandated to examine demand and supply side factors affecting financial inclusion in the context of payment systems and services, and to suggest measures that could be taken to address these issues. 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 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 micro- and some small-sized 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 the target population’s transaction needs, at little or no cost.
• The usefulness of transaction accounts is augmented by 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 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.

Samsung Pay Ups The Payment Wars

The payment wars continues, with Samsung soon to launch Samsung Pay. A device in their smart phones can interact with almost any payment terminal (not just NFC enabled) so will complete with Apple Pay and other mobile payment systems with a potentially wider merchant base. Samsung Australia is currently working with local financial institutions to customise Samsung Pay with an anticipated launch in 2016.

From The Verge.

Until recently, talking about mobile payments without using words like “confusing” or “mess” meant essentially lying. A confounding mix of banks, carriers, manufacturers, point-of-sale systems, and all the competing interests behind those businesses served to make paying with your phone unreliable. Those problems are finally beginning to fade away thanks to wider adoption and simpler back-end systems, but they’re not gone yet.

Even with Apple Pay, Google Wallet, and the soon-to-be-launched Android Pay, consumers can’t be entirely sure that the little NFC icon they see at registers will guarantee that they can tap to pay. Samsung thinks it has a solution for that last problem, though, and predictably enough it’s called “Samsung Pay.”

It transmits to almost any credit card reader

To fix the problem of ensuring that more stores will take mobile payments, Samsung turned to a clever piece of technology that lets you pay at most any terminal where you can swipe a credit card. The trick comes thanks to a tiny coil that shoots out the same magnetic code that those readers normally get from your credit card. It’s called “Magnetic Secure Transmission,” or MST; it’s built into the Galaxy S6, S6 Edge, S6 Edge+, and Note 5. As with other mobile wallets, Samsung Pay can also let you pay with NFC and it will store loyalty cards and gift cards.

Back in February, Samsung acquired LoopPay, which developed the MST technology, and it wasted little time building it into its phones. LoopPay‘s co-founder, Will Graylin, came over to Samsung with the acquisition. He contends that the threshold at which users will begin to really use mobile payments is 80 percent — that is, 80 percent or more of the stores you visit need to be able to let you pay from your phone. Since Samsung Pay can work with most credit card terminals, Samsung believes that it has a jump start on the competition.

Even though it’s transmitting via a magnet, Samsung Pay seems to be set up to maintain security. It uses tokenization, which means that your actual credit card isn’t sent, instead it uses a temporary one that Visa or Mastercard creates for you. It’s also storing that information in a “trusted execution environment,” which keeps it isolated from any app that might want to access it. Apple Pay also keeps that information in a secure element, but Samsung was quick to point out that Android Pay doesn’t (though it is also tokenized, so the risk is lessened).

To use Samsung Pay, you simply swipe up from the bottom bezel of your phone. It works from the home screen and, in a clever twist, when the phone’s screen is off. A credit card pops up and you unlock it with your fingerprint. At that point, you can either pay with NFC (as with Apple Pay or Android Pay) or hold it up near the spot where you swipe a credit card. Unlike Apple Pay or Android Pay, which can begin their payments process when they detect NFC, Samsung wants its system to be initiated by the user first. That’s why it’s using that swipe-up motion to get it started: it’s easy and works even if the phone is off. (Samsung’s executives weren’t particularly concerned about any confusion that could stem from the fact that the same gesture is used to activate Google Now on other Android phones.)

Swipe up, unlock, tap, done

Samsung trotted a group of reporters over to a Dunkin’ Donuts in New York to show it off and it worked so simply that there’s not a whole lot to say — except that the swipe on the point-of-sale station was a little awkwardly placed. Swipe up, unlock, tap, done.

There are a few places where the MST technology won’t work, namely any credit card reader that requires a physical trigger to activate the card read. That means that ATMs and gas pumps won’t really work with Samsung Pay, but most stores will.

Samsung says that it’s not taking a transaction fee from card issuers, but it is acting as a conduit for some of your transaction information. It sends that along to your phone so you can get receipts, but Graylin says that “we just pass it through” and that Samsung isn’t collecting that data.

Samsung Pay is launching in Korea on August 20th and in the US on September 28th — though a software update which enables it will come sooner. It also says “select US users” will be able to take part in a beta test beginning on August 25th. The service is also planned for the UK, Spain, and China.

Mobile Payments: The Delay of Instant Gratification

Good article from strategy+business, on the fact that platforms like Apple Pay and Google Wallet will need to ensure a seamless and secure experience for merchants and consumers. It once again highlights the upcoming payment wars.

During the next few years, many competitors, from both financial services and the hardware and software industries, will jockey for control of the sector. Payments for retail purchases through smartphone apps still represent a tiny fraction of transactions for the $2 trillion worth of goods and services that pass through retail establishments and banks each year in the United States; still, by 2018 digital wallet transactions will likely grow to represent about 6 percent of total card transactions — the majority being small-ticket purchases made online or within apps. This figure may sound small, but it’s a significant shift: Few would argue that e-commerce isn’t mainstream, yet Internet sales represented only 6 to 7 percent of all retail sales in the United States in 2014.

Just as people tend to compartmentalize their use of credit cards — one card for daily purchases, another for big purchases, and several for specialty retail — they are likely to use different mobile payment apps for different brands and different types of transactions. But only a few general-purpose branded e-wallets are likely to be left standing when the industry shakes out; that’s the nature of shared platforms. The companies that ultimately control the mobile payments platform may be technology companies or banks or retailer consortiums, or a combination of all three. The winners will be those platforms that offer five critical elements:

1. Merchant acceptance. Apple Pay is accepted at more than 700,000 merchant locations, but that number is less than 10 percent of the 8 million to 10 million merchant locations in the United States. This is significant: Consumers are less likely to use a credit card that’s not accepted everywhere. As a point of contrast to mobile adoption, Visa and MasterCard’s traditional plastic cards are accepted at 99 percent of merchant locations.

2. Interoperability. In its current version, Apple Pay does not support all cards or merchants; some private-label store credit cards and regional debit networks are excluded. Eighty-three percent of the credit-issuing market had agreed to be part of Apple Pay when it launched, but that left almost 20 percent of the market unsupported. Recently, Apple has started to expand its coverage. For example, the company worked out an agreement with Discover in April 2015 that will give Discover customers access to the app beginning the following fall. Further expansion will be critical if Apple is to ensure that any customer is able to make a transaction from his or her bank.

3. Security. For consumers and merchants alike, the fear of a breach is currently the number one obstacle to adopting mobile payments. Retailers have taken to heart the experience of Target, whose profits declined 45 percent after its well-publicized security breach in late 2013. The CEO and CIO were let go, and the company spent $250 million, excluding insurance offsets, to address the issue. Apple advanced the game by “tokenizing” the transaction (removing account information from the data flow) and using fingerprint recognition technology. But until end-to-end encryption is in place to secure the entire transaction, security holes will persist. Financial institutions and merchants will continue to battle global criminal sophisticates.

4. Platform integration. Many single-point mobile innovations exist, but they do not fit together seamlessly. One such app is Milo (acquired by eBay in 2010), which performs online searches for specific products in stores near its users’ location. Another app acquired by eBay in 2010, RedLaser, allows consumers to scan a product’s barcode in a store and immediately uncover the lowest price for that product, online or at nearby retailers. Some major retailers, including Starbucks and Walmart, have their own mobile apps with payment capabilities. At first glance, apps like these may seem to offer little more than convenient electronic credit cards. But an app, compared to a mobile-based website, is a more controllable, customizable handheld environment for the retailer. It enables businesses to better analyze customers even as customers gain more intelligence about products and services. With the people on both sides of the point-of-sale becoming smarter about one another, the behavior of shoppers and retailers is poised to change. As part of this transition, retailer loyalty, reward, and payment programs need to be supported by and integrated into shared mobile payment platforms.

5. Marketing data integration. Historically, for a variety of reasons, merchants have been unable to consistently and correctly link an individual consumer record directly to every payment transaction. Today, the convergence of the mobile phone, the payment transaction, and the online environment enables companies to track individual customers from the initial marketing impression all the way through the purchase. Those providers that leverage their mobile platforms for one-to-one marketing — before, during, and after a retail payment transaction — will have a leg up on the competition. They can achieve the holy grail of consumer marketing: precise marketing ROI calculations for segments of one. For example, a merchant could send a digital coupon via text and allow consumers to opt in, and then send personalized reminders only to those consumers. The merchant could then track coupon usage from mobile payments to determine the conversion rate and the overall marketing ROI.

Such scenarios hold great promise. But realizing them requires the establishment a complex web of institutional relationships. Who will track the data? Who will store the data? How will different institutions coordinate? Which standards will be used? And what emerging business models can monetize the new value creation? Not all the answers are obvious. But it is clear that traditional banks and financial institutions will find their greatest opportunity by leveraging their data. When financial institutions couple internal data with external data sources, they can begin to help merchants grow their business and provide consumers with a more personalized and robust shopping experience. The winners will convert that data into enhanced solutions across the value chain: targeted local and national offers, multifactor authentication, and security alerts.

The payment providers that stitch together merchant acceptance, mobile solution integration, and marketing fueled by data will be well on their way to success. Once that finally happens — and it will — customer relationships and marketing will never be the same.

US to Drive Faster Payments

The Federal Reserve System announced the appointment of Federal Reserve Bank of Chicago Senior Vice President Sean Rodriguez as its Faster Payments Strategy Leader. In this role, Rodriguez will lead activities to identify effective approaches for implementing a safe, ubiquitous, faster payments capability in the United States.

Rodriguez will chair the Federal Reserve’s Faster Payments Task Force, comprised of more than 300 payment system stakeholders interested in improving the speed of authorization, clearing, settlement and notification of various types of personal and business payments. In addition to leading faster payments activities, Rodriguez will continue to oversee the Federal Reserve’s Payments Industry Relations Program.

“Sean’s leadership experience across payment operations, customer relations and industry outreach is exactly what we need to successfully advance the vision for a faster payments capability in the United States,” said Gordon Werkema, the Federal Reserve’s payments strategy director to whom Rodriguez will report. “His passion has contributed significantly to the momentum behind our initiative to date and we’re confident in his ability to carry our strategy forward in strong partnership with the industry.”

Rodriguez brings more than 30 years of experience with Federal Reserve Financial Services in operations, product development, sales and marketing. He helped establish the Federal Reserve’s Customer Relations and Support Office in 2001 and served on the Federal Reserve’s leadership team for implementing the Check 21 initiative. More recently, Rodriguez was instrumental in the design and launch of the Federal Reserve’s Payments Industry Relations Program charged with engaging a broad range of organizations in efforts to improve the U.S. payment system.

Additional information about the Federal Reserve’s Strategies for Improving the U.S. Payment System, including the Faster Payments Task Force, is available at FedPaymentsImprovement.org.

The Federal Reserve believes that the U.S. payment system is at a critical juncture in its evolution. Technology is rapidly changing many elements that support the payment process. High-speed data networks are becoming ubiquitous, computing devices are becoming more sophisticated and mobile, and information is increasingly processed in real time. These capabilities are changing the nature of commerce and end-user expectations for payment services. Meanwhile, payment security and the protection of sensitive data, which are foundational to public confidence in any payment system, are challenged by dynamic, persistent and rapidly escalating threats. Finally, an increasing number of individuals and businesses routinely transfer value across borders and demand better payment options to swiftly and efficiently do so.

Considering these developments, traditional payment services, often operating on decades-old infrastructure, have adjusted slowly to these changes, while emerging players are coming to market quickly with innovative product offerings. There is opportunity to act collectively to avoid further fragmentation of payment services in the United States that might otherwise widen the gap between U.S. payment systems and those located abroad.

Collaborative action has the potential to increase convenience, ubiquity, cost effectiveness, security and cross-border interoperability for U.S. consumers and businesses when sending and receiving payments.

Since the Federal Reserve commenced a payment system improvement initiative in 2012, industry dialogue has advanced significantly and momentum toward common goals has increased. Many payment stakeholders are now independently initiating actions to discuss payment system improvements with one another—especially the prospect of increasing end-to-end payment speed and security. Responses to the Federal Reserve’s Consultation Paper indicate broad agreement with the gaps/opportunities and desired outcomes advanced in that paper. Diverse stakeholder groups have initiated efforts to work together to achieve payment system improvements. There is more common ground and shared vision than was previously thought to exist. We believe these developments illustrate a rare confluence of factors that create favorable conditions for change. Through this Strategies to Improve the U.S. Payment System paper, the Federal Reserve calls on all stakeholders to seize this opportunity and join together to improve the payment system.

Cool factor drives merchant interest in Apple Pay

According to eMarketer, Cool factor—not customers—drives merchant interest in Apple Pay. Merchants are interested in adding Apple Pay to their offerings at the point of sale. But according to Goldman Sachs, that interest is largely based on an elusive factor: “coolness.”

Leading Drivers of Merchant Interest in Apple Pay According to US Merchant Acquirers and ISOs, March 2015 (% of respondents) Novelty and “cool factor” were driving about 43% of merchant interest in Apple Pay, the March 2015 survey of US merchant acquirers and ISOs found. By comparison, one in five said merchants’ customers were actually asking for Apple Pay. In even fewer cases were merchants pressured to keep up with the competition. Still, most respondents said relatively few merchants were interested in offering Apple Pay—over half indicated that under 10% of merchants were interested, while 28.6% put that figure between 10% and 20%.

Goldman also asked merchant acquirers and ISOs about their own plans to enable acceptance of Bitcoin; a majority said they had no such plans.

Research shows that consumers who use Apple Pay tend to like it—but mobile payments are still a decidedly niche activity.

Shoppers Switch to Smart Phones to Pay for Groceries, Takeaway – CUA

Customers using their Android phone for ‘tap and pay’ purchases are most likely to be buying their groceries or a takeaway meal, spending an average of $27 per transaction, according to new data to be released by CUA at a national conference in Melbourne. By way of background, CUA originally was formed as a credit union in Queensland in the 1940s with just 180 members. Since then, through the amalgamation of more than 160 credit unions, they have become Australia’s “largest customer-owned financial institution”, with more than 400,000 customers, over 900 employees and $9 billion in assets under management.

In July last year, customer-owned financial institution CUA became the first banking provider in the Asia-Pacific to roll out a free mobile app using HCE technology, which allowed customers to ‘tap and pay’ with any compatible Android phone. The mobile app – CUA redi2PAY – was developed by CUA’s payments provider Cuscal and works on any NFC-enabled Android phone running on KitKat 4.4 or later.

CUA Head of Customer Insights Chris Malcolm and Cuscal Head of EFT, Acquiring and Digital Colin Sultana will share insights into how customers are using their ‘mobile wallets’ as part of a case study on the redi2PAY implementation at the Australian Cards and Payments Summit taking place at the Melbourne Convention & Exhibition Centre today.

Mr Malcolm said groceries were the top retail category for redi2PAY transactions, followed by fast food, petrol stations, restaurants/ dining and alcohol purchases.

“Interestingly, the top five retail categories for redi2PAY mobile payments are the exact same retail categories where CUA customers make the highest number of Visa PayWave purchases using their debit card,” he said.

“It appears that CUA’s early adopters of mobile payments technology are literally swapping their debit card for their mobile phone, using it for the same kind of purchases as they would have made with a traditional plastic card.”

Customers using redi2PAY are also using it more frequently – the number of customers using redi2PAY more than 35 times per month was around three times higher in March than it was six months earlier in October. The number of customers using mobile payments semi-regularly (5 to 14 times per month) is up 63 per cent for the same period.

The data also shows:

Customers spend an average of $27 per transaction when using CUA redi2PAY – the same as the average amount for Visa PayWave purchases.
The number of redi2PAY transactions spikes towards the end of the week (Thursday to Saturday). Saturday has the highest number of redi2PAY transactions, while Sunday has the least. Visa PayWave transactions also peak on Saturday, while Monday has the lowest number of payments.
Most mobile payments occur between 12pm and 8pm, with a spike from 1-2pm. The trend is similar for Visa PayWave payments.
The number of redi2PAY transactions each month has increased by more than 16 per cent since September 2014.
December 2014 recorded the highest value of redi2PAY transactions for a single month, coinciding with the lead up to Christmas.

CUA and Cuscal have already been recognised in Australia and Asia as pioneers in mobile payments. A leading financial research company in Asia, IDC, recently named CUA redi2PAY as one of the top 25 mobile innovations in financial services for 2014-15.

“There is huge potential for this technology to fundamentally change how people pay for purchases,” Mr Malcolm said.

“People tend to take their smart phones everywhere they go and now, the need to also carry cash and cards in your wallets is becoming a thing of the past.”

He said approximately eight times more CUA customers now have a compatible Android phone which could be used for redi2PAY, compared to a relatively small group of customers who had the required technology when redi2PAY was launched 10 months ago.

“We’re seeing increased take-up of this HCE technology across the banking sector, as others follow our lead. The use of ‘mobile wallets’ will only continue to grow as customers become more familiar with the technology and its security features, and upgrade their Android devices to the latest models.”

TOP 10 RETAIL CATEGORIES – redi2PAY vs Visa PayWave

(1 September 2014 to 31 March 2015)

CUA redi2PAY		CUA Visa PayWave
Category of retailer	Transactions	Category of retailer	Transactions
1. Grocery stores	26%	1. Grocery stores	27%
2. Fast food outlets	17%	2. Fast food outlets	17%
3. Service stations	14%	3. Service stations	11%
4. Restaurants	10%	4. Restaurants	11%
5. Liquor outlets	4%	5. Liquor outlets	4%
6. Convenience food stores	4%	6. Convenience food stores	3%
7. Discount stores	3%	7. Discount stores	3%
8. Pharmacies	3%	8. Pharmacies	3%
9. Variety stores	3%	9. Hardware stores	3%
10. Hardware stores	2%	10. Bars/ pubs	2%

Card Payments Regulation

A speech was delivered today by Malcolm Edey, at the Cards & Payments Conference in Melbourne following on from the Murray Inquiry and the Reserve Bank Payments System Board (the PSB) own review following on from the Murray recommendations. As the PSB’s review process is still underway, Edey did not pre-empt any conclusions that might come from that. Instead he over viewed the PSB’s general approach to retail payments since it first entered the field. His comments on more recent developments does give some clues to issues ahead however, with specific reference to NPP, interchange arrangements and surcharging.

The PSB more recently undertook its Strategic Review of Innovation in the Payments System, the results of which were published in 2012. That review was conducted over a two year period and involved extensive consultations with both the payments industry and with users of payments services. It found a number of areas where there was scope for system improvements that could be achieved through coordinated action.

The key areas were:

same-day settlement of direct entry transactions;

faster payments and out-of-hours payments to be made generally available;

capacity for richer information with payments; and

an easy addressing solution for electronic payments.

The first one of these was delivered at the end of 2013 and essentially involved an acceleration of existing direct entry processes. The remaining three form a more ambitious agenda and are together being taken up as part of the industry’s New Payments Platform (the NPP project).

The NPP is a successful example of what can be done through collaboration between the industry and its regulator. It is also a good example of the catalyst role for the PSB in promoting system innovation that was envisaged by Wallis. While it is an industry-led project, it is strongly supported by the PSB, and the Board continues to encourage commitment to the project and to its timely completion.

The project was launched in early 2013 and is now well advanced. On current scheduling the NPP will deliver a fast payments service with rich information and addressing capabilities in the second half of 2017. It will be linked to a fast settlement service provided by the Reserve Bank, which will allow transactions to be cleared and settled 24/7 in close to real time. All of this will amount to a world-class payments infrastructure.

It will also be a platform for further innovation. One of the key decisions made at an early stage of the project was to separate the basic clearing and settlement infrastructure from the commercially based overlay services that would use it. The industry is committed to an initial overlay that is intended to provide an attractive service and drive early volume growth. But it is important to note that access to the overlay space has always been intended to be open and competitive. Over time, this structure will allow new and specialist providers to make use of the rich capabilities provided by the core infrastructure.

Before moving on to some more detailed regulatory matters, I will mention one more initiative to have come out the 2012 Strategic Review, and that is the establishment of new industry coordination and consultation arrangements. In line with a recommendation from the 2012 Review, a new industry coordination body, the Australian Payments Council, was launched last year. The Council is a high-level body representing a diverse range of industry participants including banks, payment schemes and other service providers. It will have the capacity to give strategic direction to the industry as well as engaging in dialogue with the PSB. At the same time, it is important that the policy process engages with users and not just suppliers of payment services. To facilitate that, the Reserve Bank has also set up a Payments User Consultation Group which began meeting late last year.

In summary then, the policy work of the PSB has been very much consistent with the philosophy and objectives of the original Wallis reforms. A good deal of that work has been what might be termed ‘co-regulatory’ in nature, in the sense that it involved promoting industry-led solutions rather than using formal regulatory powers.

But of course the PSB does have a regulatory mandate, and it has used its powers to regulate a number of aspects of card payments where it judged that there was a public interest case to do so. Probably the aspects of this regulation that have attracted the most attention have been those related to interchange and surcharging, and I would like to make some general comments about each of these.

First, interchange. The commercial function of interchange fees is a very interesting one. They serve as a device for shifting the benefit-cost balance between issuers and acquirers in a four-party scheme and therefore, indirectly, between cardholders and merchants. Payment schemes argue that this can be an important competitive device that can promote innovation, for example by being structured to encourage network growth or the take-up of new products. Typically, interchange flows from the acquirer to the issuer, and hence the fee structure tends to encourage issuance and use of a card, but may discourage acceptance by merchants if the fee is too high. For mature schemes, however, the capacity of merchants to refuse acceptance may be quite limited. As a result, it has been frequently observed that competition between schemes can have the effect of pushing fees up rather than down, in order to maximise incentives to issuers and cardholders.

The reason that this kind of outcome is possible is that there is a misalignment between the incidence of these fees and the structure of decision-making power in a typical transaction. In a nutshell, the cardholder chooses the payment instrument but the merchant pays the fee.

In designing its card payment reforms, both for credit and debit, the PSB concluded that competition of this nature was distorting price signals in a way that inefficiently encouraged the use of high cost cards and added to merchant costs. Hence, it judged that there was a case for interchange fees to be capped by regulation. A number of other jurisdictions have since taken a similar view.

The second aspect that I want to talk about is surcharging. The PSB has consistently taken the view that merchants should not be prevented from surcharging for higher-cost payment methods. Scheme rules that prohibited surcharging had the effect of reinforcing the distortive effects of interchange fees by preventing costs from being passed on to cardholders. They also reduced the flexibility of merchants in deciding how to respond to high-cost payment instruments. The ability to surcharge improves merchants’ bargaining position by allowing them a greater range of responses, rather than just being faced with a binary decision to accept or reject a particular card.

Efficient surcharging should of course reflect the underlying payment cost. The PSB’s initial reforms to credit and debit gave merchants the right to surcharge, while effectively relying on competition to ensure that surcharging would not be excessive. This regulation was revised in 2013 in response to concerns about practices that had developed since the initial reforms, particularly about surcharging that appeared excessive or unrelated to costs. The amended regulation still prevents schemes from imposing no-surcharge rules, but it allows them to limit surcharging to the reasonable cost of acceptance. In doing so it strikes a balance, at least in principle, between the rights of merchants and schemes. Merchants cannot be prevented from recovering reasonable acceptance costs, but they can be prevented by scheme rules from going beyond that. More on that in a moment.

The PSB’s reforms to surcharging and interchange have formed part of a broader package that also included rules relating to access and transparency. I don’t have time to cover all of that today. But taken together, the effects have been beneficial. The system has continued to innovate, and merchants’ card payment costs have fallen.[³] It is also notable that these costs are significantly lower in Australia than in a jurisdiction like the United States, where reforms to card systems have been much more limited.

The Murray Report last year broadly endorsed the PSB’s reform approach while flagging a number of areas for further consideration, particularly in relation to surcharging and interchange. These have now been taken up as part of the PSB’s card payments review.

The issue of surcharging remains contentious. Instances of apparently excessive surcharging have persisted. While they acknowledge arguments for what might be called a ‘no excessive surcharge’ regime, the schemes have argued that the current formulation is too complicated and difficult for them to enforce.

The card payments review is looking at several possible mechanisms for addressing this. One option proposed by Murray is a tiered approach that would allow tougher surcharging constraints to be placed on low-cost cards. A number of other options are available to strengthen enforcement and disclosure practices, for example allowing schemes to cap surcharges that are not percentage based at some low fixed amount.

On interchange fee regulation there are a number of issues to consider. These include the overall level of the interchange cap, the complexity and proliferation of interchange categories, the phenomenon of interchange ‘drift’ with the three-year compliance cycle, and the wide disparity between interchange rates for preferred merchants and those applying to others.

While it broadly endorsed the PSB’s regulatory approach to date, the Murray Report recommended that consideration be given to tightening existing interchange regulations in some significant respects. These included lowering the overall interchange cap, and broadening its coverage to include other incentive payments that serve a similar function. It argued that this would help to prevent circumvention and, in the case of companion card arrangements, would improve competitive neutrality.

Paying For Cards

The RBA published a paper on “The Value of Payment Instruments: Estimating Willingness to Pay and Consumer Surplus” by Tai Lam and Crystal Ossolinski. This paper draws on a survey of consumers’ willingness to pay surcharges to use debit cards and credit cards, rather than cash. Just as the price a consumer is willing to pay for a good or service is indicative of the value he/she places on that item, the willingness to pay a surcharge to use a payment method reflects that method’s value to that consumer, relative to any alternatives.

They find a wide dispersion in the willingness to pay for the use of cards. Around 60 per cent of consumers are unwilling to pay a 0.1 per cent surcharge, which suggests that for these individuals, the net benefits of cards are very small or that cash is actually preferred. At the other end of the distribution, some individuals (around 5 per cent) are willing to pay more than a 4 per cent surcharge, indicating they place a substantial value on paying using cards.

On average, consumers have a higher willingness to pay for the use of credit cards than debit cards. This difference can be viewed as the additional value placed on the non-payment functions – rewards and the interest-free period – of credit cards. They estimate that on average credit card holders place a value of 0.6 basis points on every 1 basis point of effective rewards rebate.

Based on the survey data and information on the costs to merchants of accepting payment methods, they predict the mix of cash, debit card and credit card payments chosen by consumers under different levels of surcharging and explore the implications for the efficiency of the payments system. In particular, the consumer surplus in a scenario where merchants do not surcharge and the costs of all payment methods are built into retail prices can be compared with that where merchants surcharge based on payment costs and retail prices are correspondingly lower. Their findings suggest that cost-based surcharging leads to some consumers switching to less costly payment methods, resulting in greater efficiency of the payment system and an increase in consumer surplus of 13 basis points per transaction.

CBA Offers NFC Payments via Android Smartphones

Australia’s Commonwealth Bank has launched a new version of its CommBank app, which it says is Australia’s most popular, with 3.2 million unique users and approx 2.35 million of those logging in each week to securely manage everyday banking and payments, as reported in iTWire today.

The newly updated app introduces various new features today, alongside ‘innovations’ included in the app last year which the bank says is ‘resonating’ with its customers.

Lisa Frazier, the Commonwealth Bank’s Executive GM of Digital Channels, said: “Our evolution of CommBank app is focused on delivering a simple and convenient mobile experience with relevant and valuable features that exceed user expectations. CommBank app’s most recent features Cardless Cash, Lock & Limit, and International Money Transfers are proving popular.

“Cardless Cash has helped around 370,000 customers withdraw cash without their card at an ATM or enable a loved one to withdraw cash in an emergency. Lock & Limit has given our customers peace of mind, with over 360,000 transactional locks and limits set within the app.

Over 35,000 credit cards have been temporarily locked whilst their owners determine if they’ve lost or simply misplaced their card, while PIN changes and card activations remain the favourite self-service features in the app.”

But that’s what has already been introduced, so what’s new in the Commbank app zoo?

Tap & Pay for Android, that’s what. From today, this feature will be available on Android phones with NFC capability running Android OS Kitkat 4.4 and above. It uses Host Card Emulation (HCE) technology to enable Tap & Pay payments ‘on the most popular Android handsets’ and replaces the need to purchase a physical PayTag to make payments with a smartphone.

The CommBank App’s download page at Google Play notes that: “Payments from eligible transaction accounts only, not available for credit cards at this time)” and notes that you can “Also set up a widget for quick access to Tap & Pay”.

Angus Sullivan, who is another Executive GM at Commbank but in the Consumer Finance Payments & Strategy Division said: “Customer demand for convenient mobile payment technologies continues and we are focused on innovative payment features which deliver on this. Today, we are providing Android customers with a real mobile wallet solution which simplifies payments on-the-go.”

Andrew Cartwright, the SVP and Country Manager of MasterCard Australia said: “This collaboration between MasterCard and Commonwealth Bank places the power of mobile payment technology in the hands of more Australians. It also delivers the highest level of security for our cardholders who want a fast, easy and secure way to pay using their smartphone.

“We have seen rapid adoption of contactless payments in Australia, with more than 60 per cent of MasterCard transactions under $100 now made this way. MasterCard will continue to invest in technology that provides all Australians with a convenient and secure alternative to cash.”

The Commonwealth Bank has also banked several awards for its app, with its most recent being the Canstar Innovation Excellence 2015 award for its Cardless Cash, and Lock, Block and Limit features, getting the ‘Best’ designation, alongside the Innovative Online Banking Service in Money Magazine’s 2015 Best of the Best Innovation Awards, and finally the National iAward for Best Consumer Product.

Review of Card Payments In Australia

The RBA has issued a paper outlining the proposed scope of a review of card payments in Australia. Given the evolution of payments, the rise of new payment platforms, weaknesses in the current interchange arrangements, payment surcharging and changed economics in the payments value chain, this is timely. Submission on aspect of the Bank’s card payments reforms, should be provided by no later than 24 April 2015.

The RBA outlines a number of factors which indicate a review is needed:

Aspects of the interchange fee system and merchant surcharging practices have raised concerns, some of which were noted in the Board’s 2013 Annual Report and the Bank’s two submissions to the Financial System Inquiry (FSI).
There have been some significant changes to the regulation of card payments in other jurisdictions.
The completion in 2014 of the Bank’s third Consumer Use Survey and second Payment Costs Study have provided a useful evidence base for considering possible changes to policy.
The continuing growth in the role of cards in the payments system since the initial reforms underscores the need for an appropriate regulatory framework for such payments.
Interchange arrangements in the card systems will also affect the nature of new payment arrangements that are adopted by the payments industry. In particular, a more efficient and lower-cost new payment system might be hampered in its development to the extent that it had to match existing interchange payments to card issuing institutions to ensure the participation of banks in the new system.
The FSI has made recommendations directed at the Bank and its regulation of card payments, with particular focus on interchange fee regulation and surcharging.

The Payments System Board would be interested in hearing the views of stakeholders about the issues raised in the previous chapter and possible changes to the regulatory framework that might address those issues.

Some of the possible changes to the regulatory framework are along the lines of those suggested in the Final Report of the Financial System Inquiry (FSI). The Final Report endorsed the broad nature of the Bank’s reforms over the past decade or more. In particular, the Report stated that ‘the Inquiry believes interchange fee caps improve the efficiency of the payments system. Without interchange fee caps, price signals for customers are less clear and outcomes are less efficient because customers can be encouraged to use higher-cost payment methods’ (FSI 2014b, p 171). In addition, the Final Report stated that ‘the Inquiry agrees with the RBA that surcharging can improve the efficiency of the payments system by providing accurate price signals to customers’ (FSI 2014b, p 175).

However, the Final Report noted a few areas where the Inquiry believed the existing regulatory framework could be improved. These included lowering the existing interchange fee caps and broadening their application, and improving the accuracy of price signals in surcharging and the enforceability of mechanisms against excessive surcharging. The FSI Final Report took a holistic view of the card systems, just as the Bank’s earlier reforms have recognised the interlinkages between different aspects of the operations of the card systems. One example is that the Report’s recommendations on surcharging were linked to its recommendations on interchange fees. In particular, the surcharging recommendations reflect the idea that if it was possible to promote the availability of low-cost methods of payment for consumers and merchants, the case for merchants retaining the right to surcharge for those low-cost methods of payment would be reduced.

Specific Issues for Consultation

The Board is interested in the views of stakeholders on the following issues.

With respect to the regulation of interchange fees, the Board is interested in views on the following options:

Publishing thresholds for which payment system providers will be subject to interchange or related regulation, possibly based on transaction values and/or market shares. The FSI Final Report suggests that that this would give new entrants and existing providers greater certainty about how regulation will be applied and would enhance competitive neutrality between providers. Such thresholds could potentially apply to providers such as American Express, as well as other international schemes such as UnionPay, if they entered the domestic market. Thresholds might also be applied for surcharging regulation and could potentially apply to providers such as PayPal.

Broadening interchange fee caps to include other payments between schemes and issuers. There are a range of payments (such as marketing fees, sign-on fees, incentive fees and rebates) from schemes to issuers that are used in both three- and four-party schemes. These other payments can potentially be used to circumvent interchange caps: for example, a four-party scheme can increase fees charged to acquirers and use these funds to pay rebates to issuers, mimicking an interchange payment. Similarly, rebates or incentives paid by a network to an issuer in a companion card arrangement can achieve similar outcomes to an interchange fee. The FSI Final Report suggests that broadening the current interchange fee caps to apply on a broader functional basis would help prevent circumvention of interchange caps and enhance competitive neutrality in the case of companion card arrangements. Regulation of other incentive payments has already been implemented for debit cards in the United States, and is proposed for both debit and credit card schemes in the new EU payments regulation.

Making changes to the interchange benchmark system to reduce the upward ‘drift’ in average interchange rates inherent in the current three-year reset cycle. One option would be to shift to more frequent benchmark observance, such as annually or even quarterly. This would ensure that average interchange rates were much closer to the benchmark, though this might not have much effect on the tendency for the gap between the highest and lowest interchange rates to widen.

Lowering interchange caps. The FSI Final Report suggests that payments system efficiency could be enhanced by lowering interchange fee caps, with the benefits including lower product prices for all consumers as a result of lower merchant service fees, and less cross-subsidisation in the payments system.

Replacing weighted-average interchange caps with hard caps. The FSI Final Report notes that weighted-average caps allow schemes to set interchange schedules which imply relatively high payments costs for smaller merchants without market power and low costs for larger merchants. In addition, the widening in the range of interchange fees raises questions about the transparency of costs for many merchants. Furthermore, the current system of observance of the caps has meant that weighted-average interchange fees in the MasterCard and Visa systems have typically been above the caps. In the new European Union (EU) payments regulation previous settlements reached with MasterCard and Visa, constraining interchange fees for cross-border consumer credit card transactions to 30 basis points per transaction or a maximum weighted-average cap of 30 basis points respectively, will be replaced by a hard cap of 30 basis points on all credit card transactions.

Applying caps as the lesser of a fixed amount and a fixed percentage of transaction values. The FSI Final Report suggests that applying a fixed percentage cap for debit cards, in addition to a fixed-value cap, would ensure low interchange payments on low-value transactions which would promote merchant acceptance. The use of a dual percentage/value cap has also been proposed in the new EU payments regulation, where debit card interchange could be capped at the lower of 20 basis points or a fixed-value cap which member states may set at their own discretion. In the case of credit cards, the FSI Report notes that the introduction of a fixed-value cap would be a significant change and that a transition period might be warranted if it were adopted.

Including prepaid cards within the caps for debit cards. As noted above, there is a degree of ambiguity in how prepaid cards are dealt with under the interchange benchmarks. Accordingly, it would be helpful to clarify this in a review.

Allowing for ‘buying groups’ for smaller merchants to group together (subject to any competition law restrictions) to negotiate to receive the lower interchange rates that are accessible to larger merchants. This option might be considered in the event a future interchange system continued to generate large differences in the interchange rates faced by different types of merchants. A similar measure was part of a settlement between US merchants and MasterCard and Visa in 2012, although that agreement only requires that card companies meet with merchant buying groups, and not that card schemes must offer similar rates to merchant groups that bring similar transaction volumes.

With respect to surcharging, the Board is interested in views on the following options:

A tiered surcharging system, perhaps along the lines of the FSI recommendations. The FSI Final Report suggests that a three-tier approach would be likely to reduce cases of excessive surcharging by providing merchants with clearer surcharging limits that will reduce problems with enforcement in the current system. Alternatively, other variants of a tiered system might be appropriate. The FSI Final Report proposal would include:
– Allowing low-cost system providers to prevent merchants from surcharging, to encourage consumers to use low-cost payment methods. The Final Report suggests that systems would qualify as low-cost if their interchange fees were below the caps for debit systems (or if three-party systems were equivalently low-cost in terms of merchant service fees). Given the widespread holding of debit cards, this would imply that essentially all consumers would be able to make card payments (presumably including in the online environment) without being surcharged.
– Allowing medium-cost providers to limit surcharges to limits set by the Board. The Final Report suggests that schemes would qualify as medium-cost if their interchange fees were below credit card interchange fee caps (and three-party systems could qualify if their merchant service fees were equivalent to those of other medium-cost providers). The limit set by the Board might be based on average card acceptance costs. Such limits would be published, which would ensure that it was immediately observable to card schemes, consumers and others if a merchant was surcharging excessively – this would enhance the enforceability of such limits.
– Allowing high-cost providers to limit surcharges to the reasonable cost of acceptance. Such providers would also be required to disclose that they were high-cost providers so that their customers would understand why they were likely to be surcharged. The reasonable cost of card acceptance would be based on the costs of the particular merchant, meaning that there would remain scope for dispute over whether a merchant was surcharging excessively.

Targeted changes to reduce particular cases of excessive surcharging. The two industries where concerns about surcharging are most vocal are the taxi and airline industries. Surcharging in the taxi industry is becoming the focus of most state taxi regulators. In the case of the airlines, the current fixed-dollar surcharges would appear to be well above the reasonable cost of card acceptance for low-value fares, given that the costs associated with credit cards are typically mostly ad valorem or percentage-based. Accordingly, a simple measure might be to modify the Bank’s surcharging Standard or Guidance Note to allow schemes to cap any surcharges that are not percentage-based at some low fixed-dollar amount. This could result in a significant reduction in surcharges payable on lower-value fares. It is possible that a change such as this, which would be largely independent of potential other changes to the regulatory framework, could be made relatively quickly.

Any other changes to enforcement procedures and disclosure practices. Where merchants wish to surcharge for particular high-cost payment instruments it is important that any charge should be properly disclosed up front and that there is at least one non-surcharged method of payment that is generally available to consumers. The Board is interested in stakeholder views regarding the extent to which these requirements are met by merchants and also in more general views as to mechanisms by which excessive surcharging or incomplete disclosure of surcharges might be addressed.

The Board is also interested in views on some other possible regulatory changes that could improve the way that market forces operate in the cards system:

Strengthened transparency over the cost of payments to merchants and cardholders. To the extent that there continued to be large differences in interchange rates on cards from a particular system, it would seem important for merchants to know the cost of accepting a card at the time of the transaction, so they can make informed decisions regarding acceptance or surcharging. Greater transparency would also be important for consumers to enhance their understanding of whether they are using a low-cost card or a high-cost card that may be surcharged. Measures to improve transparency could include:
– Ensuring that debit and credit cards are more readily identifiable by merchants electronically.
– Requiring, as in the new EU payments regulation, that categories of cards with different interchange fees should be identifiable both visually and electronically, so that consumers and merchants are aware when a high-cost card is being used.
– Requiring, as in the EU payments regulation, that acquirers must offer merchants pricing and billing that separately shows the interchange fee and merchant service charges that apply to each brand and category of cards. While many Australian merchants are now subject to ‘interchange-plus’ pricing for each scheme, others are still subject to blended rates, including between debit and credit, and some merchant statements do not promote a good understanding of card costs borne by merchants.

Further easing of ‘honour-all-cards’ rules to allow merchants to decline to accept cards with high interchange fees. The current restrictions on honour-all-cards rules allow merchants to make separate acceptance decisions on debit versus credit, but could be extended to allow merchants the freedom to decline high-cost cards within a particular scheme.

Facilitation of differential surcharging by merchants. To the extent that the acquiring market was not providing the ability for merchants to surcharge differentially based on the nature of the card, it might be desirable to explore measures that would require card schemes and acquirers to provide merchants with such ability to differentiate. This might be supplemented, as in the EU proposal, with controls on scheme rules or contractual terms that prevent merchants from informing consumers about the cost of interchange fees or merchant service charges: this would mean that Australian merchants could not be prevented from informing customers of their cost of card acceptance if they wished to justify their surcharging policies.

Ensuring that merchants have the ability to choose to route their transactions via lower-cost networks or processors. This might involve requiring, as is the case for debit cards in the United States, that acquirers must route transactions through the network which the merchant has nominated as their preferred option among those networks available on a card. This could provide some offset to the tendency for competition between schemes to drive interchange fees higher. A stronger option, as will be required in the EU payments regulation currently being considered, would be that the scheme activities and processing infrastructure of card networks are legally separated, so as to facilitate competition in the market for processing transactions.

Clarifying arrangements for competing payment options within a single device or application. One option might be along the lines of the proposed EU payments regulation concerning ‘cobadging’ and choice of payment application. Regulatory measures might include restrictions on scheme rules that prevent the inclusion of other payment brands or payment applications on a device (e.g. mobile phone) or that may prevent different payment options being included within a payment application. The proposed EU payments regulation also requires that security standards or technical specifications, and arrangements for routing transactions, should be applied in a non-discriminatory manner when handling two or more different payment brands or applications on a single device. Similarly, providers of payment services might be required to allow merchants or cardholders the option of specifying their own preferences regarding the priority of different networks or payment methods, both on co-badged devices and in mobile wallet applications.

Finally, the Board is also interested in stakeholder views on the appropriate regulatory arrangements for prepaid cards.

General Issues for Consultation

The Board expects that stakeholders may wish to raise other issues concerning card payments and their role in the broader retail payments system. Accordingly, it encourages stakeholders to suggest any additional measures that the Bank should consider in a review of the regulatory framework. The Board will also take account of any relevant responses to the Government’s current consultation on the recommendations in the Final Report of the Financial System Inquiry.

The Board recognises that some of the possible regulatory changes discussed above (e.g. changes to the interchange fee caps) could imply significant changes to business models in the cards industry while other possible changes (e.g. to improve the transparency of costs to merchants) could imply significant systems changes by schemes and acquirers. It will be mindful of these issues as the Review proceeds. However, the Board notes its concerns about the existing cards model which results in most merchants facing significant variability in the cost of card transactions within the four-party schemes, while having no visibility over these costs at the time of the transaction. Similarly, merchants have limited or no ability to respond to these differences by charging differentially or declining to accept high-cost cards. Accordingly, the Board encourages stakeholders to suggest measures that could address its concerns in ways that would minimise adjustment costs for the payments industry.

During the 2007–08 Review, the Board and the Bank spent a considerable amount of time exploring a non-regulatory approach whereby voluntary undertakings from schemes in relation to interchange fees could serve in place of formal regulation. As noted above, ultimately industry participants were unable to arrive at arrangements that the Board considered were in the public interest. International experience also suggests that non-regulatory solutions have been difficult to achieve. Furthermore, the option of removing interchange fee caps was touched on in the Interim Report of the FSI (FSI 2014a, p 2-31) but not endorsed by the Final Report (FSI 2014b). The Board sees challenges in a nonregulatory approach, but would nonetheless be interested in stakeholder views on approaches that could result in a sustainable framework that met the Board’s concerns and were in the interests of competition and efficiency in the Australian payments system.

Finally, while it is important that any changes to the regulatory system should occur in a way that recognises all the interdependencies, the Board is interested in views about whether there are particular targeted changes, for example to the surcharging framework, that could usefully occur ahead of any more general package of reforms.