Category: Payments

Fast Retail Payment Systems

In the December 2014 edition of the RBA Bulletin, there is an important article on the emerging fast retail payment systems.  Here are some of the most salient points:

In December 2014, a group of Australian financial institutions announced that funding had been secured for the next phase of the New Payments Platform (NPP), which will provide the capability for Australian consumers and businesses to make and receive payments in near to real time. The NPP is one example of a fast retail payment system, a number of which have been implemented in other countries in recent years.

Advances in technology – in particular improved telecommunications, faster processing speeds and wide penetration of internet connectivity – mean that real-time payments can be extended to the high-volume, low-value payments used by consumers and businesses (‘retail payments’). Systems implemented in a number of countries allow businesses and consumers to make and receive payments in near to real time, with close-to-immediate funds availability to the recipient. Fast retail payment systems can benefit end users of payments systems, and also payment providers themselves – for example, by replacing the use of relatively costly cheque payments with real-time transfers using a payment application on a mobile device.

Fast retail payments can be thought of as payments that are available for use by the recipient a short time after the payment has been initiated by the sender – within minutes, or indeed seconds. This contrasts with many established retail payment systems that rely on batch processing where funds are made available on the next business day, or even several days later – particularly in the case of cheques. There are three steps within the payment process relevant for achieving fast payments – clearing, posting and settlement. First, following the initiation of a payment by the customer (payer), the exchange of payment instructions and the calculation of payment obligations between financial institutions (referred to collectively as ‘clearing’) need to be performed in real time. Many retail payment systems have tended to clear payments infrequently in batches, making timely receipt of funds by the payee impossible. Second, the recipient’s financial institution must act on the payment instructions it receives in the clearing process to make funds available to the recipient (‘posting’) in near to real time. Finally, the payer’s financial institution needs to ‘settle’ the funds owing to the receiver’s financial institution for the payment. This typically occurs by transferring funds between accounts held by financial institutions at the central bank (Exchange Settlement Accounts in Australia’s case). Clearing and posting need to occur quickly for a system to be, in effect, a ‘fast’ system. However, settlement between financial institutions need not be completed before funds are made available to the recipient customer. There is therefore freedom for settlement to occur in a number of ways and indeed the fast retail payment systems implemented to date have taken varying approaches. While there have been significant developments in recent years, the concept of fast retail payments is not new. For example, Japan’s Zengin Data Telecommunication System (Zengin System) was established in 1973. The development of fast payment systems has generally occurred in one of two ways: through the extension of existing infrastructures (such as high-value systems or real-time ATM infrastructure) to accommodate high-volume, fast retail payments, or through new purpose-built infrastructure. In most cases, new specialised infrastructure has been adopted for retail payments, but there are examples of hybrid systems processing both high-value and retail payments. For example, Japan’s Zengin System clears both high-value and low-value funds transfers in near to real time, but settlement arrangements vary with transaction size. Switzerland’s Swiss Interbank Clearing (SIC) provides for near to real time clearing and settlement of high-value payments and some retail funds transfers. A range of other countries have introduced fast retail payment systems either as hybrid systems or as dedicated low-value systems since 2000. Australia’s NPP system will rely on newly developed clearing infrastructure, with settlement occurring in real time through a new component of the Reserve Bank’s high-value settlement system, the Reserve Bank Information and Transfer System (RITS).

The use of mobile phones as an access channel for fast payment services is a focus for a number of fast payment systems, including in the United Kingdom, Sweden and Singapore. This dovetails particularly well with some services for easier addressing of payments. For instance, the Paym service recently introduced in the United Kingdom enables mobile phone numbers to be used as payment addresses for person-to-person payments (Payments Council 2014). Users register their mobile phone number and link it to their bank account number. They can then send and receive real-time payments to other registered users using their mobile phone numbers through their bank’s internet portal.

The broad approach to providing infrastructure that would support fast retail payments in Australia was established by the industry Real-Time Payments Committee (RTPC) and published in February 2013 (APCA 2013). The RTPC proposed the establishment of a mutual collaborative clearing utility to provide the payments infrastructure to which authorised deposit-taking institutions would be connected for real-time clearing of payments. This utility, known as the Basic Infrastructure (BI), will not be commercial in nature and will provide a platform through which a variety of payment services can be offered. While financial institutions will be able to offer basic payment services to their customers using only the BI, the model proposed by the RTPC anticipates that a variety of ‘overlay services’ will be able to use the BI to offer commercially oriented services, for instance through a commercial scheme. Participation by financial institutions in any particular commercial overlay would be voluntary. This model was chosen with the view that it would provide the greatest scope for innovation and competition between financial institutions and payment providers in the services that can be offered to end users. The RTPC also proposed that an agreed overlay service, referred to as the ‘Initial Convenience Service’ (ICS), would be built at the same time as the BI, to help establish a compelling proposition for use of the NPP from the outset. While the ICS will be the first overlay to give payments system users access to fast retail payments, it is intended to be the first of a number of overlay services that could be developed over time. The BI and the ICS comprise two of the three main components of the NPP. In addition, the Reserve Bank is developing a Fast Settlement Service (FSS) that will provide line-by-line real-time settlement of transactions processed through the NPP. This model will enable real-time clearing and settlement for retail payments, with the recipient’s financial institution able to provide fast access to funds without incurring interbank settlement risk. The interaction of these three components – BI, ICS and FSS – is illustrated below (Figure 1). Consistent with the approach taken in recently developed fast retail payment systems, the NPP will operate 24 hours a day, 7 days a week and will incorporate ISO 20022 messaging standards to facilitate the inclusion of richer remittance information with transactions. The NPP model also includes an addressing solution, enabling users to receive payments without having to supply BSB and account numbers to the payer. This combination – of real-time capability, 24/7 operations, richer messaging functionality and easier addressing – addresses the key gaps in the payments system identified by the Strategic Review. The capacity for new overlay services to utilise the system should also be a vehicle for innovation and competition.

NPPDec2014

Apple Pay In Australia

According to Computerworld Australia, Suncorp Bank has revealed it will soon support contactless mobile payments on Apple iOS and Google Android devices.

Suncorp is one of the first banks in Australia to confirm support for Apple Pay. Westpac has indicated it will work with Apple to open up iPhone payments to its banking app, while Commonwealth Bank has said it would examine the digital wallet.

Near Field Communications (NFC) chips have been included in Android-based phones for some time now, but Apple did not include the technology until the iPhone 6.

Our earlier post discussed Apple Pay, and its rivals in the US market. A number of developments are in train which could disrupt the payments industry.

The Payment Wars

Apple pushed mobile payments forward when it launched Apple Pay. In fact the launch in the US has been popular, Bloomberg reported that on Apple Pay’s first day, at Chase banking services seven times more people added Chase credit cards to Apple Pay than signed up for new credit card. But it is already creating a counter revolution. Over the weekend, Rite Aid and CVS disabled the near field sensors that allowed customers to use Apple Pay and Google Wallet.

This is the tip of an iceberg as more than 50 other major retailers in the US have voted against NFC payments. The rival is based on CurrentC technologies and is being developed by a consortium of merchants known as Merchant Customer Exchange, or MCX. A number of major retailers are involved, which in total account for about one fifth of all sales turnover. They include Gap, Best Buy and Walmart.

CurrentCThere are some important differences between the two systems, because whilst both facilitate payments, they do so in a different way. Apple Pay uses near field communication, and payment transaction details are anonymous, whereas CurrentC, which actually won’t be launched in the US until next year relies on an ap, which users will need to launch to pay and the merchant must scan a QR code, and it does not use NFC. They also link to debit accounts, so bypass the credit card processors, which are fundamental to the Apple Pay model. The key benefit for retailers is that CurrentC works will work with existing loyalty schemes, and allow retailers to accumulate transaction data about their customers (the holy grail of retailing). Apple Pay effectively destroys that link.

The problem is that with completing systems, all backed by large names, customers will be confused, and this confusion will potentially slow the payment revolution. At the heart of the battle is the future of retailing, and who has access to that precious customer data.

It may seen an academic debate seeing as none of the solutions are in Australia (as yet), Apply Pay requires Apple’s latest technologies and CurrentC won’t launch until 2015 in the US; but how this plays out will have a profound impact on the local payment wars down the track. We also expect to see a further proliferation of competing payment solutions which are likely to changing the landscape into the future.

Payments Competition To Increase

The Treasury just released a consultation relating to Banking Amendment (Credit Card) Regulation 2014.  Opening up access to non-ADIs is likely to increase competition and innovation in card issuing and acquiring, resulting in downward pressure on fees and charges, and better service to merchants and end users (which include consumers, business and government). Non-ADIs would also not be subject to the ongoing costs associated with supervision by the Australian Prudential Regulation Authority. We discussed the payments revolution recently. This is likley to put the existing players, namly the major banks under increased pressure.

The changes take effect on 1 January 2015. Implementation of the new regulatory framework will require the Payments System Board of the RBA to vary the Credit Card Access Regimes to provide for reporting requirements and disclosure of eligibility and assessment criteria for Scheme membership. The Australian Payments Clearing Association will also need to vary related Bulk Electronic Clearing System rules to allow certain non-ADIs to continue to participate in the system after the removal of the SCCI framework.

The exposure draft legislation would amend the Banking Regulations 1966 (the Regulations) to open up credit card issuing and acquiring to non authorised-deposit-taking institutions (ADIs). The reforms will allow non-ADIs to become credit card issuers and card acquirers in the Visa and MasterCard credit card schemes.

The exposure draft will revoke Regulation 4 of the Regulations, which provides that credit card acquiring and issuing is ‘banking business’ and triggers supervisory requirements of the Australian Prudential Regulation Authority. The exposure draft also makes a number of consequential amendments to the Regulations as a result of the revocation of Regulation 4.

All new entrants will need to meet the same consumer credit regulations that currently apply to banks (including specialist credit card institutions) under the National Consumer Credit Protection Act 2009. The proposed credit card access reforms will not alter these general consumer credit protections. The card schemes will be responsible for determining which entities may become card issuers or acquirers under their schemes, subject to a risk management framework imposed by the Reserve Bank of Australia (RBA).

Apple and the Payments Revolution

Apple’s latest product announcements included some details about their Apple Pay service, which as we highlighted previously is clearly part of an innovation strategy which will potentially have a profound impact on the payments business and consumer behaviour. Whilst initially US based, Apple Pay is something which has potentially broader consequences. To day we outline the main features of Apple Pay, and reflect on the future impact.

Apple Pay will be built into its new iPhone 6, iPhone 6 Plus, and Apple Watch devices to pay for items via Near Field Communications (NFC), which works by transmitting a radio signal between the device and a receiver, when the two are fractions of an inch apart or touching and will also enable online payments as well. Apple’s motivation, as explained by Tim Cook, was to completely change the current old payments technology, and remove the need to own a physical credit card. Apple said it will speed up the check out process, make payments more secure and ultimately replace physical wallets. Volumes and value of mobile payments are set to rise according to market analysts. Here is a summary from the WSJ.

MobilePaymentsWSJSep2014Here are some of the public comments from Apple:

Gone are the days of searching for your wallet. The wasted moments finding the right card. The swiping and waiting. Now payments happen with a single touch. Apple Pay will change how you pay with breakthrough contactless payment technology and unique security features built right into the devices you have with you every day. So you can use your iPhone 6 or Apple Watch to pay in an easy, secure, and private way.

One touch to pay with Touch ID. Now paying in stores happens in one natural motion — there’s no need to open an app or even wake your display thanks to the innovative Near Field Communication antenna in iPhone 6. To pay, just hold your iPhone near the contactless reader with your finger on Touch ID. You don’t even have to look at the screen to know your payment information was successfully sent. A subtle vibration and beep lets you know.

Double-click to pay and go. You can pay with Apple Watch — just double-click the button below the Digital Crown and hold the face of your Apple Watch near the contactless reader. A gentle pulse and beep confirm that your payment information was sent.

Convenient checkout. On iPhone, you can also use Apple Pay to pay with a single touch in apps. Checking out is as easy as selecting “Apple Pay” and placing your finger on Touch ID.

Passbook already stores your boarding passes, tickets, coupons, and more. Now it can store your credit and debit cards, too. To get started, you can add the credit or debit card from your iTunes account to Passbook by simply entering the card security code.

To add a new card on iPhone, use your iSight camera to instantly capture your card information. Or simply type it in manually. The first card you add automatically becomes your default payment card, but you can go to Passbook any time to pay with a different card or select a new default in Settings.Every time you hand over your credit or debit card to pay, your card number and identity are visible. With Apple Pay, instead of using your actual credit and debit card numbers when you add your card, a unique Device Account Number is assigned, encrypted and securely stored in the Secure Element, a dedicated chip in iPhone and Apple Watch. These numbers are never stored on Apple servers. And when you make a purchase, the Device Account Number alongside a transaction-specific dynamic security code is used to process your payment. So your actual credit or debit card numbers are never shared with merchants or transmitted with payment.

Protect your accounts. Even if you lose your device. If your iPhone is ever lost or stolen, you can use Find My iPhone to quickly put your device in Lost Mode so nothing is accessible, or you can wipe your iPhone clean completely.

Apple doesn’t save your transaction information. With Apple Pay, your payments are private. Apple doesn’t store the details of your transactions so they can’t be tied back to you. Your most recent purchases are kept in Passbook for your convenience, but that’s as far as it goes.

Keep your cards in your wallet. Since you don’t have to show your credit or debit card, you never reveal your name, card number or security code to the cashier when you pay in store. This additional layer of privacy helps ensure that your information stays where it belongs. With you.

Apple Pay works with most of the major credit and debit cards from the top U.S. banks. Just add your participating cards to Passbook and you’ll continue to get all the rewards, benefits, and security of your cards.

Reading further about the service, clearly security is a big focus because instead of storing your card on the phone, Apple Pay creates a dynamic security code. You can add in a new card just by taking an image of it. Touch ID will be used to confirm transactions (fingerprint reading technology) for added security).

Apple Pay will start in the U.S. with Visa, American Express, and Mastercard. As with any e-wallet, the key is getting business to adopt it. Apple has six banks on board and thus far including Bank of America, Capital One Bank, Chase, Citi and Wells Fargo, with more banks later, including Barclaycard, Navy Federal Credit Union, PNC Bank, USAA and U.S. Bank. In terms of merchants, they have named Bloomingdales, Panera, Sephora, Groupon, Subway, Disney, Target, McDonald’s, Whole Foods, Macy’s, and Walgreens. Apple will also accept payments and they will integrate Apple Pay into the Apple ecosystem.

This is Apple’s first foray into NFC payments, in the USA, payments have evolved more slowly than in other countries. For example in Australia, we can use VISA’s PayWave, and Mastercard’s PayPass, collectively known as PayWave.  Just touch your card and pay for anything to a limit of $100. Beyond that, you will still need to enter your PIN to confirm the payment. There have been a few phantom payments, and there is a risk of fraud if someone gets hold of your card, but it is highly convenient. In the Apple video about Apple Pay, they suggest existing PayWave devices will be able to handle Apple Pay. The current terminal standards (Ingenico and ViVOPay) are based on global standards and if Apple Pay is compliant to these, no updates to existing systems will be needed.

Consider this, already PayWave looks likely to supplement and even replace the current dedicated smartcards on transport systems like the Oyster card in London, where from mid September, PayWave will be implemented. It could be a simple step to using you phone to pay for trips directly.

There is no word on if and when Apple Pay may arrive in Australia, but the writing is on the wall for a significant shakeup, perhaps. For example, will the NSW Transport Opal transport card now be subsumed? But the real insight is the integration of consumer data, merchant data and the rest, as we highlighted in out earlier post the payments revolution around the corner.