Australian
consumers are paying too much for foreign currency conversion (FX)
services because of confusing pricing and a lack of robust competition, a
new ACCC report has found.
The final report of the ACCC’s Foreign Currency Conversion Services Inquiry
highlights important competition and consumer issues affecting
individuals and small businesses who use international money transfers
(IMTs), foreign cash, travel cards, and credit cards or debit cards for
transactions in foreign currencies.
The ACCC found that it can be challenging for consumers to shop
around and make informed decisions about FX services. As a result, many
consumers continue to use the big four banks for FX services despite the
availability of much cheaper alternatives.
It is difficult for consumers to compare prices because some
suppliers do not disclose their total price up front. In addition,
consumers pay unexpected fees for some services. Finally, complex prices
can deter consumers from shopping around because of the time and effort
required to do so.
During 2017-18, individual consumers who used the big four banks to
send IMTs in US dollars and British pounds could have collectively saved
about AUD150 million if they had instead used a lower priced IMT
supplier.
“Shopping around could save Australian consumers hundreds of millions of dollars each year,” ACCC Chair Rod Sims said.
“Consumers and small businesses tend to default to their usual bank
to send money overseas, but this may not be the cheapest option. This is
another example where consumers may end up paying more for their
loyalty.”
Guidance for consumers using FX services
The ACCC has released a guide to
help consumers shop around. For example, the guide gives tips on
sending money overseas and avoiding fees when making overseas purchases
online.
“The guide will help consumers to shop around, carefully select where
and how they pay for their purchases and to identify fees so they can
get the best deal,” Mr Sims said.
“For example, the guide explains how foreign exchange services with low or no fees are not always the best value for money.”
“We have also tried to clear up a few misconceptions, such as the
assumption that paying in Australian dollars when shopping overseas is
always best, when that is not the case.”
The final report warns that travellers can pay a high price for
leaving their purchase of foreign cash to the last minute and buying at
the airport.
Consumers should also consider whether their existing credit or debit
card may be cheaper than using foreign cash or a travel money card for
overseas purchases. Some credit and debit providers offer cards with no
international transaction fees which can be a much cheaper option than
many other products.
Consumers should be aware that some commercial comparison sites may
not be independent and that suppliers may pay for their services to be
promoted by these sites. There are, however, two government-funded
comparison websites for international money transfers (IMTs): www.sendmoneypacific.org and www.saverasia.com, which compare prices of IMT services available to a number of South-East Asian and Pacific Island countries.
Savings to be made
The ACCC inquiry found:
Foreign cash is more expensive at airport locations than at other
locations. When buying USD200 in February 2019, consumers could have
saved AUD40 by purchasing from the cheapest supplier at a non-airport
location, compared with the most expensive supplier at the airport.
Consumers and small businesses who used the most expensive bank to
transfer USD7000 would have paid more than AUD500 more than if they had
used the cheapest supplier.
If customers of the big four banks used a debit or credit card
without international transaction fees instead of a travel money card,
they could save up to AUD13 on a USD200 purchase.
Customers of the big four banks could save up to AUD5 on a USD200
purchase if they used a ‘regular’ debit or credit card instead of a
travel money card.
Guidance for businesses
The report includes best practice guidance for businesses supplying
FX services. It explains how they should disclose prices to consumers.
The guidance focuses on ensuring that businesses clearly disclose the
full price of an FX service to consumers upfront.
“We consider businesses who ignore this best practice guidance may be
at risk of breaching the Australian Consumer Law,” Mr Sims said.
“The ACCC will take action against businesses who do not make appropriate disclosures to consumers.”
New entrants providing lower prices, more advanced services
The ACCC has found that recent competition from newer entrants is
delivering better outcomes for consumers making use of IMTs, including
through lower prices and more advanced services.
These new entrants often rely on obtaining services from banks, their
vertically integrated competitors, to provide IMTs to their customers.
However, the inquiry found that some non-bank IMT suppliers had been
denied access to bank services, such as bank accounts.
“Banks need to comply with Australia’s anti-money laundering and
counter terrorism financing laws, and this is one reason banks have
given for withdrawing banking services to IMT providers,” Mr Sims said.
“The withdrawal of banking services from non-bank IMT suppliers
represents a significant threat to competition that could ultimately
result in less choice and higher prices for consumers.”
To address this issue, the ACCC recommends development of a scheme to
facilitate continued and efficient access to banking services by
non-bank IMT suppliers. This would include addressing the due diligence
requirements of the banks, including in relation to anti-money
laundering and counterterrorism financing requirements.
This scheme should be operational by the end of 2020.
Background
The inquiry was preceded by:
findings by the World Bank
in June 2018 that the cost of sending money overseas from Australia was
approximately 11 per cent higher than the G20 average, 13 per cent
higher than the UK and almost 40 per cent higher than the US
the Productivity Commission’s Report on Competition in the Australian Financial System
which recommended that the ACCC, in consultation with ASIC, investigate
what additional disclosure methods could be used to improve consumer
understanding and comparison of fees for foreign transactions.
On 2 October 2018,
the Treasurer approved the ACCC holding an inquiry into the supply of
FX services in Australia. On the same day, the ACCC released an issues
paper for the inquiry. In response, the ACCC received 63 written
submissions from a mix of consumers, FX services suppliers, small
businesses and other stakeholders.
The final report focuses its competition analysis primarily on IMTs. IMTs are significant for a number of reasons including:
prices in Australia are high by global standards and IMTs are a
significant outlay for Australians with an estimated AUD21 billion in
personal IMTs sent from Australia each year
IMTs are regularly used by groups of potentially vulnerable and disadvantaged consumers such as migrants and temporary workers
the average transaction size for IMTs is much larger than the other services considered in the inquiry.
The inquiry is the second inquiry undertaken by the ACCC’s Financial
Services Competition Branch (FSCB). The FSCB proactively monitors and
promotes competition in Australia’s financial services sector by
assessing competition issues and undertaking market studies.
Facebook released their while paper , and it poses a threat to current payment systems. The 29-page paper describes a protocol designed to evolve as it powers a new global currency.
“The Libra Blockchain is a decentralized, programmable database designed to support a low-volatility cryptocurrency that will have the ability to serve as an efficient medium of exchange for billions of people around the world.”
As Libra is a stablecoin, it will have less volatility than a crypto like Bitcoin as it’s tied to the value of real-world currencies. It’s potential is huge.
All over the world, people with less money pay more for financial services. Hard-earned income is eroded by fees, from remittances and wire costs to overdraft and ATM charges. Payday loans can charge annualized interest rates of 400 percent or more, and finance charges can be as high as $30 just to borrow $100.4 When people are asked why they remain on the fringe of the existing financial system, those who remain “unbanked” point to not having sufficient funds, high and unpredictable fees, banks being too far away, and lacking the necessary documentation.
Behind it, is the Libra Association, which is an independent, not-for-profit membership organization based in Geneva, Switzerland. “Members of the Libra Association will consist of geographically distributed and diverse businesses, nonprofit and multilateral organizations, and academic institutions.”
Founding members include:
Payments: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa
Technology
and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch,
Lyft, MercadoPago, Spotify AB, Uber Technologies, Inc.
Nonprofit
and multilateral organizations, and academic institutions: Creative
Destruction Lab, Kiva, Mercy Corps, Women’s World Banking
The reaction from the fintech industry has been positive, though others are concerned about privacy, and risk from Facebook’s existing reach, and are calling for an inquiry into the proposal before it continues. Which ever way you look at it – this is big news.
The fintech industry has expressed excitement over the announcement by Facebook that it was set to introduce a new cryptocurrency to market with the help of some of the biggest names in tech, via InvestorDaily.
The
cryptocurrency, dubbed Libra, has been announced by a Facebook white
paper stating their mission to empower billions worldwide to enter the
financial market.
“The mission for Libra is a simple global
currency and financial infrastructure that empowers billions of people,”
said the white paper.
The move has been met with excitement by
industry players, and general manager of FinTech Australia Rebecca
Schot-Guppy said such a rollout would open up new markets and promote
fintech innovation.
“Another exciting prospect out of this is
that Facebook’s reach may also help finally educate the public on the
power of blockchain and cryptocurrency. Calibra [digital wallet for
Libra] could take these technologies mainstream and put them at the
fingertips of every Australian,” she said.
Co-founder
and co-chief executive of Assembly Payments Simon Lee said it seemed
like Facebook’s attempting to copy what WeChat and Alipay had done in
China.
“We see Calibra as Facebook’s attempt to roll out what is
happening in China to the rest of the world. They’ve seen the
opportunity and have the scale to execute on it,” he said.
The
currency will be built on the Libra blockchain and backed by a reserve
of assets designed to give it intrinsic value, but perhaps the biggest
nod to consumers is that it will be governed by an independent
association.
Facebook has been plagued with user privacy
controversies, which would lead many consumers to be sceptical to
integrate the social media platform with their financial lives.
However,
the Libra Association is their attempt to placate those voices by
establishing it as a governing entity that is made up of the likes of
Visa, Mastercard, Uber, eBay, Spotify and Vodafone.
The
association, according to the white paper, will facilitate the operation
of the blockchain and manage the Libra reserve, making them the only
party able to mint and burn coins.
The association notes in the
white paper that it is important to move towards increasing
decentralisation to ensure that there remains a low barrier to entry for
the network.
The chief executive of neobank Maslow, Kane
Jackson, said the association’s concept showed that Facebook was aware
of what was required in order for the coin to thrive.
“Facebook
seems to understand that widespread adoption of finance-based products
will not be achieved without the decentralisation of their governance
and a community-inclusive approach to managing them,” he said.
Facebook
has also launched a subsidiary company called Calibra that will handle
its crypto dealings in an effort to separate user privacies, meaning
Libra payments will not intermingle with Facebook data.
Despite
Calibra operating as its own app, the wallet will integrate directly
into WhatsApp and Facebook Messenger to utilise the vast network of
Facebook to promote cryptocurrency.
It is this network promotion
that excites Jasper Lawler, head of research at London Capital Group,
who said the network would open other cryptocurrencies to billions.
“Libra
will breed familiarity of cryptos to a much wider audience. Two billion
people will now be much more open to Bitcoin and other altcoins,” he
said.
As Libra is a stablecoin, it will have less volatility than
a crypto like Bitcoin as it’s tied to the value of real-world
currencies, Mr Lawler said.
“The different properties of a
stablecoin compliment rather than compete with cryptocurrencies like
Bitcoin, Ethereum and Ripple. Being pegged to regular currencies make
stablecoins less volatile and more suited to payment processing,” he
said.
The announcement saw an overnight rally for Facebook, but
the community will have to wait to see how the rollout of the coin goes
as no launch date has been set
Despite the moves last year, CBA has now confirmed that from next year Apple Pay will be available to CBA customers.
CBA says “When Tap & Pay is turned on, you can make purchases up to $100 by tapping the back of your phone against a PayPass reader. The transaction will work even if the phone is locked, turned off or if the battery has run out”.
The Commonwealth Bank appears to have thrown in the towel as far
as keeping Apple Pay out goes, and has said the payment option will be
made available to its own customers and those of Bankwest.
In a statement issued on Friday, the bank said this move constituted
part of its “commitment to becoming a better, simpler bank and providing
the best digital banking experience for our customers”.
The CBA, along with Bendigo and Adelaide Bank, National Australia
Bank and Westpac, attempted to cut a deal with Apple over Apple Pay, but
the Australian Competition and Consumer Commission last year denied them the right to negotiate collectively.
Subsequently, Bendigo and Adelaide Bank quietly adopted Apple Pay.
ANZ was not part of this cartel, and has been offering Apple Pay since April 2016.
No mention was made of the tussle in Friday’s statement. Angus
Sullivan, group executive of Retail Banking Services at CBA, said: “We
recently wrote to our customers asking them what the bank could do
differently and we received lots of excellent suggestions.
“One of the things we heard repeatedly from our customers is that
they want Apple Pay and we’re delighted to be making it available in
January 2019.
“We are committed to making changes that benefit our customers and
simplify our business. We will continue to look for more opportunities
to innovate and listen, to ensure our customers get the best experience
when they bank with us. Responding to customer demand for Apple Pay
underscores our commitment to becoming a better, simpler bank.
“Launching Apple Pay, alongside our No.1 rated CommBank app, will
ensure our customers have the very best mobile banking experience.”
A survey conducted by analyst group Telsyte in February indicated the CBA customers were likely to switch banks if their existing bank did not provide their choice of payment mechanism.
When CBA was asked at the time about the reaction from customers, a spokesman told iTWire:
“When customers consider who they want to bank with, they take into
account a number of factors. A bank’s digital banking and payments
offering is an important factor.
“Our award-winning CommBank app is the number one free banking app in
Australia, with 4.8 million CommBank app users able to take advantage
of its tools including Spend Tracker and PayID.”
Jennifer Bailey, Apple’s vice-president of Internet Services, said on
Friday: “Apple Pay is the No.1 mobile contactless payment service
worldwide and we are thrilled Commonwealth Bank customers will soon be
able to benefit from a convenient and secure way to pay using the Apple
devices they love or within their favourite apps or on the Web.”
It remains to be seen what Westpac and NAB will do with regards to Apple Pay. All four of the big banks offer Samsung Pay and NAB last month signed an agreement with Alipay to make the service available in 2019.
He suggests a turning point has been reached. It is now easier than it has been to conceive of a world in which banknotes are used for relatively few payments; that cash becomes a niche payment instrument.
This morning I would like to speak about the shift towards electronic payments; or as the title of my remarks says, the journey towards a near cashless payments system. For some decades, people have been speculating that we might one day go cashless – that we would no longer be using banknotes for regular payments and that almost all payments would be electronic. So far, this speculation has been exactly that – speculation. But it looks like a turning point has been reached. It is now easier than it has been to conceive of a world in which banknotes are used for relatively few payments; that cash becomes a niche payment instrument.
Given this, I would like to structure my remarks around three broad points.
The first is that the shift to electronic payments is occurring quite quickly and it is likely to continue. This shift is a positive development that should promote our collective welfare.
The second is that if we are to realise the benefits of moving to a near cashless payments system, the electronic system needs to offer the functionality, safety and reliability that people require. People need to have confidence that the electronic payment system will be operating when they want to make their payments and that it will deliver the payment services that they need.
The third point is that as we undertake this journey towards a near cashless payment system, there will be a greater focus on the cost of electronic payments. If almost all payments are electronic, then the cost of making these payments matters more than it used to. The electronic system needs to be as efficient as it can be and to be characterised by strong competition. In my view, there is further work to be done here.
1. The Shift to Electronic Payments
The Reserve Bank conducts regular surveys of how Australians make their payments. The next survey will be undertaken in 2019. Until then, perhaps the best illustration of the declining use of cash for transactions is the sharp decline in the number and value of cash withdrawals through ATMs (Graph 1). Around the turn of decade, Australians went to an ATM, on average, around 40 times per year. Today, we go to an ATM around 25 times a year and the downward trend is likely to continue.
Graph 1
At the same time as the use of cash for payments has been declining, the number of electronic transactions has been growing strongly (Graph 2). Today, Australians make, on average, nearly 500 electronic payments a year, up from around 100 per year around the turn of the century.
Graph 2
New payment technologies are being developed that will further encourage this shift to electronic payments. Perhaps the most significant of these is the New Payments Platform, which has made it possible for people to make real-time person-to-person payments without using banknotes. A range of payment apps are also under development that would have the same effect. So the direction of change is clear.
There also continues to be a decline in the use of cheques (Graph 3).[1] In the mid 1990s, Australians, on average, made around 45 cheque payments per year. Today, we make around three per person. Given this trend is likely to continue, it will be appropriate at some point to wind up the cheque system, given the high fixed costs involved in operating the system. We have not reached that point yet, but it may not be too far away. Before we do, it is important that alternative payment methods are available. Progress has been made on this front, but more is required.
Graph 3
It is worth pointing out that despite the decline in cash use, the value of banknotes on issue, relative to the size of the economy, is close to the highest it has been in fifty years. For every Australian there are currently around thirty $50 and fourteen $100 banknotes on issue (Graph 4).
Graph 4
So there is an apparent paradox between the declining use of cash and the rising value of banknotes on issue. The main explanation is that some people, including non-residents, choose to hold a share of their wealth in Australian banknotes. The opportunity cost of doing this is less than it used to be because of the low level of interest rates.
While it is difficult to predict the future, I expect that banknotes will remain part of our payments system for some time to come.
In some situations, paying with banknotes is quicker and more convenient than paying electronically, although this advantage is less than it once was. Some people also simply prefer paying in cash – our 2016 survey indicated that around 14 per cent of Australians had a preference for using cash as a budgeting tool.
Banknotes also allow payments to be made anonymously in a way that is not possible in systems that leave an electronic fingerprint. This privacy aspect is valued by some people. In some circumstances this desire for privacy is entirely legitimate, but in others it has more to do with tax evasion and illegal activities.
Perhaps a more important source of ongoing demand is the fact that using cash does not require the internet to be up, electricity to be working and the banks’ systems to be operational. Banknotes are therefore an important emergency or back-up payment instrument. They are particularly useful in the event of natural disasters or failure of the electronic system. Perhaps one day the various systems will be so reliable that a backup will not be needed, but that day still seems some way off.
Overall, the shift to electronic payments that is occurring makes a lot of sense – it is similar to other aspects of our lives where things that used to be physical have been supplemented with, or replaced by, technology. This shift is likely to promote our collective welfare. I say that even though the Reserve Bank is the producer of banknotes and earns significant income, or as it’s known, seigniorage, for the taxpayer from their use. The greater use of electronic payments can bring efficiency benefits, with lower costs and more functionality and choice for users. One example of this is the reduced tender time involved in card transactions due to contactless technology. There are also non-trivial production and distribution costs involved in the cash system. Some of these are fixed costs, so the average cost of cash transactions is likely to rise as the volume of cash transactions falls. Looking ahead, there is also more limited scope for fundamental innovation in the cash system compared with the scope for dynamic innovation in electronic payments. So this journey is in our national interest.
2. Functionality, Safety and Reliability
I would now like to discuss three interrelated factors that will influence how quickly we undertake that journey. These are: the functionality offered by the electronic system; the safety of that system, and the reliability of that system. The other factor that is also relevant is cost, and I will touch on this a little later.
Functionality
The rapid adoption of contactless payments in Australia shows that Australians change how they pay quite quickly when new functionality is offered. Contactless card payments were slow to take off but once critical mass was established, they grew very quickly. In our 2013 consumer payment study they accounted for around over 20 per cent of point of sale card payments; three years later they accounted for over 60 per cent. So the functionality of the electronic payments system is key.
The development of the electronic payment system took a major step forward earlier this year with the launch of the New Payments Platform (NPP). This system allows people to make payments 24 hours a day, 7 days a week, using just a simple identifier such as a mobile phone number or an email address. It also allows a lot of information to accompany the payment. I expect that over time this extra functionality will further reduce the use of cash in the economy and also improve the efficiency of the electronic system.
The number of transactions through the NPP is steadily increasing (Graph 5). After a relatively low-key start, there are now around 400,000 NPP transactions per day. Over 2 million PayIDs have also been registered, and we expect further growth as the banks continue to roll out services to their customers.
Graph 5
The concept behind the NPP is that so-called ‘overlay’ services are developed, and that these overlay services offer new functionality that utilise the real time capability of the NPP. The first overlay service provides for a basic account-to-account payment. Among the subsequently planned overlay services are ones that will allow someone to send a request to pay, perhaps to a friend for their share of a meal out. Another overlay service would allow a link to a document to be sent with a payment; this could be a payslip or a detailed record of the transaction.
It was originally anticipated that these two overlay services would be up and running not long after the NPP launch. Unfortunately, this timeline has slipped. A number of the major banks have also been slower than was originally expected to roll out NPP functionality to their entire customer bases. This is in contrast to the capability offered by smaller financial institutions, which from Day 1 were able to provide their customers with NPP services. Given the slow pace of roll-out by the banks, and the prospect of delays for additional overlay services, I recently wrote to the major banks on behalf of the Payments System Board seeking updated timelines and a commitment that these timelines will be satisfied. It is important that these commitments are met.
It is worth observing that in other countries where banks have been slow to develop payment applications that meet the needs of the public, other possibilities emerge. China is perhaps the best example of this, with the emergence of QR-code-based payments. I expect that the NPP infrastructure will be the backbone of our electronic payments system for many years to come. But for this to be the case, the system will need to provide the functionality that people require, and it will need to do this on a timely basis.
There are a range of fintech firms that are excited by the capabilities offered by the NPP and the potential for it to be used for innovative payment solutions. In October, the RBA issued a consultation paper seeking views on the functionality and access arrangements for the NPP. In particular we are interested in views on whether the various ways of accessing the NPP, and their various technical and eligibility requirements, are adequate for different business models.
A topic that I get asked about from time to time is whether the functionality of the electronic system would be enhanced by the RBA issuing an electronic version of the Australian dollar, an eAUD. I spoke about this issue at this conference last year, concluding that we did not see a public policy case for moving in this direction at the time. In particular, it is not clear that RBA-issued electronic banknotes would provide something that account-to-account transfers through the banking system do not, particularly with the emergence of the NPP. Another important consideration was the implications for financial stability. A year on, our views have not changed.
Security
A second important influence on the rate at which we shift to a more electronic payments system is the public’s confidence in the security of the system.
Given this, a recent focus of the Payments System Board has been the high and increasing level of fraud in card-not-present transactions (Graph 6). Card-not-present fraud rose by 15 per cent in 2017 and now represents 87 per cent of total scheme card fraud losses.[2] In contrast, the industry has had successes in addressing card-present fraud, with the introduction of chip technology and the switch to PINs. Despite this, growth in e-commerce activity has provided new opportunities for would-be fraudsters.
Graph 6
The Payments System Board identified the rise in card-not-present fraud as a priority for the industry. In August this year, the Board was pleased to welcome AusPayNet’s publication of a draft industry framework to mitigate card-not-present fraud, and supports continued collaboration on this issue.
A separate but not unrelated priority for the industry is to progress work on digital identity. This is another area where barriers to effective coordination can arise. I am pleased that AusPayNet is undertaking work here, under the auspices of the Australian Payments Council. Digital identity is likely to become increasingly important as more and more activity takes place online. The RBA is highly supportive of industry collaboration on this issue and views it as important that substantive progress is made.
More broadly, individuals, businesses, governments and financial institutions all need to be aware of cyber risks. In the RBA’s most recent Financial Stability Review we noted the increasing sophistication of cyber attacks and that regulatory authorities have increased their focus on cyber issues.
Reliability
A third factor is the confidence that people have that they will be able to use the electronic system when they need to make their payments. As I noted earlier, people will still want to hold and use banknotes if they can’t be sure that the electronic system will be available when they need it. In our consumer payments survey in 2016, we asked people about why they held cash in places outside of their wallet. The most common response, from nearly half of respondents, was that it was for emergency transaction needs.
Over recent times, there have been a number of serious operational incidents that have interrupted the payments system. On some occasions these have been caused by problems with the telecommunications companies and at other times by problems at the banks. An operational incident at the RBA in August as a result of problems with a routine fire test also saw a number of RBA core systems unavailable for some hours, including the Fast Settlement Service supporting the NPP.
We all need to do better here. As we rely less on cash, outages affecting retail transactions can have a significant impact on businesses and individuals. So continued effort needs to be made by all participants in the payments system to reduce operational problems. If this does not happen, then it is possible that the Payments System Board could consider setting some standards.
3. Increased focus on Cost and Competition
My third broad point is about the cost of electronic payments and the importance of competition.
As we move to a predominantly electronic world, there will be more focus on the cost of operating the electronic payments systems and how those costs are allocated between those making and receiving payments.
Looking forward, I expect that over time the cost of electronic payments will decline further, due to both advances in technology and economies of scale. Even so, there are significant costs to operate the electronic systems, including costs for front- and back-end systems to maintain accounts, and to deliver functionality and convenience to users, as well as costs in preventing fraud and ensuring resilience. How these costs are managed and who pays for them will have a significant bearing on the efficiency of the overall system.
In terms of card payments, merchants in Australia currently pay less than merchants in many other countries. The comparison with the United States is particularly stark (Graph 7). For credit cards, Australian merchants, on average, pay 0.8 per cent of the transaction value for Mastercard/Visa transactions. In the United States the figure is much higher at around 2.2 per cent. There are also differences in the cost of debit cards and American Express cards between the two countries.
Graph 7
The main reason for the lower merchant costs in Australia is our lower interchange fees. These fees were reduced in Australia as a result of regulation by the Reserve Bank commencing in 2003. The RBA’s reforms reduced average interchange fees in the Mastercard and Visa systems by around 45 basis points. This has been reflected in merchant service fees; indeed, these merchant fees have fallen by somewhat more than the cuts to interchange, likely reflecting an increased focus on card acceptance costs by merchants (Graph 8). In addition, as a result of competitive pressure, including from the removal of no-surcharge rules, fees on American Express and Diners Club have also fallen over time.
Graph 8
Notwithstanding the reduction in interchange fees, these fees still represent, on average, around 60 per cent of the total merchant service fee on credit cards. So they remain an important part of the total cost to merchants. Conversely, these fees mean that the cardholder’s bank gets paid each time the card is used. This has meant that the cost to consumers of using these cards is often low; in some cases, cardholders are actually subsidised to use their card, through reward points and/or interest-free credit. The subsidy is provided by the cardholder’s bank, but ultimately paid for by the merchant.
The close link between interchange and merchant costs means that there continues to be significant focus on interchange and its implications for the distribution of costs between merchants and consumers. For example, there have been recent recommendations from the Black Economy Taskforce and the Productivity Commission for the Reserve Bank to consider regulatory action to lower, or even ban, interchange fees. The Payments System Board will again examine the arguments for lower interchange fees when it next conducts a formal review of the card payments system.
On the competition front, one area that merits close attention is the market for acquiring services. This has come into sharper focus as a result of concerns about the costs to merchants in the debit card system, where most cards allow for transactions to be processed by either of the two networks enabled on the card. The longstanding view of the Payments System Board has been that merchants should at least have the choice of sending the debit payment through the lower cost system, whether that be eftpos or the international scheme.
For merchants to be able to do this though, acquirers need to offer terminals and technical systems enabled to allow least-cost routing. Some acquirers have already completed the necessary work and are attracting new merchants. Others, including the major banks, made commitments earlier in the year regarding the timetable for this work to be completed. Partly on the basis of those commitments, the Payments System Board made a decision not to regulate. Since then, I regret to say there has been slippage by some, who have cited technical problems. It is important that the banks get back on track here. A failure to deliver on commitments or to provide the payment services that the community needs will inevitably lead to calls for further regulation.
4. Looking ahead
Looking beyond interchange and acquiring competition, new technologies open up the prospect of new payment options developing. Recently, there has been much discussion on the role that so-called ‘Big Tech’ firms might eventually play.
These firms have potential advantages over existing providers of payments services. In some cases, their technology and systems are more flexible, they have a greater ability to use and process information, they have well established networks which they can leverage and they are often better at interacting with their users and customers. Given this, one scenario is that these firms become significant players in the payments industry. They might be able to do this through developing new payment applications that provide a commercial return, not through charging for payment services, but by commercialising the value of the information that they obtain as a by-product of offering these services. If this scenario were to play out, it could significantly change the payments landscape, providing both merchants and consumers new payment options at low monetary cost. At the same time though it would raise a number of important issues related to data privacy, ownership and security.
The probability of Big Tech firms entering the payments arena is higher if merchants and consumers feel that the existing payment systems do not offer them the services they need and/or the prices that are being charged are too high. As I noted earlier, where banks have been slow to respond, other payment applications have emerged.
This scenario highlights a broader point. The way that people are charged for payments is complex and is changing: among other things, it is influenced by interchange fees, how the value of information is commercialised, and commercial pressures on banks. It is difficult to predict how things will ultimately play out, but these are issues the Payments System Board continues to keep a close eye on.
5. Summing Up
To conclude, I expect the shift to electronic payments will continue. The issues of functionality, security and reliability, and cost are central to the development of the system. The Payments System Board will be keeping a close eye on these issues.
While I have talked about a near cashless payments system, I want to emphasise that we don’t yet envisage a world without banknotes. The RBA is committed to providing cash consistent with demand by users and to support its distribution. Our development of the Next Generation Banknote series is a clear commitment to ensuring that cash continues to have public confidence and to meet the needs of the community.
The launch of the NPP this year was a big step forward for the industry and a credit to all of the staff at participating organisations who worked hard over the life of the project to bring it to fruition. As I mentioned, there are some key things that need to be done for the full benefits of the NPP to be available to end-users, but I am optimistic that these can be achieved and this new infrastructure can provide great functionality for Australia.
National Australia Bank is rolling out Chinese QR code payment method Alipay across the country, with the bank to offer it to its Australian business customers from 2019.
You need to have a Chinese passport to set up an account with Alipay for making purchases, so using Alipay as a payment method won’t be possible for most Australians. Our strategy is to grow acceptance of Alipay among Australian merchants so Chinese consumers have a payment method that’s familiar to them, whether they’re migrants, tourists or students. This benefits local businesses, putting them in a better position to attract Chinese consumers. It’s important to remember that Alipay is not a competitor to banks in Australia; we’re a partner.
What kind of take-up is Alipay seeing in Australia and what kinds of businesses are using it?
Alipay is the preferred payment method for Chinese people visiting Australia. We partner with close to 10,000 merchants nationwide and the take-up is growing significantly. The types of Australian businesses using Alipay tend to be retailers, including those located in Chinatowns as well as prominent tourism locations like Sydney’s The Rocks and Melbourne’s Federation Square.
Alipay lets shoppers scan QR codes with their phones to simplify mobile payments. What’s the potential for QR code payments to take off in Australia?
QR codes are increasingly a popular part of the payment process in China. For example, people scan QR codes to do everything from making donations to street musicians to controlling the temperature in hotel rooms. Alibaba’s Hema supermarkets throughout China have, for example, been developed to help bridge the gap between online and offline retail: all goods in Hema supermarkets feature QR codes. The codes aren’t just about payments, either; customers can scan the QR codes to learn more about the product. Alibaba is on a big growth drive there – this year, the number of Hema stores in Beijing will grow from five to 35.
How can Alibaba help Australian businesses looking to make headway in China?
Australia is already the third highest selling country into China on Alibaba’s Tmall Global online retail platform, with Australian brands such as Swisse and Bio Island among the most successful merchants on the platform globally. With more than 1,300 Australian brands selling on Tmall Global, many of which entered China for the first time through our platform, Alibaba remains central to their China strategy.
However, Alibaba doesn’t just offer an ecommerce platform. Our vision is to build the entire operating infrastructure to allow businesses to expand globally. In Australia, we launched our cloud computing arm Alibaba Cloud in 2016, while a growing number of merchants are offering Alipay. Longer-term, we’re planning to bring the full benefits of the Alibaba ecosystem to our partners and merchants across Australia.
And this on their announcement:
Enterprises with a NAB merchant terminal will be able to offer Chinese travellers Alipay in-store, along with access to promoting their businesses on Alipay’s marketing platform, which now holds 870 million active users.
Shane Conway, executive general manager of deposit and transaction services at NAB said that more than 1 million Chinese tourists visit Australia each year, spending more than $11 billion.
“By making China’s number one payment method available to NAB business customers, we’re enabling greater customer service and providing our business customers with access to this large tourism sector which is a win-win for everyone,” Mr Conway said.
“We’re beginning pilot testing with a small group of business merchant customers in November, before making the payment system available to all merchants through existing point-of-sale terminals in early 2019.”
George Lawson, country manager of Australia and New Zealand at Alipay said he is delighted to partner with NAB to help their business customers across the country connect to the expanding number of Chinese tourists.
“China is now Australia’s largest tourism market accounting for 81 per cent of the growth in tourism spend in Australia in the last 12 months. Enabling seamless payments with Alipay represents a significant commercial opportunity for Australian businesses,” said Mr Lawson.
He said the deal provides tens of thousands of merchants the ability to switch-on Alipay seamlessly and reduce friction at the point of sale for Chinese visitors, residents and students.
“Beyond facilitating transactions, Alipay’s marketing platform drives incremental customers and revenue as it offers the best exchange rates and reduces the anxieties associated with using a foreign currency,” Mr Lawson said.
“We expect this deal will give NAB a significant advantage among business owners wanting to capitalise on the China opportunity.”
Tony Richards, RBA Head of Payments Policy Department spoke at the Chicago Payments Symposium, Federal Reserve Bank of Chicago and described the progress on the new payments platform – NPP. 2 million PayID registrations have been achieved so far, and the volume of payments has already outpaced cheques in the system.
Initial NPP operations
After industry testing through much of 2017, the NPP became operational for industry ‘live proving’ in November 2017. It was launched for public use on 13 February this year. This involved around 50 institutions initially, with this number now having increased to around 65 institutions.
As with any completely new payment system, financial institutions have mostly taken a staged approach in their rollout strategies, gradually introducing services, channels and customer segments. In some cases this was to manage risk and allow them to fine-tune their systems and processes, while in other cases it has reflected different stages of readiness. The major banks have mainly focused initially on providing payment capabilities to consumers ahead of businesses, with the rollout to consumers now at a fairly advanced stage.
At this point, there are more than 50 million Australian bank accounts accessible via the NPP, with that number growing steadily. The number of PayID registrations has just reached 2 million – Australia has a population of 25 million. And monthly volumes and values of NPP transactions have been growing strongly.
One interesting statistic is that the number of payments occurring through the NPP has already surpassed the number of cheques that are being written by Australian households, businesses and government entities
An international comparison also offers another interesting metric. While each country is its own special case, it appears that the adoption of the NPP is proceeding at least as quickly as occurred for some other fast-payment systems
As long as the rollout of NPP to households has not been completed, advertising of Osko by BPAY has been limited, but I would expect that this will be picking up, and that financial institutions will also be doing more promotion of real-time payments to their customers. So I would expect the value and volume of NPP transactions to continue to grow strongly.
Some early lessons learned
While the NPP was launched less than eight months ago, I think one can make a number of observations that may be of interest to this audience regarding its design and build, as well as its operation to date.
The presence of a well-resourced project office (from KPMG as well as from APCA and then NPPA) that was independent of the participants was important in the design, build and test phases. This ensured high quality papers for meetings, brought skills that might not have been readily available from participants, and provided independent perspectives during debates about the design and build
Having three aggregators (or service providers) involved as participants was important in ensuring the broad reach (and public legitimacy) of the NPP. The majority of the institutions that were ready to go on Day 1 were small banks, credit unions and building societies using the services of aggregators.
While the build of the Basic Infrastructure and FSS in the centre were major projects, the internal builds for NPP participants were the most challenging tasks. The systems of large banks are inevitably extremely complex, and upgrading them to allow real-time posting and 24/7 operation has taken longer than expected for some. Banks have also placed significant focus on ensuring that their fraud detection systems can support real-time payments.
Ubiquity (or near-ubiquity) is important. It is hard for a new payment system or for individual participants to go out and market aggressively to customers until a critical mass of institutions and accounts are on board. However, balancing this point and the previous one is a challenge. Decisions to launch to the public can only occur once a critical mass of participants is ready, but a program cannot be expected to move at the pace of the slowest participant.
Real-time settlement is going well. The challenges raised by out-of-hours and weekend operations can be met by appropriate central bank liquidity arrangements. Banks can easily move the balances in their Exchange Settlement accounts between the FSS and the RBA’s main RTGS system during normal business hours. These balances are then all moved into the FSS overnight and on weekends. In addition the Reserve Bank introduced a new liquidity facility for open-dated repos, which are available to holders of Exchange Settlement accounts at no penalty relative to the Bank’s policy rate.
Five or six years ago, some banks may have questioned the case for moving to real-time payments, however no one is questioning that case now. Indeed, the early signs are that banks are looking to move their Direct Entry payments over to the fast rails sooner than was earlier expected. Similarly, the decision to move to the ISO 20022 message format and richer data will be an important one for future innovation.
It was important to have the Addressing Service ready to launch on Day 1. PayIDs get around the problems of end-users having to enter lots of numbers, give certainty about the recipient, help avoid ‘fat finger’ problems and mistaken payments, and can reduce fraud.
The involvement of the central bank – from the policy side, as well as in the delivery of settlement arrangements and as a banking service provider – has been important. I suspect that some industry participants may initially have had some concerns about having the Reserve Bank involved, but that they would recognise now that our involvement helped to get some key aspects of the design, build, and business rules right.
The fact that the Basic Infrastructure will be operated as an industry utility available to all, with commercial payment services to be provided by separate overlay services, was also helpful in getting agreement among participants in the design phase.
With the initial build mostly complete, the industry has ambitious plans for additional NPP functionality. While some of this could potentially be delivered via overlay services, it is likely that there will be additional central functionality provided or arranged by NPPA – for example, possibly a central consent and mandate service that could be used to enable direct debits though the NPP. As NPPA increases its capabilities, it may also look to new means of providing functionality. On Friday it announced an API framework with three sample APIs.
A joint venture backed by three of Australia’s big four banks has released its first app, with Beem It now available for iOS and Android devices according to a report in Computerworld.
The Commonwealth Bank of Australia, National Australia Bank and Westpac in October revealed that they would back Beem It, which the trio said would operate independently and seek to sign up additional partners as it developed cross-platform mobile payment services.
The launch of the joint venture came in the wake of the failure of the three banks, along with Bendigo and Adelaide Bank, to receive Australian Competition and Consumer Commission (ACCC) blessing to act as a cartel when negotiating with Apple over its Apple Pay platform.
More than 50 Australian financial institutions support Apple Pay. However, of the big four, only ANZ supports Apple’s digital wallet for iOS devices.
CBA, NAB, Westpac and Bendigo and Adelaide Bank lodged an application with the ACCC that would have allowed them to band together and negotiate with Apple over a number of issues relating to mobile payments.
A key goal of the banks was to force Apple to open up access to the iPhone’s Near Field Communications (NFC) antenna — which would allow the banks’ own iOS applications to support tap-and-go style payments over NFC.
Apple said in response that it would never open up NFC access.
Beem It allows instant payments between individuals signed up to the service. It can also be used to pay businesses that support Beem It and to split bills.
“We’re excited to bring instant payment technology to all Australians, ensuring that everyone can pay, request and split money via their smartphones, regardless of who they bank with,” Beem It CEO Mark Wood said in a statement.
“Beem It uses real-time banking technology to transfer funds between banks and ensure money doesn’t get in the way of great life moments.”
The service is offering $5 credit as a launch promotion. Beem It has a daily limit of $200 a day for sending money, and $10,000 for receiving money.
Earlier this year Australia’s New Payments Platform has its public launch.
The NPP facilitates real-time payments between banks, as well as additional services such as “data enriched” transactions and PayID, which allows payments to be sent using alternative identifiers instead of BSBs and account numbers.
