Category: Payments

Sleepwalking Into A Cashless Economy

In Australia, our household surveys also show significant appetite for digital payments, especially via mobile devices, and more than half of households here have not used cash for any transaction in the past month. And its rising. The drive to cashless seems unstoppable.

Yet I got caught out yesterday by the NAB systems failure, which saw their payments and internet banking services wiped out thanks to a power failure in Melbourne. My local garage has a NAB terminal and was unable to process EFTPOS payments. Luckily they had the paper based backup, which took credit cards, for later processing. Then at the local café I could not use person to person digital payments from my mobile – they were only taking cash, so I went to an ATM to find that was not working. Luckily I scraped up the spare cash I had pay for my coffee. An object lesson in frustration, and for some businesses, a loss of business, which granted NAB said they would consider compensating.

And this in the week where Telstra’s whole internet and phone system went down (without an explanation this time – at least they did not blame a lightning strike like the previous episode). And of course CBA’s payment systems had gone down previously.

Reflecting on all this, I am pulled in two directions. I am a fan of a digital migration towards a cashless society, yet it also shows there are potential risks which need to be explored further. In fact, consumers, who prefer digital, might be sleepwalking into future disaster. Time to think harder about the risks of going cashless.

And we are not alone. In some Scandinavian countries, the rush towards a cashless society is also hitting some turbulence. Take Sweden for example. It is one of the most cash-free societies in the world. The proportion of cash payments in the retail sector fell from about 40% in 2010 to about 15% in 2016. Two-thirds of consumers say they completely manage without cash; just as many say they mostly use cards even for payments under $20. More than half the nation’s bank branches no longer take or issue cash. Many stores greet the shopper with notices that they no longer accept hard currency. As a result, the total value of cash payments in the economy has fallen to less than 2% of GDP.

“In the not-too-distant future, Sweden may become a society in which cash is no longer generally accepted,” the Swedish central bank said recently. And in February, the bank warned that Sweden could soon face a situation where all payments were controlled by private sector banks. The Riksbank governor called for new legislation to secure public control over the payments system, arguing that being able to make and receive payments is a “collective good” like defence, the courts, or public statistics.

These comments have brought other concerns about a cash-free society into the mainstream. To put it bluntly, when you have a fully digital system you have no weapon to defend yourself if someone turns it off.

And in addition, no system based on technology is invulnerable to glitches and fraud. In the past year two Swedish banks had problems with card payments and by Bank ID, the digital authorisation system that allows people to identify themselves for payment purposes using their phones.  And in addition every transaction can be tracked and recorded, remember Facebook?

Now, the banks recognise that digital payments can be vulnerable, just like cash but argues that they are no more vulnerable than any other method of payment. And they say, it is being driven by the customer preference for convenient payment alternatives.

A recent opinion poll said almost seven out of 10 Swedes wanted to keep the option to use cash, while just 25% wanted a completely cashless society.

So I think it’s time to reconsider the implications of digital payments, not least because payments can be tracked, digital networks appear vulnerable and with ATMs disappearing, it will be harder to get cash when needed.

Perhaps cash is king, after all.

The Battle Of The Mobile Wallet

Juniper Research has just released a report “NFC Vs QR Codes ~ Which Wallet Wins?”

They estimate that, by 2019, nearly 2.1 billion consumers worldwide will use a mobile wallet to make a payment or send money, up by nearly 30% on the 1.6 billion recorded at the end of 2017.  The emergence of several high profile mobile payment services, including Apple Pay, Samsung Pay and Google Pay, has provided the sector with fresh impetus.

Furthermore, the accounts (or wallets) used to store consumer credentials are now have an integration of offline and online payments, enabling users to access them both for remote purchases and instore.

But there are significant regional variations in the mechanisms to make contactless mobile payments. In some countries mobile wallets win out, whereas elsewhere the NFC payment card wins. In addition Host card emulation (HCE) is on the rise, the software architecture that provides exact virtual representation of various electronic identity (access, transit and banking) cards using only software. Prior to the HCE architecture, NFC transactions were mainly carried out using secure elements, such as the chip on a card or other means.

HCE enables mobile applications running on supported operating systems to offer payment card and access card solutions independently of third parties while leveraging cryptographic processes traditionally used by hardware-based secure elements without the need for a physical secure element. This technology enables the merchants to offer payment cards solutions more easily through mobile closed-loop contactless payment solutions, offers real-time distribution of payment cards and, more tactically, allows for an easy deployment scenario that does not require changes to the software inside payment terminals.

When we compare the relative share of contactless cards and wallets in key markets outside the US (Europe, Canada and Australia), we see that, typically, cards account for well over 90% of transactions by value (rising to 98% in Spain and Canada). In the US, the positions are reversed, with mobile wallets accounting for 87% of the total.

While many markets focus on enabling instore mobile payments via NFC (which uses the same infrastructure and technology as contactless cards), a small number have embraced QR code-based instore payments. While precise mechanisms vary, typically the consumer is presented with a printed QR code, after which he/she launches the payment app and scans the code with the smartphone camera. This directs them to a payment page, where the transaction amount is entered and the transaction is made.

By far the most successful deployments of QR code-based payments have come in China, where these have already surpassed cash and cards in both instore transaction volume and values. Deployments elsewhere are sporadic, but the mechanism has been a mainstay of Scandinavian wallets for several years and is also gaining traction in India.

However, a study by researchers at the System Security Lab at the Chinese University of Hong Kong’s Department of Information found that it was possible to gain access to the phone’s camera to record an image of a QR code.

Furthermore, as QR codes can contain any kind of data (not just payment/transaction details), it is possibly to create codes containing links to malware or phishing sites.

As a result, the People’s Bank of China confirmed in December 2017 that it would be introducing plans to regulate payments by QR codes and other scannable codes. The new regulations, which come into effect in April 2018, will include a payments cap of RMB500 ($79) for basic payments, rising to RMB5,000 ($790) if additional security procedures are implemented, such as tokenisation, risk monitoring and anti-counterfeit measures.

Outside China, NFC has long been the proximity payment mechanism of choice by mobile wallet providers, although the initial model whereby the SE was based on the SIM has largely been jettisoned in favour of alternatives, where the SE is either embedded in the handset or else virtualised using HCE.

The evolution of offline payment in the US has lagged behind that in other developed markets, with EMV only mandated from October 2015. After that point, if merchants had not introduced processing systems to facilitate chip-based payments, then liability for fraud would pass from the card providers to those merchants.

Even with the onset of EMV, banks were reluctant to move to Chip & PIN, apparently concerned that their customers would be unable to remember a 4-digit PIN. Hence, US customers now use Chip & signature instead of the more secure alternative.

This means that Apple Pay and the wallets that followed in its wake, have the opportunity to establish themselves as the contactless mechanisms of choice.

The challenge facing Apple and its rivals is to ensure that the infrastructure is in place for consumers to make instore payments. According to Head of Apple Pay Jennifer Bailey, when Apple Pay first launched in September 2014, it was supported by just 3% of retailers, a figure that had risen only marginally by the end of that year. However, by the end of 2017, half of US retailers supported the mechanism, indicative of the progress that contactless has made in that market.

Nevertheless, although a majority of the remaining US retailers are now believed to own POS terminals capable of fulfilling contactless transactions, a significant number have not yet activated the technology. Furthermore, in some stores only a minority of terminals accept the technology: Juniper estimates that just under 30% of all POS terminals in the US were capable of processing contactless transactions by the end of 2017.

Purely from a payments and convenience perspective, it will be difficult for mobile wallet providers to gain market share from contactless cards. It is therefore incumbent upon them to deliver services through which the mobile wallet will become the default payment mechanism.

We would argue that there are at least 2 means by which this could potentially be achieved:

  • Offering an integrated wallet which can be used on both offline and online environments;
  • Offering services based around loyalty.

HCE threatens the central role of the network operator in NFC’s value chain, it strengthens that of the bank and makes handset-based contactless payment a more attractive proposition.

Banks have increasingly understood this. By the end of 2014, Juniper Research estimates that just 7 banks had introduced commercial services based on HCE. By mid January 2016, that number had increased to 55; by the end of 2017, Juniper Research estimates that well over 200 banks had introduced such services. Those launching in 2017 included Belfius (Belgium), Citi (US), Credit Agricole (France), Deutsche Bank (Germany), Rabobank (Netherlands) and SBI (India).

A number of banking collectives have also sought to implement HCE. In June 2016, the Danish banking collective, the BOKIS partnership, launched an HCE wallet utising a solution provided by Nordic digital payments specialist, Nets. The BOKIS partnership includes 62 banks that form the small to mid-sized banks segment of the Association of Local Banks, Savings Banks and Cooperative Banks in Denmark, together with 5 Danish regional banks: Jyske Bank, Sydbank, Spar Nord Bank, Arbejdernes Landsbank and Nykredit Bank. Meanwhile, In October 2016, 27 Spanish banks teamed up to launch a new mobile payment platform called Bizum whicih utilises HCE.

However, despite this plethora of bank launches, adoption has been relatively modest: many services have only a few tens of thousands of users, with none yet reporting that they have achieved more than a million. The scale of the challenge facing the banks is largely tied to that facing NFC in general: in Western Europe; banks’ own contactless services are up against both contactless cards and the OEM-Pays, making it extremely difficult to gain a foothold.

Cardtronics to amend unfair ATM contracts

The ACCC says ATM provider Cardtronics has admitted that its subsidiary, DC Payments, offered contract terms with small business that may be unfair under the Australian Consumer Law.

Cardtronics has given a court-enforceable undertaking to the ACCC to change terms that may be unfair for businesses under existing contracts.

“Business contracts need to balance the rights of each party to ensure they aren’t unfair, as smaller firms may not always be in a strong negotiating position,” ACCC Deputy Chair Dr Michael Schaper said.

“We considered Cardtronics’ contract had several unfair terms, including automatic renewal for six years, unilateral increase of fees, and first right of refusal should businesses seek to change providers at the contract’s conclusion.”

Cardtronic has co-operated with the ACCC’s investigation, and undertaken not to enforce unfair terms for all existing merchants, some of whom entered contracts six years ago.

“This undertaking is a great outcome for Cardtronics’ customers, as the unfair contracts protections for small business only became effective in November 2016,” Dr Schaper said.

While Cardtronics contracts will continue to be automatically renewed, the minimum notice to cancel will be reduced from six months to three months and Cardtronics will provide written notice to customers five months before the end of the contract.

Previously, merchants had to keep track of automatic rollover dates more than five years after entering contracts.

Cardtronics must also provide written notice of any fee increase to customers and allow them to terminate the contract without penalty under a new contract term.

The undertaking is available at Cardtronics Australasia Pty Ltd

Background

This outcome is part of a wider ACCC review of small business contracts in a range of industries. As part of this review, the ACCC has been engaging with a range of businesses to encourage compliance with the new unfair contract term provisions.

For more information, see Businesses remove unfair contract terms before new law.

The Australian Consumer Law allows a court to determine that a term of a standard form contract is unfair and therefore void, meaning that the contract is treated as if the term never existed.

If the term is declared void, the remainder of the contract continues to bind the parties to the extent that it can operate without the unfair term.

From 12 November 2016 the unfair contract terms provisions of the Australian Consumer Law were extended to cover standard form contracts involving small businesses.

Sydney Angels funds QPay $570k to steal millennial students from banks

Australia’s first ever student marketplace app, QPay, has raised $570,000 from a series of high profile investors, including Sydney Angels and the Sydney Angels Sidecar Fund 2, to break into student banking through the release of a student-targeted QPay MasterCard.

QPay aims to use the QPay MasterCard to capture the largest cluster of millennial consumers at the point when they’re most likely to begin making serious financial decisions – when enrolled in tertiary education.

“University is the time when life decisions start to become quite future-focussed, especially regarding our finances,” said Andrew Clapham, Co-Founder of QPay.

“We might be weighing up the amount of student debt we can responsibly accrue, and what return we might expect to receive career-wise. We could be trying to save for a deposit on a property, and wondering the best place to deposit our cash. Or, we might simply be getting a handle on our first experience with budgeting outside of Mum and Dad’s house.

“Whatever the case, university is a crucial turning point for financial decision-making. And the thousands of student transactions occurring on our app each month have allowed us to develop a financial product that perfectly suits the financial behaviour of this group.

“Given that universities arguably comprise the largest cluster of millennials anywhere in Australia, we see this as our first step towards becoming the next challenger bank for millennials,” said Andrew Clapham.

QPay is already used by more than 150,000 students across all major Australian and UK universities, including the University of Sydney, Melbourne, and Queensland, and the University of Oxford and Cambridge. The QPay MasterCard will build on the financial behaviour of these students by uniquely tailoring the rewards it offers every time the card is used for a purchase.

“If you’re a frequent coffee drinker, expect a free coffee from your local coffee shop, or if you regularly shop from a certain store, your next purchase may come with a 50% discount,” continued Andrew Clapham.

“Students are always looking for affordability and convenience – the best deal for the least amount of effort – which is why QPay is being so strongly embraced across all of these universities,” concluded Andrew Clapham.

QPay is backed by a Corporate Authorised Representative with an AFSL license, and the waiting list for the MasterCard has already grown to 4,305 students, far exceeding the initial goal of 2,000 cards.

This proof of concept was a key attraction for QPay’s prestigious investors, which include the head of Royal Bank of Scotland’s Australian arm, Andrew Chick, world-renowned leadership consultant, Charles Carnegie, and prominent angel investor, Rayn Ong.

“QPay’s viral acquisition strategies have created a high level of adoption and engagement even at this early stage,” said Rayn Ong, lead investor and non-executive director of QPay. “It makes sense to take it one step further by bundling relevant deals into the MasterCard offering.”.

QPay received $400,000 from Sydney Angels in 2016 in its first funding round, and has since performed over $11 million transactions for university students – a number which is projected to double by the end of 2018.

The original idea came when the co-founders were students, and realised there was no single access point for student needs such as second-hand textbooks, timetabling, accommodation, student organisations, and campus events.

NAB Adds Samsung Pay

NAB customers can now use Samsung Pay to conveniently make contactless payments.

Samsung Pay is a secure and easy-to-use mobile payment service that allows users to add credit and debit cards from participating financial institutions, and loyalty cards from participating merchants.

NAB Executive General Manager of Consumer Lending, Angus Gilfillan, said Samsung Pay complements the bank’s mobile payments service, NAB Pay, which customers can already use on compatible Samsung and other Android devices.

“We are continuing to invest in giving our customers the best digital payments experience,” Mr Gilfillan said.

“We know Australians increasingly want to pay for their purchases quickly and conveniently. The growth in ‘tap and pay’, and take up of NAB Pay since we launched it two years ago, has been remarkable.

“By adding Samsung Pay, we’re giving our customers more choice in digital wallets.”

NAB customers can also use Samsung, Fitbit, and Garmin smartwatches to make contactless payments, and NAB will also be adding Google Pay to its suite of mobile payment services very soon.

“We see the highest number of NAB Pay transactions being made at supermarkets, restaurants, and at takeaway venues – which is exactly when you want to be able to make quick and easy payments,” Mr Gilfillan said.

Samsung Electronics Australia’s Head of Products and Services, Mark Hodgson, says Samsung is thrilled to be able to provide the Samsung Pay experience to even more Australians.

“Our partnership with NAB builds on our commitment to providing a simple and secure digital wallet experience to every Australian using a Samsung smartphone or wearable. We believe our collaboration with partners like NAB will help further enhance our mobile experience, and we look forward to evolving the portfolio further over the upcoming year.”

NAB also announced last year that it is working with the Commonwealth Bank of Australia and Westpac to build Beem It, a free app enabling anyone to make an instant payment using their smartphone, and to request payment from someone who owes them money or to split a bill.

“We are continually looking at all options to provide our customers with access to safe and secure ways to make digital payments.”

“From our own mobile banking app and NAB Pay, to a range of other payment platforms and services, we’re investing in solutions to help our customers use and manage their money. We’re very pleased to be launching Samsung Pay to our customers now,” Mr Gilfillan said.

NAB’s Mobile Banking App includes a range of world-leading features to help customers have more control over their cards. Features include the ability to switch on or off online transactions, overseas card usage, and ATM withdrawals, and to block, unblock, and replace a card that may have been lost.

The app also includes real-time alerts and merchant information, providing customers more information about their transactions straight away, and a range of options to help them know more about and manage their repayments and accounts.

U.S. Mobile Payments Survey Shows Banks Still Trying To Catch Paypal

JPMorgan Chase & Co. has work to do if it wants Chase Pay to have the same kind of customer adoption as PayPal Holdings Inc.’s digital wallet, based on the results of a recent survey commissioned by S&P Global Market Intelligence.

About 39% of the individuals that used a mobile payment app to pay for an in-store retail purchase in the 30 days prior to taking the survey had used PayPal, versus 13% for Chase Pay.

This was one of several findings of the survey, which began with 904 respondents. Of those, 405 had not used a mobile payment app in the past 30 days, which gave us insight into why respondents would not want to use such services. The 499 that did use mobile payment services, meanwhile, yielded clues on what people do with their apps, such as the aforementioned in-store retail purchases.

Despite offering alternative services, Chase Pay recently partnered with PayPal, letting clients link their cards to their PayPal accounts through Chase Pay to access the PayPal wallet. This is not uncommon, as PayPal partners with other large banks and credit card issuers, such as Bank of America Corp. and Citigroup Inc., to link customer cards to their app. And as our survey data illustrated, respondents often used more than one wallet service.

PayPal also dominated in the survey question regarding person-to-person payments. Nearly 70% of those that had transferred money to an individual used PayPal, and the third most-used app was Venmo, which PayPal also owns. 

Based on our survey, bank apps were slightly more popular than Venmo for person-to-person payments, with about 25% of respondents saying they had used a mobile bank app and about 23% saying they had used Venmo.

The RBA on NPP

From a speech by Michele Bullock RBA Assistant Governor (Financial System) – Address to Seamless Payments 2018.

As you know, the NPP launched to the public in mid February. It is the culmination of more than 5 years’ work from inception to launch. It involved unprecedented cooperation between financial institutions to build the capability to send and receive individual payment messages between themselves in real time, with settlement also occurring transaction-by-transaction through the Reserve Bank’s Fast Settlement Service. But it also required banks to upgrade their internal systems to allow posting to customer accounts within a few seconds. The resources involved in delivering the system as a whole were substantial.

Australia is obviously not the first country to build a fast payments system. FIS in its 2017 report on fast retail payment systems noted that there were some retail payment systems with real-time features as early as the 1970s and 1980s.[1] The report listed 25 countries with live real-time systems in 2017. It listed a further 10 systems under development, at that time including Australia. FIS also provided a useful taxonomy to compare and contrast the various systems – its Faster Payment Innovation Index (FPII). The index rates faster payment systems on the basis of the features they provide. At a basic level, in order to be classified as a fast payment service the system must provide interbank, account-to-account payments in less than one minute end-to-end and be irrevocable. But, the more value-added services and openness to innovation, the higher the rating.

The Australian NPP was not rated in this report since it was not live at the time. But it certainly will offer many of the features that rate highly in the FPII. For example, the taxonomy lists ISO standard and 24/7 availability as being highly desirable features enhancing customer value – the NPP offers both these. It lists fast settlement, the ability to include remittance information with payment and the ability to assign an alias to a bank account as being some of the optional features that maximise customer value. The NPP also delivers these features. There are other capabilities that the NPP does not currently provide – like ‘pull payment’ capability – but the infrastructure will allow other services to be offered in the future.

One of the things that is unique about our NPP is the architecture. There are three facets to this. The first is that the infrastructure for exchanging messages is based on a distributed architecture rather than a centralised hub. Participating institutions implement payment gateways that exchange messages with other payment gateways. There is no centralised infrastructure that processes and switches messages. One key advantage of this architecture is that there is no central point of failure. It also means that many of the functions that might typically be performed in a hub, such as fraud monitoring and exceptions processing, are done by the individual participants. This might be desirable for institutions that want to maintain control over these processes.

The second facet of the architecture that is quite innovative is the separation of the clearing and settlement infrastructure from commercial overlays. The infrastructure has been set up as a utility, and pricing will be on a cost recovery basis. This infrastructure can then be utilised by any number of commercial ‘overlays’ to deliver services that use the NPP’s real-time clearing and settlement capabilities. The first of these is Osko – initially offering person-to-person payments but within a year or so offering payment with document and request to pay. It is also expected that other innovative services will look to leverage the real-time payment capability of the NPP.

The third relatively unusual facet is the real-time transaction-by-transaction settlement of retail payments 24 hours a day, 7 days a week. Australia has had a real-time gross settlement system for high-value payments for weekday settlements for the past 20 years. And this is indeed best practice around the world for high-value payments. But not many countries currently provide real-time settlement of retail payments, and even fewer offer it 24/7. Many fast retail payments services, for example, settle payments in batches through the day or only during business hours. The advantage of utilising real-time settlement in our fast payment service is that it extinguishes settlement risk and removes the need for other controls over settlement risk, such as caps on exposures. The fact that these controls are not required removes some limitations that might otherwise need to be considered by overlay service providers as they design their products.

So now we have this world-class infrastructure, what for the future?

The first point to note is that it is still early days. Given the complexity of the build and the long-term nature of this important piece of infrastructure, the launch was never intended to be a ‘big bang’. While there had been extensive testing ahead of launch, including an extended period of live proving, moving into production always uncovers some issues. A cautious approach to ramping up volumes was therefore an appropriate way to manage the operational risks.

Second, the experience of fast payment systems around the world suggests that volumes will increase quite slowly at first. It took the UK Fast Payment Service around 3½ years to get to 10 transactions per person per annum and Swish, the Swedish system, just under 3 years to get to this level. There are probably a couple of reasons for the initially relatively slow growth in volumes. It will take some time for people to become familiar with the new system – people are typically quite set in their payment habits. Furthermore, like all networks, there are positive externalities the more participants there are. That is, as more financial institutions offer fast payments and the reach of the system grows, it provides greater value to both individuals and businesses. If none of my family and friends can receive payments through the NPP I am less likely to sign up for an alias and use it. But the more people I can pay using the system (and the more people I can receive money from) the higher value I get from the system.

Graph 2
Graph 2: Use of Fast Payments Systems

 

Third, as noted earlier, the system has been set up to encourage the development of commercial ‘overlays’ using the real-time payment capability to deliver value-added services to consumers and businesses. Aside from the additional Osko services in prospect, possible overlays might include services for superannuation, e-invoicing and motor vehicle sales. I am sure there are many innovative minds turning to the possibilities.

This brings me to an issue that has caused some concern among potential new players in this space – access to the NPP. They observe that the system has been built by the financial institutions and is governed by a board made up of those institutions, including the four major banks. They worry that these institutions will either make participation very difficult or costly or, alternatively, will have the inside running on developing and launching commercial overlay services.

I think there are a few reasons to be optimistic that access will not be an issue. To begin with, as I noted earlier, the NPP is a utility. It is aiming to cover costs, not make a profit. Further, given that many of its costs are fixed, it is in the interests of NPP Australia (NPPA) to get as many payments through the system as possible to lower the per-transaction cost.

The structure of the board and the constitution also provide some protection. The board is comprised of eight participant financial institutions (the four major banks plus four elected representatives of smaller institutions), two independent non-executive directors (of which one is chair) plus a director representing the Reserve Bank. Each director has one vote and the constitution notes that an objective of NPPA is to promote the public interest, including through fair access.

But it is also worth noting that the NPP at its core is an infrastructure that facilitates clearing of payment messages between financial institutions and settlement of those obligations across accounts at the Reserve Bank. In this sense, it is similar to other clearing and settlement systems – cheques, direct entry or payment cards, for example. It is not necessary, or even necessarily efficient, for all financial institutions to participate directly in clearing and settlement. In the NPP, for example, there are three aggregators that provide indirect access to institutions that do not want to incur the cost of participating directly. Indeed, there are already around 50 smaller banks, credit unions and building societies that are able to offer fast payments to their customers using the aggregators.

Similarly, it is not necessary for non-financial institutions that want to use the real-time capability of the NPP to participate directly in clearing and settlement. Just as they use the rails of other payment systems through a financial institution to offer their services to customers, they will be able to use the NPP. NPPA is already engaging with start-ups on how they might utilise the infrastructure. More generally, if a business doesn’t like the price for fast payments it is getting from its bank, there are many other institutions that can offer an alternative.

In the end, though, if it looks as though lack of access is stifling competition, the Reserve Bank has the power to designate and set an access regime. As I said, I am fairly optimistic that we will not have to. But it is always an option.

 

Crypto Is Not The Future Of Money

Crypto-currencies do not stand up as a new form of money says Mark Carney, Governor of the Bank of England, speaking on “The Future of Money“. That said, the underlying technologies and capabilities, have potential.

The long, charitable answer is that crypto-currencies act as money, at best, only for some people and to a limited extent, and even then only in parallel with the traditional currencies of the users. The short answer is they are failing.

They are poor stores of value, an inefficient media of exchange and are virtually non-existent units of account.

Authorities need to decide whether to isolate, regulate or integrate crypto-assets and their associated activities.

This is probably the strongest statement on the subject so far from a Central Banker.

But, whatever the merits of crypto-currencies as money, authorities should be careful not to stifle innovations which could in the future improve financial stability; support more innovative, efficient and reliable payment services as well as have wider applications.

The underlying technologies and capabilities, have potential, given the right regulatory frameworks.

Their core technology is already having an impact. Bringing crypto-assets into the regulatory tent could potentially catalyse innovations to serve the public better. Indeed, crypto-assets help point the way to the future of money in three respects:

Decentralised peer-to-peer interactions

Crypto-assets are part of a broader reorganisation of the economy and society into a series of distributed peer-to-peer connections across powerful networks.28 People are increasingly forming connections directly, instantaneously and openly, and this is revolutionising how they consume, work, and communicate.

Yet the financial system continues to be arranged around a series of hubs and spokes like banks and payments, clearing and settlement systems. Crypto-assets are an attempt to create the financial architecture for peer-to-peer transactions. Even if the current generation is not the answer, it is throwing down the gauntlet to the existing payment systems. These must now evolve to meet the demands of fully reliable, real-time, distributed transactions.

Underlying technologies offer to transform the efficiency, reliability and flexibility of payments.

The technologies underlying crypto-assets, particularly distributed ledger, can:

  • Increase the efficiency of managing data;
  • Improve resilience by eliminating central points of failure, as multiple parties will share replicated data and functionality;
  • Enhance transparency (and auditability) through the creation of instant, permanent and immutable records of transactions; and
  • Expand the use of straight-through processes, including with “smart contracts” that on receipt of new information, automatically update and if appropriate, pay.

These properties mean distributed ledger technology could transform everything from how people manage of their interactions with public agencies, including their tax and medical records, through to how businesses manage their supply chains.

A Central bank digital currency (CBDC) accessible to all.

Crypto-assets raise the obvious question about whether their infrastructure could be combined with the trust inherent in existing fiat currencies to create a central bank digital currency (CBDC).

Currently only banks can hold central bank money electronically in the form of a settlement account at the Bank of England. To be truly transformative a general purpose CBDC would open access to individuals and firms.

The Bank has an open mind about the eventual development of a CBDC and an active research programme dedicated to it. That said, given current technological shortcomings in distributed ledger technologies and the risks with offering central bank accounts for all, a true, widely available reliable CBDC does not appear to be a near-term prospect.

Moreover whether it is desirable depends on the answers to a series of big policy questions. While these are largely for another speech, I will note that a general purpose CBDC could mean a much greater role for central banks in the financial system. Central banks may find themselves disintermediating commercial banks in normal times and running the risk of destabilising flights to quality in times of stress.

There are also broader societal questions (that others would need to answer) such as how society balances privacy rights with the extent to which the information in a CBDC could be used to fight terrorism and economic crime.

The New Payments Platform may mean faster transactions, but it won’t be safer

From The Conversation.

Australians will finally enjoy the ability to send each other money in “real time”, with the launch of the New Payments Platform (NPP) today. The platform is a mixture of new processes for settling transactions between banks, guided by the Reserve Bank of Australia.

But while this may make payments faster, it could also make them less safe.

And data from the United Kingdom’s real-time payments platform, Faster Payments, show the take-up of Australia’s system may not be that strong. Although it was launched 10 years ago, Faster Payments has not yet become the most popular payment method in the UK. The most popular is still the traditional system, which takes three days to clear.

Research into the Faster Payments platform shows it is rife with fraud and scams. Part of the problem in the UK is that banks have trouble identifying potentially fraudulent transactions.

The New Payments Platform will also change how you transfer money. BSB and account numbers will still exist, but individuals and businesses can create other identifiers, called “PayID”. This means mobile numbers or email addresses can also be used as a way to identify yourself, both to pay and be paid by others.

The platform will also remove the delays caused by weekends and public holidays and mean you can make transfers after business hours.

The impetus for a real-time payment platform came from a 2012 review by the Reserve Bank of Australia. It found that Australia’s payment system lagged behind even less developed nations, such as Mexico.

But not all banks have signed on to the new payments platform. Those taking a wait-and-see approach include Bank of Queensland, Suncorp and Rabobank. Even some of the subsidiaries of one of the big four banks, Westpac (such as Bank of Melbourne and St George), will not be involved in the launch of the New Payments Platform.

Fraud and abuse in real time

Before the New Payments Platform, numerous safeguards were built into Australia’s payment system that limited fraud and abuse. For instance, if you were planning to buy a car, you would likely go into your bank and ask for a bank cheque. This cheque would be made out to the name of the dealership or person selling the car.

A number of protections are built in to this system. The money is guaranteed by your bank and will clear within three days once deposited. If someone with a different name tries to deposit the cheque, then the cheque will not be accepted and hence the payment will be revoked.

Under the terms and conditions issued by one of the participating banks, banks are not liable for losses that are a result of you giving the wrong account information. Furthermore, a transfer instruction given by you, once accepted by your bank, is irrevocable.

This also applies if you were fraudulently induced to make a transfer via the New Payments Platform. In this case your bank might be able to help you recover the funds, but the recipient of the funds (potentially a fraudster) will have to consent to repay your funds. So if you have a dispute with a recipient of your funds transfer, you will need to resolve the dispute directly with that person or organisation under the new scheme.

It is likely that similar terms and conditions will apply to all the institutions that are members of the New Payments Platform.

The problem will only get worse as the “cap” on transactions is lifted. This happened in the United Kingdom once the Faster Payments cap was raised to £250,000 in 2015.

According to the managing director of the UK Payment Systems Regulator, Hannah Nixon: “There is no silver bullet for [authorised push payment] scams and some people will still, unfortunately, lose out.” Nixon added that account holders also need to take “an appropriate level of care” in protecting themselves.

The UK experience shows that the New Payment Platform is likely to speed up transactions. It took two years for Faster Payments to pass 500 million transactions, but it sped up and passed 5 billion transactions in just over seven years.

In June 2017, Faster Payments processed 135.7 million payments, which was a 15% increase on the previous June. These payments amounted to a total of £115 billion for that month.

But Faster Payments is still not the biggest payment platform in the United Kingdom. Although we don’t know exactly why, there are many possible reasons – including customers not wanting to switch from something they are used to and a fear of fraud.

It could also be that British financial institutions are not promoting Faster Payments to their customers as they can charge higher fees on the traditional payment platform.

Above all, the big concern is detecting fraudulent activity in real time – something that will concern banks’ risk management and which may have led to some choosing to hang back. Payments on the New Payments Platform may be faster and easier to make, but will they be safer? It could just make fraud faster and easier for fraudsters, and harder to undo for victims.

Author: Steve Worthington, Adjunct Professor, Swinburne University of Technology

New Payments Platform Launched

Today, the Reserve Bank of Australia and its Payments System Board (PSB) welcome the public launch of the New Payments Platform (NPP). The NPP is an important addition to Australia’s payments infrastructure and it will provide a platform for innovation and competition in the provision of payment services.

The Reserve Bank and the PSB thank the NPP Australia Board, NPP financial institutions and their thousands of staff who have contributed to the development of the platform over a number of years. It has been a highly collaborative industry program, which has involved considerable planning, effort and investment.

Philip Lowe, Governor and Chair of the PSB, said, ‘The public launch of the NPP represents the delivery of a major piece of national infrastructure. I would like to thank everyone who has been involved in the NPP project and I look forward to the payment innovations it will make possible and the benefits this will generate for all Australians.’

The launch of the NPP means that the industry is delivering on the key strategic objectives that were established by the PSB in June 2012 as part of its Strategic Review of Innovation in the Payments System. In particular, the NPP and the initial overlay service, Osko, will allow financial institutions to provide improved services to Australian businesses and consumers, including to:

  • make real-time payments, with close to immediate funds availability to the recipient
  • make and receive payments on a 24/7 basis
  • have the capacity to send more complete remittance information with payments
  • address payments in a relatively simple way.

Around 60 banks, credit unions and building societies will begin rolling out services to their customers from today, with the number of financial institutions and accounts linked to the NPP progressively increasing over the coming months.

The Reserve Bank developed new infrastructure, the RITS Fast Settlement Service, to enable the settlement of NPP transactions between financial institutions in real time on a 24/7 basis across exchange settlement accounts at the Reserve Bank. The Reserve Bank is also an NPP participant with newly developed services utilising the NPP for its government customers.