Lloyds Banking Group said on Monday that it was stopping people buying cryptocurrencies using credit cards, following moves last week from several major U.S. lenders.”Across Lloyds Bank, Bank of Scotland, Halifax and MBNA, we do not accept credit card transactions involving the purchase of cryptocurrencies,” the company told CNBC in a statement.
Concerns have been mounting that people buying digital currencies like bitcoin with credit cards could be getting into debt given wild price swings, particular recently given bitcoin fell below $8,000 for the first time in over two months.
U.K. Prime Minister Theresa May told Bloomberg in a recent interview that the government should consider looking at cryptocurrencies “very seriously.”
Other regulators around the world from China to South Korea have also bought in rules to try to regulate the space.
As Bitcoin loses value, it may seem like it’s just as useful as the cryptocurrency invented for a joke – Dogecoin.
But there are genuine differences between these cryptocurrencies, and it’s not just because one is “much currency, such volatility”.
There are 1,448 cryptocurrencies around the world, by some counts. For every Bitcoin you have a programmable coin like Ethereum, or a coin that acts like a token for specific services, like Augur.
Some of these coins earn better reputations because of their usefulness, the people who made them, or the tech itself. They are not all taken seriously by investors, researchers and users.
The developers behind these cryptocurrencies are also important as they convince other people to adopt them and write new code for the technology to evolve. This new tech attracts new users into the system.
Different functions
Cryptocurrencies can be divided into several types. Cryptocurrencies like Bitcoin, Litecoin, and Dogecoin only provide basic functions such as transferring value from one party to another.
The next category are smart contract cryptocurrencies like Ethereum, Cardano, NEO, and Waves. These cryptocurrencies can be programmed, and so can become the basis for applications like games and digital markets.
The third type are cryptocurrencies designed to preserve your privacy like Monero and Zcash. These claim to be “untraceable” although transaction records are still available.
The differing technologies in these cryptocurrencies mean that certain coins have more potential than others.
IOTA is used for “Internet of Things” devices (such as a smart kettle). But it has a special kind of blockchain (the technology that tracks transactions) and so can achieve much higher speeds of transaction and quicker confirmation of trades than Bitcoin.
Others like Nxt, and Ardor have built-in features that let users to do other things than just sending coins, such as creating marketplaces and even messaging.
People use cryptocurrencies like Zcash and Monero to settle transactions with “zero-knowledge”. This means the cryptocurrencies hide the information of the real payers and payees, and even the amount of coins transacted.
The major cryptocurrencies, like Bitcoin and Ethereum, are slow because of their inability to handle massive amount of data being sent by users. The technology used to secure the data are expensive and inefficient.
But new entrants, such as Red Belly from the University of Sydney, might be able to solve this problem, handling up to 660,000 transactions per second.
Smart contracts can also run into problems if they contain bugs. When a decentralised organisation built on Ethereum was hacked in 2016, US$50 million in Ether was stolen.
When something achieves the success of Bitcoin we’re bound to see competitors entering the market, hoping to grab a share.
This explains the explosion in cryptocurrencies since the Bitcoin source code was released under an open licence. Anyone can copy, modify, and release a modified version of Bitcoin.
By looking at the current trend, we will see more cryptocoins in the near future.
But as we can see, “cryptocurrency” is a term that encompasses a wide range of different technologies, communities and uses. It’s all of these factors that inform whether users, investors, developers and researchers take a coin seriously.
Author: Dimaz Wijaya PhD Student, Monash University
US consumers are making more “remote” payments according to new payments data collected by the Federal Reserve. Remote general-purpose credit card payments, including online shopping and bill pay; all enabled by digital.
The number of credit card payments grew 10.2 percent in 2016 to 37.3 billion with a total value of $3.27 trillion. The increase in the number of payments compares with an 8.1 percent annual rate from 2012 to 2015 and was boosted by continued strong growth in the number of payments made remotely. Remote general-purpose credit card payments, including online shopping and bill pay, rose at a rate of 16.6 percent in 2016. More broadly, remote payments in 2016 represented 22.2 percent of all general-purpose credit and prepaid debit card payments, up 1.5 percentage points from an estimated 20.7 percent in 2015. By value, remote payments represented 44.0 percent of all general-purpose card payments, a slight increase from an estimated 42.9 percent in 2015.
The 2016 data on trends in card payments, as well as Automated Clearing House (ACH) transactions and checks, are the product of a new annual collection effort that will supplement the Federal Reserve’s triennial payments studies. Information released today compares the annual growth rates for noncash payments between 2015 and 2016 with estimates from previous studies.
Key findings include:
Total U.S. card payments reached 111.1 billion in 2016, reflecting 7.4 percent growth since 2015. The value of card payments grew by 5.8 percent and totaled $5.98 trillion in 2016. Growth rates by number and value were each down slightly from the rates recorded from 2012 to 2015.
Debit card payment growth slowed by number and value from 2015 to 2016 as compared with 2012 to 2015, growing 6.0 percent by number and 5.3 percent by value compared with a previous annual growth rate of 7.2 percent by number and 6.9 percent by value.
Use of computer microchips for in-person general-purpose card payments increased notably from 2015 to 2016, reflecting the coordinated effort to place the technology in cards and card-accepting terminals. By 2016, 19.1 percent of all in-person general-purpose card payments were made by chip (26.9 percent by value), compared with only 2.0 percent (3.4 percent by value) in 2015.
Data also reveal a shift in the value of payments fraud using general-purpose cards from predominantly in person, estimated at 53.8 percent in 2015, to predominantly remote, estimated at 58.5 percent in 2016. This shift can also be attributed, in part, to the reduction in counterfeit card fraud, the sort of fraud that cards and card-accepting terminals using computer chips instead of magnetic stripes help to prevent.
From 2012 to 2015, ACH network transfers, representing payments over the ACH network, grew at annual rates of 4.9 percent by number and 4.1 percent by value. Growth in both of these measures increased for the 2015 to 2016 period, rising to 5.3 percent by number and 5.1 percent by value. The average value of an ACH network transfer decreased slightly from $2,159 in 2015 to $2,156 in 2016.
Data from the largest depository institutions show the number of commercial checks paid, which excludes Treasury checks and postal money orders, declined 3.6 percent between 2015 and 2016. By value, commercial checks are estimated to have declined 3.7 percent during the same period. The steeper decline in value versus volume suggests the average value of a commercial check paid has declined slightly since 2015.
Data released today from the Australia Payment Network, shows that in the 12 months to 30 June 2017, fraudulent transactions on Australian cards totalled more than $730.1 billion over the 12-month period – up 3.8% and Card fraud increased by 3.1% to $538.2 million.
Within that:
counterfeit and skimming fraud dropped 34%
card-not-present fraud increased 10%, now accounting for 82% of all fraud on Australian cards
As chip technology continues to provide strong protection against counterfeit card, fraud is migrating to online channels.
With malware and phishing attacks becoming increasingly sophisticated, we also need to be extremely wary of unsolicited emails and text messages from people we don’t know. Don’t click on the link provided and don’t be tricked into divulging confidential data such as your password
The total fraud on the scheme cards was $516 million.
ANZ today announced it was reducing international money transfer fees from Australia to foreign countries, effective immediately.
Exchange rates have also been reduced for all ANZ offered currencies, including US Dollars, Euros, New Zealand Dollars, Great Britain Pounds, Hong Kong Dollars, Japanese Yen, Philippine Pesos and Indian Rupees.
For Internet Banking there will be no fee1 for all International Money Transfers sent from Australia in a foreign currency above the equivalent of AUD $10,0002. For transfers below that level the fee has been reduced from $18 to $12.
Commenting on the decision, Group Executive Australia Fred Ohlsson said: “Australia is one of the most digitally active nations in the world, and our customers are using electronic payment methods more than ever before.”
“This decision to reduce fees and rates is great news particularly for those who regularly send money to their home countries. We’re pleased to be making these payments more affordable for our customers,” Mr Ohlsson said.
The RBA’s Tony Richards, Head of Payments Policy spoke at the Australian Payment Summit 2017 and discussed the vexed issue of Least Cost Routing for EFTPOS transactions, especially when using Tap-and-Go. Until very recently, acquirers have indicated reluctance to provide least-cost routing to their merchant customers. This is partly due to the expected systems work, including to reprogram terminals. But pressure is mounting, as for example, the recent House of Reps report.
He says indications are that all four of the major banks are moving to providing least-cost routing if requested by merchants, though in some cases they have indicated this could occur on a fairly extended timetable.
So, merchants, do yourself a favour, and ask! You may save on your transaction costs!
Given that payment costs are a significant item for merchants, it is not surprising that merchants pay attention to them. Just as merchants are keen to hold down other business costs, they are also keen to hold down their payment costs. Recently, they have drawn attention to a particular issue that is driving up their cost of payments.
The majority of debit cards issued in Australia are now dual-network cards, which means that authorisation of cardholders’ debit transactions can occur through different networks – the domestic eftpos network or the debit networks of the international MasterCard or Visa schemes. If you look at your debit or ATM card, there is a good chance it will have an international scheme logo on one side and the eftpos logo on the other.
Traditionally, cardholders have determined how their debit transactions are processed, by pressing either the CHQ or SAV buttons for eftpos or the CR button for the international network, before entering their PIN. However, with the shift to contactless or ‘tap-and-go’ transactions, the processing of debit transactions has been shifting to the international networks. This initially reflected the fact that contactless payments were only available for the international schemes. Most cards and terminals are now also activated for eftpos contactless functionality. However, when card-issuing banks send out dual-network debit cards they are programmed with the international scheme as the first-priority network for contactless use and the eftpos network as second priority.
Most cardholders are indifferent about which network processes their contactless transactions. Both networks can link to the same debit account and cardholders do not directly bear the costs of the transactions. Moreover, there are typically no rewards programs associated with debit transactions, and customers receive similar protections from fraud and disputed transactions, based on the ePayments Code and the chargeback policies of the three schemes.
However, many merchants have a preference for transactions to be processed via the eftpos network, because it is typically less expensive for them. Accordingly, many merchants have been calling for their acquirer banks to provide them with ‘least-cost routing’, i.e., terminal functionality that sends contactless debit transactions via the lower-cost network. Terminals might be programmed to always send dual-network card transactions via a particular network or they might use dynamic rules which identify the lower-cost network for each transaction.
The Bank has had discussions with consumer organisations and staff from the Australian Competition and Consumer Commission (ACCC) as to how least-cost routing might be implemented. We consider that it would be desirable for a merchant implementing least-cost routing to disclose this to customers. Depending on how terminals were actually programmed, this could be by a sign that the merchant will typically send tap-and-go debit card transactions via a certain network, but noting that customers wishing to send transactions via a different network could insert or dip their cards and push the button or keypad for their preferred network. A sign such as this would provide consumers with the opportunity to override the merchant’s preferred network if they wished. Such a framework would seem to be a reasonable balance between the rights of merchants and consumers, and it is likely that consumers would quickly become used to the idea that their transactions could be sent via different networks at different merchants.
The Reserve Bank has taken an interest in dual-network card issues because of the Payments System Board’s mandate to promote competition and efficiency. As the Bank and other observers of the payments system have frequently noted, the nature of competition in the payment card market is often such that it tends to drive up costs to merchants, as schemes increase their interchange fees to persuade issuers to issue their cards. Merchants have typically had little ability to offset these pressures (in the absence of regulatory intervention to cap interchange fees or remove schemes’ no-surcharge rules). However, dual-network cards can potentially offset the pressures for payment costs to rise, because the merchant may be able to steer the consumer to use the lower-cost of the two networks on a card. Accordingly, the Bank has indicated that it supports the issue of such cards in Australia, because they are convenient for cardholders and allow stronger competition between networks at the point of sale, facilitating both consumer and merchant choice.
Some disputes over dual-network debit cards emerged between the debit schemes in 2012-13. However, after a series of discussions with the Bank, in August 2013 the three debit schemes made voluntary undertakings to the Bank that addressed some policy concerns. These included commitments:
to work constructively to allow issuers to include applications from two networks on the same card and chip, where issuers wished to do this;
not to prevent merchants from exercising choice in the networks they accept, in both the contact and contactless environments; and
not to prevent merchants from exercising their own transaction routing priorities when there are two contactless debit applications on one card.
As noted above, most terminals and eftpos cards are now enabled for tap-and-go eftpos transactions. Given the Bank’s views about the potential competition and efficiency benefits of dual-network cards, as well as the earlier commitments by the three debit schemes, the Bank has been liaising with a range of stakeholders over recent months to encourage the provision of least-cost routing functionality to merchants.
However, until very recently, acquirers have indicated reluctance to provide least-cost routing to their merchant customers. This is partly due to the expected systems work, including to reprogram terminals.
In addition, some merchants have expressed concern to the Bank that the international schemes might resist the implementation of least-cost routing. To the extent that transactions via the international schemes are currently more expensive to merchants, a possible outcome of least-cost routing becoming available would be for the international schemes to reduce scheme or interchange fees so that merchants have little incentive to send transactions via another network. However, some merchants are concerned about other possible responses, including that the international schemes might respond to a merchant’s decision to implement least-cost routing of debit transactions by increasing the interchange rates that apply to the merchant’s credit transactions. They have also noted that the international schemes might try to preclude least-cost routing by attempting to persuade issuers to stop issuing dual-network cards. The ACCC is aware of these concerns, and is closely monitoring the situation. With the passage of the Harper reforms, which came into effect in November this year, the ACCC now has even stronger powers to investigate and take action in relation to conduct by the international schemes that might hinder competitive conduct by a lower-cost provider.
The Payments System Board has discussed issues involving dual-network cards in recent meetings. At its 17 November meeting, the Board strongly supported calls from a range of stakeholders for acquirers to provide merchants with least-cost routing functionality for contactless transactions using dual-network debit cards. It requested the Bank staff to continue to engage with the payments industry on this issue, noting that ‘a prompt industry solution was preferable to regulation’.
More recently, the Review of the Four Major Banks by the House of Representatives Standing Committee on Economics has made the following recommendation:
“The committee recommends that banks be required to give merchants the ability to send tap-and-go payments from dual-network debit cards through the channel of their choice.
Merchants should be able to choose whether to route these transactions through eftpos or another channel, noting that consumers may override this merchant preference if they choose to do so.
If the banks have not facilitated this recommendation by 1 April 2018, the Payments System Board should take regulatory action to require this to occur.”
Recent indications are that all four of the major banks are moving to providing least-cost routing if requested by merchants, though in some cases they have indicated this could occur on a fairly extended timetable. We expect that some of the smaller acquirers may be able to move more quickly.
Accordingly, the Bank expects that by early in 2018 there will be concrete indications that a critical mass of acquirers are moving to provide least-cost routing and that the international schemes are not attempting to prevent this. However, if this expectation is not met, I expect that the Payments System Board will consider consulting on a regulatory solution that deals with all the relevant considerations. While of course the measures that could be consulted on will be determined by the Board, I can imagine that this could involve considering whether some or all of the following measures might be in the public interest:
a requirement that acquirers must provide merchants with least-cost routing functionality for contactless dual-network debit card transactions
a requirement for enhanced transparency in contractual pricing of acquiring services to merchants
requirements that schemes publish explicit criteria for any preferred or strategic interchange fees and that any such criteria may not be related to acceptance decisions relating to other payment systems
anti-avoidance provisions that ensure adherence to the spirit, as well as the letter, of any standard.
Payments is fast evolving from cash or plastic to digital. But as the universe of potential digitally enabled payment options proliferates, winners and losers will be determined not by simply fulfilling a payment instruction (now taken as given) but by the customer experience, and degree of trust.
New players, new platforms, and new devices. This transformation is discussed in a recent Inc. article, which I recommend. It nicely portrays the quantum of change and the dilemmas faced by incumbents. I reckon the payments revolution is less than 10% done!
It is safe to say that for every invention, innovation, or evolution that drives the modern world, we face a tradeoff of sorts. When we shift from a relationship-based economy to a transactional one, we gain efficiency and convenience while relinquishing privacy and some level of human interaction.
For the average consumer living in an age of convenience, missing parts of conversations during dinner with friends is worth the hassle-free experience of ordering a rideshare via our mobile app or pulling up a photo on Instagram as a reference point. Intrinsically, these things aren’t bad, but what it certainly means is that we (as both businesses and consumers) are placing our trust far beyond the locus of personal control, and into the hands of the the brands delivering products and services to us vis-à-vis technology .
Want to stay at a palatial estate off the coast of Italy? You don’t need to know a prince; you just need a profile on Airbnb, a credit card, and a mobile phone.
We need to look no further than the financial technology (FinTech) industry to understand how our collective move toward convenience will translate to a heightened trust for brands that can deliver us products and services in a secure, connected, meaningful way. As consumers require less cash and more credit across devices, payments innovation will evolve to accommodate this convenience-led consumer behavior.
In a recent conversation I had with author, BBC radio/podcast host, and Financial Times writer Tim Harford, he summed it up nicely: “Credit equals trust.” More pointedly: “Over the last one-hundred years, we’ve seen a slow evolution from a particular type of trust that occurred locally, to a broadening out…whereby more and more people are trusted to do more and more things.”
While credit cards were the first trend toward expanding trust beyond your local store or banker, the next several years will reach an entirely new level of trust as mobile-enabled, contactless payment methods reach wide adoption.
Drivers of payments innovation
According to Visa’s recently released “Innovations for a Cashless World” report, four main trends will drive both consumer behavior and brand payment technology decisions over the next several years: Continuation of cashless transformation driven by card to cloud, everything as Point-of-Sale, paying in messaging platforms, transactions without borders, and the rise of the API economy.
“The ideas and findings in the report shine a light on the macro trends that will define commerce in 2018,” said Shiv Singh, senior vice president of innovation and strategic partnerships at Visa. “As innovation continues to outpace itself year after year, the rise of a cashless economy accelerates as more people around the world adopt technology.”
Several findings from the report give keen insight into our future, while simultaneously reminding us that how we pay for things holds far-reaching implications for both consumers and businesses, both of which are being somewhat forced to change old, institutionalized behaviors:
By 2020, 70% of the world (more than 5 billion people) will be connected by mobile devices, facilitating the transition to a cash-free future.
By 2020, more than 20 billion devices will be connected to the Internet; and where there is Internet there is an opportunity to channel it to a point of sale.
With more users than the population of China, messaging platforms like Facebook Messenger will drive peer-to-peer payments forward as significant growth in this area is expected in 2018.
APIs expand the opportunity for innovation by enabling companies to focus on one link in the chain rather than owning an entire value chain.
Customer experience: the ultimate trust test
While technology is one aspect of payments innovation, managing customer expectations and the human aspects of traction and adoption is also a key component. Companies must get this right in order to deliver the right products and services over the right channels at the right price point.
A recently published report by Accenture Consulting, “Driving the future of payments: 10 megatrends,” reinforces several of the salient findings from Visa’s report, while emphasizing customer experience (CX) as one of the main drivers of how payments will either succeed or fail as we move into the next several years:
“As the payments universe expands, customer experience is becoming the prime competitive differentiator. The irony–and the danger–for traditional players is that customer experience is in the spotlight just as they are losing control of customers. Less touchpoints mean less opportunities to shine. So when companies have customers’ attention, they better get it right.”
Luke Williams, Head of CX at Qualtrics, adds: “Companies are being infused with technologies, creating simultaneous potential for internal risk and disruption of their competitors. The trend now is ‘programmable technology layers’ – where the technology is open and customizable.”
According to Williams, this allows a nimble firm to compete how it wants to without being limited by narrow, rigid technologies. The rise of API economy (as cited in “Innovations for a Cashless World”) is a direct result of this trend, where the mindset shifted to interoperability of products and features.
How brands integrate technology with core aspects of the customers’ experience becomes even more relevant, as machine learning and AI replace humans in many cases. This is not necessarily a negative thing, as long as the technology is being utilized to enhance the relationship with a customer: “AI represents the future of frontline customer service.” remarked Todd Clark, President and CEO of CO-OP Financial Services. “AI-driven chatbots (computer programs simulating human conversation) can handle a significant number of basic customer service questions, freeing up resources to focus on issues requiring more significant attention. This type of support also allows for shorter wait times on the phone and with in-person chat, and as the AI system earns more about the nuances of situations, it will gradually increase the accuracy and scope of its support capabilities.”
Williams adds: “Companies that are viewed as trustworthy, while creating delightful, differentiated customer experiences (often driven by technology), will enjoy significant gains.”
As we head toward 2020, what we will lose in personal connection and first-hand decision making we will gain in broader experiences, accessibility, and opportunity. In essence, we will break down borders and (for those fortunate enough to have access) create a self-actualized world whereby simple transactions, coupled with trusting relationships, can enable the most mundane tasks to luxury experiences.
RBA Governor Philip Lowe spoke at the 2017 Australian Payment Summit and explored some of the disruption in the payments system, including falling cash transactions, an eAUD, electronic bank notes and distributed ledger systems. He also said that a convincing case for issuing Australian dollars on the blockchain for use with limited private systems has not yet been made.
A clear lesson from history is that as people’s needs change and technology improves, so too does the form that money takes. Once upon a time, people used clam shells and stones as money. And for a while, right here in the colony of New South Wales, rum was notoriously used. For many hundreds of years, though, metal coins were the main form of money. Then, as printing technology developed, paper banknotes became the norm. The next advance in technology – developed right here in Australia – was the printing of banknotes on polymer.
No doubt, this evolution will continue. Though predicting its exact nature is difficult. But as Australia’s central bank, the RBA has been giving considerable thought as to what the future might look like. We are the issuer of Australia’s banknotes, the provider of exchange settlement accounts for the financial sector, and we have a broad responsibility for the efficiency of the payments system, so this is an important issue for us.
Today I want to share with you some of our thinking about this future and to address a question that I am being asked increasingly frequently: does the RBA intend to issue a digital form of the Australian dollar? Let’s call it an eAUD.
The short answer to this question is that we have no immediate plans to issue an electronic form of Australian dollar banknotes, but we are continuing to look at the pros and cons. At the same time, we are also looking at how settlement arrangements with central bank money might evolve as new technologies emerge.
As we have worked through the issues, we have developed a series of working hypotheses. I would like to use this opportunity to outline these hypotheses and then discuss each of them briefly. As you will see, we have more confidence in some of these than others.
There will be a further significant shift to electronic payments, but there will still be a place for banknotes, although they will be used less frequently.
It is likely that this shift to electronic payments will occur largely through products offered by the banking system. This is not a given, though. It will require financial institutions to offer customers low-cost solutions that meet their needs.
An electronic form of banknotes could coexist with the electronic payment systems operated by the banks, although the case for this new form of money is not yet established. If an electronic form of Australian dollar banknotes was to become a commonly used payment method, it would probably best be issued by the RBA and distributed by financial institutions, just as physical banknotes are today.
Another possibility that is sometimes suggested for encouraging the shift to electronic payments would be for the RBA to offer every Australian an exchange settlement account with easy, low-cost payments functionality. To be clear, we see no case for doing this.
It is possible that the RBA might, in time, issue a new form of digital money – a variation on exchange settlement accounts – perhaps using distributed ledger technology. This money could then be used in specific settlement systems. The case for doing this has not yet been established, but we are open to the idea.
So these are our five working hypotheses. I would now like to expand on each of these.
1. The Shift to Electronic Payments
An appropriate starting point is to recognise that most money is already digital or electronic. Only 3½ per cent of what is known as ‘broad money’ in Australia is in the form of physical currency. The rest is in the form of deposits, which, most of the time, can be accessed electronically. So the vast majority of what we know today as money is a liability of the private sector, and not the central bank, and is already electronic.
With most money available electronically, there has been a substantial shift to electronic forms of payments as well. There are various ways of tracking this shift.
One is the survey of consumers that the RBA conducts every three years. When we first conducted this survey in 2007, we estimated that cash accounted for around 70 per cent of transactions made by households. In the most recent survey, which was conducted last year, this share had fallen to 37 per cent (Graph 1).
Graph 1
A second way of tracking the change is the decline in cash withdrawals from ATMs. The number of withdrawals peaked in 2008 and since then has fallen by around 25 per cent (Graph 2). This trend is likely to continue.
Graph 2
The third area where we can see this shift is the rapid growth in the number of debt and credit card transactions and in transactions using the direct entry system. Since 2005, the number of transactions using these systems has grown at an average annual rate of 10 per cent (Graph 3). This stands in contrast to the decline in the use of cash and cheques.
Graph 3
The overall picture is pretty clear. There has been a significant shift away from people using banknotes to making payments electronically. Most recently, Australia’s enthusiastic adoption of ‘tap-and-go’ payments has added impetus to this shift. In many ways, Australians are ahead of others in the use of electronic payments, although we are not quite in the vanguard. It is also worth pointing out, though, that despite this shift to electronic payments, the value of banknotes on issue is at a 50-year high as a share of GDP (Graph 4). Australians are clearly holding banknotes for purposes other than for making day-to-day payments.
Graph 4
This shift towards electronic payments, and away from the use of banknotes for payments, will surely continue. This will be driven partly by the increased use of mobile payment apps and other innovations. At the same time, though, it is likely that banknotes will continue to play an important role in the Australian payments landscape for many years to come. For many people, and for some types of transactions, banknotes are likely to remain the payment instrument of choice.
2. Banks are likely to remain at the centre of the shift to electronic payments
In Australia, the banking system has provided the infrastructure that has made the shift to electronic payments possible. In some other countries, the banking system has not done this. For example, in China and Kenya non-bank entities have been at the forefront of recent strong growth in electronic payments. A lesson here is that if financial institutions do not respond to customers’ needs, others will.
At this stage, it seems likely that the banking system will continue to provide the infrastructure that Australians use to make electronic payments. This is particularly so given the substantial investment made by Australia’s financial institutions in the NPP. The new system was turned on for ‘live proving’ in late November and the public launch is scheduled for February. It will allow Australians to make payments easily on a 24/7 basis, with recipients having immediate access to their money. The RBA has built a critical part of this infrastructure to ensure interbank settlement occurs in real time. Payments will be able to be made by just knowing somebody’s email address or mobile phone number and plenty of information will be able to be sent with the payment. This system has the potential to be transformational and will allow many transactions that today are conducted with banknotes to be conducted electronically.
Importantly, the new system offers instant settlement and funds availability. It provides this, while at the same time allowing funds to be held in deposit accounts at financial institutions subject to strong prudential regulation and that pay interest. This combination of attributes is not easy to replicate, including by closed-loop systems outside the banking system.
However, the further shift to electronic payments through the banking system is not a given. It requires that the cost to consumers and businesses of using the NPP is low and that the functionality expands over time. If this does not happen, then the experience of other countries suggests that alternative systems or technologies might emerge.
One class of technology that has emerged that can be used for payments is the so-called cryptocurrencies, the most prominent of which is Bitcoin. But in reality these currencies are not being commonly used for everyday payments and, as things currently stand, it is hard to see that changing. The value of Bitcoin is very volatile, the number of payments that can currently be handled is very low, there are governance problems, the transaction cost involved in making a payment with Bitcoin is very high and the estimates of the electricity used in the process of mining the coins are staggering. When thought of purely as a payment instrument, it seems more likely to be attractive to those who want to make transactions in the black or illegal economy, rather than everyday transactions. So the current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment.
This is not to say that other efficient and low-cost electronic payments methods will not emerge. But there is a certain attraction of being able to make payments from funds held in prudentially regulated accounts that can earn interest.
3. Electronic banknotes could coexist with the electronic payment system operated by the banks
In principle, a new form of electronic payment method that could emerge would be some form of electronic banknotes, or electronic cash. The easiest case to think about is a form of electronic Australian dollar banknotes. Such banknotes could coexist with the electronic account-to-account-based payments system operated by the banks, just as polymer banknotes coexist with the electronic systems today.
The technologies for doing this on an economy-wide scale are still developing. It is possible that it could be achieved through a distributed ledger, although there are other possibilities as well. The issuing authority could issue electronic currency in the form of files or ‘tokens’. These tokens could be stored in digital wallets, provided by financial institutions and others. These tokens could then be used for payments in a similar way that physical banknotes are used today.
In thinking about this possibility there are a couple of important questions that I would like to highlight.
The first is that if such a system were to be technologically feasible, who would issue the tokens: the RBA or somebody else?
The second is whether the RBA developing such a system would pass the public interest test.
In terms of the issuing authority, our working hypothesis is that this would best be done by the central bank.
In principle, there is nothing preventing tokenised eAUDs being issued by the private sector. It is conceivable, for example, that eAUD tokens could be issued by banks or even by large non-banks, although it is hard to see them being issued as cryptocurrency tokens under a bitcoin-style protocol, with no central entity standing behind the liability. So, while a privately issued eAUD is conceivable, experience cautions that there are significant difficulties and dangers associated with privately issued fiat money.
The history of private issuance is one of periodic panic and instability. In times of uncertainty and stress, people don’t want to hold privately issued fiat money. This is one reason why today physical banknotes are backed by central banks. It is possible that ways might be found to deal with this financial stability issue – including full collateralisation – but these tend to be expensive. This suggests that if there were to be an electronic form of banknotes that was widely used by the community, it is probably better and more likely for it to be issued by the central bank.
If we were to head in this direction, there would be significant design issues to work through. The tokens could be issued in a way that transactions could be made with complete anonymity, just as is the case with physical banknotes. Alternatively, they might be issued in a way in which transactions were auditable and traceable by relevant authorities. We would also need to deal with the issue of possible counterfeiting. Depending upon the design of any system, we might be very reliant on cryptography and would need to be confident in the ability to resist malicious attacks.
This brings me to the second issue here: is there a public policy case for moving in this direction?
Such a case would need to be built on electronic banknotes offering something that account-to-account transfers through the banking system do not. We would also need to be confident that there were not material downsides from moving in this direction.
Our current working hypothesis is that with the NPP there is likely to be little additional benefit from electronic banknotes. This, of course, presupposes that the NPP provides low-cost efficient payments. One possible benefit of electronic banknotes for some people might be that they could have less of an ‘electronic fingerprint’ than account-to-account transfers, although this would depend upon how the system was designed. But having less of an electronic fingerprint hardly seems the basis for building a public policy case to issue an electronic form of the currency. So there would need to be more than this.
Among the potential downsides, the main one lies in the area of financial stability.
If we were to issue electronic banknotes, it is possible that in times of banking system stress, people might seek to exchange their deposits in commercial banks for these banknotes, which are a claim on the central bank. It is likely that the process of switching from commercial bank deposits to digital banknotes would be easier than switching to physical banknotes. In other words, it might be easier to run on the banking system. This could have adverse implications for financial stability.
Given these various considerations, we do not currently see a public policy case for moving in this direction. We will, however, keep that judgement under review.
4. Exchange settlement accounts for all Australians?
Another possible change that some have suggested would encourage the shift to electronic payments would be for the central bank to issue every person a bank account – for each Australian to have their own exchange settlement account with the RBA. In addition to serving as deposit accounts, these accounts could be used for low-cost electronic payments, in a similar way that third-party payment providers currently use accounts at the RBA to make payments between themselves. Some advocates of this model also suggest that the central bank could pay interest on these accounts or even charge interest if the policy rate was negative.
On this issue, we have reached a conclusion, rather than just develop a hypothesis. The conclusion is that we do not see it as in the public interest to go down this route.
If we did go down this route, the RBA would find itself in direct competition with the private banking sector, both in terms of deposits and payment services. In doing so, the nature of commercial banking as we know it today would be reshaped. The RBA could find itself not just as the nation’s central bank, but as a type of large commercial bank as well. This is not a direction in which we want to head.
A related consideration is the same financial stability issue that I just spoke about in terms of electronic banknotes. In times of stress, it is highly likely that people might want to run from what funds they still hold in commercial bank accounts to their account at the RBA. This would make the remaining private banking system prone to runs.
The point here is that exchange settlement accounts are for settlement of interbank obligations between institutions that operate third-party payment businesses to address systemic risk – something that is central to our mandate. A decision to offer exchange settlement accounts for day-to-day use would be a step into a completely different policy area.
5. New settlement systems based on distributed ledger technology and central bank money?
One final possibility is for the RBA to issue Australian dollars in the form of electronic files or tokens that could be used within specialised payment and settlement systems. The tokens could be exchanged among members of a private, permissioned distributed ledger, separate from the RBA’s Real-time Gross Settlement (RTGS) system, but with mechanisms for the tokens to be exchanged for central bank deposits when required. Such a system might allow the payment and settlement process to become highly integrated with other business processes, generating efficiencies and risk reductions for private business. As part of this, the tokens might also be able to be programmed and sit alongside smart contracts, enabling multi-stage transactions with potentially complex dependencies to take place securely and automatically. This seems to be the general model that some people have in mind when they talk about ‘putting AUD on the blockchain’, although other technologies might be able to achieve similar outcomes.
Whether a strong case for the development of these types of systems emerges remains an open question. We need to better understand the potential efficiencies for private business and why it would be preferable for such a settlement system to be provided by the central bank, rather than the private sector; why privately issued tokens or files could not do the job. We would also need to understand why any efficiency improvement could not be obtained by using the existing Exchange Settlement Accounts and the NPP.
We would also need to understand whether and how risk in the financial system would change as a result of such a system. It remains unclear which way this could go. On the one hand, these types of processes could use a very different technology from the current system, which is based on account-to-account transfers, so they could add to the resilience of the overall payments system. But there would be a whole host of new technology issues to manage as well.
Mastercard has announced a new platform (in the US initially) which issuers can offers to their customers called Assemble. The first product allows millennials to manage money through a digital prepaid account, a mobile app and a payment card (virtual or physical).
Its a great example of the emerging digital tools aimed to build loyalty, by assisting customers with additional money management features, delivered digitally, as predicted in our Banking Innovation Life Life Cycle.
Mastercard is currently developing additional use cases to support prepaid programs for additional segments such as underserved consumers and microbusinesses, and the gig economy. Mastercard Assemble for Millennials is available now in the United States with other markets being targeted within the next year.
In our fast-paced lives, each one of us is juggling a lot – careers, relationships, social events, families, the list is endless. So why should we stress about banking and trying to manage multiple apps? Why not have one centralized, secure account to cover all of our banking needs?
Mastercard has a new platform and product to do just that:
Assemble is a prepaid innovation hub that issuers and partners will offer to customers with holistic money management capabilities including checking balances, budgeting, setting savings goals and making near-real time payments to almost anyone in the U.S. with a valid debit card via a P2P service powered by Mastercard Send.
The first product available from Assemble is geared toward millennials and, along with the features above, offers consumers a simple, smart and safe way to manage money through a digital prepaid account, a mobile app and a payment card (virtual or physical).
“Prepaid is much more than just a way to safely store and use funds. It is a foundation to create new possibilities for consumers,” said Tom Cronin, senior vice president, Global Prepaid Product Development and Innovation, Mastercard. “This technology enables our partners to deliver best-in-class digital experiences today, as we work to address additional segments such as gig economy workers and underserved consumers and micro businesses.”
Mastercard Assemble not only bundles assets and services together but also enables these digital prepaid solutions to promote innovation, increase the speed to market, and provide customers with seamless and secure usage. Issuers and partners can choose to deploy a white-label version of the solution or to integrate specific functions into their current user interfaces through APIs.
While Mastercard Assemble for Millennials will be the first launch, the company is currently developing additional use cases to support prepaid programs for additional segments such as underserved consumers and microbusinesses, and the gig economy. Mastercard Assemble for Millennials is available now in the United States with other markets being targeted within the next year.
Mobile payment technology company Sniip, a disruptive force in the payment space, is today announcing a new nation-wide partnership with Australia Post to explore the use of Sniip to enable consumers to pay bills using the Post BillPay barcode anytime, anywhere.
Founded in 2013, Sniip (www.sniip.com ) is Australia’s first completely integrated and agnostic payments and billing solution. Its app-based functionality allows users to pay their bills in seconds using just their smartphone, while companies can seamlessly transition to paperless billing. It is the first payments solution in Australia designed around the needs of the customer, instead of a bank or payments brand. It is also the only payments solution in Australia to contain a real-time, peer-to-peer functionality for consumer and business use.
Co-founder and Chief Executive Officer of Sniip, Damien Vasta, said the company was excited to be working with Australia Post to provide greater choice to consumers in how they pay their bills.
“Working with Australia Post presents an exciting opportunity to bring the benefits of speedy and secure bill-payment to the vast network of Post Billpay users Australia-wide,’’ Mr Vasta said.
“This partnership is truly a breakthrough in customer service delivery, meeting the needs of the modern customer by catering for today’s mobile-centric society.”
As a stand-alone offer, Sniip offers substantial benefits to billers including cost savings over incumbent payment methods, quicker payments and conversion to paperless bills via an in-app notification to users now.
By using Sniip Post Billpay customers will be able to use the app as an additional way to scan and pay their bills within seconds using barcode technology, eliminating the need to enter a long account or payment reference number or bank details or waste time paying over the phone.
“Mobile payments have become a hugely popular method of making both discretionary and non-discretionary payments.”
“The Sniip integration makes payments easier and safer on a mobile, allowing customers to manage their bills more efficiently in-app and simply reducing instances of misplaced bills, forgotten emails and late payment fees,’’ Mr Vasta said.
Mr Vasta said that with an estimated 80% of Australians owning a smartphone, and people using them for almost everything they once did on a desktop, mobile bill paying and receiving was the way of the future.
“There is a consumer expectation that everything can be accessed on a mobile, and everything should be easy to use,’’ Mr Vasta said.
Sniip is already a payment option for some of the largest billers in Queensland, including Brisbane City Council and Queensland Urban Utilities.
“We are delighted to be working with Australia Post to extend our service to Australians on the go through this exciting partnership.
