NPP

RBA Advocates A Strong Digital Identity System

Governor Lowe spoke at the Australian Payments Network Summit yesterday. He discussed the rise of electronic transactions, especially though the New Payments Platform, the high relative costs of international retail payments, and the need for, and potential of a Strong Digital Identity System. He also highlighted the decline in cash transactions which now accounts for just around a quarter of day-to-day payments.

A recurring theme across these summits has been the need to improve customer outcomes. I am very pleased to see that this focus has been continued at this year’s summit. The focus on customer outcomes aligns very closely with the focus of the Payments System Board. The Board wants to see a payments system that is innovative, dynamic, secure, competitive, and that serves the needs of all Australians.

Increasingly, this means that the payments system needs to support Australia’s digital economy. With the digital economy being an important key to Australia’s future economic prosperity, we need a payments system that is fit for purpose. We will only fully capitalise on the fantastic opportunities out there if we have a payments system that works for the digital economy. The positive news is that we have made some substantial progress in this direction over recent years and in some areas, Australia’s payments system is world class. However, in the fast-moving world of payments, things don’t stand still and there are some important areas we need to work on.

In my remarks today, I would like to do three things.

The first is to talk about some of the progress that has been made over recent years.

The second is to highlight a few areas where we would like to see more progress, particularly around payments and the digital economy.

And third, I will highlight some of the questions we will explore in next year’s review of retail payments regulation in Australia.

Progress Is Being Made

Over recent years there have been significant changes in the way that we make payments. We now have greater choice than ever before and payments are faster and more flexible than they used to be.

The launch of the New Payments Platform – the NPP – in early 2018 has been an important part of this journey. This new payments infrastructure allows consumers and businesses to make real-time, 24/7 payments with richer data and simple addressing using PayIDs.

After the NPP was launched, it got off to a slow start, but it is now hitting its stride. Monthly transaction values and volumes have both tripled over the past year (Graph 1). In November, the platform processed an average of 1.1 million payments each day, worth about $1.1 billion. The rate of take-up of fast retail payments in Australia is a little quicker than that in most other countries that have also introduced fast payments (Graph 2).

Graph 1: New Payments Platform — Graph 1

Graph 2: Use of Fast Payments Systems — Graph 2

I expect that we will see a further pickup in usage once the CBA has delivered on core NPP functionality for all its customers. The slow implementation has been disappointing and we expect the required functionality to be available soon.

There are now 86 entities connected to the NPP, including 74 that are indirectly connected via a direct NPP participant. There are at least six non-ADI fintechs that are using the NPP’s capabilities to innovate and provide new services to customers. All up, approximately 66 million Australian bank accounts are now able to make and receive NPP payments.

Use of the PayID service has also been growing, with around 3.8 million PayIDs having been registered to date. If you have not already got a PayID, I encourage you to get one. I also encourage you to ask for other people’s PayIDs when making payments, as an alternative to asking for their BSB and account number. It is much easier and faster.

One specific example of where the NPP is bringing direct benefits to people is its use by the Australian Government, supported by the banking arm of the RBA, to make emergency payments. During the current bushfires, the government has been able to use the NPP to make immediate payments to people at a time when they are most in need, whether that be on the weekend or after their bank has shut for the night.

One other area of the payments system where we have seen significant change is the take-up of ‘tap-and-go’ payments. Around 80 per cent of point-of-sale transactions are now ‘tap-and-go’, which is a much higher share than in most other countries. This growth has been made possible by the acquirers rolling out new technology in their terminals and by the willingness of Australians to try something different. There has also been rapid take-up of mobile payments, including through wearable devices.

Progress has also been made on improving the safety of electronic payments, particularly in relation to fraud in card-not-present transactions. The rate of fraud is still too high, but it has come down recently (Graph 3). I would like to acknowledge the work that AusPayNet has done here to develop a new framework to tackle fraud. This framework strengthens the authentication requirements for certain types of transactions, including through the use of multi-factor authentication.^[1] This will help reduce card-not-present fraud and support the continued growth in online commerce.

Graph 3: Card Payment Fraud Rate — Graph 3

As our electronic payments system continues to improve, we are seeing a further shift away from cash and cheques. The RBA recently undertook the latest wave of our three-yearly consumer payments survey. We are still processing the results, but ahead of publishing them early next year, I thought I would show you the latest estimate on the use of cash (Graph 4). As expected, there has been a further trend decline in the use of cash, with cash now accounting for just around a quarter of day-to-day transactions, and most of these are for small-value payments. Given the other innovations that I just spoke about, I expect that this trend will continue.

Graph 4: Transactions per Capita — Graph 4

Further Progress Needed

The progress across these various fronts means that there is a positive story to be told about innovation in Australia’s payments system.

At the same time, though, there are still some significant gaps and areas in our payments system that need addressing and where progress would support the digital economy in Australia. I would like to talk about four of these.

The first of these is further industry work to realise the full potential of the NPP, including its data-rich capabilities.

The NPP infrastructure can help make electronic invoicing commonplace and help invoices be paid on time. It can also support significant improvement in business processes, as more data moves with the payment. Real-time settlement and posting of funds also enables some types of delivery-versus-payment, so that the seller can confirm receipt of funds and be confident in delivering goods or services to the buyer.

The layered architecture of the system was designed to promote competition and innovation in the development of new overlay services. Notwithstanding this, one of the consequences of the slower-than-promised rollout of the NPP by some of the major banks is that there has been less effort than expected on developing innovative functionality. Payment systems are networks, and participants need to know that others will be ready to receive payments and use the network. Some banks have been reluctant to commit time and funding to support the development of new functionality given that others have been slow to roll out their ‘day 1’ functionality. The slow rollout has also reduced the incentive for fintechs and others to develop new ideas. So we have not yet benefited from the full network effects.

The Payments System Board considered this issue as part of its industry consultation on NPP access and functionality, conducted with the ACCC earlier this year. As part of that review we recommended that NPPA – the industry-owned company formed to establish and operate the NPP – publish a roadmap and timeline for the additional functionality that it has agreed to develop. The inaugural roadmap was published in October and NPPA also introduced a ‘mandatory compliance framework’. Under this compliance framework, NPPA can designate core capabilities that NPP participants must support within a specified period of time, with penalties for non-compliance. This is a welcome development.

One important element of the roadmap is the development of a ‘mandated payments service’ to support recurring and ‘debit-like’ payments. This new service will allow account-holders to establish and manage standing authorisations (or consents) for payments to be initiated from their account by third parties. This will provide convenience, transparency and security for recurring or subscription-type payments and a range of other payments.

Another element of the roadmap that has the potential to promote the digital economy is the development of NPP message standards for payroll, tax, superannuation and e-invoicing payments. The standards will define the specific data elements that must be included with these payment types, which will support automation and straight-through processing. We would expect financial institutions to be competing with each other to enable their customers to make and receive these data-rich payments.

Less positively, there is still uncertainty about the future of the two remaining services that were expected to be part of the initial suite of Osko overlay services. These are the ‘request-to-pay’ and ‘payment with document’ services. We understand there are still challenges in securing committed project funding and priority from NPP participants to move ahead, even though BPAY has indicated it is ready to complete the rollout. The RBA strongly supports the development of these additional NPP capabilities, which are likely to deliver significant value for businesses and the broader community.

Digital identity

A second area where the Payments System Board would like to see further progress is the provision of portable digital identity services that allow Australians to securely prove who they are in the digital environment.

Today, our digital identity system is fragmented and siloed, which has resulted in a proliferation of identity credentials and passwords. This gives rise to security vulnerabilities and creates significant inconvenience and inefficiencies, which can undermine development of the digital economy. These generate compliance risks and other costs for financial institutions, so it is strongly in their interests to make progress here. It is fair to say that a number of other countries are well ahead of us in this area.

The Australian Payments Council has recognised the importance of this issue and has developed the ‘TrustID’ framework. The Government’s Digital Transformation Agency has also been working on a complementary framework (the Trusted Digital Identity Framework), which specifies how digital identity services will be used to access online government services. The challenge now is to build on these frameworks and develop a strong digital identity ecosystem in Australia with competing but interoperable digital identity services.

The rollout of open banking and the consumer data right should bring additional competition among financial services providers, and digital identity is likely to reduce the scope for identity fraud, while providing convenient authentication, as part of an open banking regime.

A strong digital identity system would also open up new areas of digital commerce and help reduce online payments fraud. It will also help build trust in a wide range of online interactions. Building this trust is increasingly important as people spend more of their time and money online. So we would like to see some concrete solutions developed and adopted here.

Cross-border retail payments

A third area where we would like to see more progress is on reducing the cost of cross-border payments.

For many people, the costs here are still too high and the payments are still too hard to make. It is important that we address this. It is an issue not just for Australians, but for our neighbours as well. I recently chaired a meeting of the Governors from the South Pacific central banks, where I heard first-hand about the problems caused by the high cost of cross-border payments.

Analysis by the World Bank indicates that the price of sending money from Australia has been consistently higher than the average price across the G20 countries (Graph 5). And a recent ACCC inquiry found that prices for cross-border retail payment services are opaque. Customers are not always aware of how the ‘retail’ exchange rate they are being quoted compares with the wholesale exchange rate they see on the news, or of the final amount that will be received in foreign currency.^[2] There are also sometimes add-on fees.^[3]

Graph 5: Price of International Money Transfers — Graph 5

As part of the RBA’s monitoring of the marketplace, our staff recently conducted a form of online shadow shopping exercise, exploring the pricing of international money transfer services by both banks and some of the new non-bank digital money transfer operators (MTOs).

This exercise showed that there is a very wide range of prices across providers and highlighted the importance of shopping around.

The main results are summarised in this graph (Graph 6). In nearly every case, the major banks are more expensive than the digital MTOs. For the major banks, the average mark-up over the wholesale exchange rate is around 5½ per cent, versus about 1 per cent for the digital MTOs.

Graph 6: Price of Australian International Money Transfers — Graph 6

The graph illustrates why the cost of cross-border payments is such an issue for the South Pacific countries. These costs are noticeably higher than for payments to most other countries. This is a particular problem as many people in the South Pacific rely on receiving remittances from family and friends in Australia and New Zealand. In many cases, low-income people are paying very high fees and it is important that we address this where we can. As is evident from the graph, most digital MTOs do not service the smaller South Pacific economies, which limits customers’ choice of providers.

In part, the high costs – and slow speed – of international money transfers is the result of inefficiencies in the traditional correspondent banking process. It is understandable why some large tech firms operating across borders see an opportunity here. Where people are being served poorly by existing arrangements, new solutions are likely to emerge with new technologies. This represents a challenge to the traditional financial institutions to offer better service at a lower cost to their customers, while still meeting their AML/CTF requirements.

Central banks have a role to play here too, and there is an increased focus globally on what we can do to reduce the cost of cross-border payments. One example of this is the promotion of standardised and richer payment messaging globally through the adoption of the ISO20022 standard. The RBA is also working closely with the Reserve Bank of New Zealand, AUSTRAC and other South Pacific central banks to develop a regional framework to address the Know-Your-Customer concerns that have limited competition and kept prices high.

Operational resilience

A fourth area where we would like to see more progress is improving the operational resilience of the electronic payments system.^[4]

Disruptions to retail payments hurt both consumers and businesses. Given that many people now carry little or no cash, the reliability of electronic payment services has become critical to the smooth functioning of our economy.

We understand that, given the complexity of IT systems, some level of payments incidents and outages to services is inevitable. But it is apparent from the data we have that the frequency and duration of retail payments outages have risen sharply in recent years. In response, the RBA has begun working with APRA and the industry to enhance the data on retail payment service outages and to introduce a suitable disclosure framework for these data. These measures will provide greater transparency around the reliability of services and allow institutions to better benchmark their operational performance.

The 2020 Review of Retail Payments Regulation

The third and final issue I would like to touch on is the Payments System Board’s review of retail payments regulation next year.

The review is intended to be wide-ranging and to cover all aspects of the retail payments landscape, not just the RBA’s existing cards regulation. As the first step in the process, we released an Issues Paper a couple of weeks ago and have asked for submissions by 31 January.^[5] There will also be opportunities to meet with RBA staff conducting the review.

The review will cover a lot of ground, including hopefully some of the issues that I just mentioned. There are, though, a few other questions I would like to highlight.

The first is what can be done to reduce further the cost of electronic payments?

Both the Productivity Commission and the Black Economy Taskforce have called for us to examine this question. It is understandable why. As we move to a predominantly electronic world, the cost of electronic payments becomes a bigger issue. The Payments System Board’s regulation of interchange fees and the surcharging framework, as well as its efforts to promote competition and encourage least-cost routing, have all helped lower payment costs.

At issue is how we make further progress: what combination of regulation and market forces will best deliver this? Relevant questions here include: whether interchange fees should be lowered further; how best to ensure that merchants can choose the payment rails that give them the best value for money; and whether restrictions relating to no-surcharge rules should be applied to other arrangements, including the buy-now-pay-later schemes.

A second issue is what is the future of the cheque system?

Cheque use in Australia has been in sharp decline for some time. Over the past year, the number of cheques written has fallen by another 19 per cent and the value of cheques written has fallen by more than 30 per cent, as the real estate industry has continued to shift to electronic property settlements (Graph 7). At some point it will be appropriate to wind up the cheque system, and that point is getting closer. Before this happens, though, it is important that alternative payment methods are available for those who rely on cheques. Using the NPP infrastructure for new payment solutions is likely to help here.

Graph 7: Cheque Payments per Capita — Graph 7

Third, is there a case for some rationalisation of Australia’s three domestically focused payment schemes, namely BPAY, eftpos and NPPA? A number of industry participants have indicated to us that they face significant and sometimes conflicting investment demands from the three different entities. This raises the question of whether some consolidation or some form of coordination of investment priorities might be in the public interest.

Fourth, and finally, what are the implications for the regulatory framework of technology changes, new entrants and new business models?

The world of payments is moving quickly, with new technologies and new players offering solutions to longstanding problems. At the same time, expectations regarding security, resilience, functionality and privacy are continually rising. Meeting these expectations can be challenging, but doing so is critical to building and maintaining the trust that lies at the heart of effective payment systems. The entry of non-financial firms into the payments market also raises new regulatory issues. As part of the review, it would be good to hear how the regulatory system can best encourage a dynamic and innovative payments system in Australia that fully serves the needs of its customers.

NPP Transactions Outpaced Cheques

Tony Richards, RBA Head of Payments Policy Department spoke at the Chicago Payments Symposium, Federal Reserve Bank of Chicago and described the progress on the new payments platform – NPP. 2 million PayID registrations have been achieved so far, and the volume of payments has already outpaced cheques in the system.

Initial NPP operations

After industry testing through much of 2017, the NPP became operational for industry ‘live proving’ in November 2017. It was launched for public use on 13 February this year. This involved around 50 institutions initially, with this number now having increased to around 65 institutions.

As with any completely new payment system, financial institutions have mostly taken a staged approach in their rollout strategies, gradually introducing services, channels and customer segments. In some cases this was to manage risk and allow them to fine-tune their systems and processes, while in other cases it has reflected different stages of readiness. The major banks have mainly focused initially on providing payment capabilities to consumers ahead of businesses, with the rollout to consumers now at a fairly advanced stage.

At this point, there are more than 50 million Australian bank accounts accessible via the NPP, with that number growing steadily. The number of PayID registrations has just reached 2 million – Australia has a population of 25 million. And monthly volumes and values of NPP transactions have been growing strongly.

One interesting statistic is that the number of payments occurring through the NPP has already surpassed the number of cheques that are being written by Australian households, businesses and government entities

An international comparison also offers another interesting metric. While each country is its own special case, it appears that the adoption of the NPP is proceeding at least as quickly as occurred for some other fast-payment systems

As long as the rollout of NPP to households has not been completed, advertising of Osko by BPAY has been limited, but I would expect that this will be picking up, and that financial institutions will also be doing more promotion of real-time payments to their customers. So I would expect the value and volume of NPP transactions to continue to grow strongly.

Some early lessons learned

While the NPP was launched less than eight months ago, I think one can make a number of observations that may be of interest to this audience regarding its design and build, as well as its operation to date.

The presence of a well-resourced project office (from KPMG as well as from APCA and then NPPA) that was independent of the participants was important in the design, build and test phases. This ensured high quality papers for meetings, brought skills that might not have been readily available from participants, and provided independent perspectives during debates about the design and build

Having three aggregators (or service providers) involved as participants was important in ensuring the broad reach (and public legitimacy) of the NPP. The majority of the institutions that were ready to go on Day 1 were small banks, credit unions and building societies using the services of aggregators.

While the build of the Basic Infrastructure and FSS in the centre were major projects, the internal builds for NPP participants were the most challenging tasks. The systems of large banks are inevitably extremely complex, and upgrading them to allow real-time posting and 24/7 operation has taken longer than expected for some. Banks have also placed significant focus on ensuring that their fraud detection systems can support real-time payments.

Ubiquity (or near-ubiquity) is important. It is hard for a new payment system or for individual participants to go out and market aggressively to customers until a critical mass of institutions and accounts are on board. However, balancing this point and the previous one is a challenge. Decisions to launch to the public can only occur once a critical mass of participants is ready, but a program cannot be expected to move at the pace of the slowest participant.

Real-time settlement is going well. The challenges raised by out-of-hours and weekend operations can be met by appropriate central bank liquidity arrangements. Banks can easily move the balances in their Exchange Settlement accounts between the FSS and the RBA’s main RTGS system during normal business hours. These balances are then all moved into the FSS overnight and on weekends. In addition the Reserve Bank introduced a new liquidity facility for open-dated repos, which are available to holders of Exchange Settlement accounts at no penalty relative to the Bank’s policy rate.

Five or six years ago, some banks may have questioned the case for moving to real-time payments, however no one is questioning that case now. Indeed, the early signs are that banks are looking to move their Direct Entry payments over to the fast rails sooner than was earlier expected. Similarly, the decision to move to the ISO 20022 message format and richer data will be an important one for future innovation.

It was important to have the Addressing Service ready to launch on Day 1. PayIDs get around the problems of end-users having to enter lots of numbers, give certainty about the recipient, help avoid ‘fat finger’ problems and mistaken payments, and can reduce fraud.

The involvement of the central bank – from the policy side, as well as in the delivery of settlement arrangements and as a banking service provider – has been important. I suspect that some industry participants may initially have had some concerns about having the Reserve Bank involved, but that they would recognise now that our involvement helped to get some key aspects of the design, build, and business rules right.

The fact that the Basic Infrastructure will be operated as an industry utility available to all, with commercial payment services to be provided by separate overlay services, was also helpful in getting agreement among participants in the design phase.

With the initial build mostly complete, the industry has ambitious plans for additional NPP functionality. While some of this could potentially be delivered via overlay services, it is likely that there will be additional central functionality provided or arranged by NPPA – for example, possibly a central consent and mandate service that could be used to enable direct debits though the NPP. As NPPA increases its capabilities, it may also look to new means of providing functionality. On Friday it announced an API framework with three sample APIs.

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.

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.

Around 60 Banks Using NPP; Distributed Ledger Next?

At its meeting today, the Payments System Board considered a number of issues.

The public launch of the New Payments Platform (NPP). Members welcomed the successful delivery of this important new payments infrastructure. Around 60 banks, credit unions and building societies are already using the NPP to provide their customers with real-time payments, with close-to-immediate funds availability to the recipient on a 24/7 basis, and the number of financial institutions and accounts linked to the NPP will progressively increase over the coming months. Members highlighted the convenience of addressing payments simply with a mobile phone number and the added benefits of sending more complete remittance information with payments. The Board was briefed on the performance of the NPP since the launch, the increasing number of users registered with PayID and the growing number and value of payments.
Least-cost routing of transactions on contactless debit cards. The Board noted the benefits in terms of holding down payment costs in the economy from the continuing issuance of dual-network cards and the ability of merchants to set preferences as to which network is used when transactions are authorised. Members were encouraged that some financial institutions have made progress towards providing least-cost routing functionality to their merchant customers. The Board expects to make a decision at its May meeting as to whether the market is providing this functionality or if the Bank should issue a draft standard for consultation.
Card-not-present fraud. The Board noted that a broad range of industry participants had recently come together to begin the process of developing a coordinated strategy to tackle rising card-not-present fraud. Members welcomed the willingness of the participants to collaborate on this issue and encouraged them to continue to work closely with the Australian Payments Network to develop a clear and effective strategy that balances the interests of all stakeholders, including merchants. Members looked forward to the strategy being finalised within the next six months and implemented soon after that.
Technology and the evolving nature of payments in Australia. Members discussed the ongoing shift to electronic payments and the importance of these payments being secure, convenient and low-cost. They also discussed the potential for further innovation in retail payments from new players and technologies. This will be a major focus of the Board over the period ahead. The Board also discussed the potential for distributed ledger technology to be used for new methods of settlement of financial and other obligations.
Cryptocurrency markets. The Board considered recent developments in the price of cryptocurrencies. Members noted the speculative nature of much of the trading and the risks to investors. While linkages between cryptocurrencies and the broader financial system are limited in Australia, the Board continues to monitor developments in these markets.
The Bank’s Assessment of Chicago Mercantile Exchange Inc. for the 12 months ending 31 December 2017. The Bank undertakes formal assessments of clearing and settlement facilities licensed to operate in Australia. The assessment will be published once it has been provided formally to the Minister for Revenue and Financial Services and the Australian Securities and Investments Commission and to the relevant overseas regulators.

Terrified of Bitcoin, banks forced to innovate for the first time in 40+ years

From Sovereign.com

Yesterday morning, several banks in Australia started rolling out a new payment system they’re calling NPP, or “New Payments Platform.”

Until now, sending a domestic funds transfer in Australia from one bank to another could take several days. It was slow and cumbersome.

With NPP, payments are nearly instantaneous.

And rather than funds transfers being restricted to the banks’ normal business hours, payments via NPP can be scheduled and sent 24/7.

You can also send money via NPP to mobile phones and email addresses. So it’s a pretty robust system.

Across the world in the United States, the domestic banking system has been working on something similar.

Domestic bank transfers in the Land of the Free typically transact through an electronic network known as ACH… another slow and cumbersome platform that often takes 2-5 days to transfer funds.

It’s pretty ridiculous that it takes more than a few minutes to transfer money. It’s 2018! It’s not like these guys have to load satchels full of cash onto horse-drawn wagons and cart them across the country.

(And even if they did, I suspect the money would reach its destination faster than with ACH…)

Starting late last year, though, US banks very slowly began to roll out something called the Real-time Payment system (RTP), which is similar to what Australian banks launched yesterday.

[That said, the banks themselves acknowledge that it could take several years to fully adopt RTP and integrate the new service with their existing online banking platforms.]

And beyond the US and Australia, there are other examples of banking systems around the world joining the 21st century and making major leaps forward in their payment system technologies.

It seems pretty clear they’re all playing catch-up with cryptocurrency.

The rapid rise of Bitcoin and other cryptocurrencies proved to the banking system that it’s possible to conduct real-time [or near-real-time] transactions, and not have to wait 2-5 days for a payment to clear.

Combined with other new technologies like Peer-to-Peer lending platforms, fundraising websites, etc., consumers are now able to perform nearly every financial transaction imaginable– deposits, loans, transfers, etc.– WITHOUT using a bank.

And it’s only getting better for consumers… which means it’s only getting worse for banks.

All of these threats from competing technologies have finally compelled the banks to innovate– literally for the FIRST TIME IN DECADES.

I’m serious.

When the CEO of the company launching RTP in the US announced the platform, he admitted that the “RTP system will be the first new payments system in the U.S. in more than 40 years.”

That’s utterly pathetic. The Internet has been around for 25 years. Even PayPal is nearly 20 years old.

Yet despite the enormous advances in technology over the past several decades, the last major innovation in bank payments was back when Saturday Night Fever was the #1 movie in America.

Banks have been sitting on their laurels for decades, enjoying their monopoly over our savings without the slightest incentive to improve.

Cryptocurrency has proven to be a major punch in the gut. The entire banking system keeled over in astonishment over Bitcoin’s rise, and they’ve been forced to come up with an answer.

And to be fair, the banks have reclaimed the advantage for now.

NPP, RTP, and all the other new protocols are faster and more efficient than most cryptocurrencies.

Bitcoin, for example, can only handle around 3-7 transactions per second. Ethereum Classic maxes at around 15 transactions per second. Litecoin isn’t much better.

By comparison, there were 25 BILLION funds transfers in 2016 using the ACH network in the US.

Based on the typical holiday schedule and the banks’ 8-hour working days, that’s an average “throughput” of roughly 3500 transactions per second.

So, now that banks have finally figured out how to conduct thousands of transactions per second in real-time, they clearly have superiority.

But that superiority is unlikely to last.

It takes banks decades to innovate. They have enormous bureaucratic hurdles to overcome. They have endless committees to appease, including the Federal Reserve’s “Faster Payments Task Force.”

And most importantly, given that most banks are still using absurdly antiquated software, any new systems they develop have to be carefully designed for backwards compatibility.

Cryptofinance and other financial technology companies have no such limitations.

As my colleague Tama mentioned in the podcast we released yesterday, the cryptocurrency space sort of exists in ‘dog years’.

Things move so quickly that one year in crypto is like 7 years for any other industry.

Right now there is almost a unified push across the crypto sector to solve the ‘scalability’ problem, i.e. to securely transact a near limitless number of transactions in real time.

Those solutions will almost undoubtedly come from technologies that you haven’t heard very much about yet.

Hashgraph and Radix, for example, are two such ventures working on extremely elegant payment solutions that break the mold of previous cryptos.

Rather than build upon standard cryptocurrency concepts like blockchain, Proof of Work, and Proof of Stake, both Hashgraph and Radix have created their own algorithms from scratch.

This is the bleeding edge of the bleeding edge of a massively disruptive sector that has existed for less than a decade.

And there are literally dozens of other companies and technologies aiming for similar heights.

Some of them will undoubtedly succeed. And still other ventures that won’t even be conceived for years will have yet more disruptive power in the future.

The banks don’t stand a chance. The future of finance absolutely belongs to crypto.

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.

Why your bank will ask you to pick a ‘PayID’

From The New Daily.

From October this year, bank customers will be able to replace their clunky BSB and account number with an email address or mobile phone number, according to experts.

This ‘PayID’ will be a crucial part of Australia’s new payments system, which will allow almost instant bank transfers, 24 hours a day, 365 days a year.

The Reserve Bank, which operates the ageing system that clears payments between accounts, has been busily working for years with big players in the industry on the billion-dollar ‘New Payment Platform’ or ‘NPP’.

There’s plenty of complicated stuff happening behind the scenes, but one of the main things Australians should know is that, from October, they’ll be able to pick a PayID for each bank account they want to receive super-fast payments into.

NPP Australia CEO Adrian Lovney told The New Daily that the PayID concept will make account numbers easier to remember, and remove the risk of accidentally sending money to the wrong person.

“It makes payments more intuitive and simpler because users will be able to provide payers details which are easy to remember such as an email address or phone number,” Mr Lovney said.

“This offers greater peace of mind as people no longer have to rely on providing financial account information, such as a BSB and account number, to payers so they can receive payments.

“And services that use PayID may display a PayID name before you send a payment as an additional level of confirmation that you are sending money to the right person.”

So, if a family member wants to send you money or you’re splitting the bill at a restaurant with friends, you can simply tell them to type your PayID into their online banking and, in about 15 seconds, the money will be in your account.

The new system will be so fast and simple, it has been speculated that credit cards and cash will lose popularity.

It was built by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), which also built Australia’s current payment system in 1998.

It will allow real-time processing for all ‘push’ payments (such as wages, welfare payments, bill payments or transfers to friends and family), but won’t speed up ‘pull’ payments made on debit and credit cards.

Payments expert Nathan Churchward, whose employer Cuscal is one of the 13 companies working on the new system, predicted that PayID could become as popular a brand name to Australians as Google and Uber.

He gave a real-world example: he recently bought $2500 worth of tickets for a group of friends and accidentally gave them all his wrong bank account number. Their payments bounced back and he was left wondering why no one was paying up.

“I work in banking. You’d think I’d be able to remember my account and BSB. But I can’t!” Mr Churchward told The New Daily.

“With PayID, if you get the mobile number wrong, it will ask you if you want to pay ‘Joe Bloggs’ and you’ll realise and won’t proceed.”

Businesses also won’t have to “splash” their bank details all over the internet, where fraudsters lurk, he said.

Cuscal’s hot tips on PayID

You can’t pick a random number. Banks will probably require a mobile phone number, email address, Australian Business Number (ABN) or Australian Company Number (ACN)
You can set multiple ‘PayIDs’ for the one bank account. For example, your mobile phone number and email could both be linked to the same transactions account
However, you can’t link the same PayID to multiple accounts
Every PayID will be changeable. So if you get a new phone number, you’ll be able to ask your bank to change your PayID to the new number
If you switch to a new bank, you’ll be to reuse an old PayID. But any direct debits you’ve set up won’t automatically transfer across
Some institutions may restrict PayIDs to specific account types. So you might be able to link to a debit card account, but not a mortgage offset or term deposit
Your institution may not offer PayID straight away in October

Faster credit decisions with real-time technology

From Fintech Business.

Credit providers will need to embrace newer technologies and real-time data processing in order to meet changing client needs, writes Experian’s Suzanne Steele.

Over the last decade, the digital transformation of the banking sector has accelerated dramatically, and the pace of change is showing no sign of slowing.

Recent research data shows more than 1.2 billion people are banking on their mobile devices today, a number set to increase to over two billion by 2021.

Competition from agile new arrivals to the market, combined with a need to enhance the customer experience, are compelling credit providers to improve their range of services and reduce the time it takes to make credit decisions.

Gone are the days when a discussion with the local bank manager was the only option.

Dissatisfaction with traditional systems that fail to meet the instantaneous needs of the modern-day customer already has some Australians looking to fintech start-ups and alternative lending sources.

Millennials report convenience anywhere, any time as the primary driver for choosing non-traditional finance providers, according to recent Telstra research.

This highlights that many of today’s consumers live in a world of digital banking and expect to be able to have their banking needs met at any time, in any place and on any device.

There are signs consumer pressure is shifting the massive cogs of Australia’s financial services industry, slowly but surely adjusting to the demands of today’s hyper competitive 24/7 global economy.

The National Payments Platform (NPP) rollout in late 2017 will provide Australian businesses and consumers with a faster, more flexible and data-rich way to transfer funds within seconds.

In the NPP world, an Australian credit shopper can receive funds from friends, family or peers almost instantly.

Australian credit providers will have the same ability to almost instantly fulfil a customer’s credit wishes, but they will also need the right tools in place to assess customer risk with the same level of immediacy.

In order for credit providers to meet the evolving demands, real-time automated decision-making must become the new norm across the credit industry, enabled by access to a variety of internal and external databases.

What are the databases and insights credit providers need at their fingertips to make well-informed decisions?

In order to accurately, quickly and confidently make a ‘yes’ decision anytime, anywhere, a credit provider needs to first answer these five fundamental questions:

Is the applicant who he or she purports to be? (ID data)

Will the applicant likely be fraudulent? (fraud data)

Is the applicant too risky? (credit data)

Can the applicant afford to repay the loan? (servicing capacity data)

If the applicant has a property, is it worth what they say it’s worth? (asset value data)

Historically most credit providers have answered each of these questions separately, using disparate and unconnected systems. For example, the bank will access an existing customer’s profile on their CRM database, but will also look at external data provided by a credit bureau or a shared fraud database.

The result is a lengthy process that delays credit decisions and results in a poor customer experience. In an increasingly saturated market, consumers’ ability to access credit seamlessly will likely be a key differentiator.

A one-stop shop

Emerging technologies promise a faster and more customer-friendly alternative to these clunky systems of old, offering access to a wide range of separate databases on demand and as part of a singular process.

As banks up the ante in their adoption of cloud-based services, a more flexible, collaborative technology ecosystem is emerging.

These technologies enrich a bank’s own customer data with third-party credit data, identity information, fraud insights and property data, and make it all available online and in real time.

With integrated workflow and decisioning processes, banks can fast track applications from existing customers and prompt a request for more data from new customers.

This enables credit providers to deliver a credit decision within seconds, reducing the number of customers who drop-off midway through the application process due to the lengthy questions and delays.

However, it also ensures credit offers are more accurate, based on a holistic approach to a customer’s financial situation. For the bank, this reduces risk, streamlines operations, and enables it to offer efficient and competitive products and services.

A digitised approach also addresses an ongoing concern for credit providers.

In 2009, to meet ASIC’s responsible lending guidelines, the onus was put on lenders to request evidence such as pay slips or financial statements, to support credit applications.

This process significantly delays the processing of applications. However, by applying the same principles in data integration, banks can now automatically access bank statements to fast track their evaluation of the ability of a consumer to service a loan.

Developing an effective data hub with real-time decisioning software future-proofs a bank, enabling an agile response to both future regulatory changes and transformations to the market.

Such a capability results in a more positive experience for customers and delivers much improved efficiencies and business performance for credit providers.

Suzanne Steele is the managing director of Experian for Australia and New Zealand.

NPP’s New CEO Starts Today

The company formed by the payments industry to build and operate the New Payments Platform, NPP Australia Limited, has a new CEO, with the commencement today of Adrian Lovney as its inaugural Chief Executive Officer.

The New Payments Platform is a major industry initiative to develop new national infrastructure for fast, flexible, data rich payments in Australia. The Program proceeded to the fourth phase, “build and internal test” in August 2015. The NPP is on track to being operational in the second half of 2017.

The Program reached a historic milestone in December 2014 when 12 leading authorised deposit-taking institutions (ADIs) committed funding for the build and operation of the NPP. These institutions became the founding members of NPP Australia Limited.

NPP Australia also signed a 12-year contract with global provider of secure financial messaging services Society for Worldwide Interbank Financial Telecommunication (SWIFT) to design, build and operate the basic infrastructure. The establishment of NPP Australia and the appointment of SWIFT marked the launch of the Program’s “design and elaborate” stage, which was then successfully completed in July 2015. The current “build and internal test” stage is scheduled for completion in early-mid 2017.

In October 2015, NPP Australia reached agreement with Australia’s premier bill payment system provider -BPAY – to deliver the first overlay service to use the NPP once it is operational in the second half of 2017.

The NPP will be open access infrastructure for Australian payments. The intention is that all ADIs will connect to the NPP, either directly or indirectly through another member, so they can process a wide variety of fast data-rich payments for their account holders. ADIs can choose to join the NPP at any point in its development and operation.

Core members are Australia and New Zealand Banking Group Limited, Australian Settlements Limited, Bendigo and Adelaide Bank Limited, Citigroup Pty Ltd, Commonwealth Bank of Australia, Cuscal Limited, HSBC Bank Australia Limited, Indue Ltd, ING DIRECT, Macquarie Bank Limited, National Australia Bank Limited, Reserve Bank of Australia and Westpac Banking Corporation.

NPP Australia Chairman Paul Lahiff said in June, “Adrian is an energetic leader with a passion for leading large-scale transition programs and is well-equipped to head up the commercialisation of the NPP.”

“Adrian emerged as the outstanding candidate from an extensive domestic and global search process and the NPPA Board is delighted to have secured his services,” Mr Lahiff said.

Mr Lovney was the General Manager of Product & Service at Cuscal Ltd with responsibility for product, services, and customers across the business, including leading the organisation’s work in NPP. Previously, he was Cuscal’s General Manager Strategy & Communications, responsible for leading the evolution of Cuscal’s business over the last five years as well as the successful migration and transition of customers to a new and innovative payments platform.

Mr Lovney said in June , “I am honoured to be taking on this important role at this critical stage in the development of Australia’s New Payments Platform. The NPP is a uniquely Australian take on the real time payments infrastructure being implemented overseas. Its layered business architecture will deliver scale and efficiency, while supporting a diverse range of fast payments well into the future.

“These are exciting times and I am thrilled to be able to work with the NPP Australia Board and shareholders of NPP to help them realise the benefits of the investment they have made in this new payments system for Australia,” Mr Lovney said.