The rise of the smart phone has bundled portable banking, dating, gaming, and social media, with an almost redundant ability to make phone calls.
To allow transactions to occur between all the connected businesses and customers requires the equivalent of a healthy vascular system, which in this case is Australia’s payments system. It is to the financial system what hemoglobin is to the human body, and it’s what keeps all this mobile activity alive.
It’s an analogy Australian Payments Clearing Association (APCA) chief executive, Chris Hamilton, likes to use when describing how the payment system functions.
Australia already has a globally advanced payments system, but consumers and merchants want better, and they will soon get it.
Billion Dollar Investment
The big banks, and a number of other Australian deposit-taking institutions (ADI’s) are spending $1 billion to build new open source infrastructure which will enable funds to be available moments after a payment is made. It is scheduled to come online in 2017.
Overseeing the roll-out of the New Payments Platform (NPP), is a recently established Australian Payments Council (APC), which was formed as a strategic coordination body, with the support of APCA and the Reserve Bank of Australia (RBA).
APC has had some heavy hitters in its court, including former ANZ Australia Chief Executive Phil Chronican, Cuscal Managing Director Craig Kennedy, Eftpos Payments Australia Managing Director Bruce Mansfield, previous First Data Resources Australia Managing Director John Tait, Paypal Australia Managing Director Jeff Clementz and RBA Assistant Governor Keith Hall.
While expressing deep interest in the payments system, Chronican admits his hands-on role directly stems from the NPP.
Chronican says, “ As a piece of infrastructure it allows innovation in the future, and provides additional information that can provide merchants with purchasing data, and features like paying people without knowing their account number.”
“However, the average person does not have a lot of need currently for a real time payments system, as same day payments are already available. International companies and their products, like Apple Pay and Google Wallet, are already attempting to invade the payments system, although to date success has been tepid.
The NPP in part is a response to that. Chronican says a lot of work is going into what merchants want from the system. And it’s why APC has broad representation from new entrants, to established players, and retailers and card issuers.
NPP will be accessed by all ADI’s through a single platform, enabling anyone to be paid across Australia almost instantly.
With it is an element of “build it and they will come”, as it is expected the platform will trigger innovation and improved technology across the various access points, to create new tailored payment systems for the benefit of consumers.
So while the payments system progression over the past 5-6 years has been transformative, there is no hiatus on the horizon.
Australian Payment Systems Attract Foreign Interest
APCA’s Hamilton says the initiative, which is an industry response to the RBA’s strategic objectives, has generated a lot of offshore interest in the NPP.
He says Australia has a number of innovations that other countries are eyeing with interest and envy, including something many Australian’s take for granted – the ability to make online payments to any other bank account.
Bill payment system BPAY is another unique innovation that Hamilton says generates a lot of foreign interest, as it has not been replicated with such success elsewhere.
“Many people are surprised at the number of options available to Australians for bill payment and money transfer, which are not available in countries like the United States. Part of the reason for this is the issue of compatibility that has to be accommodated, so in larger economies it is more difficult to get everyone on the same page,” says Hamilton.
Chronican agrees, and says the United States is only just making a big push on contactless payments, and it’s a result of competition from Apple.
For the person in the street, issues like compatibility are of little interest. They just expect the system to deliver convenience and security.
Sparks Shoes retail chain founder, and chairman of the Australian Merchants Payments Forum, Russell Zimmerman, has witnessed the evolution of the modern payments system.
“We went from the introduction of Bankcard in the mid- 1970’s to Visa, Mastercard and Eftpos, but then for many years there was little change.
“That is until about six years ago when things like “tap and go” and “chip and pin” rapidly transformed the payments landscape. But looking forward the pace of change is going to be even more dramatic, with the proliferation of mobile devices that interact across the payments system,” says Zimmerman.
And along the way it has caused some issues, as the RBA had to step in as the “reluctant regulator.” The RBA put a cap on Visa and Mastercard’s interchange pricing, and allowed merchants to pass on payment costs with a discretionary customer surcharge.
The RBA is reportedly relooking at this area again, following recommendations for change from David Murray’s Financial System Inquiry, released in December 2014 with a response due March 2015.
But point of sale is just one side of the picture, as how we pay bills has also been a transformational process.
Lower Transaction Costs
While credit cards remain a popular payment method, it was the introduction of direct debit and BPAY that innovated the bill payment system, and significantly lowered the costs of transactions.
Direct debit technology originated in the US however, BPAY was a distinctly Australian innovation.
Introduced in 1997 BPAY quickly carved a position as a premier provider of bill paying services, by allowing bill payments over the internet through a financial institution’s online bank.
“The success of BPAY is evident in its growth,” says BPAY General Manager of Business Services, Keith Brown.
“In its first full year of operation BPAY’s annual transaction volume was about 9 million. It now processes more than 30 million bills a month valuing over $24 billion.
And BPAY is set for further growth, thanks to the growth in use of smart mobile device and specifically online mobile banking.
The Rise of the Smart Phone
Telsyte’s Australian Smartphone Market Study 2014-2018, revealed there were 16 million smart phone users at the end of June 2014, and by end 2015 an additional 1.5 million new users were expected to join the smartphone revolution.
Hamilton says the use of mobile systems for payments is patchy, as retailers and customers are still getting up to speed. Currently less than 10% of consumer payments to business are made by smart-phone transactions.
But as with the introduction of contactless payments just a few years ago, the take-up can be like a tsunami, once momentum builds.
Contactless payments now account for over half of the face to face transactions made under $100. And studies show people are willing to spend more when using a card instead of cash.
That extra spending is good for the economy and jobs, and the economies of scale it creates for card issuers and facilitators of the payments system means costs of the payment system can be reduced.
Chronican says the NPP will provide low cost transactions, and help the push to electronic payments.
“Cash and cheque are very expensive, says Chronican, “as the information flow has to be manually created. The move to electronic and real time payments is inexorable.”
A research discussion paper by the Reserve Bank of Australia in December last year determined Australia’s payment system had transformed from one of the most expensive in the OECD in 2006, to one of the most efficient in 2014.
From survey results the paper found total costs incurred by financial institutions, large merchants, and government in providing consumer to business payments was $8.4 billion in 2013, or about 0.54% of GDP.
This figure blows out to $10 billion or 0.64% of GDP if smaller merchant costs are extrapolated into the data, although as the paper notes, smaller merchant data is less reliable.
In comparison a similar survey of the payment systems of 13 countries in Europe in 2012 found an average cost of 1% of GDP, with ranges varying from 0.42% to 1.35%.
Of course the cost of each platform within the payment system varies, whether it be the cost to a merchant, consumer, institution, large or small business, or an economy. But ultimately it is the consumer that drives the success of each payment system.
“I thinks that gives us an edge,” says BPAY’s Brown.
“BPAY is the only payment method that gives total control to the consumer. They decide when to pay a bill, and control the bill paying transaction. With BPAY View, they can also receive alerts to ensure no payment due is forgotten”.
Direct debit – the debit side of direct entry - offers set and forget convenience but has two major drawbacks, notably if there is insufficient funds in an account when the debit is made, penalty fees may apply.
Secondly, some consumers may forget to cancel monthly or yearly subscriptions and therefore accidentally automatically renew subscriptions they may no longer want, leading to decreased customer satisfaction.
Credit cards are a well-known commodity, but surcharges and other fees make them a more expensive option in many cases. Nevertheless, as Chronican points out most businesses are reliant on credit cards for consumer payment.
And yet each of the payment systems fulfils the flexibility demanded by consumers. Where that demand will take technology in the future is an open question. But the NPP has been designed for flexibility, to adapt to new technologies as they arise.
This article represents the views and opions of the author and do not necessarily reflect the opinions of BPAY.
Published by BPAY Pty Ltd. BPAY is offered by over 150 Financial Institutions. Contact your Financial Institution to see if it offers BPAY and to get the terms and conditions. This is general advice – before using BPAY please review the terms and conditions and consider whether BPAY is appropriate for your personal circumstances.