There’s nothing worse than filling the car with petrol and suddenly realising your wallet is sitting on the kitchen table.
That’s when you become attuned to the cold, hardening stares of the customers behind you, and you stumble to explain to the attendant you really are good for the money.
Thankfully a plethora of global “digital wallets”, which you operate from your digital watch or phone, is likely to make such embarrassment a distant memory.
Underlying the technology is a payments system that has been updating almost continuously in recent years, depending where you are located.
And no matter where a business or consumer sits along the payments channel, there are updates and innovations to make life easier, cheaper, and for the most part, more secure.
New payment methods that connect the consumer to the merchant, card provider or favourite search engine are popping up with regular frequency. Some of the new names include Google Wallet, Apple Pay, Square Wallet, Softcard, Chirpify, Venmo, Dwolla, and the ever evolving PayPal.
The mobile revolution has changed how people shop and pay for retail products and services. And as innovation continues, so will the spread of payment options available.
Globally, banks were slow on the uptake of how the digital revolution would impact traditional banking business.
Off The Mark
Demonstrating the reticence to take up mobile digital payments, in 2013 the US commercial bank owned ‘The Clearing House’ said in response to a review of the nation’s payments systems: “Payment systems providers will not invest in a payment system without the prospect of a reasonable return on their investment.”
And yet in 2014, the US Federal Reserve released a US faster payments assessment, in which it said one of the key takeaways from a survey of 10 countries payment systems was: “The decision to launch a faster payments system was always strategic, not financial, as there was not an explicit business case.”
Banks now realise firms like Apple, Google and PayPal have the potential to not just infiltrate, but dominate payment systems.
Incentive to Compete
It’s a great incentive to open the purse strings and compete with the new comers, and it can only deliver new benefits to consumers, as competition for a share of their “digital wallet” expands.
While each country has its own objectives for improving payment systems, there is no doubt changing competition dynamics are a driver for change.
It’s a reality that ANZ Australia chief executive Phil Chronican, says is part of the equation behind the construction of Australia’s New Payments System (NPP), at a cost of about $1 billion to 17 big players in the payments system.
The NPP is expected to go live in 2017, and will make Australia a leader in 24/7 payment platforms.
Australia’s Ground-breaking System
While some other countries already have such systems, the Australian design offers more than just a fast payment system. It is designed to capture a vast amount of data within the payments system, which service providers can capture and turn into information for merchants, and other businesses interacting with the system.
Groups like Paypal and Google already provide such information from their own networks, but the NPP will level the playing field, at least in Australia. It is also expected to drive innovation, and provide new services to business and consumers that have yet to be invented.
Payment system consultants Lipis Advisors released a global payment systems analysis in June last year, in which it identified 14 countries with active real-time systems, and another four in development.
The bulk of the existing systems are active in parts of South America, Africa, Mexico, a number of Nordic countries, and India.
Larger is More Difficult
Until the NPP is operational, Australia rates as a same day payment system, while the slowest payment systems are to be found in the US and Europe - excluding the UK.
Chronican says larger economies suffer from compatibility issues: “In Australia you can get the big four banks together, with a couple of major card providers and the two big retailers, and you have enough market coverage to make change.
“In the US there are hundreds of companies involved, and making sure each of those players will be compatible to a new system is difficult,” he says
Japan Leader of Pack
Nevertheless, Japan has been well ahead of the pack, and implemented its Zengin fast payments system in 1973. Successive upgrades over the years introduced an increasing spread of real-time transactions, and its 6th generation upgrade in 2011 delivered real time transactions for large-value payments.
Meanwhile the Swiss Sic franc payment system has been offering real time 24/7 payment settlements since 1987, and is currently in the process of an infrastructure upgrade, of which a key outcome is enhanced global payment scheme capability.
Korea and Brazil are also leaders in fast payment systems.
Payments industry technology provider, Clear2Pay, released a white paper last year rating the innovation and speed of global payment systems.
The research showed how adopting new technology can revolutionise a payments system, and make real changes to the lives of its population.
While Australian’s have enjoyed the benefits of same day payments, bill paying over the phone or internet with BPAY, and an ability to transfer funds to any bank account number with a few clicks of a mouse, such flexibility is rare among global payment systems.
New Systems’ Adoption Slow
It also takes time for new systems to become popular. Contactless payments were introduced into Australia in 2011, but did not become mainstream until early 2013.
In comparison, US banks and financial intermediaries were slow to introduce contactless payment, allowing Apple Pay to swoop in with its own system and snap up two thirds of the value of all tap and go payments completed on the three major credit card networks in the US.
Apple Pay is expected to be introduced into Australia this year, but as the country already has a strong tap and go system, banks expect its penetration to be less successful.
In addition to competition, governments are also key drivers of changes to payment systems.
The NPP has been credited as a response from industry to requests from the Reserve Bank of Australia to speed up the payments system, combined with a threat of more regulation, if it was not forthcoming.
The most recent and studied example of how replacing an antiquated system with a leading system can be transformational as found in the UK.
Before the introduction of the Faster Payments Scheme in 2008, it took on average three days for the clearing of UK interbank electronic transfers. That can now be done in real time, and it has driven innovation.
An innovation delivered last year was Paym, a system adopted by most UK banks that allows for mobile payments using mobile numbers as an identifier. Another is Pingit, offered by banking giant Barclays for person-to-person (P2P) mobile point of sale (POS) and mobile bill pay.
A new system, Zapp, soon to be released in the UK, which will allow mobile payment to businesses without providing credit card details, and the user can check their bank balance before sending an instant payment. It also claims to be the cheapest payment service, although Paypal has a similar system.
A poll conducted by Zapp late last year found 44% of British consumers planned to switch banks if their financial institution had no plans for a mobile banking solution.
And over 50% expected their mobile device to be their preferred method of payment before the end of the decade.
Payment System No Longer ‘Banks Only’
It’s clear that the payments system is no longer the sole domain of banks. And it’s because any organisation with a large network of users has the potential to bundle its product with payment services.
In Australia that means companies like Woolworths and Coles, or Telstra and Qantas and insurance and health providers.
The UK also provides a salient lesson in self-regulation, and the risk of government imposed regulation, if industry manages to attract negative public scrutiny.
In 2009 the Payments Council, which overseas payments in the UK and was funded by the banks, adopted a policy to scrap cheques by 2018.
It caused such a public outcry, the government took a closer look at bank influence in the payment sector, and opted to scrap self-regulation.
Under proposed new regulation to be adopted this year, payment system operators will be subject to licensing conditions, and rules on efficient and transparent pricing, non-discriminatory access, good governance, maintaining and development payment systems and co-operation.
The regulator will also set prices for accessing payment systems, if it feels terms have not been calculated fairly.
That’s a path Australian banks certainly do not want to go down, and given their response to RBA pressure for modernisation of the payment systems, it’s not something the government has on its agenda.
Australian banks also have another advantage over their UK counterparts. The focus of the British public on the cheque debacle followed a long string of bank bashing that rose from the global financial crisis in 2008-09.
The situation worsened thanks to the London Interbank Offered Rate (Libor) scandal in 2012, where banks colluded and inflated or deflated their interest rates to provide profit opportunities from trades.
Australian banks came through the GFC relatively unscathed, and although bank bashing is a healthy past time in Australia, there is still a high level of trust in the integrity of the organisations, meaning that if the banks continue to respond to changing customer requirements, the current regulatory-lite regime will likely remain the norm.
And that is a good thing. Regulation, where appropriate can bring order and stability. But where it’s not needed it brings uncompetitive overtures and increased costs. And that would be a poor reversal of the nation’s current heading for world leader in payments.
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.