23 Apr 2019
The ordinary consumer doesn’t really need to understand the plumbing of the payments system. They simply want to pay for something and know the transfer of money is safe and will work.
But they do want choice in how they pay. They want to know will the payment arrive in the recipient account immediately, overnight or will they have to wait three days? Will they get confirmation of receipt? Can they set up recurring debits to their account, credit or debit card? And what are the validations and protections in place if something goes wrong?
"What is the argument for such dramatic change? Don’t these companies function well in a competitive market today?”
Sitting behind these various choices and assurances is a network of payment infrastructure and schemes, established to ensure a customer at one bank can securely and effectively make a payment to a customer at any bank in Australia - or globally. These schemes are governed by separate - and to an extent, competing - organisations.
Now one of those organisations, the relatively young New Payments Platform Australia (NPPA) has proposed the merger of three major Australian payments organisations: NPPA, eftpos Payments Australia (ePal) and BPAY.
It’s a dramatic proposal and one which inevitably leads many to question whether this is in fact anti-competitive behaviour. It could create the perception the big banks are scheming together to enhance their own interests rather than those of the Australian public by monopolising the payments infrastructure.
Others who are close to the payments industry in Australia worry if the merging of three well established organisations with varied shareholdings and separate management teams and infrastructure could be anything but a recipe for disaster.
So what is the argument for such change? Don’t these companies function well in a competitive market today?
Before exploring the challenges and opportunities with consolidation it is important to understand the current payments landscape in Australia and its evolution.
The Payments System Board (PSB) of the Reserve Bank of Australia (RBA) regulates payments in Australia. The PSB generally takes a principles and objectives-based approach to regulation, leaving the industry to determine how it meets those objectives, allowing it to self-regulate accordingly.
NPPA, ePal and BPAY provide a range of payments services to meet the RBA’s objective for increased innovation and resilience in the payments system. Rather than providing direct-to-consumer services, these bodies run the payments utilities in Australia, which facilitate the broader payments network and enable financial institutions and payment providers to offer competitive services to their customers.
The domestic eftpos scheme has operated in Australia since 1983 with the organisation ePal established in 2009 to manage and promote the eftpos system in Australia. Its 19 shareholders include financial institutions, service providers and the two major Australian retailers – Coles and Woolworths.
BPAY was founded in 1997 by the four major banks to facilitate electronic bill payments and expanded in 2018 to include Sypht, a data capture and analytics solution, and Osko, an initial NPP feature or “overlay service”.
Finally, following the RBA’s strategic review of the payments system in 2012, and with the objective of delivering real time payments, 24/7 with enriched data and easy addressing, NPPA was established in 2014 by 13 founding shareholders, including 10 institutions with a common shareholding in ePal.
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Figure 1: Domestic payment schemes have common shareholders who are also their customers, as they connect with the services provided to offer solutions to consumers, merchants and other businesses. A merged industry organisation could remove duplication and simplify governance.
These three commercial entities, along with the self-regulatory and governance-focused Australian Payments Network (AusPayNet, formerly Australian Payments Clearing Association or APCA), evolved organically with changing market needs.
Historically, each has had a distinct purpose and set of service offerings. But changing customer and regulatory expectations, along with advances in technology, have started to blur the boundaries between service propositions.
Payments need networks
A critical and somewhat unique aspect of all payments systems compared with other banking services is their reliance on a network effect. Consumer choices in payment instruments are largely dependent on merchant choices in acceptance. And vice versa.
Equally, a ubiquitous network is required in order to ensure payments can be sent and received across the industry and economy. Therefore, arguably more so than other utilities, payments infrastructure requires a high level of collaboration to enable competitive services to customers as quickly as possible.
BPAY, ePal and NPPA are collaborative entities in their own rights – but with separate governance structures and siloed objectives. So initiatives are often developed in an uncoordinated manner and in competition with each other.
This competition may not always be beneficial. There is an argument it introduces the risk of duplication and inefficiencies without any clear benefits to consumers and retailers. The case for proposed change is consequently based on the argument that rationalisation of the payment industry structure will improve the industry’s ability to deliver benefits to payment customers by enabling a single, clear strategic roadmap across payment clearing systems and initiatives.
Today, the lack of such a public roadmap creates confusion and hesitation rather than the intended outcome of customer choice and rapid innovation.
This context explains why the consolidated governance of payment utility services in Australia is not necessarily anti-competitive. It may in fact be necessary to create a robust platform for digital innovation and market-led solutions that can compete (and, where appropriate, collaborate from a position of strength) with conglomerate international schemes.
Australian financial institutions - as shareholders and customers of these utilities - might support a strategy that marshals the best talent in Australia around a clear vision to enable simpler and more customer-focused solutions.
Any attempt to consolidate three successfully operating, separate entities is wrought with risk and complexity. The proposed approach involves establishment of an Industry Committee made up of the 22 shareholders across the three organisations.
So who earns a seat at the table?
Relationships with these bodies sit across multiple divisions and functions within each shareholder organisation. The right level of seniority is necessary to ensure effective decision-making and appropriate conduct. However, this needs to be balanced with a strong understanding of payments and the infrastructure under consideration.
Will discussions include Company Directors? Management? It will be difficult to progress the agenda with so many chefs in the kitchen - although engagement and buy-in from all stakeholders will be fundamental to progressing the effort.
Additionally, what happens with work in progress during this process? It would be unreasonable to suggest the industry just stop ongoing initiatives for what may realistically be a number of months. However, company priorities and investment will be under review, and they will risk prioritising work that will potentially be duplicated and ultimately wasted.
Potential to simplify
Even with the obvious challenges, consolidation is still worth exploring in earnest, with the end goal of a more effective, productive and networked payments system that best serves its end users.
Such a move is not unprecedented. In 2017, the United Kingdom established Pay.UK as one operator for all UK retail payments, including BACS (Direct Debits and Credits), Faster Payments and Cheques. (Notably Pay.UK does not include the domestic debit card scheme which was merged with MasterCard’s Maestro scheme in 2002.)
As a company limited by guarantee, Pay.UK’s 36 guarantors have collective liability, essentially functioning as customers rather than owners of the infrastructure.
More similar to the proposal for Australia, Singapore also consolidated their payments governance under NETS in 2017. The acquisition brought together domestic card schemes, cheque clearing, direct debit bill payments and Fast and Secure Transfers (FAST), a real-time account to account payments system. While consolidated into a single entity with one governance structure, the existing businesses largely operate autonomously with separate management teams.
So consolidation, while challenging, is not impossible.
There is no doubt that if done successfully, the establishment of an entity with a broad vision, plan and governance structure for the Australian payments system might, as the NPPA Board has said, “advance the public interest, and be in the interest of all stakeholders”.
In an increasingly fast-paced digitised payments ecosystem, with competing priorities and finite resources, a single entity is in a position to champion a more agile platform and better support the innovation agendas of the competitive institutions that build services across its network.
Jackie Kallman is Head of Payments Industry and Engagement at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
23 Apr 2019
04 May 2020