The new strategic benchmark for Australian payments
In June 2012, the Reserve Bank of Australia (RBA) did something that was then unusual for a central bank. After two years of consultation, it published clear, high-level guidance on what it thought should be the strategic objectives of the domestic payments system.
In this respect, RBA was ahead of its time. Around the world, there has been a strong recent trend of public policymakers taking a holistic view on the evolution of their domestic payments systems. This trend is illustrated, for example, by the recent policy statement of the UK Payments System Regulator, or the recent U.S. Federal Reserve System paper “Strategies for Improving the U.S. Payment System” (see ‘related links’ below).
The RBA’s guidance took the form of a set of strategic objectives or challenges to the payments community over a four to five year horizon, as follows:
- Same-day settlement of all bulk electronic payments.
- The ability to make real time retail payments.
- The ability to make and receive low value payments outside normal banking hours.
- The ability to send more complete remittance information with payments.
- The ability to address payments in a relatively simple way.
The first of these objectives has already come about through reforms to the Bulk Electronic Clearing System (the domestic equivalent of ACH) implemented in November 2013. Low value bulk electronic payments in Australia now clear and settle six times a day (previously once next day), so that most routine payments reach the payee account within a few hours of the payer’s initiation. This was a significant reform in its own right, but only the first step in modernising the Australian payments infrastructure.
The New Payments Platform
The remaining four RBA strategic objectives are to be delivered in the form of an entirely new payment system. The New Payments Platform (NPP) is a multi-million dollar collaboration of 12 leading Australian payments organisations including the RBA itself representing 98 percent of domestic low value activity.
The key elements are:
- A domestic messaging network connecting all Australian account-keeping institutions, set up and operated by the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
- Use of ISO 20022 messaging to ensure maximum flexibility and extensibility.
- A new fast settlement service operated by the RBA, which will settle each payment in real time on a line by line basis.
- An addressing database which associates proxies – such as mobile phone numbers or email addresses – with account numbers, so that payers do not need to know payee account numbers.
- A provision for ‘overlay services’ that will use the basic network described above to meet specialised customer expectations – anything from a person-to-person mobile payment service to a real estate conveyancing service. These services can be set up and operated commercially by anyone who can generate sufficient customer interest.
In this way, the NPP will meet all of the remaining strategic objectives of the RBA. But the real potential of the system lies in the layering of multiple overlay services over a single ubiquitous basic network. This is an attempt to ‘future proof’ the system against the unknown long-term needs of users.
What payers and payees really want
Nobody ever said “I’d really like to make a payment!” Payments are always a means to another end. You hand over a large sum (perhaps borrowed from a bank) in exchange for the keys to your new car; a business pays a supplier for raw materials. Even a charity donation is not just a payment - it is a helping hand for a good cause. Despite this, for many years all payments had to conform to a few specific methods - a cheque or one of the national bulk electronic systems or ‘ACH’. The chosen payment method dictated the timing, work flow and data content of the payment, regardless of the particular context or need.
But now, in the age of digital disruption, user expectations are fundamentally changing. Businesses and individuals are permanently connected to each other. Whatever they want to do, whenever they want to do it, there is a downloadable app or an online service tailor-made for the job and if there isn’t, then someone is about to develop it. In such a world, it is not obvious to the customer why, when it comes to making payments, the system does not conform to their needs, instead of the other way around.
The reason why, as payments professionals know, is that efficient payment systems rely on ‘network externalities’. This simply means that the usefulness of any payment method is determined by its footprint – by how many payers and payees it connects. This is why new networks like Bitcoin struggle despite the hype and also why old networks like cheques take a very long time to die. You could have the cleverest smartphone in the world but if it does not connect to your country’s cellular network, then no matter how clever it is, it is not much use as a phone.
To my way of thinking, this is the core challenge for the payments community in the era of digital disruption: how do we meet the expectations of the digital era for payment services that are tailored to every need imaginable, while still making sure everyone can pay and be paid by everyone else?
Meeting digital disruption head on
A new and wider range of customer expectations means existing payment networks must adapt. This core challenge was the driving force behind the layered architecture of the NPP. The logic is illustrated conceptually below.
Figure 1: The New Payments Platform Ecosystem. (Source: Australian Payments Clearing Association Limited.)
The NPP is conceived as a ubiquitous network connecting the accounts of every business and individual in Australia. This maximises beneficial network effects (everyone can ‘reach’ everyone) in a standard, low-cost way. But for each type of payment, the customer experience is dictated not by the NPP itself, but by an overlay service that is designed to meet specialised needs. As the illustration shows, one likely overlay service would be designed for immediate person-to-person mobile-based micropayments. Such a service could be branded and priced to attract consumers and specify very fast turnaround with only minimal data flowing with the payment.
The same basic network could support other very different overlay services. For example, in an online used car sales service, larger amounts (requiring careful verification) are paid only when the registration of the car actually passes to the new owner. A reinsurance market has very different data needs compared with an automated manufacturer’s supply chain and so on. A loose analogy might be a rail network – a basic set of train tracks is used by a wide range of different train services: intercity expresses, local passenger services and freight trains.
In fact, the NPP is designed on the premise that we payment professionals simply don’t know the full range of payment needs our customers will have in the future. We need to create a marketplace where new payment solutions can be designed and implemented at low marginal cost as unexpected customer needs emerge.
I believe the NPP creates that potential.
Chris Hamilton is Chief Executive Officer of the Australian Payments Clearing Association (APCA). The views expressed in this article are his own and should not be attributed to APCA or its members.
Related articles in this issue:
How to Use Blockchain Technology to Develop Faster and Cheaper Inter-banking Infrastructures. The blockchain protocol and the distributed ledger used by crypto currencies could provide banks with a competitive technological advantage, if adopted quickly
Related articles in previous issues:
The Future of Payments: European Commission Invited Exchange of Views at its Conference on Emerging Challenges in Retail Finance and Consumer Policy. Participants discussed latest developments, and ones to come, in terms of consumers' safety, accessibility and convenience ( Newsletter, Issue 25, January 2015)
Virtual Currencies: a House of Cards or a Mass Market Trend? The Answer to that Question Remains Pending. A commentary on the latest developments in the emerging virtual currencies landscape ( Newsletter, Issue 25, January 2015)
SEPA Migration (Euro Area) Round Up: the Transition has been a Success Throughout the Region. Market participants comment on the 1 August 2014 deadline and next steps in the SEPA process ( Newsletter, Issue 24, October 2014)
Next Step to Create the Digital Single Market: EU Lawmakers Adopt the New Regulation on Electronic Identification and Trust Services for Electronic Transactions in the Internal Market. European Union authorities seek to enhance trust in electronic transactions ( Newsletter, Issue 24, October 2014)
The Concept of an Open Standard Interface for Controlled Access to Payment Services (CAPS). A commentary: “Access to accounts – why banks should embrace an open future.” ( Newsletter, Issue 21, January 2014)
ISO 20022 is the New Language of Payments! The Standards Forum Launched the 'ISO 20022 Adoption mApp' Featuring Information on More than 60 ISO 20022 Initiatives Globally. New adoption initiatives are encouraged to showcase their project with this mobile application ( Newsletter, Issue 20, October 2013)
The Future of Payments: Markers for Success. The six markers which payments incumbents and newcomers alike can use to define positioning and strategies for successful innovation ( Newsletter, Issue 17, January 2013)
If you would like to comment on this article, please identify yourself with your first and last name. Your name will appear next to your comment. Email addresses will not be published. Please note that by accessing or contributing to the discussion you agree to abide by the EPC website conditions of use.