The ‘payments system’ refers to arrangements which allow consumers, businesses and other organisations to transfer funds usually held in an account at a financial institution to one another. It includes the payment instruments – cash, cheques and electronic funds transfers which customers use to make payments – and the usually unseen arrangements that ensure that funds move from accounts at one financial institution to another.
The use of cash as a payment method remains widespread. One of the most comprehensive sources of data on individual cash payments is the Reserve Bank's consumer payments use diary study. This study was first undertaken in 2007 and was repeated in 2010 and 2013. These studies indicate that consumers used cash for most of their low-value transactions, with around two-thirds of the number of payments under $20 made using cash in 2013. Overall, cash payments accounted for 47 per cent of the number and 18 per cent of the value of all payments made by individuals in the 2013 study, with some substitution away from cash use and towards electronic methods observed over the three years between the 2010 and 2013 studies. The most common way consumers withdraw cash is through ATMs, which accounted for 69 per cent of the total number of cash withdrawals and 57 per cent of the value of withdrawals in 2015.
Non-cash payments account for most of the value of payments in the Australian economy. On average, in 2015 non-cash payments worth around $227 billion were made each business day, equivalent to around 14 per cent of annual GDP.
Over 70 per cent of the value of non-cash transactions is accounted for by a small number of high-value payments made through Australia's real-time gross settlement (RTGS) system. Most of the value of these payments relates to the settlement of foreign exchange and securities markets transactions.
The migration of large business payments to the RTGS system saw a decline in the importance of the cheque as a payment instrument. In 2015, around 6 cheques were written per person in Australia, down from 24 cheques per person 10 years earlier. A significant share of cheque use is related to commercial payments, and financial institution (‘bank’) cheques for certain transactions such as property settlements.
In contrast to the declining importance of cheques, the use of electronic payment instruments at the retail level has been growing rapidly. In 2015, transactions (both purchases and cash withdrawals) undertaken using either credit or debit cards averaged about 275 per person, an increase of 57 per cent on the level of five years earlier.
For many years, Australian governments and businesses have made extensive use of Direct Entry credits for social security and salary payments. Consumers and businesses also establish direct debits for bill payments. Direct Entry payments are an important part of the payments landscape. These payments continue to account for the bulk of the value of non-cash retail payments (i.e. non-RTGS transactions).
Most payment systems involve two or more financial institutions and/or other payments providers, requiring payments to be ‘cleared’ between them. For instance, details of a cheque drawn on one financial institution and deposited at another must be returned to the first financial institution so that it can debit its customer's account and verify that the customer has sufficient funds.
Arrangements for clearing most payment instruments in Australia are coordinated by the Australian Payments Clearing Association (APCA). APCA is a limited liability company with a board of directors drawn from its shareholders – banks, building societies and credit unions. APCA manages clearing for cheques, direct entry payments, ATMs and debit cards and high-value payments.
Other payments clearing systems independent of APCA include credit cards (MasterCard and Visa), the domestic debit card system managed by eftpos Payments Australia Limited (ePAL) and the BPAY system for payment of bills. As discussed in the 2014 PSB Annual Report (p46-47), following the Conclusions of the Strategic Review of Innovation in 2012, the industry has been working on a project to build a new real-time retail payment system – the New Payments Platform (NPP). The NPP is expected to be in operation in the second half of 2017. There are also two securities settlement systems with separate payment arrangements. They are the Austraclear System which settles trades in CGS and other debt securities and the Clearing House Electronic Sub-register System (CHESS) for settlement of equity trades.
When payments are cleared between institutions, they accrue obligations which must be settled. In Australia, final settlement of obligations between payments providers is by entries to their Exchange Settlement (ES) accounts at the Reserve Bank. Large-value payments are settled one-by-one on a real-time gross settlement (RTGS) basis, while retail payments are settled on a net settlement basis. The Reserve Bank has established a policy setting out criteria that payments providers must meet to open an ES Account.
Role of the Reserve Bank
A safe and efficient payments system is essential to support the day-to-day business of the Australian economy and to settle transactions in its financial markets. Accordingly, the Reserve Bank of Australia has important regulatory responsibilities for the payments system and plays a key role in its operations.
The Payments System Board (PSB) of the Reserve Bank oversees the payments system in Australia. It is responsible for promoting the safety and efficiency of the payments system and through the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998, the Reserve Bank has one of the clearest and strongest mandates in the world in relation to payments systems.
The Bank consults closely with participants in the payments industry. The Bank is represented on a number of industry committees responsible for the day-to-day management of payments clearing systems and Bank staff regularly meet with industry representatives and other regulators.
Detail on the structure and operations of the Australian payments system can be found in Payment Systems in Australia (Red Book) and the activities of the Bank's Payments System Board are reported in its Annual Reports.
Controlling Risk in the Financial System
The Reserve Bank's responsibilities for stability build on the long history of central banks' involvement in this area. The introduction of real-time gross settlement (RTGS) in 1998 eliminated the build-up of settlement exposures between financial institutions as a result of the exchange of high-value payments and transactions in debt securities. In 2002, Continuous Linked Settlement (CLS) joined Australia's RTGS system, allowing foreign exchange transactions involving the Australian dollar to be settled through CLS. The Reserve Bank, and other central banks whose currencies are settled through the CLS arrangements undertake cooperative oversight of CLS under an agreed protocol.
Under Part 7.3 of the Corporations Act 2001, the Reserve Bank has a formal regulatory role to ensure that the infrastructure supporting the clearing and settlement of transactions in financial markets is operated in a way that promotes financial stability. The Bank's powers under that Part include the power to determine financial stability standards for licenced clearing and settlement facilities. The Reserve Bank implemented revised financial stability standards for central counterparties and securities settlement facilities in 2013. The Standards seek to ensure that clearing and settlement facilities identify and properly control risks associated with their operations, thereby promoting the stability of the Australian financial system. The Standards replaced previous standards determined in 2003 to incorporate changes to international standards for clearing and settlement facilities. The Standards for securities settlement facilities apply only to facilities that settle obligations in excess of $200 million in a financial year. This ensures that the Standards apply only to securities settlement facilities that could potentially pose a risk to the stability of the financial system, exempting small systems from unnecessary regulation.
Efficiency of the Payments System
Australia was among the first countries in the world to make efficiency of payment systems a statutory objective of the central bank. In pursuit of this mandate, the Reserve Bank has encouraged a reduction in cheque-clearing times and the take-up of direct debits as a means of bill payment, and taken a number of steps to improve the competitiveness and efficiency of card systems. Initially the latter focus was on credit card systems. In 2001, the Bank designated the Bankcard, MasterCard and Visa credit card systems as payment systems under the Payment Systems (Regulation) Act. Designation is the first step in the possible establishment of standards and/or an access regime for a payment system. After extensive consultation, the Bank determined Standards for the designated schemes which lowered interchange fees and removed restrictions on merchants charging customers for the use of credit cards, and imposed an Access Regime which facilitates entry by new players.
In May 2016 the Reserve Bank released three new standards on merchant pricing (surcharging), and interchange fees for credit, debit and prepaid cards. The standard on merchant pricing commenced on 1 September 2016 although some clauses will not apply until June or September 2017. The standards on interchange fees will commence on 1 July 2017. In the meantime, previous standards continue to apply. For more information please see the Questions and Answers page or the section on Payment Cards Regulation.
In May 2016, following extensive consultation, the Bank released the Conclusions of its Review of Card Payments Regulation (see media release) which included three new standards which will contribute to a more efficient and competitive payments system.
Two of the new standards relate to the setting of interchange fees and net payments to issuers in designated credit and debit & prepaid systems. These standards will take effect on 1 July 2017. The new standards will result in a reduction in payment costs to merchants, with the weighted-average interchange fee benchmark for debit cards to be reduced from 12 cents to 8 cents per transaction, and the weighted-average credit card benchmark being maintained at 0.50 per cent. In addition, the weighted-average benchmarks will be supplemented by new ceilings on individual interchange rates which will reduce payment costs for smaller merchants. No credit card interchange fee will be permitted to exceed 0.80 per cent and no debit card interchange fee will be able to exceed 15 cents if levied as a fixed amount or 0.20 per cent if levied as a percentage amount.
Schemes will be required to comply with the benchmarks on a quarterly basis, based on weighted-average interchange fees over the most recent four-quarter period. In addition, interchange-like payments to issuers in the American Express companion card system will now become subject to equivalent regulation to that applying to the MasterCard and Visa credit card systems. To prevent circumvention of the debit and credit interchange standards, there will also be limits on scheme payments to issuers that are not captured within the interchange benchmarks.
See the Regulations page for the current interchange fee standards that continue to apply until the new standards take effect in July 2017.
As part of the Conclusions to the Review of Card Payments Regulation, a new surcharging standard was released which preserves the right of merchants to surcharge for accepting more expensive payment methods. Prior to 2003, when the RBA first set a standard for surcharging, the rules of the MasterCard and Visa schemes prohibited such charges. Consistent with the Government's amendments to the Competition and Consumer Act 2010, the new standard will ensure that consumers using payment cards from designated systems (eftpos, the debit and credit systems of MasterCard and Visa, and the American Express companion card system) cannot be surcharged in excess of a merchant's cost of acceptance for that card system.
The Australian Competition and Consumer Commission will have enforcement powers under the new framework, which took effect from 1 September 2016 for large merchants, and will take effect for other merchants on 1 September 2017. Further information about the new surcharging framework is available on the Questions & Answers - Card Payments Regulation page, with information about the old framework available on the Surcharging Questions and Answers page.
Debit Card Regulations
As noted above, the Bank has recently introduced a new standard which will take effect from 1 July 2017 covering debit and prepaid card interchange fees and net payments to issuers; it reduces the weighted average interchange fee benchmark in the designated debit card systems from 12 cents to 8 cents per transaction, with no debit card interchange fee able to exceed 15 cents if levied as a fixed amount or 0.20 per cent if levied as a percentage amount. This new standard will apply to the eftpos, Debit MasterCard and Visa Debit systems.
Prior to September 2016, an ‘honour all cards’ Standard required the removal of the requirement that merchants accepting Visa credit cards also accept Visa Debit cards. It also required that Visa Debit cards be identified both visually and electronically to allow merchants to decline acceptance if they so choose. MasterCard provided had provided an undertaking to the same effect as the Standard. The Standard covering the honour all cards rule was revoked on 1 September 2016, with MasterCard and Visa providing the Bank with written undertakings that the schemes will not impose honour all cards rules on merchants.
The Bank had also previously determined an Access Regime for the EFTPOS and Visa Debit systems; the latter was introduced to deal with technical issues arising from the interaction of Visa's rules and the credit card Access Regime. However, these issues no longer apply and accordingly the Visa Debit regime was revoked effective from 1 January 2015. The Access Regime applying to the EFTPOS system in Australia was revoked from 1 September 2015, along with the related 2004 designation of the EFTPOS system.
Credit Card Access Regimes
The introduction of Access Regimes in 2004 allowed specialist credit card institutions (SCCIs), authorised and supervised by APRA, to apply to participate in the credit card schemes, as issuers or acquirers. Formerly, the scheme rules required that participants be deposit taking institutions authorised by APRA. In 2014, the Board determined to vary the Access Regimes. This reflected its conclusion that, while the original Access Regimes were appropriate when introduced, changes in industry structure and in the ownership of the card systems meant that the regimes might be unduly restricting access. The variations came into effect from 1 January 2015 and provide the MasterCard and Visa card systems with the flexibility to expand membership beyond existing participants.
The ATM System
In 2008, the Reserve Bank designated the ATM system as a payment system under the Payment Systems (Regulation) Act. After extensive consultation, the Bank determined an Access Regime for the ATM system which supported complementary industry-based reforms. The Access Regime sets a cap on the connection cost that can be charged to new entrants to the ATM system and prohibits the charging of interchange fees except in specific circumstances. It also includes a prohibition on the charging of fees for establishing direct clearing/settlement arrangements and allows the Bank to exempt certain arrangements from compliance with aspects of the Regime where this is in the public interest.
The ATM reforms, which came into effect on 3 March 2009, were designed to: make the cost of cash withdrawals more transparent to cardholders and place downward pressure on the cost of ATM withdrawals; help to ensure continued widespread availability of ATMs by creating incentives to deploy them in a wide variety of locations, providing consumers with choice and convenience; promote competition between financial institutions; and make access less complicated for new entrants, and therefore strengthen competition. The reforms have resulted in customers now being charged directly for withdrawals by the ATM owner and the elimination of ‘foreign’ ATM fees.
Retail Payments Studies
The Reserve Bank has undertaken a series of significant studies to gather information on the Australian payments system. The Bank undertook its third survey of consumers’ use of and attitudes toward different payment methods in November 2013. As with the previous studies in 2007 and 2010, an important goal of the survey was to measure the use of cash in the economy, given that there are few direct sources of information on this important segment of the payments system.
Over the course of 2014 the Bank undertook a large-scale study of the costs of different payment methods for financial institutions and merchants. This study updated and extended the analysis undertaken as part of the 2007/08 review of the Bank's payment system reforms.
|Study||Date of Publication|
|Use of Payment Methods by Consumers|
|The Changing Way We Pay: Trends in Consumer Payments||June 2014|
|Strategic Review of Innovation in the Payments System: Results of the Reserve Bank of Australia's 2010 Consumer Payments Use Study||June 2011|
|Household Payment Patterns in Australia in Proceedings of Payments System Review Conference – 2007||April 2008|
|The Evolution of Payment Costs in Australia||December 2014|
|Payment Costs in Australia in Proceedings of Payments System Review Conference – 2007||April 2008|
The EFTPOS Access Regime was introduced in September 2006 to improve competition and efficiency in the EFTPOS system, which at that time consisted of a series of bilateral connections and business arrangements between participants. With the establishment of a central hub by eftpos Payments Australia Limited (ePAL), in August 2015 the Board judged that suitable access arrangements were in place such that the Access Regime could be removed.