Speech Update on the Strategic Review of Innovation in the Payments System
Head of Payments Policy Department
Future of Digital Payments Conference
Today I am going to give an update of some developments since the Bank released its Strategic Review of Innovation in the Payments System in June last year.
In May 2010, the Payments System Board announced that the Bank was undertaking a strategic review of innovation. The background here was a concern that in recent years it had been hard to generate some types of innovation in the Australian payments system. There was typically no shortage of innovation where a bank could innovate on its own and without having to involve other banks. But it does seem to have been difficult to get system-wide or cooperative innovation for a number of reasons. And given that payment systems are networks, this type of innovation is crucial. Accordingly, the Strategic Review looked at ways in which innovation could be facilitated through more effective cooperation between stakeholders and regulators.
There were two major decisions from the Conclusions to the Review. First, the Payments System Board will from time to time set out strategic objectives for the payments system that take account of the interests of all stakeholders. The Board will set targets, but it will largely be up to the industry to determine how those objectives could be met most efficiently. Second, there will be a more direct dialogue between the Board and the industry, and we are currently working with the industry to constitute a new high-level industry coordination body – the Australian Payments Council.
Let me first update you on progress towards the Payments Council. Following the release of the Conclusions Document the Bank engaged in further consultation on this proposal. These discussions helped to refine views on the role and make-up of the body. The Bank has since been working with APCA to design a framework for the Australian Payments Council and a plan for its establishment.
Industry representation on the Payments Council will be broader than just financial institutions, also incorporating payment system operators, non-bank institutions with their own payments processing facilities, as well as some of the newer players in the industry. Given that the Payments Council cannot be too large if it is to have effective decision-making, APCA and the Bank have been also thinking about ways to facilitate interaction between the Council and the broader payments industry. The Board has been briefed on the model that we and APCA have come up with, and I think we are close to announcing a proposal. Together with APCA, we intend to do a final round of consultation on the proposal, and hope that a Council can be formed soon afterwards.
Because the Payments Council will be charged with coordinating the activities of the industry, it will consist only of industry participants and will not have any direct representation by end-users of the payments system. However, the Bank considers it is very important that the interests of end-users are also incorporated into discussions of strategic objectives. Accordingly, the Bank will be proposing to establish a separate consultation group for end-users of the payments system, which we would expect would include representatives of consumer and business organisations, as well as government. Discussions with this group will help inform the Bank's assessment of how well the payments system is meeting public-interest objectives.
I'll turn now to the initial set of strategic objectives from the Innovation Review.
- The capacity for businesses and consumers to make payments with close-to-immediate funds availability to the recipient, on a 24 by 7 basis. Fast payments with immediate funds availability would enable individuals to make immediate personal payments, government agencies to make immediate emergency payments electronically to those in need, and potentially allow businesses to make better use of cash balances. These types of payments are already offered in countries such as the UK, Mexico, Sweden and Switzerland and are currently being implemented in Singapore.
- Second, there should be the ability to send more detailed information with payments. This would facilitate a range of process improvements for businesses.
- Third, there should be the ability to address payments in a simple manner, say by addressing a payment to a mobile phone number or an email address, rather than having to remember and correctly key in a 6 digit BSB and an account number of up to 9 digits.
The strategic review set targets for these, by end 2016 for the most part.
In February, the Board was briefed on the industry proposal to deliver a fast payments solution for Australia. The Board welcomed the proposal, and we have continued to brief the Board on developments since then. These have included:
- The formation of a program steering committee
- Commitments by more than 17 institutions to help fund the initial stages of the project, which is now called the New Payments Platform (NPP), and to contribute to project design – APCA will shortly be providing further information on this
- The appointment of a consulting firm to help manage the project.
The next major step is the development of business requirements for the NPP, and a detailed plan and budget for the next phases of development. These should be completed by the end of the year. The major task next year will be to select a solution provider for the basic infrastructure and commence its implementation.
I know that Brad Pragnall, my co-panelist, is going to speak more about progress from the industry's perspective.
From the Bank's perspective, it is very important that the NPP is based on a hub infrastructure and will link all ADIs as well as other approved participants.
That is, it will not be bilateral in nature, like many of Australia's existing retail payment streams. Bilateral systems tend to make it difficult for entry by new participants and are less conducive to collaborative innovation. The new hub-based system will be more conducive to innovation and new entrants.
The Bank is now working closely with industry to ensure that the strategic objectives are realised. Back in November, the Bank announced some Core Criteria, in order to provide industry with a more detailed set of expectations and also to serve as a tool against which it could assess any proposals. The Bank is also represented as a participant in the NPP, and is on the program Steering Committee. One of our roles here will be to ensure that the infrastructure that is built is consistent with the Board's strategic objectives and the public interest.
The Bank has also commenced work on developing the principles and requirements for the settlement component of the NPP. It will build a Fast Settlement Service, which will be operated on a 24x7 basis and will be linked to the main RITS system. It will enable the transfer of funds and settlement of transactions between any two participants in real time. It will be designed to handle high volumes of throughput with very high reliability. The Bank's timetable for the delivery of the Fast Settlement Service has been aligned with the industry timetable. The Bank will be consulting further with RITS members about the operation of the service.
I'll now turn to a final strategic objective from the Review, namely that – by the end of 2013 – all Direct Entry payments should be settled on the day that payment instructions are exchanged. The motivation here was partly to mitigate counterparty and operational risks, but more importantly to allow end users to access funds in a more timely manner.
Many of the system changes required to support this initiative are now complete and industry is currently working to amend the APCA rules to support this change, which is expected to be introduced by the end of 2013.
In addition, the Bank is making changes to its liquidity management arrangements to facilitate the settlement of DE payments near the end of the day: my colleague, Guy Debelle, spoke about these two weeks ago. The problem here was that the same-day settlement of DE payments will require settlement of the bulk of transactions late in the day, after intraday repos have been unwound and the interbank cash market has closed. The uncertainty surrounding these late flows will require a much larger amount of liquidity in the system, which the Bank will provide by allowing ESA holders to engage in repos on an ‘open’ basis; that is, without a maturity date. In aggregate, it is anticipated that ESA holders will hold open repos of between $20 and $30 billion. To ensure that RITS participants are not penalised for holding much higher overnight balances, the Bank will pay RITS participants the target cash rate on a proportion of their balances, as opposed to 25 basis points below the target for overnight ESA balances at present.
These changes will also be important for accommodating the settlement component of the New Payments Platform, but to the extent that further changes to liquidity management arrangements are needed, the Bank will consult with industry and make any necessary changes.
Overall, the Bank welcomes the progress we have seen towards achieving same-day settlement of DE payments and the initial steps towards a fast retail payments system that addresses the gaps in our existing systems. The fast payments project is a very exciting one and if successful will see the Australian retail payments system essentially at the global frontier by the end of 2016. The progress we have seen to date suggests a renewed capacity for the industry to cooperate in the interests of providing a better payments system for all stakeholders. We are hopeful that the creation of the Australian Payments Council in the coming year will help to maintain that progress.