NPP Functionality and Access Consultation: Conclusions Paper 4. Access to the NPP

The arrangements for how entities connect to the NPP has been another focus of this consultation. As was discussed in Chapter 2, the NPP was designed to facilitate a number of different types of access to the central infrastructure to cater for different business models, with risk-based eligibility criteria applying to each. The eligibility criteria and the process by which NPPA assesses and determines applications to participate are set out in the NPP Regulations, which are published on NPPA's website.

From one perspective, the NPP's access arrangements would appear to be working quite well considering that a large number of entities are already connected to the platform, including 68 smaller ADIs that are indirectly connected via aggregators or other participants and successfully providing NPP services to their customers. Moreover, it could be argued that indirect access to the NPP is all that most financial institutions need, given they can access the same functionality and avoid the costs and complexity associated with being a direct participant. The model in which there is a relatively small group of direct participants providing access to a larger number of indirectly connected entities is common in other payment systems, such as the Bulk Electronic Clearing System (BECS). This reflects that it is usually the most efficient and secure way to structure access to network infrastructure. The latter is particularly important in the case of a real-time payments system like the NPP, where there are significant operational, security and financial risks that need to be managed.

However, there will be cases where indirect access to the NPP is not available to an entity or where it does not meet its needs. For example, there may be competitive reasons why an entity does not wish to rely on another financial institution to provide it with NPP connectivity. In addition, there are an increasing number of entities providing specialised payment services that may not be eligible to become ADIs because they do not take deposits or make loans. It is therefore important that the eligibility criteria and associated governance arrangements for determining participation strike the right balance between promoting open access and protecting the safety and integrity of the platform.

It is in this context that the consultation sought stakeholder views on whether the various ways of accessing the NPP and the associated technical and other eligibility requirements were adequate for different business models, or whether other forms of access or eligibility requirements may be justified. The feedback received from stakeholders can be grouped into four broad areas: the requirement for NPP participants to be ADIs licensed by APRA; the requirement for new participants to become shareholders and subscribe to shares in NPPA; NPPA's governance arrangements for access decisions; and the structure and transparency of NPP transaction fees and how this influences access decisions. This chapter summarises this stakeholder feedback and provides the Bank's assessment and a number of recommendations.

4.1 The ADI Requirement for Participants

The NPP Regulations stipulate that to be an NPP participant, an entity must be an ADI licensed and regulated by APRA.^[21] ADIs are subject to extensive prudential requirements and oversight by APRA including in relation to capital, liquidity, business continuity management, financial and regulatory reporting, governance and risk management. Entities that have a conditional ADI licence from APRA (such as providers of purchased payment facilities) or a restricted ADI licence (RADI) under APRA's new licensing regime are also eligible to apply for participation in the NPP.

4.1.1 Issues and stakeholder views

A number of stakeholders, particularly some fintechs, viewed the ADI requirement as an excessive and unnecessary barrier to entry that undermines competition. They argued that entities providing specialised payment services may not qualify for an ADI licence given the nature of their business and so were effectively blocked from becoming NPP participants. And even if an entity could structure its business in a way that might qualify it to become an ADI, the process of obtaining an ADI licence was seen as costly and time consuming, with significant ongoing compliance and reporting obligations that impose a substantial burden.

Stakeholders observed that non-ADIs with an ESA are able to become Tier 1 (clearing and settlement) participants in the Bulk Electronic Clearing System (BECS) for direct entry payments that is administered by AusPayNet. They also observed that it is possible for non-ADIs that are providers of third-party payment services to obtain an ESA with the Reserve Bank.^[22] Stakeholders argued that if it was possible for non-ADIs to obtain an ESA and become Tier 1 members of BECS, then it should also be possible for them to become direct participants in the NPP.

Stakeholders generally accepted that NPP participants should be subject to appropriate standards of risk management and operational capability. Some stakeholders considered that holding an Australian Financial Services (AFS) licence administered by ASIC should be sufficient regulatory status for direct participation in the NPP, though they did not address the issue of whether ASIC's regulatory requirements and the obligations imposed on AFS licensees could address all the concerns that motivate NPPA's ADI requirement.

The Productivity Commission also raised concerns about the ADI requirement in its 2018 report. It observed that from a practical perspective, an entity technically only needed an ESA to participate in the NPP (to settle payments) and that the Reserve Bank does not require an entity to be an ADI to hold an ESA. The Commission argued that, in addition to lowering barriers to entry, allowing ESA holders to participate in the NPP could mean payment providers are not reliant on their competitors to operate. It recommended that, as part of an access regime imposed on the NPP, the Payments System Board should allow payments providers that hold an ESA to connect to the NPP as participants without the need for them to be ADIs.

NPPA explained that the requirement for an NPP participant to be an ADI was considered necessary to ensure prudential safeguards for the platform, and suggested that this was in line with well-established international standards for payment systems, such as the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMI).^[23] NPPA particularly noted that ADIs are required to meet an extensive range of prudential requirements, including with respect to operational and IT security risk management, are required to hold capital against losses, and are subject to rigorous ongoing oversight and supervision by APRA. NPPA argued that entities that are not ADIs, and therefore not prudentially supervised by APRA, would not provide the required level of counterparty assurance and comfort to NPPA and NPP participants. In particular, there is no assurance that these entities would have the technical and operational capability to perform the required NPP functions and to manage data security and fraud risks and meet associated liabilities. NPPA has also noted that it is a small organisation without the resources to conduct the extensive assessments of new applicants that it believes are necessary to protect the integrity and stability of the platform, and therefore relies on the prudential oversight by APRA to provide this assurance.

NPPA also noted that it is possible for non-ADIs to access the NPP without being reliant on competitors. In particular, there are a large number of entities that have accessed the NPP as identified institutions using the services of three aggregators – Cuscal, ASL and Indue – which specialise in providing wholesale payment services to other entities and do not compete in the retail market. Notwithstanding this, in a confidential submission, one stakeholder indicated that it had struggled to maintain banking relationships because of the nature of its business and claimed it had also encountered difficulties negotiating indirect NPP access with the aggregators. This entity wished to become a direct participant in the NPP so that it could ensure reliable access to the payments system and was not dependent on other entities, which could withdraw access at any time.

The Productivity Commission and some other stakeholders noted that there is a regulatory regime for non-bank payment providers in the United Kingdom that has facilitated the direct connection of these entities to the UK's Faster Payments Service, the UK's equivalent of the NPP.^[24] The Commission had suggested that the Payments System Board should consider developing a regulatory regime for non-ADI specialist payment providers in Australia. NPPA indicated that if there was a regulatory regime for non-ADI payment providers in Australia it would consider amending its eligibility criteria to allow these entities to apply to be participants in the NPP.

4.1.2 Assessment

The security and resilience of the NPP is of paramount importance to promote confidence in the system. It is therefore reasonable to expect that NPP participants, which are directly connected to each other and involved in the real-time clearing and settlement of payments through the NPP, should meet minimum standards of operational and IT security risk management. While APRA's prudential oversight of ADIs provides a high degree of assurance in this regard, the Bank is not convinced that this should be a prerequisite to participate in the NPP. There may be entities that are ineligible to become ADIs because of the nature of their business (e.g. because they are specialised payment providers and do not take deposits or make loans). However, they might still be able to meet reasonable and relevant technical, operational and risk management requirements to participate in the NPP. It would seem an unsatisfactory outcome if these entities had to restructure their business to obtain an ADI licence just so that they could become an NPP participant. Instead, there should be other ways NPPA can get the level of counterparty assurance and comfort it desires without relying on the existence of an ADI licence and APRA's prudential supervision.

While some stakeholders suggested that holding an AFS licence should be sufficient to become a participant in the NPP, the Bank notes that the obligations imposed on AFS licensees are primarily designed to address consumer and investor protection issues rather than the specific concerns associated with participation in a payments system like the NPP. Accordingly, merely holding an AFS licence is unlikely to provide the kind of assurances that NPPA and existing NPP participants might reasonably be seeking from new participants.

In regard to the suggestion of a new regulatory regime for non-ADI specialist payment providers in Australia, the Bank observes that this is not realistic in the near term, given that it would require significant policy development and consultation, and then legislative change. However, the Bank is intending to explore such a regime, together with the other agencies in the Council of Financial Regulators.

As noted earlier, some stakeholders argued that if non-ADIs can become Tier 1 participants in BECS, they should be able to become NPP participants as well.^[25] However, it is important to note that BECS and the NPP are very different payment systems, subject to different risks, and so it may be appropriate for them to have different participation requirements.^[26] Moreover, there have not been any formal applications from non-ADIs to be Tier 1 participants of BECS yet so it is not possible to assess how the requirements for non-ADI participation in BECS have worked in practice.

Given these various considerations, the Bank is recommending that NPPA should consider revising its participation requirements to allow non-ADIs to become participants. The participation of non-ADIs could be subject to a specific set of risk management, operational, financial or other requirements that are tailored to, and commensurate with, the specific risks that NPPA and its participants are seeking to manage. For example, participation in the NPP might be related to holding an ESA at the Reserve Bank. The participation requirements for non-ADIs would be publicly disclosed along with guidance on how applicants can demonstrate that they meet the various requirements. This might, for example, include the possibility that an applicant could provide an assessment of its risk management and operational capabilities from a suitably qualified and independent third party, such as a professional advisory firm.

4.2 The Shareholding Requirement for Participants

The NPP Regulations currently state that to be an NPP participant, an applicant must become a shareholder and subscribe to shares in NPPA.^[27] The amount of shares a participant would be required to subscribe to is determined by the shareholder ‘governance band’ – high, medium or low – they are allocated to. This allocation would be determined by the NPPA Board taking into consideration the applicant's significance in the Australian payments system and likely significance to the NPP.^[28] For at least the first two years of the NPP's operation, there is a requirement that new participants subscribe to the same amount of shares as the initial participants in the same governance band. An applicant allocated to the lowest band would currently be required to purchase around $2 million of NPPA shares.^[29]

The governance bands are also relevant to the appointment of directors. High-band shareholders (currently the major banks) each have the right to appoint one Director, while medium- and low-band shareholders may together elect up to four Directors. NPPA's Constitution allows for the payment of dividends on shares, but NPPA has stated that there is no intention of paying dividends in the foreseeable future. Instead, it expects any profits the NPP generates to be reinvested to build additional functionality and extend the capabilities of the platform. The Constitution also prescribes that shareholders may not transfer their shares, except to a related entity. Shareholders can choose to redeem their shares, but only at a nominal redemption value of $0.01 per share (compared with an issue price of $1,000 per share).

4.2.1 Issues and stakeholder views

A number of stakeholders argued that the requirement to become a shareholder of NPPA and to subscribe to shares was a barrier to entry for start-ups and other firms that have limited capital and are trying to grow their business. They argued that the amount of the contribution was disproportionately high compared with the contributions required to directly connect to fast payment systems in other countries, such as the United Kingdom.^[30] Stakeholders also argued that since NPPA shares are not expected to pay dividends, are not transferable and cannot be meaningfully redeemed, they are more like a membership fee than an investment in shares. They found it particularly problematic that an entity that decided to no longer be a participant would not receive any funds from its shareholding.

NPPA stated that the requirement to subscribe for shares reflected the design of the NPP as a mutually-owned industry infrastructure, where having a dispersed ownership would help ensure the NPP is operated and evolves to meet the needs of its participants and their customers. It noted that new participants would bring capital that would enable NPPA to fund the continuing development of core capabilities and investment in future functionality, which would drive further innovation. Other NPP participants noted that the capital contribution was justified given the commercial benefit a participant gets from being a direct clearing and settlement participant and the fact that they are also able to offer indirect connectivity to other entities.

NPPA indicated that over time there may be scope to reduce the subscription levels for new participants as growth in operating revenues becomes sufficient to meet future investment needs. The cost of membership might eventually be expected to fall towards the direct and indirect costs of establishing connectivity. The NPPA Shareholders' Agreement states that the requirement for new participants to contribute the same level of funding as existing participants would be reviewed by NPPA's Board after two years of operation.

4.2.2 Assessment

The Reserve Bank was involved in the challenging industry discussions in late 2014 that culminated in the agreement to fund NPPA and sign the contract with SWIFT to build and operate the NPP. Based on this experience, the Bank considers that an initial requirement regarding capital contributions was necessary to ensure that the project was funded. In particular, if entities had been given the option to wait until the NPP was already built and operating and then become a participant without contributing any capital, there would have been little or no incentive for them to fund the development of the NPP in the first place. To overcome this problem, it was deemed necessary to stipulate in the NPPA Shareholders' Agreement that, at least for the first two years, any new participants would need to subscribe for shares at the same level as initial participants of comparable size.

There are a few arguments that could be made for a continuation of the current requirement regarding capital contributions for new shareholders. First, NPPA has ongoing capital and financing needs, especially (as discussed in Section 4.4) given that transaction volumes remain well below the levels that would allow full cost-recovery pricing that will encourage migration of payments from other payment systems. Second, there is an issue of fairness for those entities, such as the aggregators, that contributed funds to build the NPP on the basis that they would be able to benefit from their investment by providing third-party agency services once it launched. These entities would be competitively disadvantaged if other entities providing third-party agency services were able to join the NPP soon after it launched without contributing any capital. Third, given that so many entities have obtained indirect access to the NPP as identified institutions, with no shareholding contribution, the requirement that participants are shareholders does not appear to have been a significant barrier to access.

While these arguments may justify a continuing shareholding requirement in the short term, they need to be balanced against the potential harm caused by any reduction in competition and innovation that the shareholding requirement may create in the longer term. This may be most relevant in the case of smaller entities that perceive a particular need to be a participant rather than to connect indirectly, and for which the minimum capital contribution of $2 million would be a very significant amount. There is also an argument that newer entities, which did not exist at the time of the initial funding decision and so did not have the opportunity to sign up at that time, should not be unduly restricted by a shareholding requirement that was largely designed to incentivise institutions to agree to fund the NPP in late 2014.

On balance, the Bank believes NPPA should review its current shareholding requirement and introduce more gradation, at least in the lower band, so that subscription requirements can be more closely tied to an entity's size or expected contribution to NPP transaction volumes. It should also establish an access route for direct participation that is based either on acquiring shares in instalments or on periodic subscription fees (without becoming a shareholder), rather than an upfront purchase of shares. This access route would be set on an economically neutral basis, which would make NPPA indifferent between receiving capital instalments, periodic fees or the existing upfront contribution. As part of the review, NPPA should give consideration to allowing entities that did not exist when the NPP was being built to join at a lower subscription level than entities that did exist when the NPP was being built and chose not to contribute. Following its review, NPPA should publicly disclose its share subscription requirements so that entities can make informed decisions about their access options.

4.3 NPPA Governance

NPPA's Board is responsible for its corporate governance. The company currently has 12 directors, including the CEO. There are two independent directors, one of which is the Chair.^[31] Each of the four major banks and the Reserve Bank are able to appoint a director. The other four directors are elected by the remaining small and mid-size shareholders of NPPA.^[32] Each Board director has one vote except for the CEO who is a non-voting director.

The requirements and process for an entity to become either a participant, connected institution or an overlay service provider are contained in the NPP Regulations and allow a role for the NPPA Board in the determination of applications.^[33] However, the Regulations state that the Board shall accept, subject to any conditions it considers reasonably appropriate, each new applicant that satisfies the company's technical and other eligibility requirements. They also allow for an applicant to request that a sub-committee of the Board review any determination by the Board that an applicant does not meet the relevant eligibility requirements. In practice, the process of assessing applications against the eligibility criteria is carried out by NPPA's management under a delegation of authority to the CEO. The NPPA Board would as a final step be asked to approve an application once it has been assessed by NPPA management as meeting the eligibility criteria.

4.3.1 Issues and stakeholder views

Some stakeholders expressed concerns about the governance of the NPP in relation to how access is determined. They worried that eight of the twelve NPPA directors are appointed by ADIs that may have incentives to restrict new entrants from access to the NPP for competitive reasons. There is a perception among fintechs that the Board is dominated by directors that represent the interests of the incumbent banks. One submission noted that there is no independent appeal mechanism if an application to be a participant or connected institution is refused. Another submission suggested that to overcome the potential for conflicts of interest to influence access decisions, the Payments System Board should be responsible for assessing applications for participation in the NPP.

Some of these views echoed concerns raised by the Productivity Commission in its 2018 report into Competition in the Australian Financial System. The Commission noted that a ‘model that requires new competitors to be accepted by incumbents can reasonably be expected to involve conflicts of interest.’^[34] While the NPP Regulations specify a mechanism for unsuccessful applicants to appeal the decision, the review is not undertaken by an independent party but by a subcommittee of the Board. The Commission suggested that it could be difficult to discern whether an applicant was denied access on the basis of risk considerations or because it was considered a competitive threat to the existing NPP participants.

In its submission, NPPA highlighted that its constitutional objectives are to operate the NPP in a manner that promotes the public interest, including by ‘facilitating fair access to the NPP as mutually owned utility infrastructure.’ In this context, ‘facilitating fair access’ is interpreted by NPPA as an obligation of NPPA to enable access to the NPP on non-discriminatory terms.^[35] Reflecting this, NPPA noted that its governance arrangements have been deliberately structured to promote access and avoid and manage any potential conflicts of interest. For example, the Board has delegated to NPPA management the initial assessment of new applications for participation and though it is expected that the Board would be involved in the final determination, the NPP Regulations require the Board to accept an applicant that meets all of the technical and other eligibility requirements. NPPA also made the point that as a network infrastructure with mainly fixed costs of operation, it is in the interests of all participants to grow the network and build volume in order to bring transaction fees down.

NPPA also noted that a number of governance arrangements have been put in place to counterbalance the influence of the major banks. Whereas the major banks have contributed around 75 per cent of the capital of NPPA, they appoint only four of the NPPA's 11 voting directors and voting rights of directors are equal, rather than proportional to shareholdings (unlike in some other payment systems). Board decisions require the support of at least two-thirds of directors present and at least eight directors must be present for a Board meeting to proceed. Some NPP participants also noted that the Board has two independent directors and one director appointed by the Reserve Bank, which do not represent any particular commercial interests. In any case, NPPA noted that its directors have fiduciary obligations under the Corporations Act 2001 to act in the best interests of the company, to avoid conflicts of interest, and to disclose and manage any conflicts if they arise.

4.3.2 Assessment

The Reserve Bank considers that it is reasonable to expect that the shareholders that made substantial investments to build the NPP should have a right to be represented on the Board. We note that the major banks do not have a majority of the votes on NPPA's Board, despite owning a majority of the shares. There are currently two independent directors (including an independent chair) and a director appointed by the Reserve Bank under its power to do so, granted in recognition of the importance of the FSS to the operation of the NPP.

The possibility that incumbents might keep out new entrants appears to be only hypothetical at this stage – the Bank is not aware that any access applications have been denied, let alone unfairly influenced by NPPA's governance structure. However, this is in an environment where the current ADI and shareholding requirements may have prevented a number of potential applicants. In any case, there is a widespread perception that NPPA's Board is dominated by the incumbent banks, and that there may be conflicts of interest that could hamper access for new entrants. Therefore, to strengthen the governance of NPPA, ensure that the Board represents a broader range of perspectives, and reduce the influence of incumbent financial institutions, the Bank believes NPPA should appoint a third independent director. We note that the NPPA Shareholders' Agreement was amended in 2018 to accommodate the appointment by the company of a third independent director, but no such appointment has been made as yet.

The Bank also believes it is important to ensure that there is an independent review mechanism for access decisions for prospective participants, connected institutions and overlay service providers. This will require a stronger governance arrangement than the current Board subcommittee specified in the NPP Regulations. Therefore, we are recommending that, where an applicant wishes to have a Board access decision reviewed, the review should be by a panel comprised of three independent Board members (possibly including the RBA-appointed director) and two independent external payments experts (to be selected by the independent directors). The panel should have the binding power to overturn the earlier denial of an application if the applicant is deemed by the panel to have met all of NPPA's published eligibility requirements. In addition to considering appeals from decisions of the Board, the panel should also have a role assessing applications directly (that is, without going via the full Board) where NPPA management does not assess the applicant as having met the eligibility criteria. The panel should also have the power to ask NPPA to review the access criteria if it believes the criteria impose unreasonable conditions.

The Bank further believes that transparency about NPP access decisions is in the public interest and would help stakeholders form accurate perceptions about NPPA's governance. Therefore, the Bank is recommending that at least once a year (possibly in its annual report), NPPA publish the number of participant and connected institution applications it received during the preceding year and the outcomes of those applications, including a summary of the key reasons (de-identified as necessary) in cases where applications were not supported by the Board. In addition, NPPA should inform the Reserve Bank's Payments Policy Department whenever an application for access has been rejected by the NPPA Board. This will ensure there is timely and independent oversight of NPPA access decisions and an opportunity for the Bank to raise concerns if the decision is not considered to be in the public interest.

The Bank believes these steps to strengthen the governance of NPPA access decisions will provide greater confidence to potential new entrants that access decisions will be fair, objective and not biased by any competitive considerations of existing NPP participants.

4.4 NPP Transaction Fees

There are broadly two types of NPP transaction fees.^[36] The first are ‘wholesale’ fees that NPPA charges its participants. These are fixed fees (in cents rather than percentage terms) per transaction sent through the NPP, and are the same for all participants. These fees are intended to be NPPA's main source of revenue to cover its operating costs, the largest part of which is the fees charged by SWIFT to operate the NPP network. To date, the wholesale transaction fees set by NPPA have not been made public. The second type of fees can be considered ‘retail’ and includes transaction fees that aggregators and other participants charge sponsored entities for processing NPP transactions and the fees that financial institutions charge their end-customers for making NPP payments. Retail fees are determined by commercial arrangements between financial institutions and their customers, not by NPPA.

4.4.1 Issues and stakeholder views

A number of submissions expressed concerns about the various transactions fees involved in using the NPP and the influence they can have on decisions to access and use the platform. The main concern relating to the wholesale fees charged by NPPA was that they are not publicly disclosed. This lack of transparency was seen as making it difficult for entities considering becoming identified institutions to evaluate whether they were getting a fair deal from the aggregators or other participants offering to sponsor them. In addition, it was argued that the lack of transparency made it difficult to evaluate whether it was preferable to invest in becoming a participant and pay the wholesale transaction fee or to connect indirectly (with a much lower upfront cost) as an identified institution and pay what was likely to be a higher ‘retail’ transaction fee levied by the sponsoring participant. More generally, stakeholders viewed the lack of transparency about NPPA's fee-setting policies as making it difficult to formulate business plans and negotiate access without directly engaging with NPPA.

Stakeholders noted that NPPA's wholesale fees were intended to be set on a cost-recovery basis. However, there were concerns that the transaction fees charged by aggregators and other participants providing sponsored access could include large mark-ups, making it difficult for identified institutions to provide competitive NPP services to their own customers. Consequently, a few submissions recommended that the transaction fees charged to non-NPP shareholders should be regulated by the Payments System Board. Underlying these concerns seems to be a view that there is insufficient competition in the market for providing third-party access.

In its 2018 report, the Productivity Commission suggested that the Payments System Board should review whether NPPA's wholesale fees were being set on a purely cost-recovery basis and intervene to regulate if the fees were deemed excessive. Regarding ‘retail’ transaction fees, the Commission was also concerned about the potential for participants to extract excessive fees from identified institutions in a way that could undermine competition. The Commission suggested that the Payments System Board should review the transaction fees charged by NPPA and by sponsoring participants as part of an access regime for the NPP.

NPPA noted that, consistent with its constitutional objective to operate the NPP as a ‘mutually-owned utility’, the intention is for the company to be an ‘economically self-sustaining entity’ rather than profit-maximising and that there are no plans to pay dividends to shareholders or repay capital contributions. Wholesale transaction fees paid by participants are expected to be NPPA's sole source of operating revenue, and the medium-term intention is that the fee will be set at a level that, based on expected transaction volumes, will cover NPPA's operating costs and any needed investment in the platform. NPPA argued that it is in its commercial interest to maximise transaction volumes across the platform and keep the wholesale transaction fee low to be competitive with alternative payment methods.

However, NPPA noted that transaction volumes are still at a level well below what is expected in the medium term so that if the wholesale fee were being set on a full cost-recovery basis, it would be quite high, which would be a disincentive to use the platform. Accordingly, the wholesale fee has so far been set well below the full cost-recovery level and shareholders have been asked to make additional contributions to cover the shortfall in NPPA's operating costs. NPPA indicated that, to date, the wholesale fee has not been published because it does not provide an accurate measure of what it costs a participant to provide NPP transactions for its customers. Once transaction volumes have increased to a level where full cost-recovery pricing is occurring, NPPA management said it would likely recommend to its Board that the wholesale NPP fee be published.

4.4.2 Assessment

There appears to be significant confusion and some unjustified suspicion among stakeholders about NPPA's pricing and revenues, which may be undermining confidence in the competitiveness of third-party access services and making it harder for entities to determine the best way to interact with the NPP. The confusion largely arises because NPP's wholesale transaction fees are not published, meaning potential users lack insight into the inherent costs of using the platform and a benchmark to compare ‘retail’ transaction prices. However, as NPPA has noted, the current wholesale transaction fee set by NPPA's management is not an accurate measure of the overall costs faced by participants in facilitating NPP payments. As an indication, using the operating costs NPPA reported in its latest annual report (for 2017/18) and average annualised transaction volumes in the six months to March, would imply a wholesale transaction fee on a cost-recovery basis of around 20 cents per transaction. This is significantly higher than the wholesale transaction fees that apply in other retail payment systems such as BECS, and so it has not been in NPPA's competitive interest to levy such a fee when it is seeking to grow transaction volumes. Instead, the wholesale fee has been set at a significantly lower level and NPPA's shareholders have been asked to make additional contributions to cover NPPA's operating costs.

In principle, the Bank agrees with stakeholders that more transparency about the wholesale transaction fee would be in the public interest, especially given the intention for NPP to be operated as a non-profit maximising utility infrastructure. Publication of the wholesale fees could help potential identified institutions evaluate the pricing offered by sponsoring participants. End-users would also be able to better understand the underlying costs that influence the prices financial institutions charge their customers for NPP services. Therefore, the Bank is recommending that, once it moves to cost-recovery transaction pricing, NPPA begins publishing its wholesale transaction fee and the methodology for determining it. In the meantime, it may be useful for NPPA to clarify in its Annual Report what the implied break-even wholesale transaction fee would have been, so that the market has better visibility of the full cost of NPP transactions to participants, based on current volumes.

In relation to pricing of NPP transactions to sponsored entities, the Bank believes this is a commercial matter for individual entities providing NPP services and their customers. There are several NPP participants – initially just the three specialist aggregators but now also some of the major banks – that compete to provide indirect access for entities (ADI or non-ADI) that wish to connect to the NPP. It is reasonable to expect that the fees – including transaction fees – these entities charge sponsored entities are subject to competitive pricing and the Bank has not been made aware of any pricing outcomes that would suggest insufficient competition. Therefore, the Bank does not see a case at this time for monitoring or regulation of the fees that NPP participants charge sponsored entities. Publication of the wholesale transaction fee should promote competitive pricing for NPP sponsorship, particularly if the barriers to direct NPP participation are also lowered, as recommended elsewhere in this report.

Similarly, the Bank believes that pricing of NPP services to households and businesses is a commercial matter for the financial institutions providing those services. So far, there has been a range of experience in how financial institutions are pricing their NPP services, with most institutions choosing to charge their business customers for NPP transactions but not their household customers. As noted earlier, there are 80 financial institutions currently providing NPP services to end-users and that number is expected to grow. The pricing of NPP services to end-users will be subject to competitive pressures and the Bank does not see a role for itself in regulating such prices.

Endnotes

See NPP Regulations, Part 4.2 Eligibility – all NPP participants. Any entity carrying out ‘banking business’ as defined in the Banking Act 1959, is required to be licensed as an ADI by APRA. [21]

See Bulk Electronic Clearing System (CS2) Regulations, Part 4 Membership as a Framework Participant. [22]

See BIS and IOSCO (2012), ‘Principles for Financial Market Infrastructures’, April. Principle 18 of the PFMI, which deals with access and participation requirements, recommends that FMIs (including payment systems) ‘should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.’ The PFMI do not stipulate that direct participants in payment systems should always be prudentially regulated entities. Instead, they advise that ‘if an FMI admits non-regulated entities, it should take into account any additional risks that may arise from their participation and design its participation requirements and risk-management controls accordingly.’ [23]

A settlement account at the Bank of England is required to directly connect to the UK Faster Payments Service. Following a policy change by the Bank of England in July 2017, non-bank payments and e-money institutions may apply for a settlement account, following authorisation by the UK Financial Conduct Authority under the Payment Services Regulations 2017. [24]

The requirement for Tier 1 BECS participants to be ADIs was removed in 2015 to allow specialist payments providers to participate. To ensure the integrity of the system, prospective Tier 1 participants that are not ADIs are subject to some restrictions and need to meet additional assurance and reporting requirements. The removal of the ADI requirement followed a decision of the Payments System Board in 2014 to vary the Access Regimes applying to the designated MasterCard and Visa systems in Australia and the removal of the specialist credit card institution framework, administered by APRA. For more details see RBA (2014), ‘Payment Card Access Regimes: Conclusions’, March. [25]

For example, BECS is a deferred settlement system, while NPP uses real-time settlement – settlement risks are lower in the NPP, but risks associated with fraud, IT security and other operational issues are likely to be higher because of the real-time settlement. [26]

See NPP Regulations, Part 4.7 Application to become an NPP Participant or Connected Institution. [27]

Currently there are 4 high-band shareholders (the major banks), 7 medium-band shareholders (including the RBA); and 2 low-band shareholders. The initial contributions of the four major banks represented about 75 per cent of NPPA's capital, but the intention is that this shareholding could be reduced to 70 per cent as new participants join. [28]

There is also an application fee payable to NPPA. It is important to note that there are also a range of other costs a new participant would incur in connecting to the NPP, including those associated with provisioning, installing and testing the NPP componentry and integrating it with the participant's internal systems as well as uplifting capabilities required to process payments in a real-time environment such as fraud detection and prevention capabilities. These costs are likely to be significantly higher than the shareholding requirement. [29]

For example, one stakeholder indicated that there was no shareholding requirement to join the UK's Faster Payments Service as a direct participant but there were some upfront fees to the scheme operator for implementation and testing. The scheme operator was also said to charge ongoing fees. [30]

According to Article 10.7 of NPPA's Constitution, independent directors are personally and professionally independent of NPPA members and related bodies corporate of members. [31]

The current directors of NPPA are listed here: https://www.nppa.com.au/the-company/board-and-leadership-team/ [32]

NPP Regulations, Part 4 (available at: https://www.nppa.com.au/the-company/governance/) [33]

Productivity Commission (2018), Competition in the Australian Financial System, Inquiry Report No. 89, page 508. [34]

NPPA (2018), Post-draft Submission to the Productivity Commission Inquiry into Competition in the Australian Financial System, 29 March 2018, Schedule 1, page 3 (available at : https://www.pc.gov.au/__data/assets/pdf_file/0007/226762/subdr122-financial-system.pdf) [35]

In addition, there is a fee capped at 1 cent that the Reserve Bank charges for each transaction settled through the FSS, split equally between the payer's and payee's institutions, and BPAY charges fees for Osko transactions. NPPA may also levy other fees, including for use of the Addressing Service and annual administration fees, as described in NPP Regulation 3.1(c). [36]