NPP Functionality and Access Consultation: Conclusions Paper 1. Introduction

1.1 Background

The New Payments Platform (NPP), launched in February 2018, is a fast retail payments system developed by a consortium of 13 financial institutions, including the Reserve Bank. The NPP provides the clearing and settlement infrastructure through which financial institutions can provide their household, business and government customers with the ability to make fast, versatile and data-rich payments on a 24/7 basis. Utilising the Fast Settlement Service (FSS) provided by the Reserve Bank, payments through the NPP are settled between financial institutions in real-time, which enables financial institutions to provide immediate funds availability to payment recipients.

This report presents the conclusions from a public consultation on NPP access and functionality that the Reserve Bank has undertaken with input and assistance from the Australian Competition and Consumer Commission (ACCC). The consultation was undertaken for three main reasons. First, the Reserve Bank had committed to reviewing the operation of the NPP sometime after its launch. The 2017 Annual Report of the Payments System Board noted that ‘at some point after the NPP is operational, it will be appropriate for the Payments System Board to assess how well the strategic objectives [that prompted the development of the NPP] have been met’.[1]

Second, the Productivity Commission's 2018 report into competition in the Australian financial system raised some concerns and made recommendations about the NPP.[2] For example, the Commission expressed concerns that the role of the incumbent financial institutions in the governance structure of NPPA could give rise to conflicts of interest that may impede access for new entrants and undermine competition. Among other things, the report recommended that:

  • the Payments System Board should impose an access regime on the NPP, to ensure widespread access of both financial system providers and consumers
  • the ACCC and the Payments System Board should investigate different ways to improve the functionality of the NPP to promote competition.

Finally, the Reserve Bank and the ACCC were aware that some entities had expressed concerns (some of which were covered in the Productivity Commission's report) that the services offered through the NPP, or the ways of accessing the NPP, did not meet their needs. For example, some businesses had expressed a desire to undertake ‘pull payments’, such as direct debits, a service that is not yet available through the NPP. In other cases, entities had argued that the requirements to become a direct participant in the NPP were unnecessarily burdensome.

1.2 The Role of the Reserve Bank

The Reserve Bank is the principal regulator of the Australian payments system. Under the Reserve Bank Act 1959, the Payments System Board is responsible for determining the Bank's payments system policy. The Board is required to do this in a way that will best contribute to controlling risk in the financial system; promoting the efficiency of the payments system; and promoting competition in the market for payment services. The Bank has a number of powers to pursue these goals, including the ability to ‘designate’ a payment system as being subject to its regulation and then to impose standards and/or an access regime on that system or on participants in that system if warranted on public interest grounds. The Bank's Payments Policy Department advises the Payments System Board in the discharge of these responsibilities.

Aside from its interest in the NPP from a policy perspective, the Reserve Bank was involved in the development of the NPP and plays a number of roles in the ongoing operation and governance of the NPP:

  • The Bank is one of the 13 financial institutions that funded the development of the NPP and is a shareholder of NPP Australia Limited (NPPA), a public company that owns and operates the NPP.
  • The Bank is a direct participant in the NPP in its capacity as a transactional banker to the Australian Government and its Departments and agencies. The Bank provides NPP services to its government clients, including the ability to make real-time payments and collect public monies via NPP payments to government accounts. These services are provided by the Reserve Bank's Banking Department. The Bank does not offer any banking or related services, including NPP-related services, to the public or non-government commercial entities.
  • The Bank built and operates the FSS, which provides real-time settlement of NPP transactions between financial institutions on a 24/7 basis. The Bank's Payments Settlements Department has responsibility for this function. Settlement services are provided to NPP participants under a contractual arrangement with the Bank.
  • In recognition of the importance of the FSS to the operation of the NPP, the NPPA Shareholders' Agreement gives the Bank the right to appoint a director to the Board of NPPA. The Bank has exercised this right and appointed the Head of its Payments Settlements Department as a director of NPPA.

Given the duties of the Bank as regulator of the payments system and its involvement in the NPP from an operational perspective, the Payments System Board has approved internal governance arrangements for the Bank's involvement with the NPP to ensure consistency with the Board's policy objectives and to manage any potential conflicts of interest. These arrangements, which cover issues such as information sharing and the role of the RBA-appointed director of NPPA, are set out in a Memorandum of Understanding (MOU) between the Bank and NPPA.[3]

The consultation on NPP access and functionality was conducted by the Bank's Payments Policy Department under the auspices of the Payments System Board. It was conducted independently of those parts of the Bank that are involved in the operation of the NPP and in a manner that is consistent with the arrangements set out in the Bank/NPPA MOU.

1.3 The Role of the ACCC

The ACCC is an independent statutory authority that administers the Competition and Consumer Act 2010 and other Acts. It works to promote effective competition and fair trading in the market place to benefit consumers, business and the community, and efficiency in the delivery of certain infrastructure services.

As the competition regulator, the ACCC has expertise with competition issues including the exercise of market power, problems caused by market structures, and developing regulatory solutions. In the ACCC's experience, competitive pressure in a market generally promotes lower prices, increased efficiencies and innovation, and better quality services. The ACCC has publicly and strongly advocated the need for competitive market structures and appropriate regulatory frameworks, relating specifically to access and pricing, to be in place for infrastructure with monopoly characteristics, such as the NPP. Several areas of the ACCC deal with issues relating to financial services, including its recently formed Financial Services Competition Branch. Its Infrastructure Regulation Division and Adjudication Branch also regularly deal with issues relating to financial services.

In this consultation, the ACCC provided input and assistance to the Bank on access issues, and participated in consultation meetings with stakeholders. The ACCC supports the conclusions reached by the Bank in this report and notes the vital importance of monitoring and future review of the issues raised by industry. The ACCC agrees that issues raised in this consultation need to be addressed and considers that these issues are likely to be addressed through the changes recommended by this report. Accordingly, the ACCC agrees with the report's conclusion not to recommend the imposition of an access regime on the NPP at this time.

However, the ACCC considers it is important that the report's recommendations are implemented as per the dates specified in this report, or earlier if practicable. It supports the recommendation for NPPA to respond to the report with its plans for action, and the Reserve Bank's commitment to monitor progress towards implementation.

The ACCC also considers that reviewing the effectiveness of these recommendations in addressing stated issues is essential, and that regulation and an access regime should remain an option if stated issues remain. The ACCC therefore supports the view that the Bank (with the ACCC's involvement) will commence a further review of access and functionality issues (and the need for regulation) by end July 2021.

In April 2017, the ACCC authorised several of the provisions of the NPP rules relating to the rights of NPPA to suspend and terminate NPP membership, membership eligibility criteria and the obligation to settle payments via the Reserve Bank's Fast Settlement Service.[4] These provisions may have otherwise breached certain of the competition provisions under the Competition and Consumer Act 2010, because they involve agreements between businesses which may be considered to be competitors. The ACCC can grant authorisation if it is satisfied that the likely public benefits outweigh the likely public detriments. If certain of the authorised provisions require amendment as a result of changes made in response to this document, NPPA may need to seek a variation to the authorisation from the ACCC.

1.4 The Consultation Process

The Reserve Bank published a consultation document in October 2018 that provided the background and motivation for the consultation and invited feedback from stakeholders on issues relating to the functionality and access arrangements for the NPP.[5] In particular, the consultation invited views on whether the various ways of accessing the NPP, and their associated technical and other eligibility requirements, are adequate for different business models, or whether other forms of access or eligibility requirements may be justified. In total, the Bank received 19 written submissions to the consultation from a range of stakeholders including payments companies, banks, technology and financial industry bodies, fintechs, consultants, an academic and some members of the public.[6] NPPA provided a written submission. Between February and March, the Reserve Bank and the ACCC held 17 meetings with stakeholders in Melbourne and Sydney, including with most of those who provided written submissions. The Bank and the ACCC also consulted with the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA).

1.5 Recommendations

This report makes a number of recommendations, which are listed below for convenience. The Bank believes that if these recommendations are fully implemented by NPPA and its participants, this should address the issues and policy concerns covered in this report. The Bank will, with the assistance of the ACCC, conduct another review commencing no later than July 2021. This review could take place earlier if the Bank becomes aware of significant issues or concerns regarding NPP access or functionality. If the Bank assesses that there has been insufficient progress in addressing the recommendations made in this report, it will closely consider the case for regulation via standards mandating functionality or an access regime imposed on the NPP and its participants.

Functionality and Overlay Services

  • NPP participants should prioritise the roll-out of NPP services to their entire customer base and address any functionality gaps that currently exist in their customer offerings.
  • Starting no later than end September 2019, NPPA should periodically publish a roadmap of the additional NPP functionality it has agreed to develop and the expected time period over which it will be delivered. The roadmap should be updated at least semi-annually.
  • By end December 2019, NPPA should introduce a power for its Board to mandate that specified NPP core capabilities must be supported by NPP participants within a specific period of time, with an enforceable sanctions regime (including possible financial penalties) to apply if participants do not comply.
  • By end September 2019, NPPA should publish its process for assessing potential overlay services, including how confidential information on the plans of potential overlay service providers will be controlled and the respective roles and responsibilities of the NPPA management, independent directors and the broader NPPA Board in approving overlay services.

Access to the NPP

The ADI Requirement for Participants

  • Direct access to the NPP should be open to a range of payments services providers. NPPA should assess and report on options for amending the NPP Regulations, and other arrangements, to allow for an entity that is not an ADI to potentially become an NPP Participant. The participation of non-ADIs would be subject to requirements appropriately tailored and calibrated to the key risk and operational considerations essential for participation in the NPP. NPPA should:

    • by end October 2019, submit to the Bank and the ACCC an assessment of options for revised participation requirements for non-ADI participants
    • by end March 2020, implement any revised participation requirements for non-ADI participants.

The Shareholding Requirement for Participants

  • By end December 2019, NPPA should introduce more gradation into the shareholding requirement by creating at least one additional lower band, so that subscription requirements can be more closely tied to an entity's size or expected contribution to NPP transaction volumes.
  • By end December 2019, NPPA should establish an access route for direct participation that is based either on acquiring shares in instalments or on periodic subscription or membership fees, rather than the upfront purchase of shares.
  • By end December 2019, NPPA should consider allowing NPP participant applicants that did not exist when the NPPA was being developed to subscribe to a lower amount of shares than usual.

NPPA Governance

  • NPPA should appoint a third independent director by end September 2019.
  • By end December 2019, NPPA should review its arrangements for applications for access as a participant, connected institution or overlay service provider. Where an application has been rejected by the NPPA Board, or by NPPA management during its initial assessment, the applicant should be able to ask for a review of the decision by an Evaluation Panel. The Evaluation Panel should be comprised of three independent directors and two independent external experts appointed by the three independent directors. The Panel should have the binding power to overturn the earlier denial of an application if it decides that the applicant has met all of the eligibility requirements and also the power to ask NPPA to review the access criteria if it believes the criteria impose unreasonable conditions.
  • At least once a year, NPPA should publish a report of the number of applications for access that it received during the preceding year, the outcomes of those applications, and a summary of the key reasons in cases where applications were ultimately not supported by the NPPA Board. The first report should cover the financial year ending June 2019.
  • NPPA should notify the Reserve Bank's Payments Policy Department within one week whenever an application for access to the NPP (as a participant or connected institution) is not supported by NPPA's Board.

NPP Transaction Fees

  • From its first pricing review after July 2019, NPPA should publish data on its wholesale transaction pricing. Prior to the introduction of full cost-recovery pricing, NPPA should publish the wholesale transaction fee that would be implied by full cost-recovery pricing. Following the introduction of full cost-recovery pricing, it should publish its wholesale transaction fee and the methodology it has used to determine that fee.

Endnotes

Payments System Board (2017), ‘Annual Report’, August, p. 40. [1]

Productivity Commission (2018), ‘Competition in the Australian Financial System’, Inquiry Report No. 89, June, available at <https://www.pc.gov.au/inquiries/completed/financial-system/report>. [2]

See: https://www.rba.gov.au/payments-and-infrastructure/payments-system-regulation/npp-mou.html [3]

See: ACCC (2017), ‘Determination – Applications for authorisation lodged by NPP Australia Limited in respect of certain provisions of the New Payments Platform Regulations’, 5 April, available at: https://www.accc.gov.au/system/files/public-registers/documents/D17%2B43242.pdf. The suspension and termination provisions were authorised for a period of five years, while the provisions on eligibility requirements and settlement obligations were authorised for perpetuity. [4]

See RBA (2018), ‘New Payments Platform Functionality and Access: Consultation’, October 2018. [5]

Non-confidential submissions are available here: https://www.rba.gov.au/payments-and-infrastructure/new-payments-platform/submissions/ [6]