NPP Functionality and Access Consultation: Conclusions Paper 2. The Development and Initial Operations of the NPP

The NPP is a fast retail payments system, developed over more than five years from inception to launch. It was developed to address a number of gaps in Australia's retail payments system that the Reserve Bank had identified in the conclusions to its 2010–2012 Strategic Review of Innovation in the Payments System. The development of the NPP was a major, and costly, project for the industry that involved significant cooperation between the 13 initial participating financial institutions, including the Reserve Bank. In addition to building the NPP itself, the participant banks had to develop and upgrade their internal systems to support the platform, including to allow posting to customer accounts in real time, and the Reserve Bank had to build a new real-time settlement system for retail payments. Since its public launch in February 2018, payment volumes through the NPP have been growing steadily as participants have progressively rolled out fast payment services to their customers, though the speed at which some banks have enabled NPP services for their customers has been somewhat slower than was initially expected.

2.1 Development of the NPP^[7]

In 2010 the Payments System Board initiated the Strategic Review of Innovation in the Payments System. This was motivated by growing evidence that the payment services provided to end-users in Australia were falling behind the services available to end-users in many other countries. The objective of the Review was to identify areas in which innovation in the Australian payments system could be improved through more effective cooperation between stakeholders and regulators.

From 2010 to 2012, the Reserve Bank consulted with the payments industry and other key stakeholders and assessed the degree of payment system innovation in Australia and overseas. The Bank found that collaborative innovation, where institutions work together to improve the underlying payments system infrastructure, had proved difficult in Australia. The Bank also found that this difficulty was affecting the ability of financial institutions to innovate and provide new and better payments services to their customers. Accordingly, the Bank concluded that there were market failures preventing, or significantly delaying, certain types of cooperative innovation that would be in the public interest.

In the conclusions to the Review, published in mid-2012, the Bank identified a number of specific gaps in the payments system that it anticipated would become increasingly problematic in the years to come.^[8] To help overcome industry coordination failures, the Bank decided to set strategic objectives for the payments system and encourage the industry to find the best ways to meet them. Reflecting the functionality gaps identified in the Review, the Bank initially set a number of strategic objectives that were likely to require the industry to build a new payment system. These objectives were to provide end-users of the payments system with:

• the ability to make real-time retail (or low-value) payments – that is, payments where the recipient has visibility and use of the funds in seconds rather than hours or days
• the ability to make and receive retail payments outside of normal banking hours – ideally on a 24/7 basis
• the ability to send more complete remittance information with payments than is available in the 18 characters that can be transmitted with a Direct Entry payment – ideally using the more flexible and modern ISO 20022 international messaging standard
• the ability to address payments in a relatively simple way, such as to an email address or a phone number – rather than using Bank-State-Branch (BSB) and account numbers which require the sender to correctly enter up to 15 digits.

The Australian Payments Network, the payments industry association, coordinated the industry's response to the conclusions from the Review.^[9] A Real-Time Payments Committee composed of industry representatives was established to prepare a detailed proposal for a new payments infrastructure, later named the New Payments Platform, which could meet the strategic objectives that had been set by the Bank. This proposal was presented to, and subsequently endorsed by, the Payments System Board in February 2013, eight months after the release of the conclusions paper from the Review. Following this, the industry established a Steering Committee to take the project forward and invited the Reserve Bank to contribute two representatives, one representing its policy function and one from its settlements infrastructure area.

The industry contracted KPMG to manage the project and, during the next year and a half, worked on project planning, the development of business requirements and the tenders for service providers. Financial institutions were then invited to subscribe as shareholders of NPP Australia Limited (NPPA), a new company established to operate the NPP as a mutually-owned utility infrastructure. In December 2014, a consortium of 13 institutions, including the Reserve Bank, agreed to fund the build and operation of the infrastructure to support the NPP and became NPPA's founding shareholders. SWIFT was soon after contracted by NPPA to build the NPP's Basic Infrastructure and BPAY was selected to build the platform's first overlay service (see below).

Parallel with the industry's work to build the NPP, the Reserve Bank worked to build the Fast Settlement Service (FSS), which would enable the settlement of individual NPP transactions in real time across Exchange Settlement Accounts (ESAs) that financial institutions hold at the Bank. In addition to building the settlement infrastructure, the Bank had to upgrade its processes and physical infrastructure to support the 24/7 operations required for the NPP. Since transactions are settled in the FSS overnight and on weekends, when the interbank cash market is closed, the Bank also worked with NPP participants to put in place suitable liquidity mechanisms to support the smooth operation of the NPP.

2.2 NPP Architecture^[10]

The NPP is a distributed system that has two main components: the NPP ‘Basic Infrastructure’ and the Reserve Bank's FSS (Figure 1).

The NPP Basic Infrastructure (BI) is an industry utility owned by NPPA and operated by SWIFT under a long-term contract with NPPA. It includes a new domestic SWIFT messaging network connecting participants to each other and to the FSS. Participants connect via payment gateways, which route ISO 20022-format messages between themselves and the FSS.^[11] Notably, the BI is a distributed network with no central message switch, which enhances the resilience of the system. The payment gateways are located within each participant's data centres and each participant is responsible for their safe and reliable operation.

The BI also includes an Addressing Service, which is a centralised database where participants can register a customer's transaction account and link it to an identifier or ‘alias’ called a PayID, which may be a phone number, email address or Australian Business Number. Instead of having to key in a BSB and account number, payers are able to direct their payments to the more easily remembered PayID of the payee that has been registered in the Addressing Service. The platform provides confirmation of the payee's legal account name to the payer prior to the payment being authorised, to further reduce the risk of misdirected payments.

The FSS is a separate service of RITS, which is the Reserve Bank's existing real-time gross settlement (RTGS) system for large-value payments. The FSS facilitates the real-time, irrevocable and unconditional settlement of each NPP payment across the ESAs of the relevant NPP participants. There is no netting or batching and payments are settled line-by-line in real time. As a result, payee financial institutions can make funds available to the recipient customer immediately, without incurring settlement or credit risk.

‘Overlay services’ are another important aspect of the NPP structure. These will be commercial payment services that leverage the BI and the ability to make real-time, data-rich and easily addressed payments. They may be simple rule-books that set standards for how participants handle certain payments (e.g. speed of posting, what data travels with the payment and what the end-user customer experience is), or they may be more complex payment solutions that involve new message types and interactions with external entities or databases. The first overlay service that launched alongside the NPP was developed by BPAY and is branded as Osko. This is a basic person-to-person credit transfer (‘push payment’) service with the ability to include up to 280 characters of data that participants make available to their customers via their existing internet and/or mobile banking channels.^[12] The Osko service includes specific rules relating to the end-user experience, including obligations on how quickly funds must be posted to the payee's account and informing users of the status of the payment.

The layered architecture of the NPP was designed to promote competition and innovation in the development of overlay services without the need to make frequent or significant technical changes to the BI. NPP participants can choose to subscribe to particular overlay services according to the needs of their customers or other commercial interests. While the Osko service was developed so that there would be a compelling reason to use the NPP when it launched, the expectation was that additional overlay services would be developed over time that may be tailored to particular payment use cases or customer needs. In fact, when the NPP was being developed, there was agreement between participants that BPAY would eventually extend the capabilities of Osko. The intention was to provide ‘request-to-pay’ functionality and the ability to send a document (such as a PDF) with a payment, services that are likely to be particularly useful for businesses.^[13] However, as discussed further below, these services are yet to be delivered and no other overlay services have been developed as yet.

2.3 Access to the NPP

Most end-users of payment services, such as households, businesses and government entities, will access NPP functionality (i.e. the ability to send and receive payments) through services provided on a commercial basis by the financial institutions where they maintain their accounts. The NPP was specifically designed to be ‘open access’ and support participation from a range of businesses across the payments ecosystem wanting to offer NPP services to their customers. NPPA's constitution states that an objective of NPPA is 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’ and ‘ensuring ongoing investment in the NPP to meet the changing needs of financial institutions and users of the Australian payments system.’

There are a number of ways that entities can access the central infrastructure, which cater for different business models and objectives. NPPA has established graduated and risk-based eligibility criteria that apply to each access method, which aim to balance the desire to encourage participation against the need to maintain the safety and security of the real-time payments infrastructure.^[14] There are four ways that businesses can connect to the NPP:

• Direct participants connect to the NPP directly using their own NPP payment gateway. They are required to be licensed as an authorised deposit-taking institution (ADI) or restricted ADI (RADI) by APRA and meet any associated prudential and operational standards imposed by APRA. They must hold an ESA at the Reserve Bank and become a shareholder (and subscribe to shares) in NPPA. They must also meet various technical requirements set by NPPA for establishing and operating an NPP payment gateway. The decision to admit a new participant is ultimately a decision of the NPPA Board, but the Board has provided delegations to NPPA management for a large part of the assessment of new applications. In addition to being able to clear and settle payments through the NPP, direct participants can offer indirect connectivity to the NPP for other entities. Currently, there are nine direct participants – the four major banks, Macquarie Bank, the Reserve Bank (via its Banking Department) and three ‘aggregators’ (Cuscal, ASL and Indue) that provide connectivity for a range of indirect participants and identified institutions.^[15]
• Indirect participants connect to the NPP using a direct participant's NPP payment gateway, but otherwise have the same capabilities as direct participants. Indirect participants are also required to be an ADI (or RADI), hold an ESA at the Reserve Bank, and become shareholders in NPPA. This type of access may suit, for example, a smaller bank that does not need or want to operate its own payment gateway. There are currently two indirect participants, Bendigo and Adelaide Bank and ING Australia.
• Identified institutions connect to the NPP indirectly via a direct participant's NPP payment gateway. Identified institutions are able to offer their customers NPP payment services, with the payments cleared and settled on behalf of the identified institution by the sponsoring direct participant (which may, for example, be a specialist ‘aggregator’). A commercial arrangement is required between the sponsoring NPP participant and the identified institution, but NPPA does not have any role in connecting identified institutions. Identified institutions are not required to be an ADI (or RADI), be a shareholder in NPPA, or hold an ESA at the Reserve Bank (they rely on the sponsoring participant's ESA for settlement). In practice, almost all identified institutions to date have been ADIs – as of May 2019, 68 smaller banks, credit unions and building societies have obtained connections to the NPP as identified institutions. One non-ADI entity providing payment services, Assembly Payments, has also been connected in this way.
• Connected institutions will connect to the NPP using their own payment gateway and are able to send payment initiation and other non-value messages through the NPP.^[16] Because they are not involved in the clearing and settlement of payments, they are not required to be an ADI (or RADI) or hold an ESA at the Reserve Bank, but they need to be financially solvent and comply with the same technical requirements for operating a payment gateway as for direct participants. This type of access may suit entities that are not ADIs but would benefit from operating their own payment gateways to submit a high volume of payment initiation messages directly into the NPP rather than via their financial institution's normal customer channels; such an arrangement might suit payroll processors, share registries, retailers or other large corporates. So far there are no connected institutions but NPPA has indicated that it is in discussions with a number of interested parties.

Entities can also apply to NPPA to become an overlay service provider. Any organisation can apply as long as it can demonstrate a sound business plan backed by the required expertise to deliver their proposed product or service. Overlay service providers will offer their product or service to NPP participants and identified institutions on a commercial basis to make available to their customers.

2.4 NPP Roll-out and Initial Operations

The NPP was launched for public use on 13 February 2018 after becoming operational for industry ‘live proving’ in November 2017. Initially, 61 institutions were connected as participants or identified institutions, with this number having since increased to 80 institutions (Table 2). Notably, this includes 68 smaller financial institutions and one non-bank payment provider that access the NPP through the services of an aggregator or other sponsoring participant (as identified institutions), without the need to directly connect to the NPP's BI and operate their own payment gateways.

As would be expected with any new payment system, financial institutions have taken a staged approach to their roll-out of end-user NPP services, gradually introducing different functionality, channels and customer segments. For example, several of the major banks prioritised retail customers over business customers and some banks have prioritised mobile banking access over internet banking access. Some banks also launched their service with restricted functionality, such as the ability to only make payments to registered PayIDs (as opposed to also to BSBs and account numbers), or with relatively low payment value limits. The different approaches banks have taken to roll out their services may have been partly aimed at managing risk and allowing them to fine-tune their systems and processes. In other cases, however, the slow roll-out reflected an insufficient level of systems work or internal preparation in the lead-up to launch. In particular, some of the major banks appear to have underestimated the complexity of integrating the NPP with their own systems and the investment required to upgrade their core capabilities. As a result, while the NPP roll-out was always intended to be gradual, it has been slower and more uneven than was initially expected.

This has contributed to delays in the development of planned overlay services extending NPP functionality to include the ability to send a document with a payment and the ability to make and receive payment requests. These extensions to BPAY's Osko service were initially expected to be operational shortly after the NPP's launch but there is still no decision on launch and it is unlikely that they could be available before about late 2020.

The Reserve Bank has expressed its disappointment with the slow roll-out of NPP services and functionality on a number of occasions. For example, in November 2018, the Governor noted that:

It was originally anticipated that these two overlay services [request to pay and pay with document] would be up and running not long after the NPP launch. Unfortunately, this timeline has slipped. A number of the major banks have also been slower than was originally expected to roll out NPP functionality to their entire customer bases. This is in contrast to the capability offered by smaller financial institutions, which from Day 1 were able to provide their customers with NPP services. Given the slow pace of roll-out by the banks, and the prospect of delays for additional overlay services, I recently wrote to the major banks on behalf of the Payments System Board seeking updated timelines and a commitment that these timelines will be satisfied. It is important that these commitments are met.^[17]

Notwithstanding the slow roll-out, the number of end-users with access to fast payments and the number and value of transactions through the platform have been growing steadily. As of end April, there were more than 55 million Australian bank accounts accessible via the NPP (estimated at about 85 per cent of all accounts that will eventually be reachable) and around 2.8 million PayIDs had been registered. The platform is now processing an average of around 600,000 payments worth $500 million each day, with an average transaction value of around $800 (Graph 1).^[18] While these transaction amounts are still very low compared with other retail payment systems in Australia, the adoption of the NPP is proceeding at least as quickly as occurred for some comparable fast-payment systems that were launched in other countries (Graph 2).

Endnotes

The material in this section draws on Richards T (2018), ‘An update on Australia's New Payments Platform’, Speech to the Chicago Payments Symposium, 3 October and Richards T (2014), ‘The Path to Innovation in Payments Infrastructure in Australia’, Speech to the Chicago Payments Symposium, 26 September. [7]

See RBA (2012), ‘Strategic Review of Innovation in the Payments System: Conclusions’, June. [8]

The Australian Payments Network was at the time known as the Australian Payments Clearing Association (APCA). [9]

A more detailed description of the structure of the NPP can be found in Rush A and R Louw (2018), ‘The New Payments Platform and Fast Settlement Service’, RBA Bulletin, September. [10]

ISO 20022 is a global and open standard for payment messaging that supports a range of message types and a large amount of both structured and unstructured data. [11]

BPAY was selected in 2014 to develop the first overlay service for the NPP as a result of a competitive tender process that was managed by the NPP project manager, KPMG. [12]

In this context, ‘request-to-pay’ functionality refers to the ability of an entity to send a payment request to a payer through the NPP, which the payer could then choose to accept to automatically execute a credit transfer from their account to the payee's account. This functionality would be similar to the current direct debit functionality, except that the payer would need to approve each payment request. This service may be particularly useful for a business wanting to use the NPP to send a notification to its customers of a pending invoice with a request to pay and provide a convenient way for the customer to pay through the NPP. [13]

The process for connecting to the NPP and associated eligibility requirements are provided in the NPP Regulations available on NPPA's website at: https://www.nppa.com.au/the-company/governance/ [14]

Aggregators specialise in providing wholesale payment services to other institutions (i.e. they have no end retail customers of their own). Their business model is to provide access to different payment clearing streams for smaller entities; some of them also provide payment products and services such as ATM access, card scheme sponsorship and fraud prevention and management. Aggregators help to promote competition in the payments industry by providing the technology, licensing and operational capabilities that might otherwise be too expensive for smaller entities to establish on their own. [15]

A payment initiation message is one that would be sent to an NPP Participant seeking the initiation of a payment from a specified account, with the payer's authorisation. They could be used, for example, by a Connected Institution to instruct a payment from its own account or from the account of a third party, such as a customer. The clearing and settlement of that payment would then be effected by separate ‘value’ messages exchanged between NPP Participants and the FSS. Other non-value messages would include those used to look up a PayID in the Addressing Service or to request the status of a payment. [16]

Lowe P (2018), ‘A Journey Towards a Near Cashless Payments System’, Speech at the 2018 Australian Payment Summit, November. [17]

Data on NPP transactions are contained in RBA Statistical Tables C6 and C6.1. [18]