Strategic Review of Innovation in the Payments System: Summary of Consultation – February 2012 4. Potential Gaps
[an error occurred while processing this directive]While much of the focus of the Strategic Review is on establishing an environment that is conducive to innovation, the consultation paper also discussed a number of specific areas that were identified as potential gaps over the next five to ten years. The responses from consultation on these issues are presented below.
4.1 Transmission of Data with Payments
It is a longstanding complaint of business that there needs to be the capacity to integrate data flows with payments, rather than having to resort to less efficient payment mechanisms, such as cheques, or having to separate data and payments and then reconcile them at a later stage. Much of the focus of this discussion has been on the Direct Entry (DE) system and its limit of 18 characters for the transmission of additional data. There was quite widespread acknowledgement among submissions that this is a genuine issue, although one submission suggested that the demand for transmitting additional data is limited. There was considerable variation in the solutions favoured by different parties. One possible solution would be to convey a reference in the existing additional data fields for the DE system, which would provide a link to the full dataset. Referencing may be used where there are concerns that the inclusion of data in the message itself might slow down payment flows or lead to system capacity constraints.
The other major class of solutions raised involves the adoption of ISO 20022 compliant messages, which provide the potential to incorporate an unlimited quantity of data. Adoption of at least one payment system based on an ISO 20022 message standard could provide the data flexibility required by business and potentially open the payments system to innovations based on the use of the associated data.
There was widespread support among submissions for the use of ISO 20022 compliant standards, but there was little support for the existing DE system to be the vehicle for this. The DE system is seen as an inexpensive and efficient mechanism for performing basic bulk-payment functions, and for many transactions this is all that is required. Moving DE to an ISO message standard would impose a large cost, not just on participants, but also on end users whose own systems are geared to the existing message types. As an alternative, some parties suggested that a new system be established to meet this need. This could, for instance, be a new clearing system established under APCA rules. APCA has already established an Australian ISO 20022 schema that could be adopted for this purpose.
One submission suggested that consideration also be given to the high-value clearing system (HVCS) migrating to an ISO 20022 compliant standard in conjunction with low-value payments. The HVCS customer message standard can currently carry 140 characters of remittance information.
4.2 Use of Standards
Comments on standards were almost solely directed towards the use of ISO 20022 compliant messages. There was widespread support for use of ISO 20022, reflecting the benefits of interoperability with offshore systems and the data transmission capacity discussed above. There was less agreement on how it should be implemented. A number of submissions argued that the cost of moving existing systems to ISO 20022 would be prohibitive, therefore it should be adopted only for new systems. Others urged mandating of the standard with a tight deadline, so that institutions would be forced to accommodate it in their systems. Some suggested a phased approach, for instance by adopting different implementation dates for new and existing systems. One submission also raised the possibility of a hub with a conversion capability to simplify migration. It was noted that there have been cases of public intervention to support the use of ISO standards in the European Union and the United States.
Only a few submissions commented on other elements of standards. Some pointed to inefficiencies that were introduced by having local device standards, but argued that these had to be weighed against the better security provided. A small number of submissions picked up on security standards, with one noting the Bank's comments on the results of its 2010 Consumer Payments Use Study which suggested that fraud may be constraining greater use of online payments. This submission argued that it is important to work co-operatively to establish security standards.
4.3 The Timeliness of Payments
The consultation paper referred to two elements of the timeliness of payments – funds availability to recipients (for instance, for emergency payments to individuals or for cash flow purposes for small businesses) and the authorisation of a payment to a merchant (so that, in an online environment, goods and services can be shipped, booked or downloaded immediately). Most submissions focused on the former, presenting a spectrum of views, including some that suggested the demand for this feature is not high enough to justify significant investment in a solution.
There are three elements that may have a bearing on when funds are available to the customer. First, timely exchange of payment messages is a necessary, but not sufficient, condition for more timely availability of funds. Currently, eftpos messages are exchanged in real time and DE messages are exchanged five times during the day (although the largest share of payments is in the final two exchanges of the day). Second, the timing of interbank settlement may have an influence. Interbank settlement for retail systems currently occurs on the morning after the message exchange. It is nonetheless possible for institutions to post funds before settlement, although in doing so they are accepting a risk that the paying institution will not settle, or at least not settle on time. This discretion over when funds are posted is the third element of the timing of availability of funds, often influenced by the institution's systems capabilities. Several submissions highlighted the fact that the capacity and willingness to post funds quickly is becoming more widespread. By contrast, some submissions suggested that the only way to achieve timely posting is to impose a mandate. Others suggested that this would be very costly for some institutions and that accelerated posting should be driven by competitive forces. Several submissions suggested that any mandating of posting standards should be left to the industry.
An important question for the review is whether there is a case for a retail system that would allow transfers closer to real time; that is, requiring more frequent (preferably real-time) message exchanges than the DE system provides. One submission argued that an ‘immediate payment’ channel is necessary to support new payment types and channels, such as mobile and online. Another suggested that ‘credit eftpos’ be adopted for this purpose; that is, the normal flow of payments in the eftpos system would be reversed so that payments could be made to cardholders. The submission suggested that internet banking sites could allow customers to enter the card number of the intended recipient of a payment. Given that eftpos messages are transmitted in real time, transactions could be posted immediately to customer accounts. This would allow the recipient to access the funds almost immediately. A further question is whether real-time or near real-time settlement of retail transactions should play a role. This is not strictly necessary for the faster availability of funds, but would reduce settlement risk and create a more level playing field for participants that are unable to extend credit.
Another issue raised in the consultation paper was the availability of the payments system during evenings, weekends and public holidays. The closure of the banking system means that a DE payment made on a Friday night might not be available until Tuesday or Wednesday, depending on the institution, and even longer over long weekends. Merchants have indicated that the same is true for settlement of eftpos receipts, even though a hold is immediately placed on the cardholder's funds. A number of financial institutions expressed concern about the cost of supporting weekend exchanges, including, some said, the need to keep treasury operations and RITS open to support liquidity needs and to prevent the build-up of exposures.
4.4 Mobile, Person-to-person and Electronic Purse Systems
The principal aim of the consultation paper in relation to these payment types was to ascertain whether there are any impediments to their development and therefore whether there is any need for public intervention.
In relation to mobile payments, some submissions highlighted the fact that technology is changing quickly and this is causing the payments industry to approach the area with caution. This also argues against public intervention. Nonetheless, there was general agreement that mobile payments in Australia are likely to be based predominantly on mobile internet or near-field communication (NFC – contactless) technology, rather than SMS-based payments. Another theme in submissions was the complexity of co-ordinating different players in the mobile payments sphere. Financial institutions, telecommunications companies, software providers, handset manufacturers and potentially other service providers might be involved and there are different views among these players about the best model for mobile payments, including, for instance, the way that NFC payments should be delivered.
The consultation document asks whether there are areas where standards are lacking in relation to mobile payments. Some submissions identified customer authentication standards and security protocols as issues. Others pointed to the fact that there are already a number of international groups working on various mobile standards. Some submissions noted that mobile phones offer some security advantages over payment cards, such as the ability to require a password to access payment applications and the capability to disable payment functionality remotely if a phone is lost.
Some parties argued that the absence of a real-time retail payments framework in Australia inhibits the development of innovative mobile payment solutions.
Those submissions that commented on person-to-person (P2P) payments generally suggested that there is no case for public intervention, although two submissions noted that such systems are hindered by the Absence of a system for easily addressing payments. One financial institution commented that the low price of existing services meant that it was difficult to find a business case to pursue a P2P solution. Nonetheless, some P2P mobile payment options have begun to be offered of late, with addressing based on mobile phone numbers or email addresses, but these are significantly less convenient where users are not customers of the same financial institution (or of a closed system).
Those that commented on electronic purse systems typically noted that widely accepted electronic purse systems in other countries have tended to grow from transport ticketing. It was noted, though, that this has not occurred with the Oyster ticketing system in the United Kingdom and, in fact, the ticketing authority in London is now focusing on encouraging the use of standard contactless debit and credit cards on the transport system.
4.5 Other Potential Gaps and Issues
There were many other stand-alone issues raised in submissions that are worthy of consideration, including the following.
- One submission highlighted the cost and opacity of remittances (i.e. from foreign workers to family members in their home countries). Remittance systems have been the subject of innovation in some other countries, though often with public intervention. The Australian Government has been working to reduce the cost of remittances, including through joint development of the sendmoneypacific.org website and a package to reduce the cost of remittances to Commonwealth developing countries.
- A small number of submissions highlighted the emergence of ‘virtual currencies’, such as Facebook credits, and urged consideration of how these might interact with traditional payment systems.
- CHOICE urged that any new solutions pursued be consistent with account portability and suggested that customers be given the ability to opt out of new payments technology (such as contactless functionality on cards).
- One submission suggested adding functionality to the DE system that would allow it to return a message to the payer, confirming that the payment had been received by the intended party. This might provide users with greater confidence in making DE payments, for instance when using internet banking for non-time-critical payments.