Payments System Board Annual Report – 2007 Developments in the Payments System
Given its broad responsibility for the Australian payments system, the Board closely monitors trends and developments in payment systems, both in Australia and internationally. The main trend globally continues to be the strong growth in the use of electronic payment methods. Australia has been part of this trend and, consistent with many other countries, there has been strong growth in card payments and electronic crediting and debiting of accounts, and a marked decline in the use of cheques.
Trends in Retail Payment Systems
Comprehensive data for Australia are available on the use of cheques and most electronic payment methods. Much less data are available on the use of cash, although the surveys currently being conducted by the Bank as part of the 2007/08 review of the payments system reforms will provide useful information (more detail on these surveys is provided in the chapter ‘Review of the Payments System Reforms’).
The available data suggest that over the year to June 2007, the value of non-cash retail payments made in Australia increased by 13 per cent (Table 2). On average, each person made around 240 non-cash payments over the year, up from an average of 130 in 1997. Electronic channels accounted for around 91 per cent of these payments, up from 65 per cent 10 years ago. And the main electronic payment methods remain card based, with 65 debit card and 61 credit card transactions per capita in 2006 (Graph 1). In contrast, in terms of values, the main methods involve electronic crediting and debiting of accounts using the direct entry system. Over the year to June 2007, card-based payments accounted for over half the number of all non-cash payments, but only about 2 per cent of the value of these payments.
Card-based payments
In total, the number of card-based payments in Australia is estimated to have been 7.4 per cent higher over the year to June 2007 than in the previous year, while the value of card-based payments is estimated to have increased by 9.5 per cent; these growth rates are slightly lower than the average of recent years. The number of debit card payments – including scheme debit and EFTPOS – grew by 9.4 per cent, somewhat faster than the 5.4 per cent growth in the number of credit card payments (Graph 2). Reflecting the stronger growth in debit card payments over recent years, the number of transactions on debit cards now exceeds the number on credit cards. The Bank currently does not collect data on a regular basis on the split of debit card payments between those made through the PIN-based EFTPOS system and the scheme-based signature debit systems. It has, however, recently held discussions with industry about the provision of such data, and expects new reporting arrangements to be in place by early 2008.
Although the number of debit card payments has grown more quickly than the number of credit card payments, the values of debit and credit card payments have grown at broadly similar rates over the past year (Graph 3). This reflects a rise in the average size of a credit card payment to around $138, up from around $125 in 2003, while the average size of a debit card payment has remained relatively constant over this period, at around $68. Given the significantly larger average size of credit card purchases, the total value of spending on credit cards is roughly double that on debit cards.
The number of debit card accounts and the number of credit card accounts have not grown as quickly as the number of transactions, suggesting more intensive use of existing accounts for payments. Both the number of debit and credit card accounts grew by around 4 per cent through 2006/07, following a few years in which the number of credit card accounts increased more quickly than the number of debit accounts (Table 3). This combination of increases in the value of credit card transactions and the number of accounts has contributed to a rise in balances outstanding on credit cards with total balances growing by around 11 per cent over 2006/07, a little lower than in recent years. Growth in balances accruing interest, at 10 per cent through the year, was also slower than the previous year. On average over 2006/07, around 72 per cent of total balances outstanding were accruing interest charges.
Within the credit and charge card market, the combined share of the ‘four-party schemes’ (Bankcard, MasterCard and Visa) has remained broadly unchanged over recent years; over the year to June 2007, these schemes accounted for 83.6 per cent of the value of credit and charge card transactions (Graph 4). The domestic Bankcard credit card scheme closed in the first half of 2007 after many years of declining market share.
One notable development over the past year has been the growth of pre-paid cards. Initially, these cards were mostly issued by retailers, replacing paper-based gift certificates. More recently, the international card schemes have introduced pre-paid cards that can be used at almost any merchant that accepts credit cards issued by these schemes. While a number of these cards have been issued as non-reloadable cards as part of a ‘cash back’ offer in a retail promotion, in late 2006 two of the major banks launched their own non-reloadable pre-paid gift cards under the MasterCard and Visa brands. The Bank currently does not collect data on spending on these cards on a regular basis, but industry liaison suggests that pre-paid cards account for only a very small fraction of card-based spending – although many see the possibility of considerable growth in the years ahead.
The past year has also seen an expansion in the range of ‘premium’ credit card products on offer. According to survey data from Roy Morgan Research, in the 12 months to March 2007, 27 per cent of credit card holders aged 18 years and over held a silver, gold or platinum card, up from 17 per cent four years earlier. These cards typically have a higher annual fee than standard cards, interest rates of around 18 per cent and are accompanied by a rewards program. The past year has also seen a continuation of a trend towards low‑rate credit cards, offering interest rates in the 9 to 14 per cent range. Many of the low-rate products were launched in 2005, and over the past two years the number of products and the number of institutions offering these cards has continued to increase, with a number of the new products offering rewards programs. Many of the low-rate cards have been marketed extensively, including through offering low, or even zero, interest rates on balances transferred from existing credit card accounts.
Other electronic payments
The number of direct entry payments grew slightly more quickly than the number of card-based payments over the past year; in value terms, however, they grew much more quickly than card payments. Over the year to June 2007, the number of direct debits grew by 6 per cent and the number of direct credits by 10 per cent, while the values rose by 14 and 15 per cent respectively. Direct entry payments now account for 34 per cent of non-cash retail payments by number, and 83 per cent by value. This high share by value reflects the nature of payments made through the system: direct credits are commonly used for payroll, social security and tax refund payments and, increasingly, for business payments including dividends; direct debits are often used for fortnightly or monthly mortgage repayments, as well as for paying regular personal or commercial bills.
Over recent years, the direct entry system has been used for an increasing variety of different types of payments. Most financial institutions offer ‘pay anyone’ facilities for customers, allowing direct credit payments over the internet. A number of non-financial institutions have also introduced online payment products in Australia that do not rely on providing the merchant with credit card details. Some of these products involve the buyer supplying payment details to a payment service provider who, in turn, pays the merchant. Another product involves facilitating a direct credit to the merchant from the buyer's normal internet banking site by populating the relevant internet banking page with the merchant's account details and the total for the transaction.
BPAY also continued its strong growth over 2006/07. In the 12 months to end June 2007, the number of BPAY payments rose by 16 per cent and the value by 19 per cent. In 2006/07, there were around 198 million BPAY payments processed for a total value of around $133 billion. At $671, the average value of a BPAY payment is relatively high, reflecting the use of the system for bill payments and funds transfers.
In contrast to BPAY's strong growth, it was reported in June 2007 that POSTbillpay, Australia Post's electronic bill payment service, will cease operations. A number of other small bill payment service providers have, however, begun operations in recent years. Bill Express provides facilities for bill payments in newsagencies and Acreis has launched ‘Once’, a bill aggregation service.
Cheques and cash
In contrast to the continuing strong growth in the use of electronic payment methods, the use of cheques continues to decline. In 2006/07, the number of cheque payments fell by 8 per cent, with the number of cheques written per person now half that of a decade ago. There nevertheless remain a variety of transactions for which cheques are still widely used. Given that many of these, such as property settlements and business transactions, are of relatively high value, the average value of all cheques written in 2006/07 was around $4,000, with the average value for cheques drawn on personal accounts being around $1,800.
As noted above, information on the use of cash as a payment method is currently relatively limited. Currency outstanding continues to grow broadly in line with GDP, with the ratio of currency to GDP averaging 3.6 per cent over the year to March 2007, very close to its average over the past thirty years. There is, however, some evidence of a slight slowdown in the use of cash for transaction purposes, with the value of cash withdrawals from ATMs (the main source of cash withdrawals) growing by around 4 per cent over the past year, compared with growth of around 6 per cent in nominal household consumption over the year to March 2007 (Graph 5). This is the third year in a row in which the total value of cash withdrawals via ATMs has grown more slowly than household consumption, after having grown more quickly than consumption for many years (although the strong growth in earlier years largely reflects a shift towards ATMs and away from withdrawals over a branch counter).
The proportion of ATM transactions conducted at ‘foreign’ ATMs has remained fairly steady over the past year at just under 48 per cent, after rising for a number of years (Graph 6).[2] This is likely to reflect, in part, an increase in the fee that some institutions charge their customers for using another institution's ATMs from $1.50 to $2.00. In June 2007, there were just under 26,000 ATMs in Australia, an increase of 26 per cent on the number four years earlier. This growth has been driven largely by growth in the number of ATMs owned by independent deployers; in 2006 the proportion of ATMs owned by these deployers was around 40 per cent, up from around 30 per cent in 2003.
International comparisons
Although the pattern of payments varies across countries, many of the recent trends in Australia are similar to those seen elsewhere in the world (Table 4, Graph 7). Countries broadly fall into two groups – those with a history of cheque use and those with a history of direct credit use. Within the cheque using group, the United States stands out given its particularly high use of cheques. The United Kingdom, Canada and France, however, have payment patterns similar to Australia, with a relatively high use of cheques and lower usage of direct debits and credits. Most European countries, on the other hand, tend to have relatively high use of direct credits and debits, and very low use of cheques.
In all the major countries, the recent trends in payment use have been very similar, with cheques declining in importance and the use of payment cards rising strongly. The decline in cheque use has been most evident in countries with historically high use of cheques. Between 2001 and 2005 (the most recent year for which international data are available), the number of cheques written per capita declined by 26 per cent in the United Kingdom, 21 per cent in the United States, 18 per cent in Canada and 12 per cent in France.[3] This compares with a decline of 28 per cent in Australia. In the major countries, cheques made up 26 per cent of the number of non-cash payments in 2005 compared with 52 per cent in 1997.
At the same time, use of payment cards has increased, not only in countries where cheque use is declining, but more broadly. Cards accounted for around 45 per cent of the number of non‑cash transactions in the major countries in 2005, up from less than 25 per cent in 1997. Use of debit cards, in particular, has grown strongly, especially in Europe and North America. Whereas in 2000 credit card transactions outnumbered debit card transactions by two to one in the United States, in 2005 there were more debit than credit card transactions. Similarly, in Canada, the United Kingdom and other European countries, the number of debit card transactions has grown more strongly than credit card transactions (Graph 8). Of the countries for which data are available, Australia and the United States are the only countries for which the number of credit card transactions is approximately equal to the number of debit card transactions; in most other countries, the number of debit card transactions is now significantly greater than the number of credit card transactions (Table 4).
Like Australia, a number of countries have seen a significant increase in the number of ATMs over recent years, with the increase tending to be highest in those countries in which direct charging has been introduced.
In Canada, direct charges were introduced in 1996, after the Canadian Competition Bureau ruled that prohibiting such charges limited competition. While charges are now common, the Canadian Bankers Association notes that over 75 per cent of withdrawals are conducted at ATMs owned by the cardholder's bank, where direct charges and foreign fees are not levied.[4]
In the United Kingdom, direct charging commenced in 2000 following a change in rules in the country's major ATM network (LINK).[5] Direct charges have mostly been limited to ATMs owned by independent deployers; ATMs owned by banks do not generally impose direct charges (nor do banks charge their customers for using foreign ATMs). The number of ATMs that direct charge has grown from around 7,000 in 2001 to 26,000 in 2006, while the number of ‘free’ ATMs has grown from around 29,000 to 35,000 over the same period.[6] Despite constituting 42 per cent of ATMs, direct charging machines accounted for less than 5 per cent of withdrawals in 2006.[7]
In the United States, direct charges became widespread following the 1996 decisions of the Pulse (owned by Visa) and Cirrus (owned by MasterCard) networks to remove rules prohibiting the charges. Most banks apply direct charges to some, or all, transactions of other banks' customers through their ATMs, and they charge foreign fees to customers that use other institutions' ATMs. The US Federal Reserve estimated that by 2002 around 89 per cent of depository institutions imposed direct charges on withdrawals from their ATMs, up from 45 per cent in 1996.[8] Over the same period, the proportion of institutions charging foreign fees to their customers fell from 80 per cent to 69 per cent.
Fraud and fraud control
Fraud rates on payment instruments in Australia were relatively low in 2006 compared with rates overseas.
The two types of payment instruments traditionally most prone to fraud are cheques and credit cards. While cheque fraud is not particularly common, when it does occur, it tends to be for high values. Data collated by the Australian Payments Clearing Association (APCA) indicate that over the year to December 2006, there were around 2,400 instances of cheque fraud in Australia, at an average value of around $13,500. This amounts to slightly less than 2 cents for every $1,000 transacted.
The rate of fraud on card-based payments is higher than that on cheques, but lower than in many countries. Over the year to December 2006, fraud on credit cards was the equivalent of 37 cents per $1,000 transacted, while on PIN-based debit cards it was less than 8 cents per $1,000. The much lower fraud on these debit cards primarily reflects the extra security from the cardholder using a PIN, rather than a signature, to authorise transactions, and the fact that these cards cannot be used in circumstances where neither the cardholder nor the card are present (such as over the internet).
Taking debit and credit cards together, the weighted average fraud rate was 24 cents per $1,000 transacted in the year to December 2006. This is less than a third that experienced in the United Kingdom over the same period (Table 5). In part, this reflects the substantial investments the Australian banks have made in fraud detection and control. In both Australia and the United Kingdom, most fraud is perpetrated by skimming cards or by using cards fraudulently in a card-not-present environment.
Australia's comparatively low level of fraud on cards has meant that the incentive to move towards both PIN authorisation and chip technology at the point of sale has been somewhat less than in a number of other countries. Nevertheless, over the past year the industry has made significant moves towards the implementation of PIN-based security systems and chip on credit cards.
While Australia's EFTPOS system has been PIN-based since its creation in the 1980s, the credit card system has always been signature-based. In 2006, however, the industry initiated a project to introduce PINs for credit card transactions. As a result, according to the current timetable, all Australian acquirers will have systems in place to accept PINs for credit card transactions, in the same way as currently takes place for EFTPOS transactions, by early 2008. While all acquirers and merchants will need to offer the option of PINs for credit cards, cardholders will, if they wish, still be able to sign in the usual way. Consumers' familiarity with PIN use in the EFTPOS system is likely to encourage a relatively rapid take-up of PINs for credit card transactions.
The move to chip on credit cards is being undertaken independently of the move to PINs and is not being formally co-ordinated across the industry. In the past year, however, the credit card schemes have introduced incentives in their interchange fee schedules to encourage chip adoption. Under both schemes' incentive arrangements, if a chip card is used in a non-chip terminal, the acquirer pays a higher interchange fee than would otherwise be the case. Visa has also introduced a program whereby merchants who meet certain security standards can qualify for lower interchange rates. There are preliminary indications that these incentives are having an effect on the chip migration process.
The High-value Payments System
The number and value of transactions settled through the real-time gross settlement (RTGS) system in Australia continues to rise.
Over the past year, the RTGS system accounted for around three quarters of the total value of non-cash payments in Australia and over 90 per cent of the value of payments exchanged directly between banks. In 2006/07, the system processed an average of around 27,000 payments per day, with an average daily value of around $168 billion (Graph 9). On the peak day in 2006/07, over 46,000 transactions were processed, with a total value of around $260 billion. Around 70 per cent of RTGS payments by value arise from banks' domestic and correspondent banking customer payments and some foreign exchange related payments, with a further quarter arising from debt securities and money market transactions.
Payments relating to equities, warrants and derivatives transactions also settle across accounts at the Bank but somewhat differently to those for debt securities. Rather than gross settlement directly between participants of the relevant central counterparty or securities settlement facility, settlement occurs on a net basis across the Exchange Settlement Accounts of these facilities. The average value of payments across these accounts was about $950 million per day in 2006/07.
Although specifically designed as a system for the settlement of large-value transactions, the RTGS system settles a significant number of small-to-medium-sized payments. In 2006/07, transactions of $1 million or less accounted for around 77 per cent of the number of RTGS transactions, but only 1 per cent of the value. Virtually all the growth in the number of transactions processed through the RTGS system since its establishment has been in relatively small-value transactions (Graph 10).
Footnotes
A ‘foreign’ ATM is an ATM owned by an institution other than the cardholder's financial institution. [2]
Bank for International Settlements, Statistics on payment and settlement systems in selected countries, March 2007. [3]
Canadian Bankers Association, Canada's ABM/IDP Network: Affordable, Accessible, Convenient and Secure, February 2007. [4]
Office of Fair Trading, Decision of the Director General of Fair Trading: LINK Interchange Network Limited, October 2001. [5]
LINK, ‘Statistics’, http://www.link.co.uk/atm/mn_atmstats.html, accessed 3 September 2007. [6]
APACS, The Way We Pay: UK Cash & Cash Machines 2007, May 2007. [7]
Board of Governors of the Federal Reserve System, Annual Report to the Congress on Retail Fees and Services of Depository Institutions, June 2003; Hayashi F, R Sullivan and S Weiner, A Guide to the ATM and Debit Card Industry: 2006 Update, Federal Reserve Bank of Kansas City, 2006. [8]