Strategic Review of Innovation in the Payments System: Issues for Consultation – June 2011 2. Objectives of an Efficient Payments System

A useful starting point for assessing potential gaps in the payments system is to establish a set of desirable attributes for such systems. This does not of course mean that each payment instrument must deliver all these attributes. But ideally the payments system overall would offer a mix of payment methods that collectively offer each of these attributes in a way that allows end-users – businesses, consumers and government – to meet their needs at a reasonable cost.

While not exhaustive, the following are some of the key attributes that can be important to end-users.

2.1 Attributes Valued by End-users

Timeliness

Not all payments are time-critical, but users of the system should at least have options available that provide timely payment. Timeliness has at least two elements. In some cases, such as emergency government payments, the timing of the availability of funds to the recipient is critical. In other cases, such as point-of-sale or online retail transactions, it is important that the merchant has immediate confirmation that the payment is on its way so that the transaction can be completed, even if the funds will not be available until some time later.

Accessibility

It is desirable that everyone who needs to make and receive payments should have ready access to the payments system. Once again this may have different elements. One is the ability to access the payments system when and where required. Cash, and more recently credit and debit cards, have provided ready access for face-to-face transactions, but ‘remote’ transactions have historically been more difficult, typically requiring the use of cheques or a visit to a bank branch. Innovations over recent years have of course dramatically improved access, with first telephone, then internet banking, and more recently mobile banking and payments.

Another element of accessibility is the availability of accounts on which payments can be made. Australia has a highly banked population, which means that access to bank-based payment methods is ubiquitous. In many lesser developed countries this is not the case. In some of these countries the introduction of mobile phone based payment systems has dramatically increased access to the payments system, even if one not necessarily based on banks.

Accessibility should not be thought of just in a domestic context. Many end-users have a need to make and receive payments across national borders.

Ease of use

It goes without saying that systems that are easier to use are preferable to those that are more cumbersome. But this is not just an issue of convenience. Systems that require manual entry of account and transaction details are prone to errors that can be costly to correct and can discourage use. That is one reason why payment cards are popular – because most of the need for manual entry is removed. The need to know a recipient's account details is another challenge for many payment instruments. One of our oldest payment methods – the cheque – deals with this by requiring only the recipient's name. The burden of course is placed on the recipient who must then manually deposit the cheque, providing their own account details. The challenge for electronic payment systems is to provide solutions that are easy for both the payer and the recipient.

Ease of integration with other processes

Payments are rarely made in isolation. Typically they are made as part of a process that requires some form of information exchange and reconciliation. Payment systems should be able to integrate efficiently with these processes. Key examples are the capacity of payment systems to carry additional information relevant to the payment and the ability of payment messages to be easily integrated with accounting and other business systems.

Safety and reliability

End-users of a payment system need to have confidence that the system will be available when expected and that payments will reach the intended recipient at the time promised. They also need to be confident that the system is secure, so that using it will not expose them to future losses as a result of information being fraudulently obtained. Some of these problems can be addressed by system participants providing a guarantee of one form or another, but good system design is a more fundamental solution.

Low and transparent prices

If two systems perform exactly the same function, users can be expected to prefer the cheaper one. However, each system typically has different attributes, and end-users make choices by weighing up those attributes and relative pricing. This means that both prices and the systems’ attributes need to be transparent, so that those choices can be well informed. Given the two-sided nature of payment systems, this does not of itself guarantee economic efficiency because prices are often skewed in favour of the party with the greatest decision-making power. Pricing is most likely to be efficient where there is a reasonable alignment between the relative prices faced by those with decision-making power and the relative resource costs of different payment instruments.

2.2 Desirable Attributes for Payment System Design

The above attributes are those that are directly relevant to the end-users of payment systems. There are other attributes of the design of payment systems that are less obvious to end-users, but which are important to ensuring that payment systems are efficient and are well placed to deliver the sorts of attributes discussed above. These include the following.

Efficient design

Payment systems should be designed in a way that achieves the system's objectives in an efficient and cost-effective manner.

Security and robustness

The system should have a level of security and operational robustness commensurate with the importance of the system. For instance, disruption of a system delivering salary and social security payments can have widespread impacts, even if not considered to have implications for financial stability.

Interoperability

Payment systems should aim to achieve a high degree of interoperability with other systems. For instance, to the extent possible, message standards should be consistent with international standards to allow the easy flow of payments across borders and to simplify access for new entrants. It is also desirable to maximise the extent to which different payment systems can use common infrastructure.

Open access

Systems should be designed in a way that makes the entry of new participants easy, quick and inexpensive for both the new entrant and incumbents. This may be dependent on the architecture of the system, the standards applied and the business arrangements in place.

Risk management

Payment systems have the potential to generate a number of risks for participants, most notably credit risk. Managing these risks is an important focus of design for systems processing large values, but all systems should have risk-management features commensurate with the level of risk generated.

Ease of adaptation to changing needs

For many reasons the needs and preferences of both payment system users and operators evolve over time, often in response to changing technology. Systems should be as adaptable as possible so that changing needs can be met in an inexpensive manner. The ability to do so would ease some of constraints on innovation discussed later in this paper.