Simplifying Australia’s payments industry

The ordinary consumer doesn’t really need to understand the workings of the payments system. They simply want to pay for something and know the transfer of money is safe and will work.

But they do want choice in how they pay. They want to know will the payment arrive in the recipient account immediately, overnight or will they have to wait three days? Will they get confirmation of receipt? Can they set up recurring debits to their account, credit or debit card? And what are the validations and protections in place if something goes wrong?

Sitting behind these various choices and assurances is a network of payment infrastructure and schemes, established to ensure a customer at one bank can securely and effectively make a payment to a customer at any bank in Australia – or globally. These schemes are governed by separate – and to an extent, competing – organisations.

Now one of those organisations, the relatively young New Payments Platform Australia (NPPA) has proposed the merger of three major Australian payments organisations: NPPA, eftpos Payments Australia (ePal) and BPAY.

It’s a dramatic proposal and one which inevitably leads many to question whether this is in fact anti-competitive behaviour. It could create the perception the big banks are scheming together to enhance their own interests rather than those of the Australian public by monopolising the payments infrastructure infrastructure.

Others who are close to the payments industry in Australia worry if the merging of three well established organisations with varied shareholdings and separate management teams and infrastructure could be anything but a recipe for disaster.

So what is the argument for such change? Don’t these companies function well in a competitive market today?

Before exploring the challenges and opportunities with consolidation it is important to understand the current payments landscape in Australia and its evolution.

The Payments System Board (PSB) of the Reserve Bank of Australia (RBA) regulates payments in Australia. The PSB generally takes a principles and objectives-based approach to regulation, leaving the industry to determine how it meets those objectives, allowing it to self-regulate accordingly.

NPPA, ePal and BPAY provide a range of payments services to meet the RBA’s objective for increased innovation and resilience in the payments system. Rather than providing direct-to-consumer services, these bodies run the payments utilities in Australia, which facilitate the broader payments network and enable financial institutions and payment providers to offer competitive services to their customers.

The domestic eftpos scheme has operated in Australia since 1983 with the organisation ePal established in 2009 to manage and promote the eftpos system in Australia. Its 19 shareholders include financial institutions, service providers and the two major Australian retailers – Coles and Woolworths.

BPAY was founded in 1997 by the four major banks to facilitate electronic bill payments and expanded in 2018 to include Sypht, a data capture and analytics solution, and Osko, an initial NPP feature or “overlay service”.

Finally, following the RBA’s strategic review of the payments system in 2012, and with the objective of delivering real time payments, 24/7 with enriched data and easy addressing, NPPA was established in 2014 by 13 founding shareholders, including 10 institutions with a common shareholding in ePal.

These three commercial entities, along with the self-regulatory and governance-focused Australian Payments Network (AusPayNet, formerly Australian Payments Clearing Association or APCA), evolved organically with changing market needs.

Historically, each has had a distinct purpose and set of service offerings. But changing customer and regulatory expectations, along with advances in technology, have started to blur the boundaries between service propositions.

A critical and somewhat unique aspect of all payments systems compared with other banking services is their reliance on a network effect. Consumer choices in payment instruments are largely dependent on merchant choices in acceptance. And vice versa.

Equally, a ubiquitous network is required in order to ensure payments can be sent and received across the industry and economy. Therefore, arguably more so than other utilities, payments infrastructure requires a high level of collaboration to enable competitive services to customers as quickly as possible.

BPAY, ePal and NPPA are collaborative entities in their own rights – but with separate governance structures and siloed objectives. So initiatives are often developed in an uncoordinated manner and in competition with each other.

This competition may not always be beneficial. There is an argument it introduces the risk of duplication and inefficiencies without any clear benefits to consumers and retailers. The case for proposed change is consequently based on the argument that rationalisation of the payment industry structure will improve the industry’s ability to deliver benefits to payment customers by enabling a single, clear strategic roadmap across payment clearing systems and initiatives.