Low Value Payments Roadmap - Australian Payments Clearing
December 2008
An Australian Roadmap
A vision for the evolution of Australia’s electronic payments systems
Australian
Payments
Clearing
Association
02
Contents
3. Vision: Australian low value payments in 2018
4. Action: the solution path for the coming years
Appendix A: list of submissions
Appendix B: summary of submissions
Usage and trends in low value payments
Transaction reference information / ISO 20022
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Low Value Payments: An Australian Roadmap
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1.Executive Summary
The needs of Australian consumers, businesses and government bodies from the payments system are diversifying and changing. Overseas, new payment systems are being deployed to address similar dynamics. In
Australia, our routine payment systems have served us well, but will need to respond to these changing needs.
The Australian Payments Clearing Association (APCA) has analysed and consulted on the future evolution of Australian low value payments. This has led to a Roadmap providing:
• a high level vision of Australian low value payments in
2018; and
• an industry solution path for the next few years to work towards this vision.
Vision
The vision starts with a set of high level expectations from payment system users, both customers and participants.
These establish the success criteria for future evolution.
Customer expectations are in four areas: reliability, security, efficiency and convenience . In addition to these, participants in the payments system will expect business potential, global alignment and risk management to be delivered. More detail on each of these appears in section 3.
The core of the vision is a layered system topology, which separates payments system functions into layers to recognise different degrees of competition, diversity, integration and ubiquity.
The overall system rests on three distinct elements: RBA settlement, an integrated communications network (or
“transport layer”) and a standard message library. Payment services are then offered using these elements through the interaction of content services and participants, ultimately reaching customers through highly competitive customer interfaces. The topology appears on page 6.
There are two important implications of this approach.
First, different payment types will increasingly converge and compete at the customer service level, ultimately driving integration in participant back offices. This is likely to occur across high value real-time payments, low value electronic payments and card-based payments. There does not seem to be a long-term future for paper payment products.
Second, while innovation and enhanced payments services will occur competitively, some industry coordination is needed in addressing the design of the base elements: settlement, network and standards. These are the platform for future competition and innovation.
Action
In the near term, APCA will explore tactical projects to address near-term industry needs, and strategic proposals to lay the groundwork for the vision.
These are:
A Network Arrangements
A.1 Network Renewal (Tactical)
A.2 Minimum Interoperability Requirements (Tactical)
A.3 Long-Term Network Evolution (Strategic)
B Settlement Processes
B.1 New BECS Settlement (Tactical)
B.2 Expanded Settlement Capability (RBA project)
(Strategic)
C Transaction Reference Information & Clearing
Processes
C.1 Global/ Domestic Standards Mapping and Gap
Analysis (Strategic)
C.2 Direct Entry Refinements (Tactical)
C.3 Feasibility of New Standard Payment Types
(Strategic)
D Other
D.1 Future of paper payments (Strategic)
More detail, including timings, is provided in Section 4.
APCA intends to review this action plan on an annual basis to take account of changing circumstances, progress towards the vision and market developments.
Low Value Payments: An Australian Roadmap
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2.Developing the Roadmap
2.1 Roadmap Rationale
“Low Value Payments”, which includes direct credit, direct debit and cheque 1 , underpin our economy. These payment types account for nearly 50% of all non-cash payment transactions by volume (far more than the high value system) and around 30% of non-cash payments by value
(far more than card-based activity) 2 .
Direct debit and direct credit payment types were established several decades ago, but still enjoy annual volume growth of around 10%. Originally set up to meet business and government needs for scheduled and bulk payments, these payment types have been successfully adapted to underpin a wide range of business and individual needs, most recently “pay anyone” transactions through internet banking. Conversely cheque usage has declined rapidly and now accommodates less than
20% of transaction volumes.
There is industry recognition of the need for system renewal. The ever-accelerating pace of economic life, rising customer expectations, the advent of new technologies and intense competition amongst service providers bring into question whether a purely “organic evolution” of low value payments will meet future economic needs.
Accordingly, in 2007 APCA members established a project to consider the future evolution of these payment types.
The purpose was not to dictate a particular solution for participants, since this tends to curtail healthy competition in payment services. But given the network nature of payments business, a shared industry view of emerging system-wide requirements and solution architecture is vital for long-term efficiency, both for customers and for industry participants.
2.2 Roadmap Objectives
In summary, the Roadmap seeks to:
• Present an informed view of the future evolution of
Australia’s low value payments infrastructure and services;
• Guide industry project activity;
• Assist payment system participants and service providers to make important investment and payment service decisions; and
• Inform users of the payment system and other stakeholders about future industry direction.
2.3 Analysis and Consultation
In 2007, an APCA Working Group commenced reviewing available industry data and statistics, identifying relevant published material and developing conceptual models.
In May 2008 a Consultation Paper on the challenges of evolution in low value payments was published. The
Consultation Paper put forward a common topology for low value payments with key components, suggested a number of concept proposals for each component and sought feedback. Submissions were invited from a wide range of industry stakeholders. To encourage involvement in the consultative process, a seminar on the subject was held in June 2008 in Sydney.
The responses to the consultation process, including
21 written submissions, were received in mid-2008.
Individuals and organisations that made submissions are listed in Appendix A. A summary of the views expressed in the submissions is contained in Appendix B.
There is a glossary of terms in Appendix C.
Further feedback was received from stakeholders throughout the development of the Roadmap document itself, including from the RBA which expressed views broadly supportive of the projects put forward in this paper.
Lastly, the submissions yielded numerous insights about possible future developments. APCA will use the issues, recommendations and suggestions made in the submissions to inform current and future work.
1 For the purposes of this consultative process, LVP does not specifically refer to the value of the payments per se but seeks to group the direct entry and cheque payments systems together for industry strategy purposes. LVP does not include the “high value” RTGS mechanism nor card-based consumer merchant payment mechanisms.
2 APCA Consultation Paper – Low Value Payments, Challenges of Evolution (May 2008).
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The future evolution of low value payments in Australia, and indeed globally, will have many twists and turns.
Market-driven innovation provides the impetus for system evolution and it is neither possible nor desirable to predict future developments step-by-step.
However, this evolutionary process can be greatly assisted by a long-term aspiration: a vision of what kind of payments system would best serve the economy in, say, 10 years.
This will provide general guidance as customer needs and circumstances change, as participants develop their businesses and as future innovations become possible.
The vision is in three parts:
1. A set of outcomes provides short statements about what payments systems customers and participants are likely to want from the payments system. Customer needs will usually be met by competing payment institutions participating in the system, but participants will usually need to rely on the underlying inter-institutional payments system in order to deliver customer outcomes. These statements can be thought of as “success criteria” for payment services;
2. A system topology that sets out through a diagram and accompanying text a high level framework for understanding future system structure; and
3. Some implications of the vision: how far different it is from today’s systems, and the challenges that will arise in working towards it.
3.1 PAymENT SySTEm OuTCOmES
3.1.1 Customer expectations
Payments customers comprise the millions of individuals, businesses, government organisations and others who are active in the Australian economy. From the payments system, they expect reliability, security, efficiency and convenience.
Exactly how these expectations are met, and who is responsible for meeting them, will depend upon the payment service, but in most cases customers will rely on a payment institution participating in the system to meet payment needs and deliver innovations.
Also, there are some trade-offs: very high security may reduce convenience; very efficient services may cost more; increased standardisation across the value-chain may reduce competitive differentiation.
Reliability
• Payment services are available when customers want to use them.
• Payment services tend to prevent or identify and correct mistakes by customers.
• Payment services have established service levels and adhere to them.
Security
• Payment services will prevent unauthorised access to information or value.
• Payment services will prevent unauthorised modification of information.
• Payment services will manage the risk of fraud .
Efficiency
• The payments system supports ongoing innovation and enhancement of payment services.
• Payment services are responsive and timely , both as to confirmation of payment and delivery of value.
• Customers get the payment information they need with each payment.
• Payment services support customers’ own business processes (such as account reconciliation).
• The payment system allows value for money services to be offered to customers.
Convenience
• Customers find it easy to use and access payment services.
• The payment system is ubiquitous , allowing payments from anyone to anyone.
• The payments system facilitates choice and competition in payment services offered to customers.
• The payments system does not prevent or hinder the customer’s decision to change financial service providers
( switch accounts) .
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3.1.2 Participant expectations
Participants use the payments system to carry on business providing payment services to their customers, as well as making and receiving payments themselves. In addition to the customer expectations set out above, participants will want business potential, global alignment and risk management.
Business potential
• The payments system will support commercial, competitive and profitable offering of payment services by participants.
• The payment system will facilitate the development of new business opportunities and processes.
• The payments system will permit access on objective terms.
Global Alignment
• In seeking to increase efficiency of payments activity,
Australia’s payment systems will seek to align with and influence development of global payment standards .
Risk Management
• The payments system will minimise or remove counterparty and operational risk in payments.
• Regulatory risk (in particular from competition laws) in collaborative payment innovations will be appropriately managed.
• The payments system will monitor and seek to minimise systemic risk .
3.2 PAymENT SySTEm TOPOlOGy
In the consultation paper, APCA used a “simple payments topology” to discuss aspects of payments.
3 To articulate the vision of payments in 2018, we have expanded and modified this diagram to accommodate (at a very high level) the complexity of the future payments marketplace, while retaining the key components.
The result appears below, and the remainder of this section discusses each component.
PAYMENT SYSTEM TOPOLOGY
Integration/Ubiquity
LOW
CUSTOMERS
TAILORED
CUSTOMER
INTERFACES
PAYMENT SYSTEM
PARTICIPANTS
(Examples)
TRANSACTION
& SERVICE HUBS
(Examples)
PAYERS & PAYEES
Diversity/Contestability
BANK
A
PAYMENT SERVICE
PROVIDER
B
INSTITUTION
C
NETWORK
CONNECTIVITY
BILL PAYMENT
SERVICE
MESSAGE
VALIDATION
BANK
D
MERCHANT
TRANSACTION
INTEGRATION
MAJOR
E
E-INVOICING
INSTITUTION
F
HIGH
INTEGRATED NETWORK USING STANDARD MESSAGE LIBRARY NETWORK
SETTLEMENT
RBA SETTLEMENT
HIGH LOW
3 Ibid., page 17.
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3.2.1 layering: Integration/ubiquity vs.
Diversity/Contestability
The challenge in the 10-year vision is how to promote innovation and choice in customer service (the top of the diagram) while ensuring stability and efficiency in the underlying system (the bottom of the diagram). These two goals are to some degree in tension: on one hand, customers will demand service innovation, diversity and contestability, leading to great complexity in payment products and services; and on the other, they will expect system reliability, ubiquity (they can transact with anyone at any time) and efficiency.
To resolve this tension, payment system functions are separated out and provided in functionally independent layers. Each layer has a different resolution of the competing goals, with lower layers maximising efficiency through integration and ubiquity, and upper layers maximising innovation and service through diversity and contestability.
3.2.2 Customers and customer interfaces
In the future, as now, the large community of Australian payers and payees will continue to have complex and diverse needs from the payments system. Accordingly, payments products, services and interfaces will be developed by payments service providers competing with each other. By this means, customer needs can be met as they change, diversify and adapt over time.
Interfaces will be an area of competitive differentiation and innovation, within the framework of minimum standards for data elements and processes set by reference to the underlying payments system (see below).
3.2.3 Payment institutions and the network
Direct participation in the payments system will require access to an underlying integrated network, which provides physical and logical connectivity to all other participants and to payment hubs and schemes that provide particular payment services.
The network could rely on service provision from a small number of network service providers, interconnected so that each participant would require only one (or, for business continuity purposes, a few) access points to the network for all payments business. This connectivity would be independent of the type of payments supported, and of the content or format of payment messages. In network architecture terms, this is sometimes referred to as a
“transport layer”.
3.2.4 Payment message types and system services
The vision assumes that by 2018, all payments will be automated in nature, even if a physical item, such as an authentication chip or even a paper instrument 4 is used to initiate the payment.
APCA believes that a wide diversity of payment services could be supported by two ubiquitous, flexible electronic payment instrument types: a payer-initiated credit (push) transfer and a payee initiated (pull) debit transfer.
On this basis, the vision includes a standard message library, in which the data elements and business processes for all permutations of these two basic types are recorded.
Ideally, all payment messages in Australia would use this standard library. The international data and process standards established under the ISO 20022 5 framework may in the future provide the framework for this.
In addition to payment messages, the consultation process identified some demand for a range of “payment-related messages”, which could support a range of customer services. The extent of demand remains to be quantified.
Examples include messages to validate account details, or to notify a switch of account details. The ISO 20022 framework could also provide the framework for this.
Given the diversity of customer needs, it seems feasible that there will be a range of different payment schemes, hubs and services that connect participants together and add value to payment services offered by participants to customers. Collectively we have called these “system services”.
Some of these may be payment delivery systems in their own right: participants join a multilateral framework of business and operational rules and requirements for payments in that system. Such services may be hub-based, in which payment authorisation messages flow between the hub and each participant. There may also be non-hub services, which establish rules and procedures for bilateral payments messaging. An example of the former might be
BPAY; an example of the latter might be APCA’s BECS.
There may also be services (hub-based or otherwise) that provide a value-added service to pre-existing payment flows. Examples might be reconciliation with a separate e-invoicing or EDP 6 processing framework, or compliance validation of messaging under government requirements such as anti-terrorism and money-laundering.
Not all of these system services will include all participants, let alone all end customers: there is likely to be contestability and variation in system services, and each will have its own membership criteria, process and data standards and business rules.
Whatever the nature of the system service, both system efficiency and service competition would be enhanced if all such services connected to an integrated transport layer and used a standard message library to communicate with participants.
4 Section 3.3.1 outlines APCA’s proposals for the future evolution of Australia’s cheque clearing system.
5 More information can be found at www.iso20022.org.
6 Enterprise data processing systems integrate ordering, fulfilment and payments functions across supplier and customer chains in particular industries.
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3.2.5 Settlement
The vision assumes that for systemic liquidity and stability reasons there will always be a single inter-participant settlement system for Australian currency, administered by or for the RBA. Currently, this is RITS. However, there will be greater flexibility in settlement options: daily or intraday batch, file by file or payment by payment. The choice of settlement arrangement will be determined by the content service being used by participants, or by the participants themselves.
Settlement for all payments is envisaged to be scheduled and managed through the integrated network, and using the standard message library. It may take place in real-time, as part of the payment message flow, or it may be a separate step from payment authorisation and clearing.
3.3 ImPlICATIONS
3.3.1 Convergence of payment types
An important finding of APCA’s consultations is that the current distinction between card-based payments and other low value payments will continue to blur. Card payments provide immediate assurance of value in consumer purchasing, and in Australia are usually the only non-cash way of doing so over the counter. But on the web, card payments compete with specialist non-card payment services like BPAY,
Paypal and others. As business cases emerge, pressure builds for a new system to address emerging needs.
At the level of participants and systems, this has led to separate networks and systems for different payments services, reflecting their historical origins. This can create back-office complexity and cost.
For these reasons, although APCA originally set out to address future directions for non-card low value payments, we have found that in important respects, it is impossible to avoid some consideration of the future evolution of card-based payments and real-time high value payments at the same time. APCA believes that the 2018 vision is relevant as general guidance for these systems as much as for low value payments.
Another result from consultations is that paper instruments, particularly personal cheques, do not appear to have a long-term future as a payment type. They are relatively expensive to process and their use is in decline. There is nothing to indicate this decline will be reversed.
There are advantages of cheques over current electronic alternatives such as ability to attach non-standard reference information, integration with traditional accounting systems, and avoidance of any need for technology by customers.
All of these can and will need to be addressed by electronic payments.
3.3.2 Coordination and Evolution
There may seem to be a large gap between the 2018 vision and today’s payment systems, which are largely distinct and bundled. Each has its own web of network connections, message standards, process rules and business and commercial obligations.
That said, there are significant common elements. The first is a common settlement infrastructure in the RBA’s RITS and the 9am batch used for the settlement of the great majority of low value payments. RBA is currently examining redevelopment of the settlement infrastructure to reduce risk and provide flexibility in settlement arrangements, particularly timing: this is discussed further below.
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Another common element is the substantial overlap in membership of Australian payment systems. As a result of the impending end of life of X.25 network technologies, there is increasing interest amongst participants in redeveloping their mutual connectivity arrangements across multiple payments systems using Internet Protocol (IP) technology. This could be done on a “like for like” basis but also provides an opportunity for rationalisation and enhancement. This is addressed further below.
8
Finally, overseas development of the ISO 20022 framework as a universal payments messaging standards framework provides a model for future universal standards development.
We are still a long way from universal standards becoming a global reality, but the theoretical benefits are persuasive.
Standards create a consistent experience for participants and reduce development cost and risk by allowing software developers and other vendors to provide robust “standard” products and services to payment providers. They maximise beneficial network effects and economies of scale from payments infrastructure. Against this, it can be challenging for relatively small economies such as Australia to influence the content and timeliness of global standards.
Accordingly, in the three areas where the vision would suggest a need for some industry consensus and coordination to provide the platform for future evolution and competition – settlement, networks and standards – there are promising developments. APCA’s suggestion is that the industry now work to take advantage of this rare confluence of events. The “Solution Path” in the next section outlines the next steps.
7 See section 4 (Project B.2).
8 See section 4 re networks and settlement.
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APCA’s consultations elicited a wealth of specific suggestions for improvement of Australian low value payments systems.
A summary of responses appears in Appendix B. Where these are specific changes that could be made to existing systems, we will refer them to the appropriate body for assessment and further action. Larger, structural proposals have been incorporated into a project programme, set out in the table below, which attempts to address the priorities of the next few years.
Each project is briefly described, along with an estimated timing. They are grouped under the component headings of the original consultation document. APCA will explore tactical projects to address near-term industry needs and strategic proposals to lay groundwork for the vision.
It is important to recognise that the long-term nature of the Roadmap reflects the long lead times required for such significant change and is designed to assist industry participants with their own strategic and budgetary planning, rather than committing to a certain pre-determined course of action. Many of the projects involve the development of feasibility assessments or business cases for future structural changes, and many such changes will, if and when implemented, involve selecting amongst competing service providers. Some of these initiatives have yet to be specifically budgeted by APCA.
Project Name Description
A Network Arrangements
A.1 Network Renewal
(Tactical)
In response to the need for network technology redevelopment from X.25 to IP, develop an industry case for an optional COINbased network solution to support one or more APCS, BECS and
CECS (i.e. electronic exchange of paper instruments, direct entry transactions and domestic debit card transactions).
Start Date
Underway
Key Dates
Industry decision needed early
2009. If developed must be available for use end 2009/ early 2010.
Should be complete by early 2009.
A.2 Minimum
Interoperability
Requirements
(Tactical)
APCA will review the rule frameworks for APCS, BECS and CECS to ensure that minimum objective standards exist for network connectivity in light of impending technology end of life issues.
Switch or hub operators (such as BPAY, Visa and MasterCard) may also need to consider their own network requirements.
A.3 Long-Term
Network Evolution
(Strategic)
Once decision in A.1 made, a longer-term, strategic feasibility and industry case should be assessed to explore the scope for convergence of underlying networks for all Australian payment systems, including direct entry, cards, BPAY, and the High Value system.
B Settlement Processes
B.1 New BECS
Settlement
(Tactical/Strategic)
APCA should develop a risk-based industry case for steps to reduce settlement risk in BECS and provide the capability for more timely settlement, clearing and funds availability options for customers. There may be a programme of different steps with different timing, cost and risk.
Underway
Before end
2009.
To be determined
Early 2009.
Program agreed by mid
2009.
Low Value Payments: An Australian Roadmap
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B.2 Expanded
Settlement
Capability
(RBA project)
(Strategic)
Industry should support RBA’s development of enhanced settlement capabilities in RITS (Project B.1 may take advantage of new capabilities provided by RBA).
C Transaction Reference Information & Clearing Processes
C.1 Global/ Domestic
Standards
Mapping and
Gap Analysis
(Strategic)
C.2 Direct Entry
Refinements
(Tactical)
APCA should develop a detailed mapping and gap analysis between the ISO 20022 message set and each message standard in use in Australia. This could identify opportunities for short-term enhancement, as well as provide input on future strategic development (see C.3 below).
Assess system specific refinements to the current DE system, for example, to enable enhanced DE offerings that address authorisation and mistaken payment issues.
C.3 Feasibility of New
Standard
Payment Types
(Strategic)
D Other
D.1 Future of paper payments
(Strategic)
Based on the mapping and gap analysis in C.1, APCA will assess the feasibility of migration of each Australian message set to a unified set of globally compliant message standards, beginning with direct entry.
APCA should consider a long-term strategy for the management of the decline in paper payments. This might include consideration of electronic alternatives and measures to reduce processing unit costs.
This table leads to the following Gantt Chart:
Underway
2009
2009
2009-10
2009
File-by-file and multilateral batch by mid
2010.
Complete by mid 2010.
Complete by mid 2010.
Complete by mid 2011.
Complete by end 2010.
Gantt Chart
LVP EVOLUTION ROADMAP
A.
Network Arrangements
A.1 Network Renewal
A.2 Minimum Interoperability Requirements
A.3 Long Term Network Evolution
B.
Settlement Processes
B.1 New BECS Settlement
B.2 Expanded Settlement Capability
C.
Transaction Reference Information & Clearing Processes
C.1 Global/ Domestic Standards Mapping and Gap Analysis
C.2 Direct Entry Refinements
C.3 Feasibility of New Standard Payment Types
D.
Other
D.1 Future of paper payments
2008
Jan-Jun
2009
Jul-Dec Jan-Jun
2010
Jul-Dec
2011
Jan-Jul
N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J
This programme will not lead directly to the 2018 vision of Section 3 – there are more intermediate steps that will need to be taken. However, APCA believes that the sequencing and decision steps outlined in the programme provide a good beginning towards the vision. Both vision and programme will need periodic reassessment in light of changes in the competitive market place, technology and other environmental factors.
That said, it is APCA’s conviction that industry consensus around the vision and the immediate priorities for action sets the industry on a sound, globally competitive pathway to the future.
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Appendix A: List of Submissions
The following institutions and individuals provided submissions to APCA’s “Low Value Payments – Challenges of Evolution” industry consultation paper. Some of these submissions, where permission has been given, are available at www.apca.com.au.
ANZ
Australian Settlements Ltd
Australian Tax Office
CardsConsult
Commonwealth Bank of Australia
Commonwealth Treasury
ComputerShare
HBOS Australia
Indue
Mr Carlisle Proctor (APCA Associate Member)
Mr Kerry Gore (Independent submission)
Mr Russell Thurlow (APCS Advisory Council Member)
NAB
Optus
Prismac Systems Australasia
Reserve Bank of Australia
Security Printers’ Association
St.George Bank
SWIFT
Vocalink
Westpac Banking Corporation
Low Value Payments: An Australian Roadmap
12 uSAGE AND TRENDS IN lOw VAluE PAymENTS
Future of Direct Entry and Electronic Payments
Most respondents believed that there would be an increasing move towards electronic payments. There was recognition that despite the resilience and success of the current direct entry system, changes, both tactical and strategic, were needed to meet future needs.
Tactical concerns focused on the imminent end of support for X.25, DDN and related elements of the current bilateral arrangements. There was also concern over mounting overnight settlement risk in BECS. One submission noted that the direct entry system was suffering from an
“identity crisis” as it was processing values well beyond that intended and as a result creating unnecessary settlement risk that needed to be addressed.
Strategically there was recognition in many submissions that the direct entry system had proven very flexible in the way it had been adapted, for instance “pay anyone” features within internet banking. However, many of the submissions noted that any future system needed to be able to better meet emerging customer needs – timeliness and speed, improved reference information, validation and other features. Direct entry needed reinvigoration or a new system created if direct entry was to flourish in the real-time world of electronic commerce and “not to go the way of Bankcard”.
There were a few submissions that expressed concern about “change for change’s sake”, noting that the direct entry system was good at what it did well – moving lots of money cheaply and efficiently. A number of submissions also noted the importance of cost – preferring changes that were low cost and low technology, as well as ensuring a lower cost structure going forward. There were also concerns expressed that cooperative innovation had the potential to hinder competitive innovation.
Future of Cheques
There were strongly held and differing views on the future of cheques. A number of submissions saw no long-term future for cheques with some calling for a phasing out of cheques by a certain date. Other submissions, in particular vendors and service providers in the cheque industry, believed that cheques remained relevant.
Many submissions identified the positive features of cheques including:
• Simplicity
• Low technology needs for payee and payer
• No need for payee’s account details
• Data rich – ability for payer to attach additional information
• Proof of payment
• Control of timing of payment / cash flow management
• Ability to reconcile as well as maintain records for tax and audit
• Multiple authorisations / ability to review expenditure.
It was noted that any future electronic payment type needed to provide some, if not all, of these features if it was to be an effective cheque replacement.
Despite the opposing opinions on the long-term future of cheques, there was a general consensus that the industry should consider ways of managing the costs of cheque decline. This was premised on concerns that as volumes declined the per unit cost for processing cheques would increase.
NETwORk ARRANGEmENTS
In the Consultation Paper, payment service providers were asked a number of questions about their preferred network architecture for dealing with inter-financial institution traffic.
In dealing with this question, many of the submissions focused on the withdrawal of support for the existing X.25 bilateral network connections and related technology and telecommunications infrastructure over the next two years was a common concern within the submissions. There was broad industry agreement on the need for urgent action.
There was a strong view that any replacement arrangements should provide secure, high capacity IP connectivity between participants. There was little support for replacing the bilateral arrangements on an IP “like with like” basis. Strongest support was a VPN / COIN solution with support for a hub solution as well. There was only modest support for a full ACH solution, with concerns expressed over costs, risks introduced by an ACH as well as a general observation that an ACH did not reflect previous industry practice and thus would struggle to attain support.
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In discussing the features of any replacement network architecture, many of the submissions noted the importance of governance arrangements and defined eligibility criteria.
Other network requirements identified in the submissions included security, capacity, resilience, cost effectiveness, efficiency and accessibility. There was also a view that there needed to be some ability to enhance this network in the future through modules or enabling a central service entity to offer particular services.
Though many of the submissions were focused on replacing the existing bilateral arrangement, there was also a strong desire to create a “future proofed” network with the ability to cater for new message types (and formats in relation to
ISO20022). There were also strong views expressed that new network arrangements should also permit future convergence of payment systems.
Some submissions noted other elements of any replacement or new network including contestability. There were preferences expressed for a network or networks to not be overly reliant on a single technology or telecommunications carrier.
A few submissions also canvassed whether there should be a number of networking options available – for instance, a domestic COIN operating alongside a SWIFT option.
SETTlEmENT PROCESS
Along with the need to address the network concerns, resolving overnight settlement risk was identified in most industry submissions as the other immediate issue requiring attention.
Most submissions noted that the current settlement arrangements in BECS meant increasing levels of overnight settlement risk. Concerns were raised that the increasing values going through BECS meant it was becoming systemically important and thus potentially subject to the BIS Principles.
There was general support within the submissions for moving towards “same-day settlement”.
The submissions expressed a preference for intra-day batch settlement windows rather than file-by-file settlement. There was not a clear consensus on the number of settlement windows, however submissions suggested between two and four settlement windows per day.
The submissions identified a number of issues that would need to be addressed in any changes to settlement including whether the changes would be mandated or subject to bilateral arrangements between parties, netting, hours of operation and batch times. Other issues requiring attention include addressing concerns over liquidity management and ensuring efficient interaction with other settlement arrangements such as CLS.
A number of the submissions expressed support for industry involvement in the RBA’s current “Low Value Feeder” project and encouraged this involvement to help attain a good outcome.
TRANSACTION REFERENCE INFORmATION / ISO 20022
A number of submissions noted that BECS was good at moving money but not as good at moving information.
This meant it was fit for service when limited reference information was needed, for instance in the payment of salaries and wages.
However the inability to structure sufficient remittance detail electronically was seen as preventing electronic processing of receipts by business customers, leading to a need for costly and inefficient manual reconciliation processes.
Some submissions agreed with the Consultation Paper that the reference information associated with the relevant transaction needed to be appropriately detailed and structured. Some submissions noted that this need was seen to be most prevalent in “data rich” environments, for instance funds management and superannuation.
In a number of submissions, addressing the existing limitations on transaction reference information within
BECS was key to developing an adequate “cheque replacement” for businesses.
There was a general view that any new facilities should be based on published international standards where appropriate.
There was general support within the submissions for industry moving towards implementation of ISO 20022.
There was recognition in the submissions that this implementation would likely be a long-term project. However there was stronger support in the submissions for moving towards ISO 20022 implementation rather than devoting industry resources towards developing a domestic or interim measure. Other standards, such as ISO 8583, were also suggested. There was recognition that international standards provided benefits, including making it easier for software providers to develop products.
Low Value Payments: An Australian Roadmap
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ClEARING PROCESSES
Real-time (or near real-time) clearing capability for electronic payments was identified in many submissions as a critical component for future enhanced payment services. This was seen as operating in tandem with a move to more frequent settlement.
There was general support for multiple batch clearings with an ability to move towards real-time or near real-time
“payment by payment” clearing, as well as clearing being done on something closer to a near 24/7 basis.
It was recognised that real-time clearing capability, when used for notification purposes, would enable confirmation to the payee of good funds to be applied to a payment being settled at a later time. This could allow a supplier of goods or services to release the purchased entitlement to the buyer in advance of credit advice as well as use real-time notification in association with the remittance detail, although it could be a message separate from remittance detail if required.
The supplier (payee) could be made aware of payment authorisation in a fashion analogous to an EFTPOS authorisation today for a consumer payment. A combined notification service could effectively enable “internet debit” for consumer customers via a direct credit mechanism.
It was also recognised that applied to direct debit, real-time clearing would enable an “authorisation” to be requested and sent to the payment originator prior to the initiation of a direct debit transaction to avoid the risk of dishonours. If the transaction model were extended to both authorise and then to debit, with real-time advice of authorisation failures, it would address some of the perceived shortcomings of existing direct debit.
TRANSACTION FACIlITATION
A number of the submissions noted that business customers have expressed interest in electronic invoicing. Developing a national approach that was premised on accepted standards was seen as critical for ensuring the success of such an initiative.
Overall, the submissions acknowledged that this was a feature that a new network should be able to offer. However there was acknowledgement that the lack of a critical need at this point meant that this measure would require further investigation.
CuSTOmER INTERFACE
There were differing views on customer interface. Generally submissions were of the view that this should remain a competitive space, though some industry and user submissions did note that some level of standardisation would create a better experience for users.
OThER ISSuES IDENTIFIED
The submissions identified a number of other issues including account validation procedures that would help minimise mistaken payments in the direct credit environment and measures to facilitate account switching. Overseas initiatives such as UK Faster Payments were cited as possible models for reform.
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Appendix C: Glossary
ACh
APCA
APCS
BECS
BIS
CECS
ClS
COIN
DDN
DE
Automated Clearing House.
A means of switching electronic payments between participants and providing various central services to participants.
Each participant connects only to the ACH.
Australian Payments Clearing Association
Limited.
APCA is the primary vehicle for payments industry collaboration with a mandate to improve the safety, reliability, equity, convenience and efficiency of the Australian payments system. More information about APCA can be found at www.
apca.com.au
.
Australian Paper Clearing System.
The set of rules, procedures and message definitions associated with cheque clearing.
Bulk Electronic Clearing System.
The set of rules, procedures and message definitions associated with Direct Entry (direct credit and direct debit) transactions.
Bank for International Settlements.
An international organisation which fosters cooperation among central banks and other agencies in pursuit of monetary and financial stability.
Consumer Electronic Clearing System.
The set of rules, procedures and message definitions associated with EFTPOS and ATM transactions.
Continuous Linked Settlement.
A multi-currency settlement system.
Community of Interest Network.
A communications network built to service the needs of a community with common interests or goals. See also VPN.
Dedicated Digital Network.
A telecommunications infrastructure used for sending business messages.
Direct Entry.
The collective term for the electronic collection, transactions and application of direct credit and direct debit payments in accordance with BECS procedures, managed through individual IT systems in participating institutions and resulting in clearing files being exchanged between institutions bilaterally.
hVCS
IP
High Value Clearing System.
The set of rules, procedures and message definitions associated with high value transactions done on a RTGS basis through RITS.
Internet Protocol.
Method or protocol for sending messages between computers across the Internet.
ISO International Standards Organisation.
A cooperative of national bodies that set standards in many areas of technology, industry and commerce. “ISO” is also used to refer to relevant standards it issues, for example “ISO 20022”.
ISO 20022 A framework for financial messaging and associated services established through ISO processes drawing on providers and users of financial services in payments, securities,
FX and trade services. Also referred to as the
“Universal financial industry message scheme” or ”UNIFI”.
RBA
RITS
Reserve Bank of Australia.
Reserve Bank Information and Transfer System.
Australia’s central bank settlement system across which settlement of payment obligations occurs via Exchange Settlement Accounts.
RTGS
SwIFT
Real-Time Gross Settlement.
The continuous settlement of funds or securities transfers individually on an order by order basis.
An international network for financial transactions messaging.
X.25
VPN
A “pre-internet” network layer protocol used to send business messages between computers and electronic devices.
Virtual Private Network.
A means of connecting various parties to a common network with a common means of addressing one another without having to physically connect to one another.
Low Value Payments: An Australian Roadmap
Australian Payments
Clearing Association limited
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