Regulatory architecture needs structural changes in Australia

A Westpac Institution Banking Report

Wellington, March 24, 2022

Reform of Australia’s A$650 billion-a-day payments industry is long overdue, but will the changes come at the cost of creativity across this rapidly changing landscape? This is one of the questions explored by Nish Dharmaratne, Westpac Institutional Bank’s Head of Product, Global Transaction Services, who shares her insights into the trends shaping Australia’s payments system in 2022 and beyond.

By Susan Muldowney

It is shaping up to be an eventful year for Australia’s dynamic payments space following Federal Treasurer Josh Frydenberg’s announcement of “the most significant reforms to our payments system in 25 years.”

On the agenda are regulations for digital wallets, Buy Now Pay Later (BNPL) and cryptocurrencies, as well as a plan to explore the feasibility of a central bank digital currency before the end of this year.

Overdue Reforms

Payments’ reform is overdue, with current regulatory architecture dating back two decades.

Approximately 55 million non-cash payments are now made in Australia every day at a value of around AUD 650 billion. And, while money is moving faster than ever before, so too is innovation across the payments landscape.

What trends will influence payments in 2022 and beyond? Expect new developments in PayIDs, tokenisation, virtual card enhancements and more customer choice, says Nish Dharmaratne, Westpac Institutional Bank’s Head of Product, Global Transaction Services, who shares her insights into the future of payments in Australia and why changes, particularly payment roadmap refresh must not come at the cost of creativity.

The Treasury’s final report on the Payments System Review was released last August and notes that current regulatory architecture is out of step with significant changes to Australia’s payments ecosystem. What trends are driving these changes?

Payments are now a lifestyle-based choice and this is driving a much greater focus on the user experience.

Growth in Cryptocurrency has ushered in stable coins (Shutterstock through Westpac)

Innovations remove barriers

The choice is extending, from what people want to buy to how they want to pay – whether that is paying before or after, through a currency of choice, or a channel of choice-making user experience an important priority for payment ecosystems.

Innovations like API technology and open banking, as well as the creation of the NPPA [New Payments Platform Australia], which went live in 2017, has removed barriers of entry for non-bank providers and have created a wide range of new real-time payment services to consumers, businesses and government agencies.

This is creating more competition in the market with financial institutions or non-bank providers being able to break the payments value chain into components to specialise in smaller customer segments or niche services.

An example is in the cross-border payments space, where multiple non-bank providers are offering highly interactive technology-centric payment solutions at a very low cost.

They are not regulated to the extent of the banks, but they’re going through the local clearing systems and making that cross-border payment quite seamless, very quick and at a very reasonable price point.

Dynamis payments space

The payments space is very dynamic. But the challenge is that many of the existing payment infrastructure and mechanisms were introduced when there were no smart technologies or smartphones. As the Treasury’s Payment System Review points out, the landscape requires a regulatory refresh with a view to bringing efficiency.

The ACCC (Australian Competition & Consumer Commission) has authorised the merger of NPPA, BPay and Eftpos to create Australian Payments Plus. What will the new entity mean for businesses and consumers?

I think this is one of the biggest changes in the industry to watch out for this year in the payments space. It’s a bit too early to speculate exactly what it will mean for payment innovation and trends, as the roadmap is yet to be seen, but it is quite likely some of the technologies and infrastructure may merge to bring new efficiencies to the market increasing the focus on the customer and end-user.

Banks are expected to double their efforts to streamline payment infrastructure in the back end to support the interoperability of a common industry model for Australian payments. This will help the banks to provide innovative payment solutions and enhance the front-end experience for the customers.

E-Commerce Boom

Efforts in open banking or uplifting to ISO20022 standards are foundational to this journey.

Covid-19 triggered an e-commerce boom with online shopping in Australia growing 76% in November last year compared to the same time in 2019, along with an increase in online scams. Card payments remain a popular choice for sales and procurement, how can transactions be more secure?

I think we’ll see growth in virtual cards and tokenisation as a means of greater fraud protection and payment efficiency.

Rather than a physical plastic card, virtual cards are randomly generated numbers associated with your credit card account. They are currently available in various forms, but Westpac is looking at an enhanced offering to our corporate customers to improve the procurement cycle through better reporting, reconciliation and real-time information, as well as reducing the risk of fraud.

The virtual card for corporate customers will also provide more transparency, especially for large procurement hubs, and will improve the user experience on both sides.

Can we expect innovations for PayID?

PayID in general is an ability for a consumer to create their own identity for payment without necessarily disclosing the account and the BSB number to a third party. Where there is a clear nexus with the customer and their identity, there is an opportunity to innovate solutions around that, whether it is customer experience focused or payment efficiency-focused innovation.

For example, let us say that you want to pay your energy bill. You have digital options, such as QR codes, or you can use BPay. Another option could be a PayID that the energy company creates for you to allow you to make your payment straight away through Osko. It is faster and more convenient on both sides, so it’s a win-win for the company and the consumer.

Cryptocurrency exchanges

Australia is creating a licensing framework for cryptocurrency exchanges and will consider launching a retail central bank digital currency as part of its payments industry overhaul. Do you see a state-sponsored digital currency as inevitable for Australia?

Organisations like the International Monetary Fund are promoting a central bank digital currency to counter the growth of private forms of money created through cryptocurrency, which is currently a speculative game.

People are calling it an asset class, but the challenge is that it is decentralised and lacking in regulation at this point in time. One way to overcome that challenge is to create a legalised and framework-based state-sponsored digital currency.

Exorbitant growth rates in the cryptocurrency world have led some markets to come out with stablecoins, which is still a cryptocurrency, but it’s pegged to something more stable, like a commodity or a fiat currency.

Banks are looking at digital currencies, but I think we need to tread lightly and first understand the use case and ensure that is a safe path for our customers.

In order to build trust in digital currencies, we need to start with the central banks, and that is how I feel it will evolve in Australia.

Modernisation of the payments regulatory architecture may include new rules around fees and surcharges for BNPL this year. Is there a risk of regulation impeding innovation?

Payment Solutions

A payment solution like BNPL is based on consumers’ choice, and certain demographics are very attracted to BNPL for reasons such as not having access to ready credit.

However, BNPL has to have some level of control and understanding of the credit cost. If a bank was offering the same product, it would have to reserve capital for the amount of exposure, monitor to ensure buyers are paying on time, look at default rates, et cetera. At the moment, none of the BNPL companies has to abide by the strict regulations that apply to the normal lending scenario, allowing BNPL providers to make their offer compelling to the consumer.

So, I think remaining unregulated is not an option for BNPL in the long run, and the RBA has hinted at that recently. The question is whether the change will come as part of Treasury-led payment reforms, or whether it will come separately.

The important thing is that we do not want to deter creativity because there is so much good happening in the BNPL space and it does recognise a unique trend in the market.

It also recognises the value of customer choice. A balance is required. Controls will be introduced, so it’s a matter of ‘watch this space’ for 2022.

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