Future of payments: review or preview?

Gone are the days when “the system” was run by an establishment of major financial institutions, global networks, big retailers and regulators. Today, with the advent of blockchain, digital payments, big tech market places, fintechs, AI, cryptocurrencies and a myriad of niche payment networks, we are in a diverse, many times more complex, “ecosystem”.

"Being nearly a quarter of a century old, that regime is definitely ancient in this period of rapid disruption and creative destruction. But it’s not necessarily out of date.”

Drawn from biology, this latest piece of financial jargon recognises the real world consists of many systems interacting with and influencing one another. These ecosystems are so diverse and so rapidly evolving they are not amenable to the timely but largely reactive deliberation which has typified payments regulation for half a century or more.

The old system was more stable but less innovative and less responsive to the rapid change and consumer demands of today. But the new ecosystem doesn’t have that stability of incumbency - for all its innovative potential. That’s the regulatory challenge.

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Ultimate authority

In Australia, the current payments regime was established after the Wallis Financial System Inquiry recommendations released in 1996. Wallis established a Payments System Board, created under the auspices of the Reserve Bank of Australia (RBA).

The regulator has ultimate authority to set the rules, as it did with certain fees relating to the credit card system, but more often than not it has been happy to work with industry participants, effectively under than mission statement of “work it out among yourselves but if you can’t - or we’re not happy - we’ll work it out for you”.

Being nearly a quarter of a century old, that regime is definitely ancient in this period of rapid disruption and creative destruction. But it’s not necessarily out of date.

Around the world, two models of regulation are emerging. One is essentially an ecosystem of regulation which assumes no central body can ultimately set the rules and umpire a global system with all these new players and technologies. And if there was a central body, it might actually frustrate the entry of new competition.

The other approach is to beef up the central umpiring. The recommendation of this new Australian review is to give the Federal Treasurer more power and subordinate the public service entities. That position assumes the opportunities and threats emerging as the pace of payments disruption accelerates does require more centralised control to be “in the national interest”.

Progress needed

According to the review’s author, lawyer and financial services specialist Scott Farrell, “this review has found that our regulatory architecture needs to progress in three aspects”. They are:

• Enhanced payments leadership. The Government’s role in providing overarching strategic direction, vision and oversight should be enhanced with new obligations and powers to protect the payments system and to establish an inclusive, specific, and dynamic strategic plan for its development.
• Aligned payments regulation. The coordination between payments regulators should be strengthened and a functional perspective on payments regulation implemented to improve consistency and certainty in regulatory outcomes and better align with the strategic direction.
• Simplified payments licensing. The government should establish a single, integrated licensing framework for payment services that scales up with businesses as they grow, provides clear consumer protection, and facilitates transparency in access to payment systems.

Farrell’s review provides a valuable snapshot of the Australian system and while it is focused on the domestic regulatory architecture it is cognisant of global forces. And ultimately Australia is something of a satellite state when it comes to the payments universe.

Payments is a global system, whether that be established players like Visa and MasterCard or evolving entities like Worldline or Square or new powerhouses like Amazon, Google, Apple, Tencent or Alipay.

Australia cannot quarantine itself from global forces. Take, as just one example, central bank digital currencies (CBDCs).

As Farrell’s review notes, “given Australia is an open economy with vast international linkages, the actions of foreign central banks around CBDCs could have domestic implications”.

“The nature of those implications and the potential risks they pose will vary depending on the country issuing the CBDC and its design. For instance, if a foreign-issued retail CBDC were to be made available and used for domestic transactions, considerations would need to be given to the implications on financial stability, monetary policy, privacy, national security, AML/CTF, consumer harm, and data collection and use by oversight agencies.”

Potential to improve

A new report from New Zealand, Payments NZ’s “Developments in the global payments landscape: 2021 Environmental Scan Report”, echoes that thinking: “Central bank digital currencies have moved into mainstream discussions about the future of money because they are seen to have the potential to improve both financial stability and financial inclusion.”

Indeed, both reports essentially pick up the same themes – as have a swathe of reports globally.

The New Zealand scan found the six critical themes are:

1. Payments are continuous and increasingly international in orientation.
2. Payments are faster, more mobile, more informative, less visible, and increasingly better linked across the value chain.
3. Payments infrastructure refreshes and renewals are widespread.
4. Financial services and payments regulation is expanding and aiming to produce more inclusive and resilient systems.
5. Payments security and authentication is a key concern.
6. Payments associations face increased expectations.

Again, it is the global nature of payments and the major payments players which will determine how the new ecosystem evolves and that will pose ongoing challenges around national sovereignty of regulation and the need for much greater global coordination to manage cyber security threats.

The one certainty is the pace of disruption will continue and hence the need for innovation and competition intensifies – without putting individuals or systems at risk. Given the pace of change, even current thinking could be rapidly obsolete.

Payments industry veteran Grant Halverson of McLean Roche argues even current reviews are out of date: “Australia needs a future vision for payments supported by a strategy plan” – one that goes beyond a focus on regulatory structures to anticipate what is looming,” he says.

“Payments in 2030 will revolve around fully portable 'digital' consumer and business IDs which are supported in cyberspace and do not require a card, watch or phone,” Halverson forecasts, “rather a consumer 'calls up' the ID at any point of sale and confirms the sale using bio-metrics and security features which work in person or remotely for digital and ‘eCommerce’ transactions.”

“Portability and convenience will be the key drivers while service levels, data and ID protection are critical deliverables,” he adds. “This future poses key challenges for regulators who must be aware of the changes and react quickly to pre-empt excesses.”

Given what has happened to payments during COVID-19, with a massive shift to ecommerce and digital payments, and recent developments in the Chinese payments world – now the world’s biggest – any new regulatory regime must be agile and adaptable. Just like any commercial entities who want to succeed.

Andrew Cornell is Managing Editor of bluenotes