The Australian payments system: fit for future?

This shift will have profound implications for payment systems, for the institutions processing payments and for regulation.

"The use of biometrics to support payments is becoming more popular, in the first instance to authenticate the “cardholder”.”

Payment ecosystems

When AusPayNet (then the Australian Payments Clearing Association, “APCA”) was formed as the industry association and self-regulatory body for the Australian payments industry in 1992, it had nine members. It now has 149.

This demonstrates the growth in the number of participants in the payments ecosystem: from financial institutions and payment system operators, to merchants, payment gateways, payment service providers and tech companies.

In the future, this payments ecosystem will only become more diverse, given the previously described changes in the way we pay, as well as the way payments are accepted. Much like Apple’s recent announcement of “tap to pay” technology which enables merchants to use their phones – rather than a payments terminal – to accept payments.

Broader developments in the digital and data economy such as the future directions of the Consumer Data Right and digital identity will also introduce new payments players in areas such as payment initiation through open data, as well as consent.

Trends

The use of cards continued to increase in 2021 – debit cards in particular. Of the 12 billion card payments last year (up more than 13 per cent), almost 75 per cent were a debit card transactions.

A factor in this increase is the rise of digital wallets as nearly half of Australians now use their mobile phones to pay for transactions of all values. Similarly, online payments have surged. There was $A53 billion of online spending in 2021, up 20 per cent year-on-year.

Consumer preference for the convenience and security of non-cash payments can be seen in the dropping volume of cash withdrawals, down to 395 million in 2021 from 625 million in 2017.

The decline in the use of cheques also continues to accelerate. There were 37 million cheque payments in 2021, down over 25 per cent. This was the sixth consecutive year in which there was an annual decline of more than 20 per cent.

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Cards and cardholders

So, how is the way we pay likely to change in the future?

The rising popularity in the use of “cards” in digital wallets and online – rather than traditional, plastic cards – provides a lead indicator. Payments using tokenisation, not only of cards but of other payment methods, such as account-to-account payments, will become the norm.

The use of biometrics to support payments is also becoming more popular, in the first instance to authenticate the “cardholder”. Ultimately this will extend to enabling device-not-present payments – such as retina scanning or pay by face – which are already being trialled.

Whether less cash will ultimately lead to a cashless society is a more nuanced argument.

Some experts predict Australia will become 98 per cent cashless by 2024. However, the use of cash as a store of value means banknotes in circulation are at record highs - even while the number of cash transactions is decreasing,. The use of cash as a store of value – and indeed as a fallback payment mechanism – is likely to persist, at least until it is potentially replaced by central bank digital currency (CBDC).

More certain is the fate of the cheque. The decline in cheque use is accelerating and according to Reserve Bank of Australia Governor Philip Lowe “It will be appropriate at some point to wind up the cheque system”.. However, it will be key that customers who are cheque users are not left behind and are given access to and education about digital payment alternatives.

Over the next five or so years, we will also need to migrate away from the Bulk Electronic Clearing System (BECS) system. Alternatives such as the New Payments Platform (NPP) provide 24/7/365 availability, real-time processing, smart addressing and richer, structured data which BECS does not. AusPayNet is already consulting industry on the future of BECS.

Closure of such legacy systems will simplify payments in Australia and strip costs out of the national economy.

Regulatory environment

The evolution of payments also has implications for regulation, especially as the current regulatory settings for Australian payments date back to the 1990s. Those regulatory settings were based on two assumptions:

1. that in regulating deposit-taking, payments were also being appropriately regulated; and
2. the regulation of payment systems would regulate payments as whole.

However, neither assumption is now valid. As we’ve seen, payments are being processed by a diverse range of payment service providers. And payment services such as buy now, pay later are now layered on existing payment systems.

The need to contemporise the regulation of Australian payments was recognised in a recent report commissioned by the Australian Government’s Department of Treasury titled, Payments System Review: from system to ecosystem.

Crucially the report addresses both of the now erroneous assumptions described above:

• it recommends the licensing of payment service providers; and
• it vests regulators with the power to designate new payment systems and services.

This will make the regulation of Australian payments fit for future, supporting innovation and protecting consumers, as payments continue to change.

Andy White is CEO of Australian Payments Network (AusPayNet)

• AusPayNet, Australian Payments Network Limited, is the self-regulatory body set up by the payments industry to improve the safety, reliability, equity, convenience and efficiency of payment systems in Australia.