The next wave in real time payments evolution

As of November 2022, “nearly six dozen countries on six continents support real-time payments”.  And many countries in all regions of the world are rolling out Open Banking initiatives – which allow customers to share their banking data with accredited third parties. This drive to embed and scale fast payments across all aspects of the customer payment journey is only increasing.

“But as the industry transitions to real time and third parties seek to initiate payments on behalf of customers, the lines between card and account-to-account payments start to blur.”

Australia’s real time payments system, the New Payments Platform (NPP), launched in 2018 - six years after the Reserve Bank of Australia (RBA) conducted its Strategic Review of Innovation in the Payment System.

Since this time, the NPP has evolved as the strategic payments’ platform for Australia. The RBA’s initial objectives did not include real time debits, facilitation of real-time cross border payments, or third-party payment initiation capability. However, a decade later these are foundational elements for an innovative and competitive payments system.

PayTo example flow

The following use cases illustrate how PayTo can be used by third parties to initiate authorised payments from a payer customer’s bank account.

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There are plenty of efficiencies to be found by enhancing direct debit payments, but its adoption is lagging other systems such as card payments.

Authority to debit a customer’s bank account for payment in Australia is enabled by direct debits through the Direct Entry or Bulk Electronic Clearing and Settlement (DE or BECS) system. Introduced by the Australian Payments Clearing Association (now AusPayNet) in 1994, uptake on direct debits was slow but has since grown into a critical payment mechanism for billers and consumers.

From January 2002 to January 2022, direct debits in Australia doubled in volume and grew at a rate of 80 per cent in value, according to the RBA. In this time, interactions between payers and payees have developed in ways that could not have been foreseen at the outset.

Merchant-consumer interactions are increasingly online and many merchants are holding stores of value on behalf of their customers. Debiting a customer’s account is just one step in a several-staged transaction which increasingly involves more parties than just the consumer and their bank and the biller and theirs.

Real time transactions in Australia yielded estimated efficiency savings of over $200 million for businesses and consumers, according to Payments New Zealand’s 2022 Environmental Scan report. This was driven by a reduction in the payments float, helping to unlock an additional 0.06 per cent of the country’s gross domestic product, “but transaction growth remains constrained by Australia’s reliance and preference for card-based schemes.”

Digitisation Journey

According to RBA data, card payments make-up around two-thirds of consumer payments. A range of reasons contributes to this including wide availability of contactless cards and accessibility of card payment via mobile wallets, as well as the consumer protections such a chargebacks – features not included in account-to-account payments.

These discrepancies need to be addressed if account-to-account payments are to become a viable alternative to cards. But as the industry transitions to real time and third parties seek to initiate payments on behalf of customers, the lines between card and account-to-account payments start to blur.

Australia’s businesses and consumers are operating in a real-time environment and the direct debit system is due for an overhaul. A system that enables electronic debits to accounts without validating the customer’s consent, with the potential to dishonour that debit up to two days later, becomes increasingly unworkable.

In RBA Governor Philip Lowe’s address to the Australian Payments Summit in 2021, he stated “the existing system of direct debits has worked well in some respects, but a more modern system is now needed.”

The NPP’s PayTo Service will offer a wide-scale networked alternative to direct debits and, in some cases to cards, with further opportunity for digitisation, innovation, and customer control. Billers and third parties will have access to real-time account validation when a PayTo agreement is created, real-time funds transfer and consent verification at the time of payment and readily accessible, centralised and secure storage of PayTo agreements.

The platform aligns to the ISO20022 data standard for financial services, enabling richer transaction data for enhanced reconciliation, resulting in reduced manual exception processing.  Consumers will also have greater control and visibility over payments from their bank accounts through their banking channel. They can instruct a third party to make a payment on their behalf and even use a PayID to pay.

Whilst the benefits of moving direct debits to PayTo are considerable, the tail on the digitisation journey is likely to be long. Many merchants still set up paper-based agreements with their customers. They may not have the systems and processes in place to shift online, either for payment or for the relationship more broadly.

A transition of direct debits to NPP will enable simplicity and consistency in customer experience and protection. But such a transition is complex, requiring innovation and enhancements to NPP capability and the implementation of new business models across the economy.

Merchants and billers will look to their banks as trusted partners to guide them through this complexity and to realise the significant opportunity that payments digitisation will bring.

Jackie Kallman is Head of Payments Industry and Engagement at ANZ.