Edey is the RBA Assistant Governor (Financial System). His speech covers the Bank's broad review of payment systems and features information about the ways in which payments by Australian consumers are changing, eg a significant ongoing reduction in the use of personal cheques.
Edey comments that "there's no particular trigger" for the review launched in July last year and expected to result in a final report at the end of 2011. The RBA's Payments System Board has "a mandate to promote payments system efficiency", including the cost, speed and reliability of payment services.
As a regulator, we recognise that our approach to these questions has to be quite different from the way we approach other cases for regulatory involvement. The RBA has significant powers, as you know, to designate payments systems and to set standards. But we're well aware that you can't regulate innovation into being. That's not the intention. As far as possible we'll be aiming to work with industry, looking at whether there are areas where more co-ordination is needed, and assisting with that where we usefully can.The Bank's objectives in relation to an efficient payments system include -
Timeliness - Not all payments are time-critical, but users of the system should at least have options available that give recipients timely access to their funds and allow timely confirmation to both parties.Edey referred to information gathered through the RBA Payments Use Study, covering 1,200 households in 2010. Participants kept a diary of their payments over a one-week period and were asked about their attitudes to newer payment methods such as contactless payments.
Accessibility - It's desirable that everyone who needs to make and receive payments should have ready access to the payments system.
Ease of use - It goes without saying that systems that are easier to use are preferable to those that are more cumbersome. But this is not only an issue of convenience. Systems that require manual entry of account and transaction details are prone to errors that can be costly to correct and can discourage use. That is one reason why payment cards are so popular – because most of the need for manual entry is removed. The need to know a recipient's account details is another challenge for many payment systems. One of our oldest payment methods – the cheque – deals with that by only requiring the recipient's name, with the recipient doing the rest. The challenge for electronic payment systems is to replicate or improve upon that sort of convenience.
Ease of integration with other processes - Payments are rarely made in complete isolation. Typically they are made as part of a process that requires reconciliation and recording of information by the parties involved. It's desirable that payment systems should be able to integrate efficiently with these processes. A key example here is the capacity of payment systems to carry additional reconciliation information with the payment.
Safety and reliability - End users of a payment system need to have confidence that the system will be available when needed and that payments will reach the intended recipient at the time promised. They also need to be confident that the system is secure, so that using it will not expose them to future losses as a result of information being fraudulently obtained. Some of these problems can be addressed by system participants guaranteeing payments, but good system design is a more fundamental solution.
Low and transparent costs - Some would say that this has been a preoccupation of the RBA over the past decade. If two systems perform exactly the same function, we should of course prefer the cheaper one. But the reality is more complicated than that. Each system typically has different attributes from every other system, and so end users need to make choices as to which one most cost-effectively meets their needs. That means that costs need to be transparent, so that those choices can be well-informed.
RBA conclusions from the diary data are that -
First, the broad patterns of payments behaviour observed in the 2007 study still hold.Edey went on to note that -1. Cash remains the most widely used payment instrument in Australia and the dominant instrument for low-value payments.Second, payment patterns have nonetheless evolved to some degree in the three years since the initial study.
2. Cards are the dominant payment method for mid-value payments (between $50 and $500), with the use of credit cards growing relative to debit cards as the transaction value increases.
3. BPAY and internet banking are used frequently for bill payments and high-value transactions.1. Use of cash has declined, especially noticeable in cash's share of the value of traditional payment methods – down from around 40% to 30% of the value of those payments;
2. Debit cards appear to have been substituted for cash, with scheme debit and EFTPOS transactions both gaining share.
Cheques - Fewer than 40% of consumers reported making a payment by cheque in the past year, most commonly because they felt there was no alternative for the type of payment. "That is significant, given that one of the issues being considered both by the industry and the current review is the scope for phasing out cheque use".From privacy and security perspectives Edey highlighted several areas of strategic concern -
It's in my wallet - In responding to questions about what factors influence the choice of payment method at the checkout, respondents indicated that the most important factor was "what they happen to be carrying with them at the time". Otherwise, "the main factor cited in determining how people pay is the speed of processing the transaction, followed by the ability to use their own funds and the ease of managing finances". Speed is significant as an explanation of why people continue to use cash for small value transactions. It also indicates that the current push towards contactless cards might be quite important for many consumers.
Online - In considering high adoption of online payments around 90% of respondents had access to the internet. Of those, about 80% reported having made an online purchase and almost 60% reported an online transfer of funds to a family member or friend. "A surprisingly high 60 per cent of people with internet access said they pay most of their bills online". In considering factors preventing greater use of online payments 25% of respondents indicated that they were already satisfied and didn't think mechanisms could be improved. Otherwise, the major factor preventing greater use of online bill payments is perceived risk of fraud.
Fraud - Around half of respondents identified risk of fraud as a factor discouraging greater use for online purchases. "Probably this reflects a lower degree of comfort with online purchases using methods like credit cards and PayPal, compared to making bill payments using BPAY and internet banking transfers."
Adoption of contactless payments and mobile payments is much lower than online payments, with only 3% of respondents having made a contactless payment in the period and under 10% having ever made mobile payments.
Transmission of data with payments
Successful integration of payments systems into other processes requires that sufficient information travel with the payment to allow proper reconciliation. A business owner making payment to a supplier might wish to convey information, not just on the invoice number, but (for example) on which items on that invoice are being paid and why. An employer making a payment to a super fund needs to be able to provide information on the relevant employee accounts, the amounts of each payment and even the type of payment. Even an individual sending money to a friend or relative might simply want to attach a personal message to that payment. At the moment, the choices are largely either: to limit the additional information to the 18 characters permitted by the direct entry system; separate the payment from the information and put in place a process to bring them back together at a later stage; or to pay by cheque attached to the information source.
Timeliness and ease of addressing payments
There are times when we really need payments to be made quickly. The classic example is government emergency payments. Most government payments to individuals can be made perfectly adequately by the direct entry system. But in an emergency, the availability of funds the next day might not be sufficient. In recent times many such payments have been made using the RTGS system, even though this is a long way away from that system's intended use. Even then, the speed can vary significantly depending on the systems of the recipient bank.
A related issue is the ease of addressing payments to individuals. Writing someone's name on a cheque is relatively straightforward, directing an electronic payment can be much more difficult. For most people this currently involves entering BSB and account number details into an internet banking package. This of course means having to obtain those details from the recipient (who mightn't even remember them) and then keying in all the details correctly, which probably doesn't meet the 'ease of use' test.
The decline of cheques
The number of cheques written in Australia has been declining by an average of 9% per year over the past decade, adding to unit costs so that cheques, already an expensive form of payment, are becoming increasingly so. Cheque use remains "entrenched in certain areas" because it meets a number of specific needs, including the ease with which cheques can be addressed to others and accompanied by additional information, suitability in face-to-face exchanges and for providing an element of financial control.
Mobile payments
The Board's main interest will be in determining impediments to development of mobile payments, eg regarding messaging, device and security standards that have significant implications for efficiency and for innovation. The increasingly global nature of commerce suggests that adoption of internationally compatible standards will be very important for maintaining a world class payments system.
Electronic purse systems (general purpose, prepaid, and typically contactless cards such as Oyster and Octopus) have been successful where there is significant interdependency with electronic transport ticketing systems, slow to develop in Australia. Edey asked whether there is a significant impediment to development of these systems in Australia, given the already high use of payment cards. [A perspective on consumer expectations is provided in last year's 55 page ACMA study [PDF] on Community research into attitudes towards use of mobile payment in Australia.]
Security
The RBA's survey results suggest that concerns about fraud are impeding the take-up of online payments. This may also become an issue for mobile payments. A question for the Strategic Review is whether there is a need for increased co-ordination and co-operation on fraud issues.
