Low Value Payments: Challenges of Evolution

Transcription

1 Australian Payments Clearing Association Low Value Payments: Challenges of Evolution A consultation document on the future of Australia s Low Value Payments systems

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3 02 Australian Payments Clearing Association 1 May 2008 Every efficient economy needs safe, convenient, efficient and low-cost payment systems to support the plethora of routine payments which are the economy s lifeblood. Whatever value-added payment services may be competitively developed and offered by individual organisations, they ultimately rely on broadly-based systems accessible to all payment service providers - and through them, to their customers. In Australia, these many-to-many payment systems are: TheAustralian Paper Clearing System - for cheques and other paper instruments The Bulk Electronic Clearing System - for direct credits and direct debits. This consultation document focuses on the future evolution of these infrastructures. Most developed economies rely on payment systems that are more organically evolved than they are designed. Australia is no exception. While our systems have served us well over many years, there is room for debate on how best to shape their future evolution. APCA s contention is that this is best done holistically, with the input of all stakeholders, and with regard for the importance of efficient and competitive markets in payment services. I invite your participation in this important work. Yours sincerely, Russell Rechner Chairman

4 03 Contents Executive Overview 4 1. Introduction 8 2. Rationale for Consultation Low Value Payments Trends and Observations Industry Direction Components Direction and Priorities Consultation and Next Steps 30 Glossary 31 Appendix A: Payment Types and General Topology 33 Appendix B: Summary International Developments 36

5 04 Executive Overview The Australian payments industry is keen to see payments services evolve to meet emerging customer requirements and to remain at the forefront internationally in meeting those requirements efficiently. In particular, international standards developments in electronic payments are being reflected in new services for customers in other markets, and similar facilities are expected to be in demand locally. A worldwide trend away from cheques and other paper instruments is being driven in part by changing customer demands for electronic payment alternatives and the efficiencies of straight through processing, mirroring the Australian experience. Our challenge in the evolution of the Australian payments industry is to determine the nature of future services of greatest benefit to customers and the basis for industry investment to meet those needs. This paper seeks broad consultation and input into the future evolution of Australia s low value payments infrastructure. This includes direct credits and direct debits, (collectively direct entry or DE ), cheques, and more recently, BPAY, which uses this infrastructure. These are all open loop systems, broadly accessible by customers for payments across all qualifying payment service providers. Transactions involving cash, card products or real-time gross settlement are not part of the immediate focus, although they are sometimes potential substitutes for low value transactions. DE products are the dominant electronic payment types used by business customers, and direct credit underpins the increasingly popular internet banking pay anyone service for consumers and small businesses. These have had a substantial effect in reducing demand for cheques over many years. BPAY has grown rapidly as a distinct open-loop payment service and has contributed to a major decline in cheque usage by consumers. Although the direct credit, direct debit and cheque systems are reliable, mature and efficient, a number of evolutionary issues have been raised, and APCA seeks to promote debate on these across all stakeholders. Key issues for both customers and payments service providers alike are: The future demand for cheques as a payment type in the light of increasing payment automation by business customers and increasing attraction of electronic payments for consumer customers; Requirements for extended transaction data in support of straight through processing of business payments, and how such requirements may be met by future electronic payment types; and Timeliness of payments and access to value by customers. Further issues for the payment service provider community are: The emergence of international message standards for payments and how to leverage them; The structural and service opportunities presented by replacement technologies within the payments network infrastructure; and The growth of settlement risk associated with current deferred net settlement arrangements. As a basis for consultation and to stimulate debate, APCA proposes that initiatives be considered by the industry for future development at a component level. That is, each component may be considered somewhat independently and may be subject to differing priority for attention. Components and alternatives for further investigation include: Network Arrangements: Replacement of legacy communications links with IP alternatives. These could include individual IP point to point links, participation in a common industry VPN or participation in hub based services. Settlement Processes: Introduction of more frequent inter-fi settlement procedures in conjunction with RITS developments at the RBA, ranging from a number of intra-day settlement windows for LVP to real time file by file settlement.

6 05 Executive Overview Transaction Reference Information: Provision of extended facilities for the direct credit payment type to support structured reference information, enabling straight through processing for customers. This may be through an extended remittance field appended to current direct credit messages, or through adoption of new international standards such as ISO20022 credit transfer with XML definitions for associated data. An ISO20022 credit transfer would be a new payment type, with implications across a number of components. Clearing Processes: Provision of faster inter-fi clearing capability, in association with real-time notification and authorisation services for customers requiring these features. Transaction Facilitation Services: Consideration of the merits of services feeding customer payment requests via participants in the payments system. E-invoicing services (for example) could be directed to both business and consumer payment applications. Customer Interface for Payments: Specific services and access channels for customers should support common standards for initiating payments and reporting payments made. This applies to both the generation and receipt of bulk payments as well as support for individual payments. The customer interface itself is seen as a proprietary space for payments providers to interact with their customers, and should remain subject to individual competitive development. Industry participants will need to be satisfied that a business case exists for each proposed development. Investment decisions are only likely to be made if there is a critical mass of participants prepared to utilise the preferred solution(s). As such, the developments foreseen in these component areas still need to be explored in more detail by the industry. For consultation purposes, this paper proposes a relative priority of attention to these various components. The network component at the connectivity level should receive priority attention by the industry. Further structural opportunities should be examined as soon as possible to potentially leverage the investment. The settlement component is also seen as a high priority, and would have benefits both for participants and customers. Extended facilities for transaction reference information and process innovation in clearing should be considered in the near to medium term to enable customers to improve the efficiency of their payments processing. Business transaction facilitation services may be considered as a future extension of capability to benefit customers, but will require significant inter-industry co-ordination. Customer interface standards will be defined to accommodate these various payments and associated services in accordance with agreed requirements. Interested parties are invited to provide their comments generally, or as responses to the specific consultation questions in the document. For convenience, these questions are repeated on the following pages in their respective component categories, grouped as relevant to the reader, whether a payment services provider or a payment services customer, along with those of a more general nature. Submissions will be published on APCA s website, unless confidentiality is requested. The closing date for submission of responses and commentary to APCA is Friday 27 June Please send responses by to Mr Rob Magee, Project Manager rmagee@apca.com.au APCA will host an industry conference during the consultation period to consider relevant issues and provide additional perspective. Your participation will assist the industry generally, as well as participants and users, to ensure that Australia continues to enjoy world-class payments infrastructure.

7 06 Executive Overview Consultation Questions (Consolidated from the Paper) Usage & Trends Commentary Questions for Payment Services Customers 3-1 How do you anticipate your usage of cheques in (say) 5 years time will compare to your usage today? What factors would influence this? 3-2 What is your view of the merits and shortcomings of direct credit as it is today in meeting your payments needs? Similarly for direct debit and BPAY if you are a user of these services, what merits and shortcomings do you see? 3-3 What facilities associated with these electronic payment types would make them more attractive for you? Questions for All 3-4 What is your view as to why cheques are used in preference to electronic alternatives? Do you anticipate these factors changing over time? 3-5 What additional aspects of the current situation would you wish to see considered in support of any case for change? 3-6What additional commentary would you like to provide? Network Arrangements Commentary Questions for Payment Services Providers 4-A1 What factors do you consider most important to the selection of a network architecture for inter-fi payments traffic? 4-A2 What additional high level requirements would be important to assess between alternatives? 4-A3 Apart from transition, what other implications would there be if a change was made from bilateral network arrangements to COIN or VPN 4-A5 What further suggestions or variations would you add for this component? Settlement Process Commentary Questions for Payment Services Customers 4-B1 What proportion of your inwards payments would benefit from faster access to the funds received? Similarly, what proportion of your outwards payments would benefit from being recognised faster by the payee? Why? What specific timing issues or problems affect you? Questions for Payment Services Providers 4-B2 Do you believe intra-day settlement would reduce your concerns over settlement risk satisfactorily? 4-B3 What respective merits do you see in being able to support real time file by file settlement versus adoption of (less frequent) intra-day settlement windows? What other dependencies do these alternatives introduce? Questions for All 4-B4 What further suggestions or variations would you add for this component? Transaction Reference Information Commentary Questions for Payment Services Customers 4-C1 To what extent would extended transaction information improve operational efficiency for your business? Is STP (straight through processing) on your agenda? 4-C2 Would initiatives such as these encourage greater use of electronic payments in lieu of cheques? Questions for Payment Services Providers 4-C3 What is your view of the potential offered by ISO20022 as a payments framework both for inter-fi and FI-customer services? What alternatives should be considered? 4-C4 Do you perceive benefit in introducing an interim capability on existing BECS messages before adoption of (eg) ISO20022? Is this realistic for you? Questions for All 4-C5 What are your views regarding the adoption of international standards vs the development of local standards for payments and payments integration? 4-C6 What other commentary would you provide on this component?

8 07 Executive Overview Clearing Processes Commentary Questions for Payment Services Customers 4-D1 What advantages would real time or faster authorisation / notification processes provide you? Questions for Payment Services Providers 4-D2 Are there other clearing related requirements you would suggest? 4-D3 What additional impacts would these concepts present? Questions for All 4-D4 What further suggestions or variations would you add? Transactions Facilitation Commentary Questions for Payment Services Customers 4-E1 To what extent is electronic support for invoicing on your business horizon? 4-E2 To what extent would a service such as described attract you to adjust your business processes to take advantage of it? Would it influence take up of electronic payments for commercial transactions for you? Why? Questions for Payment Services Providers 4-E3 How familiar are you with the Finvoice model or equivalents elsewhere? What additional lessons do you believe we could derive from these? Questions for All 4-E4 What is your view of wider services such as these being provided to customers through payment services providers? 4-E5 What other segment based solutions could take advantage of a transaction facilitation service coupled to payments? What would drive the case for action for these segments? 4-E6 What other comments would you like to make regarding this proposition or variations? Customer Interface Commentary Questions for Payment Services Customers 4-F1 What are your views on the importance of the standardised integration of payments with customer software? 4-F2 What proportion of your payments would you see being enacted in real time as opposed to being batched for bulk submission? Questions for All 4-F3 What other commentary would you provide regarding this component? Direction and Priorities Commentary Questions for All 5-1 What is your view of the respective priority of initiatives? 5-2 What is your view of the case for action? Where would you look for benefits? 5-3 What is your view of the emergence of convergence in electronic payments? 5-4 What is your view of the future of the cheque as a payment type? 5-5 What final comments would you like to make on the future of Low Value Payments in Australia?

9 08 1.Introduction Payment systems are essential to all our lives Without them, economic life would be next to impossible. It is a testament to the reliability and efficiency of the existing systems that so little is heard about them day to day, despite the crucial role that they play. 1 These words, written for the United Kingdom, apply with particular force to Australia s low value payments infrastructure: cheques, direct credit, direct debit and increasingly services such as BPAY. If payment systems make an appearance in public debate, the focus is most likely to be on financial stability through the RBA s high value payments system, handling the many billions of dollars flowing each day amongst financial institutions, or on the millions of daily consumer payments like credit cards, EFTPOS or ATM transactions. Low value payment types do not usually rate a mention outside the industry itself: their reliability, convenience and efficiency are taken for granted. Yet they underpin the economy: low value payment types account for nearly 50% of all non-cash payment transactions (far more than the high value system) and around 30% of non-cash payments value (far more than card-based activity). One reason for this combination of low profile and economic significance is that low value payment types have evolved incrementally and organically to meet changing economic needs. In 1995, cheques represented around 50% of non-cash payments, but have been used less and less as electronic payment types developed to meet traditional payment needs more efficiently and conveniently. Cheques now represent less than 10% of payment volume and continue to decline. Conversely, electronic payments such as direct credit and direct debit have enjoyed annual volume growth of around 10% over the same period. Originally set up to meet business and government needs for scheduled and bulk payments, these payment types have been successfully adapted to a wide range of business and individual needs, most recently ad hoc pay anyone transactions through internet banking. BPAY was established to address the specific needs of consumer bill payment as a value added service. It has enjoyed impressive annual volume growth from a lower base than other payment systems: 19% pa on average in the last 5 years. 2 In recent years, there has been industry debate about perceived limitations of these successful, adaptable systems, and where to next?. As the pace of change and volume of activity in economic life accelerates, it is timely to question whether organic evolution will be sufficient to support community needs and expectations in the future. In response, APCA members are developing an industrylevel view of future economic needs for low value payments, and of the system evolution required if the industry is to meet those needs. Our purpose is not to dictate any particular systems solution, and still less to curtail healthy competition in payment services. However due to the essential interdependence of the participants in the payments industry, a shared industry view of emerging requirements and solution architecture is vital for long-term efficiency, both for customers and for industry participants. This paper outlines a view of the current environment based on a simple payments topology: that is, a generic conceptual template applicable to all payments. 3 It then analyses each element of the topology to tease out a view of future evolution, and potential industry innovations suggested by that view. 4 1 UK Payments Council, National Payments Plan: Consulting on change in UK payments (2007) Foreword. 2 Section 3 summary statistics. 3 The topology is presented in Appendix A for reference. 4 Innovation concepts are set out in section 4, aligned with the topology.

10 09 Introduction Industry participants will need to be satisfied that a business case exists for each proposed development. Investment decisions are only likely to be made if there is a critical mass of participants prepared to utilise the preferred solution(s). As such, the developments foreseen in these component areas still need to be explored in more detail by the industry. For consultation purposes, this paper proposes a relative priority of attention to these various components. We now seek to test this analysis through consultation with the broader stakeholder community. This paper asks specific questions based on these views and innovation concepts, and all interested parties are invited to respond. APCA will seek to promote debate on the issues raised in this paper in a range of different forums. Our ultimate objective is to build an enduring industry consensus on the future evolution of Australia s critical low value payments infrastructure. To assist in this task we have listed a number of questions against various observations and propositions in this paper, addressed specifically to Payment Service Providers and Payment Service Customers. This will, it is hoped, have the following benefits: Industry groups (including APCA itself) will be provided with guidance on industry-wide measures to enhance payment system efficiency; Payment service providers will be provided with valuable environmental context for their own decision-making on operational investment and payment service development; and Payment service users will have greater confidence in the industry s overall commitment to system efficiency and improvement, and be led to consider the benefits of future enhanced payments services. APCA seeks your active participation to realise these benefits.

11 10 2. Rationale for Consultation Payment Types The focus for this body of work is Low Value Payments (LVP). This is an industry term including all those payments not flowing through the high value payments system, RTGS, and also excluding cash and card based payments. The magnitude of the payment itself has limited bearing on the analysis indeed many payments of a low $ value flow through RTGS for various reasons (eg faster receipt of value), while many payments of a high $ value flow through the DE system (or even cheque) due to lower transaction costs or no requirement for immediacy. The exclusion of card based payments from this analysis also applies to micro-payments solutions and emerging mobile payments in the consumer space. The LVP services on offer in Australia comprise historical mechanisms such as the cheque, proven electronic mechanisms through BECS Direct Entry (Direct Credit and Direct Debit) and the newer, targeted BPAY service 5 which relies on the LVP infrastructure. All of these have the common characteristic that they are open loop systems open to all participants and their respective customers without 3rd party contractual arrangements needing to be in place for customers. Open loop systems require standards to be agreed among a wide number of participants permitting any to any completion of payment transactions. Closed loop systems such as in-house on-us solutions or services such as Paypal focus on their own customer base solely, and are free to establish in-house standards for their customers to meet. Credit Card Debit Card LPV Payment Types High Values RTGS The LVP payment types compete with one another to a large extent. Their respective features influence the customer s choice of instrument to use in various circumstances. Overlaps also occur with out-of-scope payment types as shown. RTGS and card products act as substitute payment types in various circumstances. LVP payment types underpin a vast array of customer payment requirements. At a summary level the payment contexts addressed by the LVP payment types include: Business to Consumer (B2C) eg salaries; Business to Business (B2B) eg commercial transactions; Consumer to Business (C2B) eg payment for goods and services; and Consumer to Consumer (C2C) eg ad hoc personal transactions. Payments to and from Government share the same characteristics as payments to or from business, and the same choice of instruments is available. A brief description of each of the in-scope payment types is attached in Appendix A for reference. Their relative volumes and values in calendar year 2007 are represented in Exhibit 2.1 overleaf. 6 5 The BPAY service is operated by BPAY Pty Ltd and is not subject to APCA oversight. APCA does not make representations on behalf of BPAY Pty Ltd as to future service developments. 6 RBA Tables C01, 04, 05, 06. RTGS shows SWIFT PDS Figures (HVCS) only. Credit card includes charge card. Debit card includes EFTPOS and scheme debit, but excludes ATM transactions.

12 11 Rationale for Consultation Exhibit 2.1 Comparative Volumes and Values, 2007 Comparitive Volumes (millions, 2007) Comparitive Values ($bn, 2007) Direct Credit 1,435 Direct Debit 560 BPAY 211 Cheque 411 Debit Card 1,470 Credit Card 1,352 RTGS 6.5 Direct Credit 6,534 Direct Debit 4,706 BPAY 146 Cheque 179 Debit Card 89 Credit Card 192 RTGS 31,373 As these graphs indicate, the payment types being considered by this paper account for just under 50% of all payments by volume, and approximately 30% of all payments by value. Issues under Consideration Although the direct credit, direct debit and cheque systems are reliable, mature and efficient, some evolutionary issues have been raised, and APCA seeks to promote debate on these across all stakeholders and invites comment accordingly. Key issues for customers and payments providers alike are: The appropriateness of cheques as a payment type for many circumstances in the light of increasing business automation by customers, and implications for future demand; Requirements for extended transaction data in support of straight through processing of business payments, and how such requirements may be met by future electronic payment types; and Timeliness of payments and access to value by customers. Other key issues pertinent to payment service providers are: The emergence of international message standards for payments; The structural and service opportunities presented by replacement technologies within the payments network infrastructure; and The growth of settlement risk under current deferred net settlement arrangements. APCA s own strategic analysis has distilled specific issues relating to current capabilities and limitations as follows: The inability of electronic payments to support sufficient reconciliation information which can be reliably applied by payees to a receivables or funds allocation process; The inability of our electronic LV payment types to support emerging international standards for payments messaging, and to take advantage of facilities supporting them in commercial accounting software; The time taken for assurance of good payment to payees, potentially before value is applied, and the time taken for value to be received by payees under general processing circumstances; The constraints imposed by the legacy communications technology employed for current bi-lateral network arrangements and the desire to leverage new network technologies to maximum effect for the benefit of providers and customers alike; The risks associated with daily deferred net settlement of payments obligations between participants; and Implications for customers in switching their business from one institution to another given the complexities of standing arrangements for payments. APCA s conviction is that because of the interdependency of the players in the payments industry, as well as its complex market dynamics, such structural concerns require holistic analysis. This is consistent with the requirement for governance arrangements for payments infrastructure to facilitate innovation yet foster competition in the industry. Component Initiatives As a basis for consultation and to stimulate debate, APCA proposes that initiatives be considered at a component level by the industry as part of the future roadmap. These components are: The customer/provider interface for transactions; Transaction reference information carried with payments; Clearing arrangements between institutions; Settlement of payment obligations between institutions and recognition of value for customers; Network arrangements for carriage of payments between institutions; and Transaction facilitation services for customers (eg segment focussed services). Section 4 presents a range of concepts for consideration and invites commentary accordingly. Interested stakeholders are also invited to propose other aspects of payments system evolution for consideration.

13 12 3.Low Value Payments Trends and Observations This section summarises the current situation regarding low value payment services in Australia and sets the basis for consideration of improvements which would benefit customers, participants and the economy as a whole. Indicative Volume and Value Trends Exhibit 3.1 Recent Volume and Value Profiles by Payment Type 7 million million million Direct Entry Volumes 1,500 1,250 1, BPAY Volumes Direct Entry Credit Transfers Direct Entry Debit Transfers BPAY Cheque Volumes Cheques Customer Cheques Financial Institution $bn $bn $bn Direct Entry Values 7,000 6,000 5,000 4,000 3,000 2,000 1,000 BPAY Values ,000 1,500 1, BPAY Cheque Values Direct Entry Credit Transfers Direct Entry Debit Transfers Cheques Customer Cheques Financial Institution 7 Source: RBA Payments Data, BPAY Pty Ltd

14 13 Low Value Payments Trends and Observations Direct Credit Trends In Australia direct credits were already heavily utilised by business and government by the mid 1990s as a means of bulk payment for (e.g.) salaries and wages. However, in contrast to many European countries, the system was not traditionally used to make person-to-person payments or pay bills. This changed with the advent of internet banking, which opened an access channel to the direct credit system to make pay anyone payments (especially C2C, some C2B). The number of direct credits has risen on average by around 6 per cent per annum and their value by around 20 per cent per annum over the past decade. Volume growth for direct credit has been stronger over the last 5 years (CAAGR 10%), with growth 2007 over 2006 at 11%. Value growth over the same 5 year period has shown a CAAGR of 15% and 2007 over 2006 of 17%. Exhibit 3.1 shows the clear correlation between this recent volume growth and the substantial growth in value transacted. Over the last decade the number of Direct Credit Users has increased almost threefold to 208,000 8, with many more making use of bureau and internet services triggering direct credit payments. Direct Debit Trends The number of direct debit transactions has grown more strongly than the number of direct credits, although from a lower base. In the 1990s, Australians appeared reluctant to authorise direct debits to their transaction accounts, but since the mid 1990s there has been a four-fold increase in the number of such payments. Since 1999 direct debit volumes have increased by 90% (CAAGR 8.4%). For the 5 year period , direct debit volumes grew at a CAAGR of 10%, while growth 2007 over 2006 was 9%. Direct debit values over the same period showed a CAAGR of 15%, with growth 2007 on 2006 at 18%. Exhibit 3.1 shows a close correlation between direct debit and direct credit volume vs. value trends over recent years, pointing to increasing familiarity and demand for these payment types. Over the last decade the number of businesses using direct debits to collect payments has increased sixfold to 14,000. Direct Debit is only available to approved clients based on their financial strength, integrity and reliability. BPAY Trends BPAY commenced operations in 1997 as a branded service open to financial institutions for the collection of consumer bill payments to billers banking with any participating institution. Access channels were initially telephone banking, with internet access following shortly after. BPAY has grown to displace cheques as the primary means for consumer bill payment. Since 2003 internet banking originated BPAY transactions have outnumbered telephone banking originated transactions, with internet originated reaching nearly 80% of all BPAY transactions in From 2002 to 2007, BPAY volumes have grown fold (CAAGR 19%), with growth 2007 over 2006 of 15%. Over the same period values have grown over threefold (CAAGR 26%), with growth 2007 over 2006 at 20%. Exhibit 3.1 shows the growth in transaction volume and value of the BPAY service over recent years, driven both by wider consumer acceptance and by wider biller acceptance. Over 15,000 biller codes are now registered on BPAY. All Australian financial institutions offering telephone or internet banking services participate in the BPAY scheme, making it ubiquitous for customers. Cheque Trends Since 1995, cheque volumes have declined significantly, with cheques share of non-cash payment volumes reducing from around 50% to less than 10% today. Since 1999 overall cheque volumes have decreased by 32% (CAAGR -3.6%). For the period 2002 to 2007, customer cheque volumes showed a CAAGR of -7%, with decline 2007 over 2006 of -9%. Values represented by customer cheques over the same period have shown a CAAGR of -5%, although 2007 over 2006 actually saw value growth of +2%. The volume of financial institution cheques has declined at a CAAGR of -5% over the last 5 years, although they actually increased by +2% 2007 over The value represented by FI cheques over the same period has shown a CAAGR of +7%, with somewhat surprising growth of +25% 2007 over The proportion of total cheque value represented by FI cheques has risen considerably, from under 18% in 2002 to 28% in According to the RBA, some 65% of current cheque volumes are believed to be from business accounts (accounting for 65% of total value of all cheques with an average value $3,610). Some 32% of current cheque volumes are personal cheques for an unknown purpose (accounting for 12% of total value of all cheques with an average value of $1,400), while 3% of current cheque volumes are FI cheques (accounting for 25% of the total value of all cheques). International Comparison The tables overleaf in Exhibit 3.2 show the relative volumes by payment type per head of population for a selection of countries for years 2004, 2005 and 2006 (latest data). It is clear that for those countries with relatively high cheque usage, there is a distinct move away from cheque in favour of electronic payment types. In the UK the reduction in cheque volumes continues at close to 10% pa, similar to Australia. In the US and Canada, however, there is a stronger cheque culture which continues to be reinforced by massive imaging developments. Even so, declines in the order of 5% pa are observed. In European countries with well developed direct credit systems (eg The Netherlands and Germany), this payment type clearly dominates. It may be initiated by paper (eg giro credit) or electronically. 8 Source APCA 9 Source BPAY Pty Ltd

15 14 Low Value Payments Trends and Observations The giro trend itself is downwards with low current share of volumes (lower than cheque in Australia). These direct credits typically have a detailed reference field in the payment to assist in reconciliation by the payee (eg 140 characters). This obviates one of the greatest residual attractions for cheque payments as seen in Australia, UK, Canada and the US where the direct credit product is functional but poorly featured, and suited mainly to (eg) bulk salary payments. This strength of attraction is set to increase Europe-wide with the advent of the SEPA credit transfer payment type with rich XML data to facilitate straight through invoice processing (and other applications). This payment type is based on the ISO20022 standard. Similar comments apply regarding the growth of direct debit, although the penetration of this payment type is driven by behavioural factors (eg customer trust). Business practice is also a strong influence in those countries with high penetration where payments made this way generally receive a discount. Appendix B contains a variety of international observations at a summary level, along with useful reference links. Exhibit 3.2 Incidence of Non-Cash Payment Instrument Usage in Selected Countries (number per head of population) 2004 Cheques Direct Debits Direct Credits Debit Cards Credit Cards Total Australia Canada France * Germany * 181 Netherlands Sweden UK United States * Data for 2003 Sources: PSB Annual Report Cheques Direct Debits Direct Credits Debit Cards Credit Cards Total Australia ** Canada France * * 225 Germany Netherlands Sweden UK United States * Split between debit and credit cards not available ** Includes BPAY transactions Sources: PSB Annual Report Cheques Direct Debits Direct Credits Debit Cards Credit Cards Total Australia Canada France * Germany Netherlands Sweden UK United States * Split between debit and credit cards not available Sources: BIS Redbook, RBA, ABS

16 15 Low Value Payments Trends and Observations Strengths and Weaknesses of Current Low Value Payment Types Exhibit 3.3 summarises the perceived strengths and weaknesses of direct credit, direct debit, BPAY and cheque mechanisms. This is drawn from an analysis undertaken by APCA through a workshop programme with individual participating institutions, drawing on knowledge through customer segment feedback, product management and product operations. These findings were compared with the findings published in the DCITA report 10 and found to be consistent. No additional external market research has been undertaken. Exhibit 3.3 Summary Strengths and Weaknesses Direct Credit Direct Debit BPAY Cheque Key Strengths Low cost, wide accessibility, control, integration with commercial software for payers. Cleared funds. Set and forget for consumers paying regular obligations to trusted parties. Easy reconciliation for recipients, and control over their cash flow. Strong procedural support through providers. control. Trusted brand, convenient and widely accepted access channels, clear and simple operation. STP for billers, better experience for their customers. Cleared funds. Scheme operation as value added service. Familiarity, control (payer), unlimited accompanying remittance information. No need for account detail. No restrictions on value written. No need for technology by customers. Key Weaknesses Insufficient detail to support many commercial transactions. Risk of mistaken payments. Difficult reconciliation. Not well suited to immediate payments or online merchant payments. Cannot advise payee of good funds in transit. Cannot use credit card accounts. Forget leads to dishonours and significant cost in manual intervention. Unable to provide pre-authorisation prior to debit attempt. No positive acknowledgement. Consumers historically reluctant to provide account detail and relinquish control. Restricted to payments not requiring extended detail (eg full remittance data). Not suited to ad-hoc payments (eg where the payer does not have an enduring relationship (eg account) with the payee). Timeliness. Risk of loss or dishonour. Processing costs and time for customers (payers and payees). Reconciliation requirements. Declining penetration in market. A key observation from the above is that all payment types have various strengths and weaknesses depending on the context of their usage. In other words, not all strengths or weaknesses are important all the time. It is also clear that the cheque has a number of positive attributes not matched by current electronic payment types. As highlighted by the DCITA report, there is a reticence in the market (especially B2B) to change from cheque to electronic payment both on the grounds of I will if they will and of there not being a suitable mechanism to meet all requirements. In particular, major cheque users such as the superannuation industry and the funds management industry have not determined any viable alternative to transact payments electronically for some circumstances. It is also clear that no segment has voiced an opinion that more cheques would be better. With a distinct reduction in consumer cheques being offset to some extent by continued use of business cheques, there is clear need for viable alternative mechanisms to be put in place to assist those customer segments wishing to take greater advantage of electronic payments processing. 10 Exploration of Future Electronic Payments Markets June 2006

17 16 Low Value Payments Trends and Observations Reader Commentary Usage and Trends Questions for Payment Services Customers 3-1 How do you anticipate your usage of cheques in (say) 5 years time will compare to your usage today? What factors would influence this? 3-2 What is your view of the merits and shortcomings of direct credit as it is today in meeting your payments needs? Similarly for direct debit and BPAY if you are a user of these services, what merits and shortcomings do you see? 3-3 What facilities associated with these electronic payment types would make them more attractive for you? Questions for All 3-4 What is your view as to why cheques are used in preference to electronic alternatives? Do you anticipate these factors changing over time? 3-5 What additional aspects of the current situation would you wish to see considered in support of any case for change? 3-6 What additional commentary would you like to provide?

18 17 4.Industry Direction Components Common Topology The Low Value Payment types share a common logical topology as illustrated in Exhibit 4.1. This topology is characterised by having an open loop architecture (ie inter-fi). Closed loop on-us or proprietary payment types address a single institution or payment services provider, and do not rely on industry-level standards. The various components in this topology are seen as relatively distinct areas for industry innovation, although cross-impacts will arise in many cases. The primary components in this topology are: A triggering transaction between the parties to the payment; The interface provided to customers by payment service providers which captures, carries or presents payment and related transaction information; Exhibit 4.1 Simple Payments Topology Transaction reference information passed between the parties to the transaction via the payments system; Clearing information passed between institutions for payment exchange, control and other purposes; Settlement obligations aggregated by clearing stream (settled in RITS); and The network arrangements permitting the carriage of this information. These are described more fully in Appendix A. The following sub-sections provide directional concepts by component for discussion purposes. For each component, existing arrangements are summarised and some broad evolutionary requirements and observations are presented. Concepts addressing these requirements are proposed for discussion purposes. These are not to be seen as agreed commitments - those that are seen by the industry to have merit will still need to be subject to specific business and technical analysis before investment decisions are taken. Comments are invited on all concepts. Triggering Transaction or Arrangement (Invoice, standing order, salary etc) Payee Customer Transaction Interface Customer Transaction Interface Account Institution Transaction Reference Information Payee Institution Account Clearing Information (Inter-FI as well as Customer Authorisation/Notification) Setttlement Processes Underlying Network(s)

19 18 Industry Direction Components A) Network Arrangements Existing FI FI FI FI Payee FI FI Institution Payee Institution Current network arrangements are bilaterally agreed between participants and are based largely on dedicated lines. The issue with current networks is their legacy technology and associated supportability, and lower performance capabilities. The BPAY network is based on a hub and spoke architecture with member institutions but still largely uses legacy communications technology. Requirements and Observations The replacement of existing network connections is already under consideration by some participants. The basic requirement is to provide secure, high capacity IP connectivity between participants. Similarly, there is a requirement to provide the same capability between individual participants and industry utility services such as BPAY and others that may be defined in future. Beyond point to point connectivity however, IP technology presents opportunities to consider further enhancement to the capabilities and efficiency of payment services operations at an industry level. The network architecture chosen could potentially be made to support all payment types, ie LVP types, card payments etc. The use of IP WAN technology could allow all participants and utility services associated with the industry to become addresses on a common virtual private network (VPN). A VPN may be managed as a COIN (Community of Interest Network) in which a variety of service levels are negotiated in common and management services provided in accordance with community requirements. A VPN could allow each participant to have just one logical link to the network (multiple physical links for redundancy), and avoids participants having to link to each other participant individually. An industry network could support all participants, including providers of value added or utility services needing to be accessed by any participant. A structural variation would be to use hub based services with individual IP links between participants and the hub. While IP communications technology does not require a central hub or switch to route transactions, a hub may offer a variety of benefits to all participants through the provision of common value added services. At one level this could cover full ACH capability (ie market rules, payment operations and various utility services), as seen in the USA, UK and several European countries. At a more focused level SWIFT is an example of a hub based service offering connectivity and enhanced messaging services with validation, but no market management. FI FI FI FI FI FI Common Network Central Service Entity FI FI FI FI FI FI

20 19 Industry Direction Components A) Network Arrangements (cont ) Concept Proposal A-1 Provide individual point to point IP links to replace existing leased lines. Leave bilateral compliance and commercial arrangements intact. Concept Proposal A-2 Put in place an industry VPN or COIN with a common addressing schema for all payment types at all participants. Concept Proposal A-3 Introduce a central hub facility for LVP payments network operation. Replace bilateral commercial arrangements with individual commercial arrangements between the hub operator and each participant. This is both a technical transformation and a business transformation proposition similar in reach to the multilateral scheme variation of A2 above. Considerations This is a minimum option, replicating the status-quo with modern technology. New entrants and additional services would require individual links to all participants or links via an existing participant. Considerations Industry utility services for various applications may be defined and added to the network addressing schema as required. If bilateral commercial arrangements were left intact, this would present as a hybrid proposal combining the current commercial logic with a structurally simple network readily adaptable to new applications and new entrants. If new multi-lateral commercial arrangements were sought, these could be equally supported by this network architecture and scheme type participation rules through a management entity. Considerations This architecture could be applied to other payment types (eg EFTPOS etc) with either unique service hubs of their own or incorporation into a common logical hub. The hub (ACH) model provides an ability to add value centrally to any transactions requiring it. This may be for (eg) field or content validation, security, AML, or other industry mandated purposes. It could also enable central development of specialised facilities without the requirement for individual development by all participants. A hub model could also enable common bridging with other networks eg internationally. Questions for Payment Services Providers 4-A1 What factors do you consider most important to the selection of a network architecture for inter-fi payments traffic? 4-A2 What additional high level requirements would be important to assess between alternatives? 4-A3 Apart from transition, what other implications would there be if a change was made from bilateral network arrangements to COIN or VPN arrangements? 4-A4 What do you consider to be the relative merits of a hub based service (the ACH model) vs a VPN type model? 4-A5 What further suggestions or variations would you add for this component?

21 20 Industry Direction Components B) Settlement Process Existing The various intra-day exchanges (clearings) build net positions between institutions for settlement of obligations next day via RITS. Significant exposures are built up during a day s transactions. Value is generally applied on the day of exchange for electronic payments and may be drawn upon from 9am the next day. For cheque deposits, value is generally applied on the day of deposit, but cannot be drawn upon until finally cleared (up to 3 days). Institution Payee Payee Institution Setttlement Processes Requirements Introduce more frequent inter-fi settlement procedures in conjunction with RITS developments at the RBA, ranging from a number of intra-day settlement windows for LVP to real time file by file settlement. Concept Proposal B-1 Considerations Introduce a number of intra-day settlement windows for LVP in conjunction with RITS as the standard mode of operation. Concept Proposal B-2 Introduce the capability for real time settlement on a file by file basis. This may apply in conjunction with B1 above. This could be supported through continuous updating of net positions at the national collator in conjunction with intra-day exchange of clearing files. When combined with either real time or frequent clearing, a range of service levels could be offered to customers while at the same time reducing the risks associated with the deferred netting process. Considerations Settlement files would be batches of payments collected either through real time or batch clearing processes. Settlement capability would be provided at the time of submission of the settlement file, depending on availability of ESA funds. Questions for Payment Services Customers 4-B1 What proportion of your inwards payments would benefit from faster access to the funds received? Similarly, what proportion of your outwards payments would benefit from being recognised faster by the payee? Why? What specific timing issues or problems affect you? Questions for Payment Services Providers 4-B2 Do you believe intra-day settlement would reduce your concerns over settlement risk satisfactorily? 4-B3 What respective merits do you see in being able to support real time file by file settlement versus adoption of (less frequent) intra-day settlement windows? What other dependencies do these alternatives introduce? Questions for All 4-B4 What further suggestions or variations would you add for this component?

22 21 Industry Direction Components C) Transaction Reference Information Existing Direct Credit: 18 character reference field populated by payer, insufficient for clear, unambiguous remittance detail. Direct Debit: Originator assigns reference information directly in own systems. BPAY: Customer reference number, date and amount details passed to biller. Cheque: Attached paper. Payee Institution Transaction Reference Information Payee Institution Requirements and Observations The inability to structure sufficient remittance detail electronically prevents electronic processing of receipts by business customers, leading to a need for manual reconciliation processes. The overall requirement is to transport reference information associated with the relevant transaction to a level of detail appropriate to that transaction. This may be provided by additional fields in the message itself, or in a related message. This detail should be able to be captured or entered at the payer or the payer s institution and passed through to the payee for subsequent application to a receivables/reconciliation process. The available reference capacity may be loaded and interpreted in a common way by one customer segment, and loaded and interpreted in a different way by another segment. For example, a commercial invoice payment may be structured and recognised in one way within this capacity while (say) a superannuation payment may be structured and recognised in another way. Those structures could be defined and agreed in conjunction with the segments concerned. The overarching requirement in the above is for reference information to be driven by the triggering transaction, and to be structured using standards established for the purpose by the general parties to these transactions. Such standards may be established domestically by (eg) a segment community or may draw on international structures as advocated by the likes of TWIST or EACT etc. Local standards for information associated with common simple transactions (eg salary payments etc) could well be incorporated. A key issue for discussion is the relative benefit of new facilities being based on published international standards or being developed uniquely for the Australian domestic market only.

23 22 Industry Direction Components C) Transaction Reference Information (cont ) Concept Proposal C-1 Extend the existing direct credit message type by appending a fixed length field to the end of the current message structure. A field length of 140 characters could be considered (as per past European practice), or up to say 500 characters could be evaluated for suitability. This may be seen as an interim measure prior to C-2 below. Concept Proposal C-2 Introduce a new credit payment type based on ISO20022 credit transfer with reference data structured for standard payments purposes. Specific XML definitions may be determined by industry groups (eg commercial payments, superannuation rollovers between funds, funds management etc). Concept Proposal C-3 As a flow-on from C-2 above, migrate direct debit payments to the ISO20022 direct debit definition for structural consistency. Considerations If the extended field was not required for a particular payment, it would remain blank. The impact on both payer (remitter) and payee (beneficiary) bank systems would need to be assessed. No processing of this information would be required, just carriage. It would need to be presented to the payee in such a way as to enable it to be reconciled with the credit applied. This does not address participant concerns over the remaining life of BECS related systems. Considerations This payment type would operate in parallel with existing direct credit and would seek to meet the needs of particular segments initially. It may be operated as a new clearing stream entirely, in parallel with BECS. ISO20022 could eventually be used as a wrapper for existing direct credit payments to be eventually migrated away from DE. In the longer term, this proposition could enable the retirement of the DE format and associated systems. Considerations This need not take place initially. Once the handling of ISO20022 for credit transfers was set in place, the messages associated with direct debit could be added to the suite. Questions for Payment Services Customers 4-C1 To what extent would extended transaction information improve operational efficiency for your business? Is STP (straight through processing) on your agenda? 4-C2 Would initiatives such as these encourage greater use of electronic payments in lieu of cheques? Questions for Payment Services Providers 4-C3 What is your view of the potential offered by ISO20022 as a payments framework both for inter-fi and FI-customer services? What alternatives should be considered? 4-C4 Do you perceive benefit in introducing an interim capability on existing BECS messages before adoption of (eg) ISO20022? Is this realistic for you? Questions for All 4-C5 What are your views regarding the adoption of international standards vs the development of local standards for payments and payments integration? 4-C6 What other commentary would you provide on this component?

24 23 Industry Direction Components D) Clearing Processes Existing Direct credit and direct debit payments are cleared intra-day through bilateral file exchanges between institutions. Direct credits are treated as good funds. There is no ability to advise the payee of good funds in transit in advance of value being applied. Fit for basic purposes (eg salary) but not well suited to real time on-line merchant payments. Direct debits are subject to dishonour. Next business day advice of direct debit failures to the originator (payee institution) leads to process inefficiencies. No ability to confirm funds availability in advance (authorisation) or to confirm account authority. BPAY payments are cleared through the BPAY system multiple times per day (via payer institutions). Payees (billers) can be advised of good funds in transit in advance of value being applied, but not real time. Cheque payments are applied overnight after deposit. Subject to dishonour and do not permit recognition of good funds being applied until cleared. Cheque payments are applied overnight after deposit. Subject to dishonour and do not permit recognition of good funds being applied until cleared. Institution Clearing Information Payee Payee Institution Requirements and Observations Real time clearing capability for electronic payments could become the foundation for FIs to provide enhanced payment services between customers irrespective of value transfer. This capability may be used in full, ie payment by payment or it may be used to support multiple batch clearings. It could also form the basis for future operational convergence of different electronic payment types over common infrastructure. Real time clearing capability when used for notification purposes would enable confirmation to the payee of good funds to be applied to a payment being settled at a later time. This would allow a supplier of goods or services to release the purchased entitlement to the buyer in advance of credit advice. This model would use real time notification in association with the remittance detail, although it could be a message separate from remittance detail if required. The supplier (payee) could be made aware of payment authorisation in a fashion analogous to an EFTPOS authorisation today for a consumer payment. Although the rationale for richer remittance information is to support STP for commercial customers, a combined notification service could effectively enable internet debit for consumer customers via a direct credit mechanism. When applied to direct debit, real time clearing would enable an authorisation to be requested and sent to the payment originator prior to the initiation of a direct debit transaction to avoid the risk of dishonours. If the transaction model were extended to both authorise and then to debit, with real time advice of authorisation failures, many of the shortcomings of existing direct debit would be overcome.

25 24 Industry Direction Components D) Clearing Processes (cont ) Concept Proposal D-1 Provide the capability for real-time clearing of direct credit and direct debit transactions between institutions. Concept Proposal D-2 Provide an (optional) real time notification facility in direct credit to advise payees that good funds have been approved for payment against the associated detail, prior to those funds appearing in the target account. Concept Proposal D-3 Provide an authorisation facility to direct debit users whereby the originator s direct debit request is authorised (and duly notified) against available funds prior to being drawn. This may extend to the validation of direct debit account ownership and direct debit authority at the time of request. Considerations This would permit a range of service levels for direct credit and direct debit transactions from immediacy of transaction processing with real time clearing to lower service levels for less urgent transactions cleared a number of times per day in bulk. Considerations Real time notification would enable the payee to (e.g.) release goods or services immediately in the knowledge of good payment forthcoming. This would be considered a value added service over existing direct credit. Considerations Immediate notification of payment success or failure could be provided to the payee user (beneficiary) for follow up action both through its own customer channels and via the payer institution. This would be considered a value added service over existing direct debit. Questions for Payment Services Customers 4-D1 What advantages would real time or faster authorisation / notification processes provide you? Questions for Payment Services Providers 4-D2 Are there other clearing related requirements you would suggest? 4-D3 What additional impacts would these concepts present? Questions for All 4-D4 What further suggestions or variations would you add?

26 25 Industry Direction Components E) Transaction Facilitation Existing Payment requests and payment instructions are passed directly between the parties to the transaction (mostly paper). For commercial transactions, the payer and payee are often in a customer supplier relationship. Traditional commercial flows are paper based, comprising items such as quotations, purchase orders, invoices and remittance advices. Even when electronically conducted from the purchase order stage, the resulting payment transaction largely retains a manual component in associating detail from invoices into remittance information accompanying a cheque or an electronic payment. There are no uniform standards in the Australian market for the electronic linkage of all aspects of the transactions chain, although numerous individual community standards exist. Consumer electronic bill presentment services such as BPAY View have started to address aspects of this requirement. Institution Payee Payee Institution Requirements and Observations In the business customer market, all organisations have one or more relationships with payment services providers, and increasingly now have electronic connections in place through business banking services. A primary requirement is to enable an electronically submitted invoice to be received by the payer and converted into a payment transaction carrying rich remittance detail, free of errors, such that it can be reconciled by the supplier as a straight through process (STP). The carriage of remittance information as part of a payment has been considered in component (C). The automated receipt and conversion of this information for this purpose by the payer is not yet common practice in Australia. Accordingly, there will be a requirement to enable an accounts payable process to receive invoices electronically from one or more services established for this purpose, or from suppliers directly if part of a trusted network. A core requirement will be the adoption of universal standards for invoicing data to be accepted as a normal business practice in Australia, and desirably consistent with international standards. Standards consolidation is emerging, promoted by international organisations such as TWIST which take a business user view of the requirement. There is scope for an industry leadership position to be provided by the payments sector in facilitating commercial invoicing. The Finvoice model in Finland and elsewhere in Scandinavia is an excellent example of a ubiquitous invoicing standard. It provides the missing link between electronic commerce between parties (ordering etc) and the electronic payment for goods and services fully reconciled. The service is provided as a utility by the banking sector using existing internet based banking services, and is supported at the customer site by software integration with business systems for both payers and payees.

27 26 Industry Direction Components Concept Proposal E-1 Provide a universal invoicing support service based on a standard means of receiving invoices from the supplier (payee eventually), routing them to the customer (payer) and incorporating the necessary reference detail into payments transactions submitted by the payer. Institution Payee Payee Institution The logic of such a service could apply equally for commercial invoices (eg B2B) and consumer invoices or payment requests (B2C or C2C). The specific detail and information structure to be supported for commercial applications would be of a higher level of complexity than that required for consumer invoicing, and would need to adopt standards recognised by ERP systems. Considerations This service would need to work irrespective of the banking arrangements of either party. This implies that any change in financial services provider by a business customer should not require a change in the way in which business is undertaken other than a series of parameter changes in their commercial software. This service would carry the material from sender to receiver unaltered, irrespective of address, posting at the supplier s institution and being delivered by the customer s institution ready for presentation and payment action. The mechanism used for such services could be centralised or decentralised, provided that it supports an any to any model for customers. It is also plausible that 3rd party competitive services offering invoicing (and other) capability may arise. The barriers to this happening to date have included the lack of standards, the lack of industry support, the absence of a reason to connect to the service provider prior to the existence of such a service, and the lack of critical mass in various individual business communities who could potentially benefit. It is conceivable that other (non-invoice related) services associated with payment initiation (eg for a particular market segment) could be facilitated in a similar way through the payments network. Questions for Payment Services Customers 4-E1 To what extent is electronic support for invoicing on your business horizon? 4-E2 To what extent would a service such as described attract you to adjust your business processes to take advantage of it? Would it influence take up of electronic payments for commercial transactions for you? Why? Questions for Payment Services Providers 4-E3 How familiar are you with the Finvoice model or equivalents elsewhere? What additional lessons do you believe we could derive from these? Questions for All 4-E4 What is your view of wider services such as these being provided to customers through payment services providers? 4-E5 What other segment based solutions could take advantage of a transaction facilitation service coupled to payments? What would drive the case for action for these segments? 4-E6 What other comments would you like to make regarding this proposition or variations?

28 27 Industry Direction Components F) Customer Interface Existing Direct Credit: Corporate or business banking, and consumer internet banking. Direct Debit: Corporate or business banking. BPAY: Business and consumer internet banking and telephone banking. Cheque: Cheque book, deposit services. Institution Customer Interface Customer Interface Payee Payee Institution Requirements and Observations This is a competitive space underpinned by industry standards for basic features. Front-end services feed back-end systems. No industry level co-ordinated change is required other than that any change or addition of payment type(s) will require customer interfaces to support agreed standards or specifications. Their presentation would remain competitive. interfaces will need to be able to capture all relevant payment details from the payer to load into the payment instruction. These may accommodate interfaces directly into commercial software, or be made available as per internet banking services today for individual transactions. Industry standards for these interfaces are anticipated, with the intention of avoiding the cost of unique institution-specific instances of commercial software for customers. Payee interfaces will require the payee to be able to interrogate the status of an account and determine that a specific payment has been made, as today. They will also need to be able to accommodate (through commercial software linkages) specific payment detail to be applied for straight-through-processing purposes. Also, where real time notification or debit authorisation services are made available to payees, the customer interface will need to be able to support the associated standards. Again, these interfaces should have a common definition for the industry to avoid institution-specific instances of commercial software at the customer site. Concept Proposal F-1 Considerations Develop transaction standards for the new payment types supported at an industry level, leaving customer interface development and presentation as a matter of competition. Customer access for open services continues to be provided through participants. The standardised nature of customer interface requirements should facilitate change of payment service provider without major customer impact. In many instances, the underlying payment instrument may be invisible to the user. This is the case today with the internet pay anyone service where the payment instruction triggers a direct credit payment. Questions for Payment Services Customers 4-F1 What are your views on the importance of the standardised integration of payments with customer software 4-F2 What proportion of your payments would you see being enacted in real time as opposed to being batched for bulk submission? Questions for All 4-F3 What other commentary would you provide regarding this component?

29 28 5.Direction and Priorities The industry development work outlined for consideration in this paper could be undertaken progressively and in parallel with present arrangements. APCA s view (for discussion) regarding the relative priority for action in the component areas described earlier is as follows: Now Initiatives (infrastructure/risk focus, near term, shorter lead time) Network modernisation should receive high priority, with consideration of the merits of solutions beyond simple point to point link replacement. Settlement arrangements to permit intra-day settlement for DE payments should be considered in the short term (consistent with emerging RBA capabilities) to reduce settlement risk. These may range from a number of intra-day settlement windows for LVP to real time file by file settlement. These component initiatives are largely for the benefit of payment service providers in the short term. Enhanced settlement processes would result in benefits for customers in certain circumstances only, not across the board. Both become pre-requisites for subsequent payments system innovation proposals. Next Initiatives (customer benefit focus, nearmedium term, longer lead time) Provide support for transaction reference information. An assessment should be made of the merits of a new payment framework based on ISO This would be driven via a new clearing stream taking advantage of the new network and settlement arrangements. This framework could progressively incorporate and replace existing electronic payment types for operational purposes. An assessment should also be made of the benefits of introducing interim measures based on an extended DE message, in which case such an initiative may be brought forward for the benefit of customers. Provide faster (up to real time) clearing capability for electronic payments from the time of launch of the new payment type. This capability may then be extended to customers (largely payees) for authorisation / notification purposes to overcome current shortcomings in direct debit and direct credit. Progressive implementation of the new payment type would enable the development of facilities suited to specific customer segments in the first instance (eg commercial payments), followed by gradual migration of other customers to new facilities. It is also envisaged that once all current payment traffic can be satisfactorily serviced under the new arrangements and has been migrated accordingly, there would be no further requirement for support of the legacy electronic payment systems. Full operational benefit would not be received until this support was removed. Later Initiatives (longer term value added services for customers) Transaction facilitation services provided by the payments industry could be considered longer term. While simpler services may be introduced earlier, complex services (eg B2B invoicing) would need to be defined through various cross-industry initiatives working with representative bodies from those segments wishing to take advantage of new capabilities. Other Initiatives identified through this consultation process or as might otherwise be proposed may be addressed in timeframes most suited to the case they present. Practicalities For the payments industry to progress any or all of the innovation proposals discussed in this paper, a variety of investment considerations will need to be examined by participants. These include: Customer business case ie the work will result in capability or services which generate overall returns to a level sufficient to warrant the investment. Potential customer demand is the primary driver for these business cases, including customer willingness to adapt to and pay for new services; Improved operational efficiency ie the work would be done in order to provide unit cost reductions, capacity uplift etc in the overall provision of the service; The avoidance of future risk ie the work must be done because the risk of not doing so becomes unacceptable; Industry imperative ie the work brings the participant into a compliant position with agreed or mandated standards; and Alignment with investment cycles ie the time is right for a variety of other internal reasons.

30 29 Direction and Priorities The successful evolution of electronic services for Low Value Payments (LVP) will depend on wide adoption by all stakeholders - providers and customers alike. In particular, the solution will not have the desired benefits until customers are attracted to it. To this end, the participants will need to address the drivers of customer behaviour and payment preference as a major part of any implementation programme. Competition Policy Implications In exploring the innovation proposals in this paper, the promotion of efficient competition in payment and related financial services will be a central concern. This means that proposals will need to be developed in a way that continues to promote fair access, competition between services and ease of transition from one service provider to another. These considerations have structural relevance in the following areas: In network arrangements, service utilities on a common network (concept proposals A-2 and A-3) could provide account switching services such as routine transaction logging and transaction re-routing; As proposed new infrastructure developments are analysed, fair access for providers and the facilitation of customer account switching should be design considerations. This will be important for the new credit payment type (concept proposal C-2), real-time clearing (concept proposal D-1) and the invoicing support service (concept proposal E-1); and The promotion of industry-wide standards for customer interfaces can enhance substitutability of services and promote customer transition from one provider to another (concept proposal F-1). Long Term Convergence A further consideration consistent with these discussion proposals is the potential for convergence of all electronic payment types into a common framework for messaging, networks and control, with consequent implications for longer term governance. For example, if ISO20022 is adopted as a payments messaging framework for LVP in Australia and if an industry VPN or hub scheme were established for LVP messaging, then all other payments messages (eg EFTPOS, ATM, credit card) could potentially fall within the same umbrella framework and be supported by the same IP routing infrastructure under common governance arrangements. This would permit a variety of opportunities for further innovation to benefit the customer, as well as the potential for additional operating efficiencies for industry participants. The adoption of international standards and appropriate networking could further extend these opportunities to include international payments both for business and consumer customers. Could this be a future world class structure for our market to strive for? Reader Commentary Direction and Priorities Questions for All 5-1 What is your view of the respective priority of initiatives? 5-2 What is your view of the case for action? Where would you look for benefits? 5-3 What is your view of the emergence of convergence? 5-4 What is your view of the future of the cheque as a payment type? 5-5 What final comments would you like to make on the future of Low Value Payments in Australia?

31 30 6.Consultation and Next Steps The purpose of this paper throughout has been to stimulate and invite comment and to seek further contribution of ideas for consideration. Please feel free to make comments in relation to any aspect of this paper. The various questions posed in each section are grouped for convenience of the reader: Questions for Payment Services Customers those seeking the perspective of a payments user Questions for Payment Services Providers those seeking the perspective of an industry participant Questions for All comments welcome from either Please provide your responses to these questions only where you feel able to contribute. There is no need to respond to all questions. General commentary is most welcome in lieu of responding to individual questions. Feedback received through the consultation process will be consolidated and used to refine the Working Group view of the overall direction for Low Value Payments. This will lead to the formation of a refined roadmap with recommendations for industry developments arising. These will then be subject to individual investment decision making processes by participants. We thank you for your time and interest in participating in this consultation process, and look forward to your response. The closing date for submission of responses and commentary to APCA is Friday 27 June Please send responses by to: Mr Rob Magee, Project Manager rmagee@apca.com.au Submissions will be published on APCA s website unless confidentiality is requested.

32 31 Glossary ACH Access Channel APCS BECS Business Clearing CAAGR CECS Collator Consumer DCITA Report Direct Entry EACT Eurozone FinVoice Giro HVCS Automated Clearing House a means of switching electronic payments between participants and providing various central services to participants. Each participant connects only to the ACH. The means provided to customers to interact with their financial institution. Customer interfaces to payments services are provided via various access channels. Australian Paper Clearing System. The set of rules, procedures and message definitions associated with the cheque clearing. Aka CS1. Bulk Electronic Clearing System. The set of rules, procedures and message definitions associated with Direct Entry (direct credit and direct debit) transactions. Aka CS2. A business as the customer of a financial institution The process of collecting, collating, exchanging and controlling payments instructions between participants in the payments system. Compound Average Annual Growth Rate Consumer Electronic Clearing System. The set of rules, procedures and message definitions associated with EFTPOS and ATM transactions. Aka CS3. A role performed by the RBA on APCA s behalf across all low-value clearing streams in managing the settlement obligations of participants. Each Tier 1 participant sends the Collator an Exchange Summary for each clearing stream following the end of each banking day containing the participant s settlement obligations against each of the other Tier 1 participants. A consumer as the customer of a financial institution Exploration of Future of Electronic Payments Markets, Published by the Australian Government. The collective term for the electronic collection, transmission and application of direct credit and direct debit payments in accordance with BECS procedures, managed through individual IT systems in participating institutions and resulting in clearing files being exchanged between institutions bilaterally. ( DE ) European Association of Corporate Treasurers active in transaction standards. The set of countries in the European Union using the euro as their domestic currency. An e-invoicing utility service provided through banks in Finland and other Scandinavian countries. XML based. A means of making a paper direct credit payment from one customer to another, noting bank and account information rather than the name of the payee. Used extensively in Europe in a number of forms in lieu of cheques. High Value Clearing System. Supports expedited, high value payments between customers settled between participants via RITS at the time of submission on an RTGS basis. HVCS uses SWIFT messaging. Aka CS4.

33 32 Glossary ISO20022 Aka UNIFI. A framework for financial messaging and associated services established through ISO processes drawing on providers and users of financial services in payments, securities, FX and trade services. Low Value Payments (LVP) Low Value is an industry term applied generally to bulk payments and cheques. Excludes cash, cards and RTGS payments. Includes direct credit and direct debit. Participant A financial institution or payment service provider active in the payments industry The customer whose funds are debited. Aka Remitter. Payee The customer in final receipt of the funds. Aka Beneficiary. In the case of direct debits, the payee is the Originator of the transaction. Institution The institution acting for the payer in the remittance of funds. Payee Institution The institution acting for the beneficiary in the receipt of funds. Payment Context Who is paying who and for what. Eg a business making a salary payment to a consumer, or a business making a commercial payment to another business etc. Payment Message The underlying electronic form of the payment instruction passing between financial institutions, structured to standards. Payment Type The means used to carry the payment from one party to another. Cheque, direct credit, direct debit etc are payment types. RBA Reserve Bank of Australia RITS RITS is the RBA s high-value payments system across which settlement of interbank payment obligations occurs on a real-time gross settlement (RTGS) basis via Exchange Settlement Accounts. RTGS Real Time Gross Settlement. Australia s High Value Clearing System (HVCS or CS4) is an RTGS system. SEPA Single European Payments Area. The set of countries in the European Union participating in a common payments market effectively making previously cross-border payments domestic. The payments are all denominated in euro. This includes countries such as Sweden and the UK not using the euro as their domestic currency. SEPA also accommodates non-eu countries such as Norway and Switzerland. Settlement The process of adjusting values held in the exchange settlement accounts of Tier 1 participants in order to meet the obligations of who owes who how much. For APCS, BECS and CECS this is done on a multilateral net basis across all clearing streams. These net obligations are held and entered into RITS by the Collator and settled in the 9am Batch on the business day following exchange. STP Straight Through Processing. Inbound: The ability to handle an incoming message and apply its content to a business process without manual intervention. Outbound: The ability to collate information and generate an outgoing message from a business process without manual intervention. SWIFT The Society for Worldwide Interbank Financial Telecommunications, an international network for financial transactions messaging. TWIST Transactions Workflow Innovation Standards Team a not for profit organisation of corporate treasurers, banks, electronic trading platforms and others setting standards to integrate financial and physical supply chains. A major contributor to ISO VPN Virtual Private Network. A means of connecting various parties to a common network with a common means of addressing one another without having to physically connect to one another. XML Extensible Markup Language. A means of structuring and describing data fields in conjunction with the field itself, rather than outside the field. Its primary purpose is to facilitate the sharing of structured data across different information systems, particularly via the Internet.

34 33 Appendix A Payment Types and General Topology Direct Credit A direct credit payment is an instruction by a payer to its payer institution to pay a sum to a nominated payee s BSB/ account number. This instruction is generally received through an online business banking facility or via an internet banking pay anyone facility. The payment can contain up to 18 characters of reference information at the discretion of the payer. Funds are applied to the payee account prior to 9am on the next business day. Payments such as salaries and dividends are typically made using direct credit. institutions periodically send files of direct credit payments to payee institutions using a decentralised bilateral network. Direct credits are cleared funds and cannot be dishonoured. Settlement between payer / payee institutions is on a net deferred basis. Direct Debit A direct debit payment is subject to prior authority being given by the account owner (payer) to the payee for funds to be debited from the payer s account by the payee. The payee originates the payment through submission of a direct debit transaction to the payee institution which then passes the request to the nominated payer institution to fulfil. Payments such as insurance premiums and utility bills are often made using direct debit. Payment success is reliant on funds being available in the payer account at the time of the transaction. notification is usually via bank statement with simple reference information passed by the originator. Unsuccessful / rejected payments are notified to the originator (debit user) (ie the payee) within 72 hours of the transaction submission. As with direct credit, the payment can contain up to 18 characters of reference information, payee institutions periodically send files of direct debit payments using a decentralised bilateral network. Settlement between payer / payee institutions is on a net deferred basis. BPAY BPAY is a C2B payment service which provides for bill payments by telephone or internet banking services. Payees are allocated a unique BPAY biller code. The payer uses this biller code and a payee-supplied reference number when submitting a payment to its payer institution. Biller codes and reference data are verified at the time of payment submission. Payments are drawn from the payer s account at the time of the transaction, and cannot be dishonoured. institutions periodically send files of payments to a centralised BPAY system. BPAY calculates the respective positions of the participants and effects settlement via the Direct Entry system. Cheque A cheque is an instruction to the payer institution to pay the stated sum to the payee named on the face of the cheque or to the presenter of the cheque. Funds are drawn from the account shown on the cheque. No payee account details are required. The cheque instruction is honoured after the cheque clearing process in complete. This process starts when the payee presents the physical item to the collecting institution as part of a deposit transaction. Usually an electronic payment record containing details from the cheque is created and sent to the payer institution. Procedures managing the flow and reconciliation of cheques are followed. The drawer s account (ie the payer) is generally debited and the payee account is credited overnight after presentment, with funds not available to be drawn until the cheque is cleared some 48 hours later. Payments Topology Customers drive payments. Commerce in the market overall is facilitated by the payments mechanisms provided by the payments industry. Selection of payment type to settle a transaction is a customer decision, and is influenced by the differing features of the payment alternatives made available. The Low Value Payment types share a common logical topology as illustrated in Exhibit A.1. This topology is referred to throughout this paper when drawing comparisons between payment types or when highlighting the impact areas for innovation. This topology is characterised by having an open loop architecture (ie inter-fi). Closed loop on-us or proprietary payment types are excluded for the purposes of this discussion.

35 34 Appendix A - Payment Types and General Topology Exhibit A.1 Simple Payments Topology Triggering Transaction or Arrangement (Invoice, standing order, salary etc) Payee Customer Transaction Interface Customer Transaction Interface Account Institution Transaction Reference Information Payee Institution Account Clearing Information (Inter-FI as well as Customer Authorisation/Notification) Setttlement Processes Underlying Network(s) Key elements of this topology include: Triggering Transaction: The stimulus for the transfer of value is typically some sort of transaction (e.g. a request by the payee for payment for goods or services) or a standing arrangement (eg salary payment). For purchase transactions, the payment request could be represented through a physical or electronic invoice either before or after the goods/services are released. Customer Interface: The payer is provided with a choice of various access channels and presentation services to make payments (eg personal or business internet banking facilities, telephone, branch or cheque etc). These are provided by the Institution for the purpose of capturing payment instructions and associated detail and carrying this information to the payment system. The payee needs an ability or decision to accept payments of various types, (eg providing BSB and account details or Sorry, no cheques ) and this is accompanied by a means to determine and confirm receipt of that payment (eg personal or business internet banking facilities, statements etc). These are provided in conjunction with the Payee Institution to carry and present this information to the payee. Institution: The payer institution provides access channels to the payer and provides access to a store of value from which the payer will transfer funds. In turn, the payer institution provides the necessary interfaces to the payments system to effect that transfer of funds. Payee Institution: The payee holds the payee institution responsible for the allocation of funds received to the payee account. The payee institution provides access channels through which payee notifications are provided (eg statements, internet or business banking facilities etc), as well as the necessary interfaces to the payments system to receive funds and apply them accordingly. For direct debit users, the payee institution provides the means for the payee (beneficiary) to originate the transaction against prior authority given by the payer customer. Transaction Reference Information (Non-Value Data): The payment is generally accompanied by reference information to enable the payee to reconcile the payment received against the transaction. This information may be transmitted by means outside the payment (eg mail or fax or payslip), or may be carried along with the payment detail through the payment system (eg for presentation on the payee s statement or for notification etc). (Illustrated). Clearing Information (Payment Messages): A variety of information flows provide the controls between financial institutions underpinning individual or batched payments to ensure the integrity of the payment system. These exchanges occur multiple times per day.

36 35 Appendix A - Payment Types and General Topology Authorisation / notification information flows are about an individual payment, and not necessarily in the payment message itself. While these messages today are inter-fi for control purposes, there could be logic for providing customer messages in certain circumstances. Settlement Information: The final exchange of value between financial institutions through respective exchange settlement accounts at the RBA via the RITS system. The recognition of value for the beneficiary customer (payee) may be logically uncoupled from the inter-fi settlement process. For example an institution may elect to provide earlier access to value by customers under certain circumstances. Underlying Networks: The infrastructure used by payments system participants to exchange payments and related information. Network connections may carry a wide variety of traffic, not just LVP related. In Australia connectivity between institutions is presently based on bilateral links (predominantly leased lines) in accordance with bilaterally agreed commercial arrangements. Accordingly, each participant maintains a physical connection to each other participant. The BPAY system uses individual links from institutions to a central system for scheme clearing purposes. Other jurisdictions make use of central automated clearing house architecture (ACH networks), either IP based or using legacy technologies, where each participant connects only to a central hub. VPN alternatives using IP technology permit a single logical connection to a network with all other participants being addresses on the network. These are often called a COIN (Community Of Interest Network). The information components in the payments chain may occur at different times. For example, a payment is made by a customer, it is cleared at a later time by the payer institution (generally overnight), settlement is effected (next day), notification is available to the payee after 9am, with value recognition following (immediate for direct credit, 3 days for cheques). Importantly, the customer process involved in selecting a payment type to make a payment (payer) or in nominating a payment type for acceptance (payee) is driven by factors along this extended transaction chain. This means that any initiative to attract customers from one payment type to another needs to be mindful of the requirements to be met by their transactions and the ability of the respective payment types to meet those requirements. Exhibit A.2 summarises existing Low Value Payment types within this topology. Exhibit A.2 Low Value Payments Fit to Topology Customer Interface (eg) Transaction Reference Information Clearing Information Direct Credit Direct Debit BPAY Cheque File transfer File transfer Telephone or Internet Cheque book Online banking banking File to bureau Internet banking Branch deposit 18 character Advice to lodgement ref. Can be dishonoured. Separate fax or mail advice. Good funds. BECS processes between institutions Biller Number & Customer Reference Number. Good funds. institution to scheme to Biller institution. Net positions to BECS. Settlement Deferred net settlement via RITS processes Information Network Bilateral direct links Each FI has links to the scheme hub, several IP. Transactions Not presently available in Australia on a broad industry basis Facilitation Remittance advice slip or other attached documentation. Can be dishonoured. APCS processes between institutions Via bilateral links

37 36 Appendix B Summary International Developments Message Standards There is an increasing view internationally that the ISO20022 framework for payments messaging should be embraced directly for new services developments. UK s Faster Payments initiative and Europe s SEPA are based exclusively on ISO The International Payments Framework (IPF) is based on ISO20022 and the USA Wire Transfer System is contemplating a migration away from STP820 (EDI) to the richer free XML structure of ISO The ISO20022 format would use its XML structures to suit the needs of various applications or market segments, based where possible on international standards such as TWIST, or based on segment specific structures defined for the purpose. This framework is supported by both proprietary and open networks and is now the European standard. Long alpha account numbers are supported, allowing payments to have funds paid to/from credit card accounts as well. So what is it? ISO20022 is a framework within which standardised financial messages are to be developed. This is known as the UNIversal Financial Industry (UNIFI) message scheme. UNIFI does not describe the messages themselves, it is a recipe to develop message standards. The main ingredients of this recipe are a development methodology, a registration process and a central repository. One of the most interesting characteristics of UNIFI is that it provides a way to achieve the long term convergence objective, and at the same time, it also provides a way to facilitate the short term coexistence of several standards. (Eg a BECS message may be described under the ISO20022 framework). The cornerstone of the UNIFI framework is its Financial Repository where approved models, transactions, messages and their components are stored. The Repository content is published on the UNIFI website. It contains two parts: the Data Dictionary, with all the components used in models and message formats, and the Business Process Catalogue, with the business models, transactions and messages. The organisation of the repository is described in the UNIFI standard, as well as the process to approve new repository items. The defined standards (and their XML) are held in the repository for industry use. ISO20022 has 4 focal areas for message development: payments, securities, foreign exchange, and trade services (including e-invoicing). In the payments realm, the instruments supported are credit transfers, cheques, direct debits, debit and credit cards. A variety of message standards are defined within the framework suited to the needs of various stakeholders (eg financial institutions, private and corporate customers, payment factories, central banks, clearing houses and RTGS systems) using these instruments. In particular, the message standards for payment initiation, cash management and associated data management, inter-fi clearing and settlement have all been defined. Country Snapshots As part of our LVP process, we have been keen to gain further insight into the way in which payments innovation has been addressed in other jurisdictions. Direct contact has been made with: Canada, (via the Canadian Payments Association) because of similar scale and concentration of participants and apparent continued predominance of cheque payments; UK, (via APACS) because of history of recent innovation along with similar concentration of participants; Netherlands, (via Netherlands Bankers Association) because of similar scale of domestic market to Australia and reputation for innovative consumer payment services (C2B and C2C); and Finland, (via Federation of Finnish Financial Services) because of an innovative approach by the banking sector to invoicing and payments services for the B2B supply chain.

38 37 Appendix B Summary International Developments Canada General: An interesting observation from discussions with Canada was their recognition that major changes to improve cheque usage (truncation, imaging, statements with image links etc) is causing business customers to review why they are using cheques in the first place. There is no suitable direct credit product in Canada to meet broad B2B needs it seems less featured than our DE and there is no apparent leadership on standards to replace it despite general agreement of the need to do so. Messaging: Legacy standards are in use as in Australia. No agreement as yet as to what form they may evolve to in future. UK Networking: The network structure in Canada is similar to Australia, with bilateral arrangements in place. The underlying network infrastructure has now been converted to an IP based VPN, dramatically lowering operating costs. General: The UK Faster Payments initiative was driven by a slow electronic payments cycle and regulatory pressure to address timely settlement of telephone and internet payments, and has successfully addressed these issues. It will operate in parallel with BACS (similar to our BECS) for some time and active discouragement of cheques is being contemplated. Vocalink, the operator of this service, foresees a longer term convergence of payment types over a common infrastructure. Messaging: Faster Payments is built within the ISO20022 framework, enabling various message structures to be defined. Netherlands Networking: The UK infrastructure for all payment types is ACH based, with Vocalink as the hub service operator. In addition to payments processing, this hub also enables a variety of value added services to be made available to all participants for various market applications. General: Customers do not use cheques in the Netherlands, giro paper is the traditional no-tech instrument and is in decline. The Netherlands is dealing with the major process of implementing SEPA payment standards for direct credit (SEPA credit transfer) and SEPA direct debit. These standards are based on ISO20022 XML messaging and processes and will become the default in all Eurozone countries. In the Netherlands, there is a belief that the local services were of a much lower cost and inherent complexity, so are moving a bit reluctantly. Local direct credit and direct debit services will be phased out completely over the next 5 years, although various value added services (eg online debit) will remain in the Netherlands market until SEPA catches up. Messaging: SWIFT message standards are used for domestic LVP. These are being replaced by the SEPA mandated ISO20022 framework. Networking: SEPA permits banks to select a Clearing and Settlement Mechanism (CSM) of their choice. The fundamental requirement is to be able to connect any to any via intelligent routing of payments messages. While not mandated, the most common type of connectivity is the ACH hub model, with the various ACHs connecting variously to one another. This is known as the Pan European Automated Clearing House (PEACH) framework. SWIFT has been selected as the primary inter-bank CSM in the Netherlands.

39 38 Appendix B Summary International Developments Finland General: Very high penetration of electronic payments (direct credit). Customers do not use cheques, and giro is in rapid decline. SEPA project activity is underway in Finland, with the imminent phase out of local direct credit and direct debit services. The unique Finvoice system for B2B commerce will remain for the foreseeable future until ISO20022 definitions become accepted and implemented (eg TWIST standards or similar). Finvoice is analogous to our BPAY system in that it is designed for a specific market (B2B commerce in this case) and is a nationally branded, trusted and well understood service. All businesses have a Finvoice Number registered. All invoices contain this number, and all payments are made from the payer referencing their Finvoice number to the Finvoice number of the payee. Direct credit is the underlying transport for the payment. Invoices themselves may be paper (with barcode) or electronic. Commercial software suppliers have integrated Finvoice support into accounting applications. Finvoice is not yet deployed for consumer bill payments, where internet banking direct credit is the dominant payment type. Messaging: Domestic SWIFT-derived message standards used bi-laterally. SEPA ISO20022 under implementation. Networking: The existing bi-lateral network structure is being replaced by an ACH model for the SEPA implementation via the Euro Banking Association s (EBA) STEP2 system. It was deemed more economical to draw on an existing service with the necessary pan-european connectivity and message handling abilities than to build this capability domestically. The non-sepa payment types will remain on the bi-lateral network for the time being.

40 Australian Payments Clearing Association Limited ABN Level 6 14 Martin Place Sydney NSW 2000 Tel Fax Australian Payments Clearing Association