The Reserve Bank of Australia (RBA) and the Australian payments industry are working together to establish a new payments system infrastructure to support future innovations in payments for businesses and consumers in Australia; the ‘fast payments’ solution. At the RBA’s Payments System Board (PSB) meeting on 15 February 2013, the Real Time Payments Committee (RTPC), a new payments industry committee with representation from a range of institutions, put forward its proposal to establish an industry based project to deliver the ‘fast payments’ solution.1
This article highlights this Australian initiative for developing countries as an alternative path to ensuring the success of payments innovation projects aimed at accelerating financial inclusion.2 This initiative demonstrates a level of engagement between a payments regulator and industry participants which goes beyond public-private dialogue; it involves a regulator setting high level strategic objectives for the industry and then assisting the industry to ensure those objectives are met.
The RBA is keen to see industry players focus their efforts on this initiative.3 Australian businesses and consumers have, in recent years, enjoyed greater payments innovations by Australian banks in the form of greater product differentiation and increased speed in processing payments. However, these innovations run on the banks’ existing payments system infrastructure which are becoming out-dated, inflexible and exposed to greater operational risk. There is a general acceptance by Australian payments industry players that their systems need greater operational resilience.4 Consumer demand for increased banking convenience through greater technological innovation and payments efficiency is also driving banks to develop their underlying systems.5
The changes being proposed in Australia will support the development of more efficient and innovative payments products and processes. Banks’ customers (both individuals and businesses) will be able to ‘Pay Anyone, Anywhere, Anytime’ with cleared funds. The RBA has noted the industry’s proposal makes substantial initial progress towards meeting the RBA’s strategic objectives. Namely the proposal aims to facilitate “fast payments for consumers and businesses, with richer information, easier addressing and close to immediate funds availability to the recipient on as near to a 24×7 basis as practicable, by end 2016.”6 Settlement funds will be final and irrevocable; eliminating the settlement risk which is present in many retail payment systems today.
This payments initiative requires an overhaul of existing payments system infrastructure as it involves transforming from batch-based overnight processing to real time processing. This is a large and complex project for a developed country such as Australia where banks’ core payments systems are old, complex and with excessive interdependencies.7 Furthermore, payments players must work together on this initiative because they are changing the underlying infrastructure into which all payments players connect. Such cooperation is difficult amongst competitors focused on protecting their depositor base and their existing investments in payments products and arrangements. However, cooperation is the key to the success of the initiative.8
In developing countries, new payment methods and payments innovations have been hailed as a means towards greater financial inclusion. However, a stumbling block in many countries has been how to design a new payments product or system which can reach a critical mass of end-users to truly enable users to ‘Pay Anyone, Anywhere, Anytime.’ New payments products and systems are often confined to a limited user group, determined by the end-user’s choice of Telco provider or bank or the dominant Telco provider or bank in that particular market. The initiative underway in Australia to overhaul the payments infrastructure takes a step back from the myriad of innovations in end-user payments products and systems and looks at how to develop the architecture of the underlying infrastructure so as to provide adequate support for ongoing innovations in payments. This is not to say that there has not been a substantial focus on building interoperable payments products and systems in developing countries9, however, that focus is made a lot easier with a payments regulator assisting the drive towards true end-user interoperability.
While it may be argued such payments system development is too costly for developing countries to consider, it is possible developing countries face a different cost structure to developed countries as the former are unlikely to have the vast legacy systems which the latter must contend with; the developing countries may be able to ‘leap frog’ some of costs involved in such infrastructure development work.
Developing countries would need assistance from aid organizations to have their capacity strengthened to carry out such reforms. A lack of resources and trained staff prevents regulators from effectively adopting high level strategic approaches to financial access reform.10
Supporting and driving this type of payments system reform in developing countries could provide these countries with a much stronger foundation on which to build payments products and processes accessible by all, the banked and unbanked, thereby truly working towards the goals of financial inclusion.
1 Reserve Bank of Australia, “Industry Proposal for a Fast Payments Solution”, 20 February, 2013
2 This article is an updated and abridged version of an earlier article posted on 17 February, 2013
3 The RBA made this point in its “Strategic Review of Innovation in the Payments System: Conclusions” in June 2012. This document is widely used and referenced throughout this article.
4 This acknowledgement of a need for greater operational resilience was highlighted in a paper by the RBA: “Operational Incidents in Retail Payments Systems: Conclusions”, November 2012, p3.
5 See Dr John Laker’s speech to the American Chamber of Commerce in Australia, “Life in the Slow Lane,” 11 May 2012 (Dr Laker is Chairman of the Australian Prudential Regulatory Authority)
6 RBA, Op. cit., February 2013
7 As highlighted in the paper by the RBA: “Operational Incidents in Retail Payments Systems: Conclusions,” November 2012, p3.
8 RBA, Op. cit., February 2013
9 See, for example, The Economist, Schumpeter, “All together now”, 17 January 2013
10 See the Consultative Group to Assist the Poor and World Bank Group, 2010. “Financial Access 2010, The State of Financial Inclusion Through the Crisis”
Louise Malady is a researcher and consultant for mobile banking and payments regulation based in Sydney, Australia. Louise has over 15 years of experience in payments, obtaining her expertise with institutions including the Asian Development Bank, the Monetary Authority of Singapore and the Reserve Bank of Australia. Louise holds a Master of Applied Finance from Macquarie University, Sydney.