New Payments Platform Functionality and Access: Consultation October 2018

The Reserve Bank of Australia is seeking views from interested stakeholders about the functionality of, and access to, the New Payments Platform (NPP). The Australian Competition and Consumer Commission (ACCC) is providing input and assistance on access issues, and will participate in the consultation.

Background

The NPP, launched in February 2018, is a fast payments system developed by a consortium of 13 financial institutions, including the Reserve Bank. The NPP operates on a 24/7 basis and allows financial institutions to provide immediate funds availability to payment recipients, even where the payer and payee have accounts with different financial institutions. NPP payment messages use the ISO20022 message format and can carry much richer remittance information than the 18 characters currently available for Direct Entry payments. In addition, the NPP provides a ‘PayID’ service, which provides the option for a payment to be made to a registered phone number, ABN or email address (instead of addressing a payment to a BSB and account number).

The NPP was developed to address a number of gaps in Australia's retail payment system that the Reserve Bank had identified in its 2012 Strategic Review of Innovation in the Payments System.^[1] It is owned and operated by NPP Australia Limited (NPPA), a public company whose current shareholders are the financial institutions that funded the development of the NPP. NPPA's directors include four appointed by the four major banks, four representing small- and medium-sized institutions, two independents and one appointed by the Reserve Bank, with each director holding an equal vote.^[2] Importantly, NPPA's constitution notes that an objective of NPPA is to ‘operate the NPP in a manner that promotes the public interest’, including by ‘facilitating fair access to the NPP as mutually owned utility infrastructure’ and ‘ensuring ongoing investment in the NPP to meet the changing needs of financial institutions and users of the Australian payments system.’

In 2017, the ACCC authorised several of the provisions of the NPP rules relating to the rights of NPPA to suspend and terminate NPP membership, membership eligibility criteria and the obligation to settle payments via the RBA's Fast Settlement Service.^[3] These provisions may have otherwise breached certain of the competition provisions under the Competition and Consumer Act 2010, because they involve agreements between businesses which may be considered to be competitors. The ACCC can grant authorisation if it is satisfied that the likely public benefits outweigh the likely public detriments.

NPP Roll-out

The NPP is a major and complex piece of payments infrastructure and was a significant, and costly, project for the industry. The financial institutions currently connected to the NPP have been rolling out fast payments services to their customers gradually and according to their own schedules, with some choosing to bring on particular channels or customer segments earlier than others. While the roll-out has been somewhat slower than initially expected, all four of the major banks are now providing NPP payments for most of their retail customers and increasingly, their business and corporate customers. Importantly, around 70 smaller financial institutions that are not NPPA shareholders also have connections to the NPP through agents and are therefore able to offer fast payment services to their customers.

Consistent with the gradual rollout, NPP transactions have been growing steadily since its launch. Over 2 million PayIDs had been created as of end September, and over 35 million payments worth about $30 billion had been sent through the platform. The average value of an NPP payment is nearly $1000, consistent with the NPP being used for some larger-value business payments that previously would have gone through the Direct Entry system, although most transactions are significantly smaller. These figures suggest that the adoption of the NPP is proceeding at least as quickly as occurred for other fast-payment systems in some other countries.^[4] Over time, it is expected that the NPP will replace an increasing share of Direct Entry payments, particularly those that are more time-critical or that benefit from the additional data capabilities.

NPP Access

The NPP was designed to facilitate a number of different types of access to the central infrastructure to cater for different business models, with risk-based eligibility criteria applying to each:

• Direct participants connect to the NPP using their own NPP payment gateway. They are required to be an authorised deposit-taking institution (ADI) or restricted ADI (RADI), hold an exchange settlement (ES) account at the Reserve Bank, and become shareholders in NPPA. They must meet prudential and operational standards set by APRA. Direct participants are able to clear and settle payments and may provide indirect connectivity to the NPP for other institutions. Currently, there are eight direct participants – the four major banks, the Reserve Bank's Banking Department and three ‘aggregators’ that connect a range of other indirect participants and identified institutions.^[5]
• Indirect participants connect to the NPP using a direct participant's NPP payment gateway. Indirect participants are also required to be an ADI (or RADI), hold an ES account at the Reserve Bank, and become shareholders in NPPA. This type of access may suit, for example, a bank that is a shareholder in NPPA but does not need or want to operate its own payment gateway. There are currently two indirect participants.
• Identified institutions connect to the NPP via a direct participant's NPP payment gateway. Payments are cleared and settled on behalf of the identified institution by the direct participant (which may be an aggregator). As mentioned above, around 70 smaller banks, credit unions and building societies (which are not shareholders in NPPA) have already obtained connections to the NPP as identified institutions. Identified institutions are not required to be an ADI (or RADI) or hold an ES account at the Reserve Bank in order to make NPP payments. One non-financial corporate has also been connected in this way, with NPPA expecting several more in the near term. Identified institutions hold accounts with the direct participant.
• Connected institutions will connect to the NPP using their own NPP payment gateway. Connected institutions are not required to be an ADI (or RADI) or hold an ES account at the Reserve Bank, but they need to be financially solvent and meet technical requirements. They will be able to send payment initiation and other non-value messages, with these messages cleared and settled by direct participants. This type of access may suit entities that are not ADIs but would benefit from operating their own payment gateways to send a high volume of payment initiation messages; examples could include share registries or payroll providers. So far there are no connected institutions but NPPA has reported that it is in discussions with interested parties.

Table 1: NPP Eligibility Criteria

	Direct Participant	Indirect Participant	Identified Institution	Connected Institution
Shareholder of NPPA
Licensed by APRA as an ADI (or RADI)
Hold an ES account at the RBA
Connect via own payment gateway
Connect via third-party payment gateway
Source: NPPA

Functionality

With the exception of corporate entities connecting as either identified or connected institutions, customers (including individuals, businesses and government entities) access the NPP through the services offered by their financial institutions. These services will typically take advantage of ‘overlay’ services. The first overlay, known as ‘Osko’, was developed by BPAY. Osko offers customers the ability to send payments from their bank account to another with real-time funds availability, via an online or mobile phone application provided by their financial institution.

At this point, Osko is the only overlay service provided for the NPP. However, BPAY is planning on expanding Osko's services to include the ability to send a document with a payment and the ability to make and receive payment requests. Over time, it is envisaged that a range of other payment services, developed by different parties, will utilise the NPP to offer a variety of payment options tailored to particular contexts and addressing a range of customer needs. The layered architecture of the NPP was designed to facilitate innovation in overlay services from a range of different organisations. NPPA has a process and eligibility requirements for entities that wish to develop overlay services for the NPP.

NPPA is also planning on enhancing the functionality of the NPP by building additional infrastructure that is analogous to the central PayID functionality. One initiative that is in development is a central ‘consent and mandate service’, which would store payment authorisations by consumers and businesses, including those associated with regular direct debit payments. This functionality could be useful in the future in facilitating open banking and also allowing consumers to switch more easily between financial institutions. NPPA has recently announced an API framework, including three sample APIs, to support third parties who wish to leverage the NPP's capabilities. NPPA and SWIFT have also announced an NPP API sandbox that will help third parties build and test NPP-based applications in an independent environment.

Consultation

There are three reasons for this consultation.

First, the Reserve Bank has previously committed to review the operation of the NPP sometime after its launch. For example, the 2017 Annual Report of the Payments System Board noted that ‘at some point after the NPP is operational, it will be appropriate for the Payments System Board to assess how well the strategic objectives [that prompted the development of the NPP] have been met’.^[6]

Second, the Productivity Commission's recent report into competition in the Australian financial system made some recommendations concerning the NPP. Specifically, the report recommended that:^[7]

• the Payments System Board should impose an access regime on the NPP, to ensure widespread access of both financial system providers and consumers
• the ACCC and the Payments System Board should investigate different ways to improve the functionality of the NPP to promote competition.

Third, the Reserve Bank and the ACCC are aware that some entities have expressed concerns (some of which are set out in the Productivity Commission's report) that the services currently offered through the NPP, or the ways of accessing the NPP, do not currently meet their needs. For example, some corporates may have business models that would require the ability to execute ‘pull payments’ such as direct debits, a service that is not yet available through the NPP. In other cases, entities have noted difficulties in using NPP services due to challenges in accessing banking services more broadly. For example, some entities have expressed interest in becoming direct participants in NPP (instead of identified institutions), partly because they have found it difficult to establish or maintain transaction accounts and banking relationships. Finally, concerns have also been raised that the governance structure of NPPA, particularly the role of the incumbent participants, could give rise to conflicts of interest that may impede access for new entrants. Some similar concerns were raised with the ACCC during its authorisation process.^[8] In some cases these concerns relate to the requirement for NPP participants to become shareholders in NPPA.

Therefore, the Bank, with support from the ACCC, is seeking views from stakeholders on issues relating to the functionality and access arrangements for the NPP. In particular, we are interested in views on whether the various ways of accessing the NPP, and their associated technical and other eligibility requirements, are adequate for different business models, or whether other forms of access or eligibility requirements may be justified.

Interested parties should provide their views in writing, by no later than 30 November 2018, to: nppsubmissions@rba.gov.au. Submissions will be published on the Bank's website, unless they are clearly marked as confidential or the Bank determines that there are reasons not to do so. The Bank will endeavour to meet with stakeholders that make submissions and, depending on stakeholder interest, may conduct an industry roundtable.