About the Payments System
The ‘payments system’ refers to arrangements which allow consumers, businesses and other organisations to transfer funds usually held in an account at a financial institution to one another. It includes the payment instruments – cash, cheques and electronic funds transfers which customers use to make payments – and the usually unseen arrangements that ensure that funds move from accounts at one financial institution to another (see Retail Payments in Selected Countries: A Comparative Study and Clearing and Settlement Arrangements for Retail Payments in Selected Countries).
Cash is probably the most important instrument for small-retail transactions and for transfers of value between individuals. Anecdotal evidence and experience suggest that cash transactions account for the dominant share of the number of transactions, but a very small share of their value. The ready availability of cash through automated teller machines (ATMs) has sustained its use. In 2009, withdrawals from ATMs averaged $12.6 billion a month, which equates to around $575 per person.
Non-cash payments account for most of the value of payments in the Australian economy. On average, non-cash payments worth around $220 billion are made each business day, equivalent to about 20 per cent of GDP.
More than 75 per cent of the value of non-cash transactions is accounted for by a small number of high-value payments made through Australia's real-time gross settlement (RTGS) system. Most of the value of these payments relates to the settlement of foreign exchange and securities markets transactions.
The migration of large business payments to the RTGS system has meant a decline in the importance of the cheque as a payment instrument. Less than 1.5 million cheques are written each business day and they account for just 3 per cent of the value of non-cash payments.
In contrast to the declining importance of cheques, the use of electronic payment instruments at the retail level has been growing rapidly. In 2009, transactions (both purchases and cash withdrawals) undertaken using either credit or debit cards averaged about 200 per person, an increase of 35 per cent on the level of five years earlier.
For many years, Australian governments and businesses have made extensive use of direct entry credits for social security and salary payments. On the other hand, there has been a traditional reluctance on the part of consumers to use direct debits for bill payments. This appears to be disappearing with direct debit payments growing strongly in recent years. Total direct entry payments now account for about 20 per cent of the value of non-cash payments.
Most payment systems involve two or more financial institutions and/or other payments providers, requiring payments to be 'cleared' between them. For instance, details of a cheque drawn on one financial institution and deposited at another must be returned to the first financial institution so that it can debit its customer's account and verify that the customer has sufficient funds.
Arrangements for clearing most payment instruments in Australia are co-coordinated by the Australian Payments Clearing Association (APCA). APCA is a limited liability company with a board of directors drawn from its shareholders – banks, building societies and credit unions. APCA manages clearing for cheques, direct entry payments, ATMs and debit cards and high-value payments.
Other payments clearing systems independent of APCA include credit cards (MasterCard and Visa) and the BPAY system for payment of bills. There are also two securities settlement systems with separate payment arrangements. They are the Austraclear System which settles trades in CGS and other debt securities and the Clearing House Electronic Sub-register System (CHESS) for settlement of equity trades.
When payments are cleared between institutions, they accrue obligations which must be settled. In Australia, final settlement of obligations between payments providers is by entries to their Exchange Settlement (ES) accounts at the Reserve Bank. Large-value payments are settled one-by-one on a real-time gross settlement (RTGS) basis, while retail payments are settled as a batch on a deferred net settlement basis. The criteria which payments providers must meet to open an Account are set out in the RBA Media Release Eligibility for Exchange Settlement Accounts and further background is in the Bulletin article The Role of Exchange Settlement Accounts.
Role of the Reserve Bank
A safe and efficient payments system is essential to support the day-to-day business of the Australian economy and to settle transactions in its financial markets. Accordingly, the Reserve Bank of Australia has important regulatory responsibilities for the payments system and plays a key role in its operations.
The Payments System Board (PSB) of the Reserve Bank oversees the payments system in Australia. The PSB is responsible for promoting the safety and efficiency of the payments system in Australia. Through the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998, the Reserve Bank has one of the clearest and strongest mandates in the world to oversee the operation of the payments system.
The Reserve Bank's responsibilities for stability build on the long history of central banks' involvement in this area. The introduction of real-time gross settlement (RTGS) in 1998 eliminated the build-up of settlement exposures between financial institutions as a result of the exchange of high-value payments and transactions in debt securities. In 2002, Continuous Linked Settlement (CLS) joined Australia’s RTGS system, allowing foreign exchange transactions involving the Australian dollar to be settled through CLS. The Reserve Bank, along with the other central banks whose currencies are settled through the CLS arrangements, undertake cooperative oversight of CLS under an agreed protocol.
The Reserve Bank implemented financial stability standards for central counterparties and securities settlement facilities in 2013. The Standards seek to ensure that clearing and settlement facilities identify and properly control risks associated with their operations, thereby promoting the stability of the Australian financial system. The Standards replaced previous standards determined in 2003 to incorporate changes to international standards for clearing and settlement facilities. The Standards for securities settlement facilities apply only to facilities that settle obligations in excess of $200 million in a financial year. This ensures that the Standards apply only to securities settlement facilities that could potentially pose a risk to the stability of the financial system, exempting small systems from unnecessary regulation.
Australia was among the first countries in the world to make efficiency of payment systems a
statutory objective of the central bank. In pursuit of this mandate, the Reserve Bank has encouraged
a reduction in cheque-clearing times and the take-up of direct debits as a means of bill payment, and
taken a number of steps to improve the competitiveness and efficiency of card systems. Initially the
latter focus was on credit card systems. In 2001, the Bank designated the Bankcard, MasterCard and Visa
credit card systems as payment systems under the
Payment Systems (Regulation) Act 1998. Designation is the first step in the possible establishment of standards and/or an access regime for a payment system. After extensive consultation, the Bank determined Standards for the designated schemes which lowered interchange fees and removed restrictions on merchants charging customers for the use of credit cards, and imposed an Access Regime which facilitates entry by new players.
The interchange fee Standard requires the fees paid by transaction acquiring institutions to card issuing institutions to be no higher, on a weighted-average basis, than a cost-based benchmark. Initially separate benchmarks were calculated for each scheme but, in 2006, the Standard was amended to provide for the calculation of a common benchmark to cover both the MasterCard and Visa schemes. The amended Standard does not apply to the Bankcard scheme, which was closed at the beginning of 2007. The common benchmark applying for the three years from 1 November 2006 is 0.50 per cent. This compares with the average benchmark interchange fee for the preceding three years of a little under 0.55 per cent.
Under the Standard on merchant pricing, merchants are now permitted to impose a charge on customers who pay with credit cards. Previously, the rules of the MasterCard and Visa schemes prohibited such charges. American Express and Diners Club have agreed voluntarily that merchants can impose charges on customers who pay with their cards. American Express has also agreed to amend its contracts with merchants to allow them to encourage their customers to pay with another card or payment method.
The introduction of Access Regimes has allowed specialist credit card institutions (SCCIs), authorised and supervised by APRA, to apply to participate in the credit card schemes, as issuers or acquirers. Formerly, the scheme rules required that participants be deposit taking institutions authorised by APRA.
In 2004, the Reserve Bank designated the Visa Debit system and the EFTPOS debit card system as payment systems under the Payment Systems (Regulation) Act 1998. After extensive consultation, the Bank determined Standards for the setting of interchange fees for both systems, and the removal of the ‘honour all cards’ rule in the Visa system. It also determined an Access Regime for the EFTPOS and Visa Debit systems.
The interchange Standards have led to lower interchange fees. In the case of the EFTPOS system, the Standard involves the adoption of a cap and floor on interchange fees. For Visa Debit, there is a cap on the weighted-average interchange fee in that system. The interchange fee benchmark applying to the EFTPOS system for the three years from 1 November 2006 is 5 cents per transaction; the minimum fee is 4 cents per transaction. The interchange fee benchmark for the Visa Debit system is 12 cents per transaction for the three years from 1 November 2006.
The ‘honour all cards’ Standard requires the removal of the requirement that merchants accepting Visa credit cards also accept Visa Debit cards. It also requires that Visa Debit cards be identified both visually and electronically to allow merchants to decline acceptance if they so choose.
The EFTPOS Access Regime is relatively limited in nature. It was designed to complement an Access Code, developed voluntarily by the industry, which addresses most of the aspects of access to the EFTPOS system. The Access Regime sets a cap on the price that an existing participant can charge an entrant seeking to establish a connection and sets out provisions that will ensure that negotiations over interchange fees are not used to frustrate entry. The Visa Debit Access Regime is similar to that for the Visa credit card scheme, allowing the participation of SCCIs.
During the course of the development of these reforms, a MasterCard-branded debit card was released in Australia. The RBA indicated that this new scheme debit system would be subject to the same requirements as the Visa Debit system. Both schemes were given the opportunity to voluntarily comply with the reforms. MasterCard provided an undertaking to this effect, but Visa didn’t. The interchange Standard and the ‘honour all cards’ Standard were therefore imposed formally on the Visa Debit system.
In 2008, the Reserve Bank designated the ATM system as a payment system under the Payment Systems (Regulation) Act 1998. After extensive consultation, the Bank determined an Access Regime for the ATM system which supported complementary industry-based reforms. The Access Regime sets a cap on the connection cost that can be charged to new entrants to the ATM system and prohibits the charging of interchange fees except in specific circumstances. It also includes a prohibition on the charging of fees for establishing direct clearing/settlement arrangements and allows the Bank to exempt certain arrangements from compliance with aspects of the Regime where this is in the public interest.
The ATM reforms, which came into effect on 3 March 2009, were designed to: make the cost of cash withdrawals more transparent to cardholders and place downward pressure on the cost of ATM withdrawals; help to ensure continued widespread availability of ATMs by creating incentives to deploy them in a wide variety of locations, providing consumers with choice and convenience; promote competition between financial institutions; and make access less complicated for new entrants, and therefore strengthen competition. The reforms have resulted in customers now being charged directly for withdrawals by the ATM owner and the elimination of ‘foreign’ ATM fees.
The Bank consults closely with participants in the payments industry. Bank officers represent the Bank on a number of formal industry committees responsible for the day-to-day management of payments clearing systems and are engaged regularly in informal meetings with industry representatives and other regulators.
The Reserve Bank is a member of a number of international groups focussing on payments. It has contributed to work undertaken by the Bank for International Settlements on Core Principles for Systemically Important Payment Systems: foreign exchange settlement risk; retail payments and their clearing and settlement systems; and securities settlement systems, see Disclosure Framework for Securities Settlement Systems. The Bank is also represented on the EMEAP Working Group on Payment and Settlement Systems which, amongst other publications, has produced a guide to payment systems in East Asia and the Pacific: Payment Systems in EMEAP Economies.
Detail on the structure and operations of the Australian payments system can be found in Payment Systems in Australia (Red Book) and the activities of the Bank's Payments System Board are reported in its Annual Reports.