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.
The use of cash as a payment method remains widespread. One of the most comprehensive sources of data on individual cash payments is the Reserve Bank's consumer payments use diary study. This study was first undertaken in 2007 and was repeated in 2010 and 2013. These studies indicate that consumers used cash for most of their low-value transactions, with around two-thirds of the number of payments under $20 made using cash in 2013. Overall, cash payments accounted for 47 per cent of the number and 18 per cent of the value of all payments made by individuals in the 2013 study, with some substitution away from cash use and towards electronic methods observed over the three years between the 2010 and 2013 studies. The most common way consumers withdraw cash is through ATMs, which accounted for around 70 per cent of the total number of cash withdrawals and around 60 per cent of the value of withdrawals in 2014.
Non-cash payments account for most of the value of payments in the Australian economy. On average, in 2014 non-cash payments worth around $227 billion were made each business day, equivalent to around 14 per cent of annual GDP.
Over 70 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 saw a decline in the importance of the cheque as a payment instrument. In 2014, around 7 cheques were written per person in Australia, down from 26 cheques per person 10 years earlier. A significant share of cheque use is related to commercial payments, and financial institution (‘bank’) cheques for certain transactions such as property settlements.
In contrast to the declining importance of cheques, the use of electronic payment instruments at the retail level has been growing rapidly. In 2014, transactions (both purchases and cash withdrawals) undertaken using either credit or debit cards averaged about 250 per person, an increase of around 55 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. Consumers and businesses also establish direct debits for bill payments. Direct Entry payments are an important part of the payments landscape. These payments continue to account for the bulk of the value of non-cash retail payments (i.e. non-RTGS transactions).
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 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), the domestic debit card system managed by eftpos Payments Australia Limited (ePAL) and the BPAY system for payment of bills. As discussed in the 2014 PSB Annual Report (p46-47), following the Conclusions of the Strategic Review of Innovation in 2012, the industry has been working on a project to build a new real-time retail payment system – the New Payments Platform (NPP). The NPP is expected to be in operation in the second half of 2017. 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 on a net settlement basis. The Reserve Bank has established a policy setting out criteria that payments providers must meet to open an ES Account.
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. It is responsible for promoting the safety and efficiency of the payments system and 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 in relation to payments systems.
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, and other central banks whose currencies are settled through the CLS arrangements undertake cooperative oversight of CLS under an agreed protocol.
Under Part 7.3 of the Corporations Act 2001, the Reserve Bank has a formal regulatory role to ensure that the infrastructure supporting the clearing and settlement of transactions in financial markets is operated in a way that promotes financial stability. The Bank's powers under that Part include the power to determine financial stability standards for licenced clearing and settlement facilities. The Reserve Bank implemented revised 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. 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 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 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 Board decided in May 2012 to vary the standards relating to merchant surcharging to allow the card schemes to limit surcharges to the reasonable cost of acceptance. The decision to vary the Standards reflected the Board's concerns about the increase in cases where surcharges appear to be well in excess of acceptance costs or where surcharges are ‘blended’ across card schemes or products even though merchants' acceptance costs may be considerably higher for some cards than others. The varied Standards came into effect on 18 March 2013. More information about the surcharging standards is available on the Surcharging Questions and Answers page.
The introduction of Access Regimes in 2004 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 2014, the Board determined to vary the Access Regimes. This reflected its conclusion that, while the original Access Regimes were appropriate when introduced, changes in industry structure and in the ownership of the card systems meant that the regimes might be unduly restricting access. The variations came into effect from 1 January 2015 and provide the MasterCard and Visa card systems with the flexibility to expand membership beyond existing participants.
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. 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 latter was introduced to deal with technical issues arising from the interaction of Visa's rules and the credit card Access Regime. However, these issues no longer apply and accordingly the Visa Debit regime was revoked effective from 1 January 2015.
Under the current Visa Debit and eftpos interchange fee standards, weighted-average multilateral interchange fees in each of these systems are required to be less than 12 cents per transaction (paid to the issuer), with compliance points on 1 November every three years after 2006 or any time the scheme varies its interchange fee schedule. Bilaterally-negotiated interchange fees in the eftpos systems are required to be less than 12 cents per transaction. These eftpos interchange fee benchmarks replaced earlier requirements which required bilateral interchange fees in the eftpos system to be between 4 and 5 cents per transaction (paid to the acquirer).
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.
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 it was necessary for the Bank to formally impose the interchange Standard and the ‘honour all cards’ Standard on the Visa Debit system.
In 2008, the Reserve Bank designated the ATM system as a payment system under the Payment Systems (Regulation) Act. 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 focusing 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 (Executives' Meeting of East Asia-Pacific Central Banks) 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, Clearing and Settlement 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.
- With changes to the architecture of the eftpos system, and the development of eftpos Payments Australia Limited (ePAL) as a scheme to manage the eftpos arrangements, the Bank consulted on possible changes to the eftpos Access Regime. In November 2012 the Board concluded that if ePAL were to implement appropriate access arrangements, the Access Regime could be removed. The Board considers that this condition is likely to be met when three major banks have connected to the eftpos Hub.