Payments System Board Annual Report – 2005 Bill Payments and Automated Teller Machines
In addition to the actual and proposed reforms of credit and debit cards, the Bank has spent considerable time examining various aspects of the bill payments market.
The Bank's initial focus was on the direct debit system and its use for the payment of household and commercial bills. While many billers prefer to be paid through this system because of its relatively low cost, many bill payers had expressed reluctance to use the direct debit system. In response, the Bank worked with the bill payments industry to address consumers' main concern – namely, the perceived risks in giving billers automatic access to their bank accounts. As a result of this work a direct debits charter for billers was agreed. The charter set out the service levels that a biller should meet, including: how and when notification of the payment will be given; how payers could change or cancel direct debit authorities; how privacy and complaints would be handled; and how payment could be stopped if the amount was disputed. The Bank's work in this area was reported in the 1999 and 2000 Payments System Board's Annual Reports. Since then, the number of direct debits per head has almost doubled from around 11 per head per annum in 2000 to around 19 in 2005.
More recently, in the second half of 2004, the Bank undertook a survey of 40 billers to obtain a more comprehensive picture of how households pay bills and the various costs to billers. The focus of the survey was the bills paid by a typical household including council rates, insurance premiums, and water, electricity, gas and telephone bills, although the data obtained also included some commercial bill payments that could not be separated from household bills. The survey was based on 2003 data, with the surveyed billers collecting over 291 million payments in that year totalling $162 billion. The survey asked billers for information on the number and value of bill payments received through a number of different methods and for information on the total value of fees paid to bill collection agents. The distribution of the surveyed billers across industries is shown in Table 5.
Most billers provide customers with a wide variety of ways to make payments. These can be classified into two broad groups: those where the payment is made direct to the biller and those where the payment is made through an agent.
There are typically a number of different ways that payments can be made directly to a biller. If the biller has a street-front location, payments can sometimes be made over the counter. In such cases, billers might decide to accept cash, cheque, EFTPOS or credit/charge cards. An alternative method is the use of credit or charge cards over the telephone or internet. Some billers also provide bank account details to allow payers to send direct credits from internet banking packages. Finally, some customers provide their billers with direct debit authorities, allowing the biller to initiate a debit to the customer's account on the day the bill is due.
A number of different agency arrangements are also available. Australia Post is by far the largest agent, providing customers with the opportunity to pay bills over the counter at its numerous branches and electronically via its POSTbillpay internet service. Bill Express offers a similar over-the-counter service, allowing customers to pay bills at newsagents. BPAY also offers an electronic bill payment service, with customers using the telephone or internet to make payments from their deposit account or credit card account to billers. Another alternative is a locked box service which, on behalf of the biller, collects cheques that are sent through the mail. The service is often operated by a financial institution, which then processes the cheque payments on the biller's behalf.
Although the secrecy provisions of the Reserve Bank Act 1959 limit the information that can be published from the survey, the results suggest that for many billers the main way in which bills are paid is over-the-counter payments collected by a third party. Of the 40 billers surveyed, 23 reported that this was the most frequent method of payment used by their customers (see Table 6, which shows for each method of payment, the number of billers for which the method is the most commonly used, as well as the second and third most commonly used).
Those billers reporting that over-the-counter payment through third parties was the most common form of payment, typically reported that these payments accounted for more than a third of all bills paid. Utility companies, as well as some telephone companies, general insurers and some government agencies (primarily for one-off tax payments such as stamp duty on property transactions) reported frequent use of this method by their customers. Often these payments are made by cash.
A quarter of firms reported that a credit card payment direct to them was the most common way in which bills were paid. For these billers, credit card payments commonly accounted for around 20 per cent of all payments. Credit card payments were particularly important for telephone companies, utilities and general insurers. They were also important for some government departments, such as traffic authorities.
Of the remaining payment methods, BPAY was often cited as one of the more frequently used payment methods; many billers reported that it was the second or third most common method of payment. Cheque payments, both directly to billers and through locked box facilities, and cash payments directly to billers are important to only relatively few billers. These are mainly councils and government agencies such as offices of state revenue and traffic authorities with large branch networks.
A small number of billers reported that direct debits were the most important means of collecting payments. These include firms in the health insurance, superannuation and life insurance industries. For these firms, the payments are typically fixed amounts, known in advance, and made regularly. A number of other billers, with variable payments, also appear to have had some success with direct debits, including a cable TV company, a telephone company and a small number of utilities.
Costs of collecting bills
The survey also collected data on the fees that billers paid to agents for collecting bills on their behalf. Again, confidentiality restrictions prevent the reporting of fees charged by individual agents. However, it is possible to provide some idea of the range of fees for bill payment collection by agents.
Billers in the survey reported that fees paid to agents ranged from $0.23 to $1.69 per payment, depending on the biller and the agent. As a percentage of the average transaction size, the average fee paid by billers to agents was typically less than the average merchant service fee for credit card payments (currently 0.92 per cent). This suggests that, for many billers, the cost of going through an agent was likely to be less than the cost of taking a credit card payment directly. An exception to this is where bills are of low value.
Issues in bill payments
Overall, the survey results highlight a number of issues regarding bill payments in Australia.
The first is that over-the-counter bill payments, often by cash, remain a popular means of payment for many individuals. While not all billers offer such a payment facility, most do, often through an agent. In some cases, utilities are required by government to offer such a facility under the terms of their licences. One attraction of this method of payment to some customers is that a stamped receipt is typically provided. Another is that customers are not typically charged for making payments over the counter, although recently a number of firms have introduced a charge.
The second is that direct credits are not frequently used for bill payments. While many billers noted that this could be an efficient and low-cost way to collect bills, they also noted that it was currently difficult to collect bills this way. In particular, there is very little space allocated in direct entry files for the remittance details and this can make reconciliation difficult. This problem is most acute for billers with large numbers of payments where manual reconciliation is difficult. Billers suggested that ‘standardising’ the file formats to make it mandatory to identify the payee and amount paid was the minimum change needed to improve efficiency for billers. Some billers were concerned that the banking industry appears reluctant to initiate improvements in the direct credit system that could improve its efficiency and make it more user friendly.
The third is that although many billers identified direct debits as being low cost and a preferred way of receiving payment, a number of others identified aspects of the system that are still causing them difficulties. Those that saw advantages to direct debits have used campaigns promoting this payment method at customer service centres and when customers make telephone payments. Others offer discounts to customers who pay by direct debit, while some councils are implementing marketing campaigns, including prize-based promotions, to promote usage. In contrast, other billers cited high dishonour fees charged by banks and the high back-office processing costs if a direct debit is rejected as reasons why payment by direct debit is an unattractive option. To avoid these costs, some billers have started to contact customers who have a history of difficulty in paying accounts to ensure there are sufficient funds available before manually initiating a direct debit. Manual intervention, however, offsets some of the cost advantages of automated direct debits.
In summary, the survey indicated that billers offer customers a large number of alternative ways of paying bills. Consumers remain attracted to making bill payments in a face-to-face environment but electronic bill payment methods, particularly credit cards and BPAY, have gained in popularity. With the increasing use of internet banking and the ability to use this method to pay bills, many billers would like to see changes made to the direct credit system to make this an easier way of receiving payments.
As part of its review of the bill payments industry, the Bank also recently examined the case for regulating interchange fees in the BPAY system. This follows the setting of a standard for interchange fees in the Bankcard, MasterCard and Visa credit card systems and the release of draft interchange standards for the EFTPOS and Visa Debit systems. BPAY is the only payment system in Australia that currently has an interchange fee that has not been subject to actual or proposed regulation.
BPAY was established in 1997 and is owned by a group of financial institutions in Australia, including the major banks. Customers of financial institutions participating in BPAY can make payments by telephone or internet to billers that sign up to BPAY. Payments typically are made from a deposit account, although they can be made from a credit card account if the biller allows. BPAY can also process some financial transactions where individuals are moving funds between accounts.
Since its establishment, BPAY has grown rapidly. In 2004, BPAY processed around 106 million transactions valued at around $65 billion (Graph 6). While the number of BPAY's transactions is still relatively small, the average transaction size is relatively large, at over $600, and the total value of BPAY payments exceeds the total value of EFTPOS transactions.
Like the Bankcard, MasterCard and Visa systems, BPAY has interchange fees that are paid by the biller's bank to the payer's bank, with the fees being centrally set. The methodology for calculating the fees is similar, although not identical, to that used in the Bank's interchange standard for credit cards. The fees have been regularly reviewed and a consultant is employed periodically to calculate costs. Over time, as BPAY has grown, average transaction costs have declined and this has been reflected in lower interchange fees.
The current interchange fees are shown in Table 7. The capture reimbursement fee is paid by the biller's financial institution to the payer's financial institution. It is a flat fee and differs depending on whether the payment is from a deposit account or a credit card account. The fee for a transaction to a debit account has fallen from $0.75 in 2002 to $0.44 in 2005 (excluding GST). For a transaction to a credit card account the fee has fallen from $0.67 in 2002 to $0.38 in 2005. As well, an ad valorem fee is paid by the biller's financial institution to the payer's financial institution whenever a BPAY payment is made from a credit card account. It is a percentage of the payment value and is paid in addition to the capture reimbursement fee. It has fallen from 0.80 per cent in 2002 to 0.27 per cent in 2005. In addition to the capture reimbursement fees described above, the biller's bank pays 4 cents per transaction to the payer's bank if the payer's bank has implemented BPAY View, an electronic bill presentation service.
In examining the case for regulating these fees, the Bank considered the likely effects of a reduction in interchange on the pricing of BPAY payments to consumers. It paid particular attention to the likely changes in the relative pricing of various bill payment methods, and thus to the extent to which various methods were likely to be used by consumers. It concluded that a decline in interchange fees, through regulation, would be likely to lead to a reduction in the price charged to billers for accepting payments through BPAY, but that it would also be likely to lead to an increase in the price charged to consumers for using the BPAY system.
One likely effect of such a change in pricing would have been a shift away from BPAY towards other methods of bill payment, including credit card payments directly to billers, cheques and over-the-counter cash payments. Given the current relative prices and resource costs of these alternative payment methods, the Bank's view is that such a shift could not have been said to be in the public interest. As a consequence, it has concluded that there is currently not a strong case to regulate the interchange fees in the BPAY system. In reaching this conclusion, it noted that BPAY's interchange fees had fallen through time and were projected to fall further as costs declined.
Although the Bank decided not to regulate BPAY's interchange fees, it had been encouraging BPAY for some time to publish its interchange fees. In May 2005 the Bank wrote to BPAY renewing its request for BPAY to publish its fees. The Bank indicated that if BPAY was unable to agree, then the Bank would consider designating BPAY as a first step to possibly setting a ‘transparency’ standard that would require publication of interchange fees. In response BPAY agreed to publish its interchange fees.
The Bank also examined BPAY's access rules. BPAY has wide membership among financial institutions although a relatively small number (mainly the largest banks) participate directly in the system; the rest participate through other members. This type of tiering in payment systems is common in Australia and around the world. It is often a rational response by smaller financial institutions to the costs inherent in direct participation in a payment system. The Bank is not aware that any financial institutions have been denied membership of BPAY, and is not aware of any non-financial institutions that have sought to join the scheme.
In announcing its decision not to regulate BPAY, the Bank noted that it will again review BPAY's interchange fee arrangements in 2007 as part of its review of all systems with interchange fees.
Automated Teller Machines
Over 2004/2005, the Bank has continued to monitor industry efforts to reform ATM pricing.
In June 2004, after an industry group had spent two years examining various options, the Bank called for submissions on whether it would be in the public interest to designate the ATM system with a view to considering whether or not to set a standard and/or impose an access regime. Although not unanimous, most participants expressed the view that the industry was close to developing a consensus view on the way forward and wanted the Bank to allow more time for a voluntary solution to be found. Since then, however, the industry has struggled to achieve consensus.
Like most ATM networks around the world, the Australian ATM system is built upon a system of interchange agreements. These agreements specify the arrangements under which cardholders from one bank can use another organisation's ATM to withdraw cash from their accounts. These agreements specify that the cardholder's bank has to pay the ATM owner an interchange fee which averages around $1 per withdrawal for providing cash through the ATM. Typically, the bank that has to pay the interchange fee will recover the cost from its customer with a so-called 'foreign fee', averaging around $1.50 per transaction, considerably above the typical interchange fee. Some institutions, however, elect not to charge a foreign fee and absorb the interchange fee they have to pay whenever one of their customers uses another institution's ATM.
In Australia, several concerns have been identified with interchange arrangements for ATMs, prompting the industry's recent work.
One is that there are limited incentives for ATM owners to put ATMs in out-of-the-way locations. With an interchange fee averaging around $1 per cash withdrawal, any locations where the cost of operating the ATM would be higher than $1 per transaction is unlikely to be supplied with an ATM. This means that remote locations with high costs and a low number of withdrawals have no ATMs but cities have an abundance of them. A second concern is that the pricing to the consumer is often not as transparent as it might be. While financial institutions periodically notify cardholders of the fee for a foreign ATM transaction, the cardholder is not reminded of the fee at the point he/she is undertaking a transaction. A third is that there is limited competition in the pricing of ATM withdrawals. While providers of deposit accounts may choose to compete in terms of the foreign ATM fee that they charge their customers, there is little evidence this has occurred. More importantly, since the owners of ATMs do not directly charge those withdrawing the cash, there is little incentive for them to lower the price they charge the cardholder's bank.
The industry group has been looking at a number of proposals to address these concerns. One option would be to abolish interchange fees, and to allow ATM owners to charge directly those withdrawing cash. A variation on this could be that the ATM owner directly charges, with either the cardholder or his/her institution paying the charge. Another would be to allow a combination of interchange fees and direct charging in which ATM owners could join networks that pay interchange fees within the network but charge directly customers of financial institutions that are not members of the network.
If some form of direct charging were to be adopted, competition would be expected to increase as ATM owners competed for providing cash withdrawals, both in terms of price and location. In addition, prices could be made transparent by ATM owners notifying cardholders of the cost prior to making the withdrawal. Such a regime would also give ATM owners the ability to recover costs in high-cost locations, providing them with incentive to install ATMs in places that were previously not serviced by ATMs. Evidence from Canada and the United States, where direct charges have become more common, suggests that direct charging does encourage ATM owners to deploy more terminals.
Notwithstanding the advantages of a change to current arrangements, the industry has struggled to develop a model that is agreeable to all parties involved.
One concern is that it may be difficult for small financial institutions with a limited ATM network of their own to offer their cardholders a widespread network that is free to use. With a system of interchange fees, small institutions can allow their customers to use other institutions’ ATMs but absorb the interchange fee, therefore allowing their customers free withdrawals. Under a direct charging regime this is more difficult as customers would see a charge up front. While this charge could be rebated to the cardholder, such an approach involving a charge and a rebate may generate an adverse customer reaction. Regional banks, credit unions and building societies have expressed concern about a direct-charging regime for this reason and would like the ability to maintain interchange arrangements so that they can offer their customers a nationwide ATM service at a price that can compete with that of the nationwide banks.
A second concern is that where direct charging has been implemented in other countries it has often met with consumer opposition. This has been most evident in the United Kingdom where the major banks have elected not to direct charge customers for use of their ATMs even though they are permitted to do so (if they do not accept an interchange fee). To date, only the non-bank owners of ATMs have charged consumers directly. In total around 40 per cent of the ATMs in the United Kingdom now levy a charge, although these ATMs account for only about four per cent of total withdrawals through ATMs. In the United States, there has also been an adverse consumer reaction, with some state governments attempting to ban direct charging by ATM operators. The situation in the United States and Canada is complicated by the fact that consumers paying a direct charge to the ATM owner can also be levied a charge by their own bank since interchange fees remain. Consumers have reacted adversely to being levied two separate charges for the one withdrawal.
Access to the ATM system
Whatever model of charging for foreign ATMs emerges, there is a need to develop better access arrangements for direct connections between ATM owners and card issuers. As with the case in the EFTPOS system, current access arrangements do not promote competition and the Bank encourages the ATM industry to address this issue without further delay.
Purchased Payment Facilities
The Bank announced class exemptions for purchased payment facilities in 2004, where the total amounts involved were small or the number of entities to which payments could be made was limited. In 2005, the Bank decided that an electronic gift card proposed by Westfield for use only in its shopping centres should likewise not be subject to the Payment Systems (Regulation) Act 1998 because of its limited nature and purpose. The Bank, in conjunction with the Australian Securities and Investments Commission (ASIC), is currently examining the possibility of widening its existing class exclusions so that the Act does not apply to any similar gift cards issued in the future.