Payments System Board Annual Report – 2006 Trends in the Australian Payments System
The Board continues to pay close attention to the changing structure of the Australian payments system. One of the most notable trends over the past decade has been the continuing movement to electronic payments; over this period, the number of such payments has increased by around 230 per cent and their value by around 390 per cent. A second significant structural change has been the tendency for the unbundling of payment services, with a number of non-financial institutions competing to supply services in various parts of the payments process. This change has been associated with the entry of a number of new, non-financial firms into the payments business.
The discussion below provides some perspective on these two important trends as well as an overview of the current structure of the Australian payments system.
The Australian Payments System
On average, there are at least 13 million non-cash payments made in Australia each day. The overwhelming majority of these payments are made electronically (Table 1). There are no statistics on the number of cash payments made each day.
Card-based payments currently account for just over half the non-cash payments made in Australia, with an almost identical number of debit and credit card transactions. The direct credit system accounts for a further quarter of non-cash payments, with the number of direct credits around two and a half times the number of direct debits.
In terms of values, the most significant payment system is the real-time gross settlement (RTGS) system operated by the Reserve Bank. Amongst other things, this system processes interbank payments associated with purchases of securities and foreign exchange transactions. It accounts for around three quarters of the total value of non-cash payments in Australia, but over 90 per cent of the value of all payments exchanged between banks. On an average day, the system processes around 25,000 payments with a total value of around $145 billion, the equivalent to Australian GDP for two months. Of the other payment systems, the largest values are carried by the direct entry system, which accounts for some 80 per cent of the value of non-cash retail payments.
The structure of the Australian payments system today is quite different from that a decade ago (Table 2). Since 1995, the average number of cheques written per person each year has more than halved to 27. In contrast, the average number of credit card transactions per person has increased around five fold to 58 per year. There has also been very strong growth in the use of debit cards and direct debits.
Use of credit cards in Australia is now broadly on par with that in North America, although much higher than that in Europe. In contrast, debit card usage in Australia is lower than that in both North America and Europe. Use of the direct entry system is also lower than in many European countries (Table 3).
Card payments
While the use of both credit and debit cards has increased substantially over the past decade, the timing of growth has differed. Credit card use grew particularly rapidly in the second half of the 1990s as many cardholders responded to the widespread introduction of reward programs. Growth subsequently slowed in the early part of this decade as credit card use became more widespread; over the past couple of years the number of credit card transactions has increased at an annual rate of around 8 per cent. In part, growth has been influenced by the Bank's reforms which have led to cutbacks in reward schemes and the introduction of surcharges on some credit card transactions.
The pattern of growth in debit card transactions has been more even. Recently, growth in the number of debit card transactions has exceeded that in credit card transactions by a considerable margin, reflecting not only developments in the pricing of credit cards, but also moves by many financial institutions to provide deposit accounts that provide unlimited electronic transactions, including debit card transactions, for a fixed monthly fee. The chapter on Reform of Card Payment Systems provides a more detailed discussion of these trends.
The vast majority of Australians have at least one debit card; in consumer surveys, around 91 per cent of adults report that they have such a card (Table 4). In contrast, surveys suggest that credit cards are not as widely held, with 55 per cent of adults reporting that they have either a credit or charge card. Data collected by the Bank show that there are currently 30 million debit cards on issue in Australia, and nearly 18 million credit and charge cards.
Of the adults who hold a credit or charge card, most hold cards issued under the schemes operated by MasterCard, Visa and, until recently, Bankcard. Only around 9 per cent of the adult population holds a card issued under schemes operated by American Express or Diners Club; three quarters of these cardholders also hold a credit or charge card issued under the Bankcard, MasterCard or Visa brands.
The survey evidence also provides some perspective on the demographic characteristics of those that hold a credit card. It shows that credit card holding increases significantly with both income and age. Only 26 per cent of 18 to 24 year olds hold a credit or charge card, compared with 65 per cent of 40 to 54 year olds. Similarly, while only 35 per cent of individuals with household income under $30,000 have a credit or charge card, 81 per cent of those with household incomes over $130,000 do so (Graphs 1 and 2).
For most face-to-face transactions, debit and credit cards are close substitutes for one another. In many situations, a credit card is viewed simply as a payment card, rather than as an ongoing source of credit. Around two thirds of credit cardholders surveyed in the year to March 2006 said that they usually pay off all credit cards each month.[1]
One area where the two types of cards are not good substitutes is for payments over the telephone and internet. While the debit cards issued under the international schemes can be used in this way, the larger domestic PIN-based EFTPOS system can only be used in situations in which a PIN can be entered into a merchant's terminal. In 2005/06, around 18 per cent of credit and charge card transactions were undertaken in circumstances where the cardholder and the merchant were not face to face, a figure that has increased strongly over recent years.
The average value of a credit and charge card transaction is currently around $135, more than twice the average value of a debit card transaction. In part, this difference is explained by the higher average incomes of those with credit cards, as well as differences in the patterns of credit and debit card spending.
Direct entry payments
The direct credit system has been used by businesses and governments for many years for salary, dividend and social security payments. To initiate a payment, the payer provides details of the payment and the beneficiary's bank account to his or her own bank. Direct debits on the other hand involve a payer providing an ongoing authorisation to another party to request a debit to his or her account. Direct debits are often used for recurring payments such as bill payments.
Direct credits were already heavily utilised by business and government by the mid 1990s but, unlike in many European countries, the system was not traditionally used to make person-to-person payments or pay bills. This has changed with the advent of internet banking in which the direct credit system is used to make ‘pay anyone’ payments from desktop banking packages. Provided the payer knows the bank account details of the intended recipient, direct credits can be used to make payments to anyone with a bank account. The number of direct credits has risen on average by around 6 per cent per annum and their value by around 20 per cent per annum over the past decade. In 2005, there were nearly as many direct credit payments as there were credit card transactions.
The number of direct debit transactions has grown more strongly than the number of direct credits, although from a lower base. In the 1990s, Australians appeared reluctant to authorise direct debits to their transaction accounts, but since the mid 1990s there has been a four-fold increase in the number of such payments and there are now as many direct debit transactions every year as there are cheque transactions. Price has been important in influencing take up of direct debits, with some billers offering discounts when bills are paid this way.
Bill payments
A more recent addition to the range of electronic payments is BPAY which was developed by a consortium of banks specifically to handle electronic bill payments. Payers contact their financial institution, either by telephone or internet, and instruct it to send a payment to the recipient using BPAY; around three quarters of BPAY transactions are initiated over the internet. The payment usually comes from a deposit account but can come from a credit card account if the biller permits this. Around 14 million bills worth $9 billion are paid each month using BPAY, more than the total value of EFTPOS transactions. There are a number of other providers of electronic bill payment services, but to date they remain relatively small.
Despite the growth in electronic bill payments, payments over the counter and cheques through the mail remain important to many businesses.
Cheque payments
Cheques have traditionally been used for payments by mail, either in a business-to-business context or for bill payments. Because they can be made out in favour of a specific party, cheques provide a relatively safe way of making payments through the mail system.
Around two thirds of the cheques written in Australia in 2005/06 were commercial cheques – business‑to-business payments with an average value of $3,610 (Table 5). Most of the remainder were personal cheques, with an average value of around $1,400, suggesting that there are some very large personal cheques still being written. While there are relatively few cheques written by financial institutions, those that are written tend to be for large values; in total cheques written by financial institutions account for around a quarter of the total value of all cheques written.
Cash payments
Cash, comprised of currency notes issued by the Reserve Bank of Australia and coins issued by the Commonwealth Treasury, is the traditional payment instrument used for transactions where the payer and the receiver are face to face. Cash provides the recipient with immediate value which can then be used to make further payments; cash payments do not involve a third party, such as a financial institution.
While data are not available on cash withdrawals over the counter, data are collected on withdrawals from ATMs, cash outs at merchants and cash advances on credit cards. These data show that around 85 per cent of the value of cash withdrawn through these channels is through ATMs. The average withdrawal through an ATM is $170, considerably larger than the average value of a cash-out transaction through the EFTPOS system, but smaller than the average value of a cash advance on a credit card (Table 6).
Many cardholders now pay a fixed monthly account keeping fee and are not charged each time they withdraw cash from their own institution's ATMs. However, around half of withdrawals from ATMs are from ‘foreign’ ATMs and most institutions charge a ‘foreign ATM’ fee when customers use another institution's ATM. The most common fee is $1.50, though two large retail banks have raised their fee to $2 in the past year. Withdrawals over the counter at a branch typically also incur a fee and some merchants charge for cash out through the EFTPOS system.
The move to electronic payments
There are a variety of interrelated factors that help explain the strong growth in electronic payments over the past decade. These include: advances in technology; the lower costs of electronic payments compared to traditional alternatives; and the increasing recognition by consumers of the convenience of making payments electronically.
Advances in technology have both allowed the development of new means of payment and created a demand for these means of payment. Improvements in banks' internal systems and the growth of the internet have created new opportunities for electronic payments and the increasing importance of electronic commerce has resulted in a complementary demand for electronic payment methods that can be used in situations where the payer and payee are not in direct physical contact. Indeed, payments for many of the newer electronic services that Australians are now buying – mobile phones, access to the internet, information and entertainment downloads – can only be made electronically. Advances in technology have also recently made mobile electronic payments possible, with some tradespeople now carrying mobile terminals, preferring card payments to cheques and cash.
A second factor is the lower cost and convenience of electronic payments. Higher bank charges for writing cheques, lower per transaction charges for EFTPOS and the incentives to use credit cards have encouraged consumers to use electronic payments. The lower cost to merchants of a number of these payment methods has also seen some merchants encourage customers to pay electronically. Lower costs have also allowed firms to offer customers the option of making more frequent payments which can be automatically scheduled, with quarterly replacing annual payments, and monthly replacing quarterly. These more frequent payments can provide firms with more consistent cash flow and reduce credit losses, and are welcomed by many consumers.
A third factor encouraging electronic payments is growing awareness and acceptance by customers of the benefits of making payments electronically. Many younger bank customers do not have a cheque account and bank customers of all ages have become increasingly comfortable using online banking systems and the telephone to pay bills and make purchases. Consumers have also become more comfortable with using direct debits to bank accounts for recurring payments.
The trend towards electronic payments will no doubt continue for sometime yet, with there being a number of areas where there is scope for further changes in payment patterns. One is the development of electronic payment methods that are widely accepted for micro payments, which to date have been made largely with cash. Another is a greater use of electronic means of payment by businesses, which often still rely heavily on cheques. A third is the development of a secure online payment method, which could further boost online commerce.
Whether new forms of electronic payment succeed depends not just on whether technology solutions can be found, but also whether these means of payment can be priced attractively to both merchants and consumers. A recent report by the Department of Communications, Information Technology and the Arts concluded that the economic benefits of increasing the proportion of payments made electronically are substantial.[2] It identified roles for government and the industry in promoting such a move. The Bank's work on improving price transparency and increasing competition in the payments system will assist in this process, as will industry initiatives currently underway. Developments in some of these areas are discussed in the following chapters.
The Unbundling of Payment Services
Traditionally, participants in the various payment systems in Australia have been financial institutions. The role of these institutions has stemmed from the fact that they hold the deposit accounts from which consumers make many payments. Recently, however, there have been a number of changes, both market-based and regulatory, that have allowed non-financial institutions to participate more fully in payment systems.
On the market side, there has been a trend towards unbundling of the payment process which has allowed non‑financial institutions to participate in particular parts of the transaction process. Whereas in the past, financial institutions controlled most of the payment process from end to end, these days there is increasing outsourcing of functions. Some financial institutions have outsourced their payment switching and processing to third parties. Specialist switches have emerged and there are signs that there are others looking to compete in this market as well. Non‑financial institutions are also increasingly participating directly in transaction acquiring. In the EFTPOS system, one large merchant has established itself as an acquirer of transactions and has joined the clearing system for EFTPOS transactions as a self-acquirer. A non-financial institution has also joined the clearing system solely as an acquirer of EFTPOS and ATM transactions. A number of non-financial institutions are looking to acquire EFTPOS transactions in their own right rather than through an established player. In the ATM system, there have been a number of new entrants deploying ATMs and around 45 per cent of Australia's ATMs are now owned by independent deployers.
Competition among acquirers has resulted in an unbundling of acquiring services from general banking services, with some merchants choosing to separate the two. The most recent results of East and Partners' review of Australia's merchant acquiring markets indicated that 24 per cent of surveyed merchants were either certain or likely to change acquirers in the next six months.[3] Around 28 per cent of merchants would consider changing acquirers without necessarily reassessing their transactional banking arrangements.
On the regulatory side, two changes have allowed non-financial institutions to participate more fully in payment systems. The first was the establishment of an Access Regime for the Bankcard, MasterCard and Visa credit card schemes in 2003. The creation of a new class of authorised deposit-taking institution, known as Specialist Credit Card Institutions (SCCIs), has provided an avenue for firms that are not traditional deposit takers to enter the credit card system as either an issuer or an acquirer or both.
The second major change has been the implementation in 2006 of an Access Regime for the EFTPOS system in conjunction with an Access Code adopted by the current participants (see the chapter on Reform of Card Payment Systems ). By making the connection process more transparent, the Regime and the Code have together facilitated participation in the EFTPOS system.