Transcript of Question & Answer Session Panel participation at the 2nd Annual Real-Time Payments Summit

So to kick off this afternoon, we've got another panel discussion to talk through the concept of regulation speeding up adoption of real-time payments in Australia. We have to join us: Katrina Stuart, Head of Engagements at NPPA; Tony Richards, Head of Payments Policy at RBA; and Melisande Waterford, General Manager, Strategic Programs at APRA.

Now, as mentioned earlier this morning, the Reserve Bank published just yesterday a conclusions paper on the New Payments Platform, which covers areas around the functionality of the platform and the access to using the platform. We're going to start off the session with Tony giving us a sort of four to five minute précis of a 38-page report. So over to you, Tony.

Thanks very much, Lance. I should note that the report that we put out yesterday was done jointly with ACCC, it's not just the Reserve Bank. I'll try to give you an overview of the report, the conclusions from the report. This comes from a consultation that we announced late last year, which was to look into access and functionality in the NPP. The report concludes that the NPP is largely providing the functionality that the Bank asked the industry to deliver when we did the Strategic Review of Innovation in the Payments System back in 2012.

The four particular gaps we identified back then were that payments should be real-time, they should be more data-rich than they were at that point, payments should be more easily addressed than sending something to a BSB and account number, and that payments should be available 24/7. Our assessment is that the NPP has well and truly provided the functionality that enables the provision of those services.

But the ability of end users to benefit from all that central functionality depends on what their financial institutions have done and the services that they get from their financial institutions. As we say in the report, the rollout of real-time payments by financial institutions, especially some of the larger ones, has been slower than we hoped for and it's been uneven. Different banks have prioritised different customer segments. They've prioritised different channels, et cetera. Customers aren't yet seeing all the benefits that come from ubiquity, all the network benefits that we expect to come from the NPP. That's especially true for business customers because the banks have typically prioritised their consumer customers here.

That's prompted some entities to complain about ‘the NPP’, when in many ways it's not a problem with the NPP. It's a problem with the services that are being provided by their financial institutions to take advantage of the NPP. What we've seen is that the rollout of things that we hoped would be ready on day one is still proceeding. So that's delayed the ability of the industry to bring on some of the things that we hoped would be ready to go on day two – for example, some of the overlay services that we hoped would have been up and running by now. That's Request to Pay and Payment with Document have been delayed. The ability of NPPA to put in place central functionality or native functionality independently of overlays, things like the Consent and Mandate Service, that's been delayed by the fact that some financial institutions are still working on their day one rollouts.

So what do we do about this? Well, the simplistic thing would be to say that if we could wind back the clock, some financial institutions should have started a year earlier or two years earlier. They should have better anticipated the problems that come from trying to modernise their legacy systems. But that's obviously something that we can't do. But what we're doing is that the Reserve Bank is engaging with the major banks in particular, at senior levels, to encourage them and make sure that they're prioritising their continuing work on NPP functionality.

A second thing we're doing is that we and the ACCC are recommending that we should strengthen NPPA's hand, that's New Payments Platform Australia's hand, in dealing with its participants. One of the recommendations in our report is that NPPA should have the ability to impose mandates on its participants, that they must support some types of functionality. And if they don't, that NPPA should be able to impose penalties on them. The ability to impose mandates and impose penalties exists in some other payment systems, particularly the international card schemes. We think it would be appropriate for NPPA to have it.

I'll touch more briefly on some access issues. The first thing to note is that there are about 80 financial institutions that are now providing NPP services, or NPP-related services to their customers. In many ways, it's been a real success story, that we've had very wide access in Australia compared with some other markets. That's largely due the fact that among the 13 participants, who've subscribed to and funded the NPP, there are three aggregators who are providing indirect connections to about 70 smaller banks and mutual institutions. That's been a great success, that small banks have been able to connect and offer fast payments, faster than some of the large institutions.

But it is the case that there are some concerns about access to the NPP. This is both in terms of becoming a participant or also setting up an overlay service. So we've made a few recommendations in the report. One is that the NPPA should look at its current rule that to become a participant, an entity must be an ADI, an authorised deposit-taking institution. The fact is that there may be some classes of entities out there that want to connect to the NPP directly – it's actually a major task to connect to the NPP but they still want to do it – they are a provider of payments services, so it would benefit them to do that. But they simply cannot become an ADI because they're not doing the sort of business that APRA requires for them to become an ADI – for example, taking deposits. We're asking NPPA to come up with an alternative form of access for entities that are not ADIs.

We're also asking NPPA to review its rules on capital contributions. We think it's thoroughly appropriate that NPPA should have rules requiring entities that could have signed up on day one, but may choose to sign up shortly, we think it's thoroughly appropriate that they should have to make a capital contribution that's probably broadly similar to what they would have had to make had they signed up to be a day one participant. But it may be the case that there are smaller entities that didn't exist at the time that the NPP was initially funded. So we're asking NPPA to review its capital contribution rules to see if there's possibly a lower capital contribution for smaller entities, or entities that didn't exist at the time that the NPP was funded.

We're also asking NPPA to review their procedures for dealing with applicants who want to become participants or overlay services. The concern has been expressed that an entity might want to become a participant or an overlay Service in the NPP, but the decision to allow it to become a participant or an overlay service is in the hands of the NPP's board. The board consists of financial institutions, some of which will be competitors to the potential participant or overlay service. So we're asking NPPA to consider whether those decisions could be made by the independent directors, with the financial institutions sitting out from that process.

We're asking NPPA to respond to the report by the end of July. We're proposing that the Reserve Bank and the ACCC will do another formal review in 2021. In the meantime, we will be monitoring the progress that institutions are making in rolling out functionality to their customers. We'll also be looking at any access concerns that are expressed to us. In the event that there were problems, we could certainly consider designating the NPP and imposing an access regime on it. Or if we were more concerned about the services that financial institutions were or weren't offering to their customers, we could potentially consider imposing some standards on participants in the NPP regarding the services that they must offer to their end users.

But for the time being, we think the NPP is a wonderful new set of payment rails for the Australian economy. It'll be a platform for innovation. We note that the uptake, the volume growth in the NPP, is running ahead of some equivalent fast payment systems in other jurisdictions. There certainly is a good story to tell from the NPP. We hope that, as some of these recommendations can be implemented, that we can see even better services provided to end users.

Thank you, Tony. We'll return to the report later on. I might ask Melisande to explain APRA's role in this because not everyone would see APRA playing a role in the NPP versus the RBA or ASIC.

Okay. So I wouldn't say that APRA has a direct role in the NPP. But my substantive role, which is different to the one up there, is the Head of our Licensing Unit. We have been engaging with a lot of players that are interested in entering the Australian market in various different forms. There is quite a lot of inquiries and quite a lot of interest in potentially sometimes getting an ADI licence, which appears to be motivated either by a lack of clarity about what type of access they may or may not want or need, or indeed, concerns that without direct access that there might be competitive impacts or other sort of pieces.

It's a space we've been dragged into conversations at different stages about. So it's an area that we have quite a bit of interest. Prudential regulation is not something that you'd want to do for fun. It's quite difficult for new entrants to establish themselves anyway. It's fundamentally in everyone's interest that the people who want to become an ADI actually do want to become an ADI.

Katrina, part of the report from the RBA and ACCC is talking about access. It would seem that there's lots of ways to access the NPP already, given the fact that 80 institutions have lined up. Is the criticism we've seen in the media fair, or are people just not aware of the ways that they could link in?

I think a large part is education and awareness around those different options for how to interact with the NPP. We do have a number of different ways. You can become a participant and connect directly. You can connect indirectly as what we call an identified institution, which doesn't require being an ADI. We even have something called a connected institution, which is for organisations that might want to be able to initiate payments. They're not actually processing the payments themselves, but if they felt that their business model warranted it, they could connect directly in order to initiate those payments.

We feel that there are a number of different options. I think education and awareness around some of those different options is important. We continually try to put information out into the market and educate people around those different access pathways. We do find a lot of the time that people come to us and say, ‘We want to be able to connect directly’. When we actually say, ‘Well, what are you trying to achieve? What is it that you really want to do?’ When we walk them through that, they understand that connecting directly is not necessarily what they want to be able to do. They want to access the NPP in order to be able to make and receive payments or offer payments services to end customers, but that doesn't require having that direct connection.

What they also don't understand is actually the technical requirements that's actually required to stand up an NPP payment gateway. There's availability, there's resilience, there's security, which is obviously of paramount importance to us to ensure that we safeguard that, given we're talking about the real-time movement of money. And they, I think, sometimes underestimate what's actually involved.

Tony, from a security point of view, do we really want hundreds of people connected to this infrastructure?

Well that's not the way that most payment systems work. Most payment systems have a relatively small number of direct participants and then lots of entities connect indirectly. That's what we're seeing in NPP, you've got about 70 smaller banks, credit unions and building societies that are choosing to connect – initially through 3 aggregators, but I think it's increasingly becoming the case that, some major banks are also offering indirect connections.

So, as Katrina said, it's an expensive business to set up an NPP gateway. Many institutions are saying it's much easier for us to connect through someone else who has already set up that gateway and there's about 70 institutions doing that.

That's right.

Katrina, have many people actually applied to, deliver an overlay service, or become a participant.

So, today we've had no applications, for either a participant or an overlay service. There has been a lot of interest, but as we walk people through what it is they're not to achieve, they realise there's other, better ways for them to do that.

I'd just like, to maybe, touch on the overlay service piece because we've spoken about the access piece. I think there was a common misperception in the early days of the NPP – that an overlay service was like having an app and putting it on the App store. Certainly, particularly from the fintech segment there was a lot of misconception around that – people thought it was really super simple as that, and that's not the case at all in terms of an overlay service. I think also what we found is that a lot of organisations, and particularly fintechs, can actually achieve what it is they're looking to achieve by just using the NPP and using its capability and using what's there. Certainly, there are some capability shortfalls at the moment that we're actively working to address in conjunction with the participating banks. Particularly, payment initiation is a really important one for a lot of fintechs.

But with those capabilities that are there a lot of organisations can achieve what it is they want to achieve and they don't need to create an overlay service. They can incorporate the NPP into their own product and service offering outside of the platform and offer that to customers. Such as we saw this morning from Adrian's presentation – the likes of what Assembly Payments is doing with Carsales; with Block8 and their block chain solutions; and also organisations like Earnd – they're just incorporating that capability.

So this is like people saying they paid by PayPal but they actually paid using a credit card or a debit account. So I could pay by system X but Osko could be in the background.

That's right.

So how are you ever going to get people to understand that?

So a lot of our focus is around that native capability development and trying to help people understand what they can actually do with that capability and what's possible. The more that we have different examples, real-life examples, like some of the organisations we spoke about this morning, that really brings it to life to people because it's reality, it's not us talking in theory about what's possible. So the more that we see some of those examples emerge we're trying to shine a light on them to say ‘look what this organisation has done or what this organisation is doing.' Because I think that really brings it to life and that's much more powerful than anything that we can say.

And with two regulators on the panel here what role can regulators play in gaining more adoption of NPP? Or is that your function?

I'd like to go back about 7 or 8 years ago and the Reserve Bank conducted the Strategic Review of Innovation in the Payment System then. Back at that point we thought the problem was that industry had trouble coordinating. There was no sense that the industry was coming together to deliver fast payments to Australian businesses and households. So our role there was that we did the review and we told the industry 'we strongly encourage you to build something that will deliver fast payments' and the hint was that if industry didn't do that, we'd find a way to ensure that fast payments were delivered – and industry took the hint and built it. But it took a fair bit of work to get the industry to sign up to fund the NPP. I remember about six years ago there were people from large banks telling me ‘we don't think there's any demand for real-time payments.'

So sometimes they take a bit of persuading. But I genuinely think that there's a demand for immediacy in so many aspects of our lives and that sooner or later the banks will be trying to meet that demand for immediacy in payments too. So I think we can for the most part rely on competition to take advantage of real-time payments. But there are times when industry needs to be brought together in a room and encouraged to work together. We did that with the Strategic Review of Innovation and we're trying to strengthen the hand of NPPA in its efforts to build central or native functionality in the NPP that can be used by everybody. Because the problem there is that it only takes one or two large laggards and it can slow things down for everyone. So we are trying to strengthen the ability to cooperate and do cooperative innovation.

Then we expect that it's in the interest of all institutions to compete on the sides – that once they put that collaborative central infrastructure in place that it's very much in an individual institution's interest to compete to use that functionality to provide better services to their customers.

And I think that, regulators as general rule, can be a hindrance or a help in this. You can assist. So, I'm speaking from APRA's perspective here – of course the Reserve Bank is never a hindrance. But for regulators like APRA there is a role to encouraging or being open to looking at new systems, encouraging legacy systems, and so forth and security. You can take a very, conservative hard line about certain things, and not adopt an open-mind to new ways of doing business. Which can ultimately, sort of, have flow through effects to the appetite of the institution to engage with some of these types of things.

I think, from my perspective, trying to encourage new entrants into the banking space, the more that these things get up and running and the people can see opportunities in them. It's difficult enough, for new entrants to get up in this space. So, the more opportunities there are, that they can think of innovative ways to do it and feel that, that's achievable then, I think, the better it's going to be for everyone.

Tony, your report, to use your word, is full of encouragement and voluntarily undertakings and cajoling. There's actually no teeth in this, as it stands. This is hypothetical, but some might say that from the banking side, that if you'd mandated things, it would become a compliance project, which would deliver budget, which would make it happen. Whereas, this might not push it along, quite so fast.

I think the Reserve Bank has made it pretty clear to the large financial institutions that have been slower to implement that we place a very high priority on this. So I think that CEOs and boards are aware of the importance that we place on this so that it's viewed as very close if not a compliance project.

But I think it is the case that banks have got a lot of balls in the air at the moment. This is not the only thing they're working on in the payments area and then outside of payments they've got a lot of things coming out of the Royal Commission. We want them to deliver as fast as is possible. But we wouldn't want them to be taking shortcuts. I'm not sure that mandating – well mandating would require standard setting and it would require regulation – and by the time we did all that I'm not sure that we'd get things done any faster. So the banks are well aware that we place a high priority on this and I think it's close to being viewed as mandatory.

And Katrina the NPPA's response obviously due at the end of July, but I think you've already come out with some comments about the report. Could you paraphrase those for us?

Sure. Yes, and I look forward to working on it until the end of July as well, thanks Tony. So we came out with a statement yesterday. Overall, we felt the report was very balanced, we felt it was very fair in terms of its assessment of where things are at as it related to NPP access and functionality.

On the functionality side we felt that the RBA was very supportive of the agenda that we were trying to deliver with the banks and acknowledged the work that is currently underway to build that native capability. Some of the recommendations around things like the mandatory compliance framework that was suggested by the Reserve Bank is actually something that is already currently underway. As Adrian mentioned this morning, we've been working on that for a number of months now with the participating financial institutions, because having a little bit of extra teeth does help the banks to get some internal priority. In terms of access we felt that overall it was very balanced. There are some recommendations there that we'll take away and look at. Certainly, we feel that keeping the balance between open access and the safety and security of the system is going to be of paramount importance. That's our primary objective. So whilst we do have open access as part of our constitutional objectives we need to ensure the safety of the system given its real-time movement of money.

So making sure that we have those options is going to be important. We're always willing to consider new options around how we might look at things slightly differently and given the learnings that we have over the last couple of years. So we'll look to see how they can be modified. Some of that work as Adrian mention this morning, is already underway and particularly as it relates to things like the subscription period etc, so we're feeling pretty good.

Okay. Melisande, you spoke about bringing new competition into the market?

This is actually quite hilarious we've got someone from industry saying we're trying to balance stability and we've got someone here saying it's great from the competition – from the regulator. So how's that for ironic?

Yes. Reverse positions. But you mentioned about bringing new competitors in. Do we see the role of the NPP as bringing new players into the market?

Well it's not directly our space per se. But I think that things like the NPP make people feel very- much more optimistic and feel that there are other opportunities that there might not have otherwise been.

It certainly seems to have encouraged some international interest and people with the different ideas than they might have otherwise have had. I sometimes describe the licensing job as ‘Australia's Got Talent’, because some ideas might not actually work but it is interesting nevertheless. And I do think that it does provoke a lot more thought and I think things will come out of that. Not all of them will be successful, not all of them will come to fruition, but … yeah.

Tony was that you're thought? I mean there's a lot in the report about new entrants and having that access for new entrants. Is that what we want? A lot more players in the market?

Yes, subject to the points that both the two speakers have said that safety and soundness and security is important too. Real-time payments provide greater risks for fraud. It gives banks less time to stop fraud. So it's very important that new entrants don't bring excessive risk. But in general the ability to see that a payment has been received in real-time must be good for new entrants, for non-traditional players.

When we look at Australia and compare the real-time payments that we've got here versus what's been set up in the US under The Clearing House for example. That's a system that's been set-up by 25 large banks. We've got one that's been funded by our large 4 banks but it's also being funded by a lot of smaller institutions and I keep coming back to the fact that there's 70 smaller financial institutions. and some of them are absolute minnows. I don't think it will be too long before we start seeing some of the new start-up banks also providing NPP services to their customers.

Well we've already got one with Up, that's already live offering those services to customers. So there will be more definitely.

And I also just want to make the point that competition's not always just about numbers of players. So I think certainly, when we think about competition it's also about the offering that's coming to market and I think that that is certainly changing.

So different offerings, different ways to pay. I remember a conference a few years back, I made the point it's not like Australians are revolting in the streets because they don't have ways to pay, but this is an extra way to pay.

What about global coordination? We heard actually before lunch from NAB about the trials they're using Swift to make faster payments cross-border. Is there any regulatory coordination underway internationally to make that happen?

Nothing particularly significant yet. There's talk about it, and one of the things that we thought we could do to facilitate the possible eventual linking of fast payment services was by saying that when the industry built something it should be ISO 20022 compliant because that's the way of the future. So there's no regulatory push, but I imagine that it will emerge in time. But I'd say let's finish the rollout and get all that day one functionality in place, and let's get some of the planned day two functionality in place and international links might be day three or four.

Katrina, the things that you see from inside the NPPA on the regulatory front that are causing friction or could be done differently to speed up adoption?

I'm not sure anything is causing friction. I mean I think actually one of the successes of the NPP has actually been the role that the RBA as the regulator has played in its early development, and in its close observation of how things were developing as it was being built and then delivered by the participating financial institutions. And I think that that has been part of the success that we've seen. I think certainly there is that role that the Reserve Bank can continue to play in encouraging banks to roll out capability and providing that gentle encouragement or maybe a little bit stronger if it's needed – that definitely is a very useful role to play.

I was thinking about Tony's comment about all of the compliance projects that are now underway across the banks across Australia sucking money out of innovation and new product development because the budgets are being squeezed down.

Yeah, I think we all acknowledge that with the Royal Commission that's had a huge impact and it is taking a lot of resources and effort and time internally within banks, as to be expected and that's not going to go away any time soon. But I think there's always challenges, prioritisation. There's always something, and it's a matter of how that's managed. And I think the important thing is how we as an industry work together to focus on what do we collectively need to develop to create the minimum network effect that's required, while still enabling the different organisations to pursue their own commercialisation objectives as well. So it is a balance, but I think if we can get that right, then I think we'll all win and we'll all move forward.

Questions from the audience? You've got two regulators on hand here. Ready for your bullets.

Thanks Lance. Tony, I've got two questions for you. One is during your review, did you look at what other countries or industries have done overseas, like PSD2 in Europe and go - is that an application that we should apply in Australia? So open banking and payments. And the second question is what does NPP success look like in five years' time for the Reserve Bank?

On PSD2, there's a bit of stuff happening already in that area that Melisande and I could talk a little bit about and that's, we are reviewing the framework for purchased payment facilities, stored-value facilities, and we're planning on proposing a new framework. There's a joint consultation underway that has been underway for a while, that involves ASIC, the RBA, and APRA to think about how stored-value facilities are regulated. I think we're getting reasonably close to some decisions there, but I can't tell you any more about those. But it's quite possible that you'll see more in that area. It might be useful if we had a more formal framework for regulation of payment service providers, stored-value facilities. So I'd say watch this space, but don't expect anything immediately. Melisande may want to add something on that.

What does success look like? We've got a graph that shows the number of fast payments per capita per year, and I'll be watching that graph closely. At the moment, the adoption of fast payments in Australia is running well ahead of what happened in the UK. And it's running somewhat ahead of what happened in Sweden, which has been a big success – Swish their P2P service. So I'm hoping that that line continues to rise very, very rapidly. I'm hoping that we'll see continued migration from the slow rails to the fast rails. So the direct entry system, some of the banks are already sending some of their direct entry payments through the NPP and I think that's increasingly going to happen. At some point in the future, the industry may say, is it time to close down the direct entry system? But I think that's still a fair while off. But that would probably be quite a good outcome if there was some rationalisation of the payment rails and all payments could go through the fast rails. I'll leave it there. Maybe Melisande might want to add something on PSD2s.

We have at the moment what's called a PPF framework, Purchased Payment Facility framework, which is a term which is unique to Australia. The only PPF that is actually licensed is PayPal but there is quite a lot of interest in this space in the market. And the framework is quite old and the terminology and the definitions and what triggers someone being caught by the framework, which by and large at this stage means it gets caught by prudential regulation – means that prudential regulation doesn't necessarily always suit that environment.

So there has been a number of reviews of which the FSI, the Productivity Commission both recommended a review of the framework and to introduce a more graduated framework. So we put out a joint discussion paper almost a year ago just looking at options about how we could put in place a graduated framework with objectives of simplifying the framework where possible, retaining the safety that is needed at various different bits, particularly in my space where something is quite deposit-like, aligning more closely internationally, which seems to have two aspects to it. One is actually just even terminology, which would be a big step forward because you sit across the table from someone and you just can't understand what each other's talking about. But also, just in terms of the level of requirements and such for different types of entities and so forth. So as Tony says, we're in the fighting throes of agreeing a sort of a framework, internally within the CFR agencies and we should be reasonably close to coming out with something.

Tony, you talked about the termination of DE. What about the termination of cheques? Do we see the NPP driving cheques out of the market?

Cheque usage is falling very rapidly. Last time I looked at the statistics, the number of cheques being written in Australia is falling about 25% per annum. And I think the value of cheques is falling by closer to 35% per year and that largely reflects the rise of electronic conveyancing – I think the fact that some of those high-value cheques are leaving the system. It'll be for industry to decide when and if the cheque system is going to be switched off, but the Australian Payments Council has said that the time is coming closer when an end date could be announced. The challenge will be that the few remaining use-cases for cheques are not necessarily met by the NPP. We'll have to think about those users that for whatever reason don't use electronic payments and still like to use paper-based payments and NPP is not yet meeting their needs. But yeah, I expect the end of the cheque system, the announcement of an end date, is not that far away.

You missed me getting criticised by Adrian this morning for using Netbank. There are people out there who don't use any internet banking at all.

My accountant insisted on a cheque.

[Laughs] Further questions from the floor? No. So Tony, in the future, what form of regulation do you see around real-time payments? In most of the payment systems in Australia there is a regulatory framework, and the RBA hasn't sort of put its oar in the water yet on the NPP, because it's very early days. Do you see a framework coming out in the end?

I would actually question the premise that there is actually all that much regulation. There are a few instances where the RBA has regulated where we felt that industry was not able to deal with concerns and it was in the public interest to regulate, but there's not many of them. So there's the interchange standards, there's the surcharging standard. There's a little bit of regulation in the ATM space, but that's it. So we would hope that where we have policy concerns in the area of real-time payments, that industry can deal with them and we've given a roadmap for some of the issues we'd like industry to address and Katrina tells me that industry understands the policy concerns and is going to attempt to address them. So I think success looks like the absence of regulation for real-time payments. But it would only be if we felt that industry wasn't dealing with our concerns.

Well on the positive note, we might close the panel. So join with me in thanking Tony, Melisande, and Katrina for their input. Thank you.