Strategic Review of Innovation in the Payments System: Summary of Consultation – February 2012 2. Payments System Governance

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Governance is a topic that payments systems around the world continue to grapple with. This largely stems from the fact that open payment systems require co-operation between competing institutions. Co-operation is required to establish and operate payment systems, and also when there is a need to change or update a system in some way. However, as outlined in the consultation paper, there are many things that might prevent the necessary level of co-operation, including:

  • lack of recognition by individual institutions of the benefits that might be provided to end users
  • concerns that an innovation might benefit a competitor
  • misalignment of investment cycles
  • an incentive to hold back while others take the initial implementation risks
  • lack of capacity of those participating in industry fora to commit their institution's resources
  • a desire to maintain arrangements that discourage new entrants
  • concerns that innovations will simply cannibalise existing revenue streams
  • concerns about competition law.

There was no consensus among submissions on how to deal with these issues. The various key perspectives put were as follows:

  • Current governance arrangements are adequate. Some of the larger industry players, including some financial institutions and the international card schemes, take this view. Nonetheless, Australian Payments Clearing Association (APCA) members generally are happy for improvements to current arrangements to be explored and are supportive of APCA's governance review. In general, support for the status quo reflects a belief that existing arrangements work sufficiently well.
  • Effective industry self-governance arrangements can never be found, therefore the Reserve Bank/PSB needs to take more of a role in directing outcomes.
  • Representation in governance arrangements needs to be expanded. Many held this view, with suggestions for those to be represented including: non-financial institution service providers, such as ATM deployers and cheque processors; and representatives from the superannuation, insurance and real estate industries.
  • While canvassing views broadly is to be encouraged, effective decision-making is not possible in a large group, so any decision-making body should be kept small.
  • The ‘business case’ or ‘business potential’ for any innovation should be properly considered in the governance framework to avoid unjustified expense to participants.
  • The power to mandate outcomes is critical. One party noted the example of the superannuation industry, which had struggled with the design and adoption of standards on superannuation data for a decade, but has made rapid progress since the Australian Government decided to mandate standards. A number of submissions suggested that APCA should have a greater capacity to mandate outcomes. Others felt that this would be inappropriate because of the prominence of the major banks in decision-making for APCA.
  • A high-level roadmap should be determined for the payments system to give players a clear idea of industry direction over time and allow them to plan accordingly. This was a consistent theme among many submissions. While APCA has its own Low Value Payments Roadmap, a number of submissions suggested that this role should be taken on by the Reserve Bank/PSB.
  • Decision-makers within APCA are not sufficiently senior within their own institutions to allow them to make authoritative decisions. One financial institution suggested that a group of higher-level representatives could be established to set and implement an industry roadmap.
  • APCA voting should be based on one vote per seat, rather than voting based on clearing volumes, which places significant power in the hands of the major banks.

Two quite substantial submissions were received in relation to governance: one from APCA and one prepared by Deloitte Access Economics on behalf of ePAL. APCA argues in favour of self-regulation in the payments industry, noting that, in the absence of an authoritative self-governance framework, participants are inclined to focus their efforts on encouraging the Reserve Bank to make a decision in their favour, rather than searching for a co-operative solution. It argues for the establishment of a single, comprehensive industry self-governing body, with clear authority to implement policies and ensure compliance. Under this model, APCA would publicly determine comprehensive payments system goals, with the PSB establishing public policy priorities and maintaining oversight. APCA anticipates that this model would require amendments to the Payment Systems (Regulation) Act 1998, including to provide relief from elements of the Competition and Consumer Act 2010 (so long as industry agreements are approved by the PSB). APCA is currently undertaking a review of its own governance.

APCA's stated desire for a broad reach for a self-governing body reflects a view that the payments system is becoming increasingly ‘marketised’, with the role of traditional clearing systems declining and competition between payment systems and schemes increasing.[1] It argues that competition should drive innovation and that industry governance should concentrate on establishing a fair and effective framework for competition and minimum requirements to promote wide access, security and reliability. Minimum requirements might, for example, relate to settlement arrangements, means of physical connection and message standards.

The Deloitte/ePAL submission bears some similarity to that of APCA, proposing a mix of private and public sector governance. Under this proposal, a private entity like APCA, but with an expanded membership) would assume responsibility for standard setting and administration of payment streams, with delegated authority from the Reserve Bank to enforce its decisions. The board of the governance body would be industry appointed, but subject to veto by the Bank, and would be accountable to the Bank. The body would have a joint function as the facilitator of commercial outcomes and overseer of public policy objectives. Membership would be open to all those with a legitimate commercial interest in the payments system. The submission acknowledges, though, that some types of decisions (such as those on interchange fees and accommodation of new entrants) may be too difficult for such a body, and may therefore require the Bank to exercise its authority. Protocols would be established to determine when decisions would be referred to the Reserve Bank.

2.1 Structure of Clearing Systems and Rules

The consultation paper also sought views on whether the current reach and structure of APCA rules is appropriate. APCA rules cover the clearing streams that feed into the Bank's settlement system – the Reserve Bank Information and Transfer System (RITS). These are streams for cash, paper, consumer electronic, bulk electronic and high-value payments. The consumer electronic stream has traditionally supported what has generally been regarded as two separate payment systems – the eftpos system and the ATM system. The bulk electronic system initially supported bulk files of direct credits and direct debits, but in later years has also been used for internet banking transfers. There are, of course, numerous payment systems that sit outside these clearing streams, including the international card schemes and BPAY, though the interbank obligations that arise for mutual participants are added to the amounts notified for settlement in the APCA consumer electronic and bulk electronic streams.

The consultation paper asks whether this current structure provides sufficient flexibility. In other words, do clearing streams established to service specific instruments allow sufficiently for the clearing and settlement of new products and new participants? Also, are rules that cover only the existing APCA streams sufficient, or would an alternative approach of one broad set of rules, which cover clearing and settlement for the retail payments system as a whole, provide more flexibility?

Some industry players were supportive of the current clearing and settlement arrangements in their submissions, arguing that these arrangements have not constrained innovation. A number of other players, however, argued that new products are not well supported because they have to be forced through existing clearing streams that have very specific, predefined characteristics; for instance, it is unlikely that existing clearing streams would be able to accommodate the sorts of features that are being demanded by end users (e.g. greater data transmission capability and more timely clearing). Some parties argued that a new clearing stream could be established to meet these needs, whereas some others argued the case for a simplified structure; for example, one financial institution proposed merging the bulk electronic and high-value systems as the features of the two move closer together.

Some submissions suggested that the reach of the clearing rules should be broader, to encompass, for example, the international card schemes. One of the card schemes, however, argued that its arrangements should remain separate from APCA's, pointing to the fact that it has been relatively successful at innovating under its current arrangements. One also noted that innovating under scheme arrangements is much more effective than under co-operative arrangements. As discussed above, APCA has noted the declining role of the traditional clearing streams and the greater focus on commercialisation of, and competition between, payment systems.


The establishment of ePAL and the separation of its rules from the relevant APCA clearing stream is an example of this. [1]