Strategic Review of Innovation in the Payments System: Issues for Consultation – June 2011 5. The Environment for Innovation in the Australian Payments System

Innovation in the Australian payments system has been quite varied. Casual observation of the current environment suggests significant innovation across a number of areas. As discussed in Section 3, there has been a very strong movement towards online payments in recent years and new online systems such as payclick, Paymate, PayPal and POLi have emerged. Some credit card schemes have adopted EMV chip technology and eftpos is entering a similar process. The availability of contactless cards and readers has expanded rapidly in recent times, with usage gradually increasing. Individual institutions are experimenting with new ways of utilising mobile phones for person-to-person and point-of-sale mobile payments.

Despite this, there are clearly identifiable areas where there is an emerging or anticipated demand for payment services that are not currently being provided. These will be discussed in more detail in the next section, but they include the transmission of additional data with payments and real-time or near real-time transfers. To a degree, these emerging innovation gaps derive from inflexibility in the co-operative clearing and settlement arrangements that underpin many of Australia's main retail payment systems. Ironically, some of these same systems were at the forefront of global innovation when they were first implemented in the 1980s. This highlights a fundamental distinction between types of innovation in Australia – proprietary versus co-operative innovation.

Proprietary innovation is that which occurs largely at the discretion of a single commercial entity. As such, the decision to innovate in this way will be based largely on the benefit to the innovator. An innovation might reduce costs to that entity or generate additional revenue. In either case, in a competitive environment, this is likely to generate benefits for both end-users as a group and shareholders. However, the scope of proprietary innovation can be relatively limited. For instance, a bank may implement a mobile payment system to service its own customers relatively easily, but a system that provides the same level of service for payments to and from another bank's customers is much more difficult because it requires co-operation between the two.

Co-operative innovations are those that create change across all participants in a system and, therefore, rely on the co-operative arrangements between system participants to achieve change. This is most clearly evident in Australia in the payments clearing systems operated by APCA, which underpin Australia's key retail payment systems. Innovation in these arrangements requires agreement of the participating members. APCA's structures have been designed to facilitate this, but the very nature of the agreement required can make change difficult. Fundamental change in these areas has at times been hard to come by.

Less problematic for innovation is the case where there is a single, commercially focused decision-making body for a payment system. One example of this is the international card schemes, which can implement innovations either through mandated rule changes or through commercial arrangements with participants. This sort of arrangement has been mirrored in the establishment of eftpos Payments Australia Limited (ePAL) to govern the eftpos system. This is already resulting in moves towards greater innovation in that system.

This section first examines some of the possible barriers to payments innovation from a theoretical perspective, before considering questions related to the high-level governance arrangements for the industry, including identifying some of the models adopted overseas. It then considers the structure of clearing and settlement rules in Australia and payments system architecture.

5.1 Why Might Innovation be Difficult: Insights from Network Literature

Innovation in network industries is notoriously complex because ‘network effects’ mean that choices by individuals or firms may not necessarily lead to adoption of a network or innovation that is in the public interest overall.[10] This occurs because, on the demand side of network markets, an individual user of a network values the network more highly as the number of users increases. This makes innovation difficult as an individual decision-maker does not take into account the benefit that their joining the network or adopting the innovation provides to others. Another implication is that ‘inertia’ (where movement from a legacy product to a superior product fails, or is slow, to occur) is possible because the network benefits of the old and widely used system may outweigh the technical benefits of adopting new, technically superior technology that is not used by many people. For instance, members of a widely used membership-based online payment system may be reluctant to move to a new system with fewer users, even if they thought it was a superior system. This inertia may be a socially efficient outcome, but there may also be cases where the full social benefits from switching may outweigh the costs.

Inertia might also occur as a result of co-ordination problems, where consumers' choices depend not just on the technical benefits of innovations on offer, but also on expectations of the technology choices that other consumers will make. In particular, consumers may not adopt a new technology if they are unsure whether it will be adopted by other consumers – the so-called ‘chicken-and-egg’ problem. In payment systems, this problem is magnified by the fact that often two different groups of end-users, for instance merchants and consumers, need to be convinced simultaneously of the benefits of a new technology. This may be a particular problem with emerging technologies, such as mobile payments, and can suggest a need for co-ordinated standards.

This review, however, is more concerned with co-ordination on the supply side of network markets, where industry participants need to co-operate in the provision of compatible network products so as to deliver a system that is of optimal benefit to end-users. Such situations are characterised by strong incentives for both compatible and incompatible competition between participants. Where there are strong network benefits, user demand for a high level of compatibility can drive co-operation, as demonstrated by Australia's universally accessible eftpos and ATM networks built on bilateral arrangements between financial institutions. At the same time, there are a number of reasons why firms may resist co-operation and compatibility of systems. Dominant firms, in particular, have strong incentives to avoid compatibility because it neutralises the competitive advantage of market leadership by allowing the customers of competing firms to share in the network benefits. Even where firms are using fundamentally compatible technology, dominant firms can still use incompatibility to create barriers to entry – for example, by promoting standards that are difficult for competitors to meet.

The literature suggests that there are a variety of reasons why industry bodies might find it difficult to foster sufficient co-operation between participants for a move to a new technology. These include industry participants: having existing investments in different technologies; having concerns that their investment in standardised technology might hand competitors an advantage; trying to retain arrangements to keep competitors out; and disagreeing over the timing of a technology upgrade because of misalignment of their investment cycles. A particular problem of industry bodies that the literature focuses on is the difficulty of achieving consensus in a committee style of decision making. This process can be viewed as a war of attrition, whereby participants have vested interests in particular technologies, leading them to try to outlast each other in supporting their preferred technology.[11] Accordingly, although vested interests do not necessarily prevent industry bodies from choosing the optimal technology, they can cause excessive delays in the decision-making process. Other concerns with committee decision making are that: technology decisions tend to be backward looking and based on proven technology, as it is easier to gain consensus on familiar technology; and the technical competence required for discussions on technology means that the views of end-users may not be adequately represented.

Policy recommendations from the literature

The literature has generated relatively few specific policy recommendations owing to the complexities of network markets. Nevertheless, it suggests that standards are an important mechanism for solving co-ordination problems on both the supply and demand sides of network markets. Accordingly, public policy can support and, if necessary, strengthen standards-setting organisations.[12]

The literature offers some suggestions to reduce the problem of delays in the committee style of decision making that is commonly found in industry bodies and other standards-setting organisations, including:

  • changing voting rules to reduce the power of vested interests, for example by adding independent directors or allowing majority voting;
  • allowing incomplete standardisation, such as by allowing the use of adaptors/translation services for incompatible technologies in parts of the standard; and
  • standardising early, before vested interests can develop, although this may be at the expense of failing to co-ordinate on the optimal standard for society as a whole.[13]

The literature also notes that in some circumstances, especially where industry participants are resisting the compatibility of network goods, public policy may need to mandate a particular standard. However, this should only be done when the merits of competing standards are clear and when standards are likely to be long-lasting – not when technology is undergoing rapid change. Also, performance standards are preferred to technical standards; for example, a target can be set for the provision of particular services, without mandating the particular technology involved.

The Australian experience

The above observations seem broadly consistent with observed outcomes in Australia. In general, significant co-operative innovations have been difficult to achieve, with key stakeholders often unable to reach agreement. Where significant co-operative innovation has occurred, it has often been with the aid of some form of external intervention. Examples range from the creation of the RTGS system in the 1990s, to ATM reforms and implementation of the industry Community of Interest Network (COIN) for the clearing of retail payments between payments system participants. This suggests that further consideration of the governance arrangements for the industry is warranted to determine whether there are enhancements, or indeed an alternative model, that could help to overcome these issues.

5.2 Representation in Industry Governance

One important question in examining industry governance is whose views governance arrangements take into account. Decision making in relation to Australia's retail systems takes place at a number of levels:

  • individual payment system participants make their own proprietary decisions about services offered to end-users and the investments made to provide and support those services;
  • stand-alone payment systems, such as the card systems, may also make decisions from a largely proprietary perspective, but may consider both participants and end-users as customers;
  • at an industry level, APCA makes decisions about the co-operative aspects of payment systems through rules governing payments clearing. APCA rules encompass factors ranging from interconnection standards and the type of payments that can be cleared through different systems to payment message formats and device standards; and
  • the Payments System Board has an overarching mandate for promoting safety, stability, competition and efficiency in the payments system. It has powers to set standards and access regimes for these purposes. The Board has a preference for co-operative industry solutions and only uses its powers where issues cannot be adequately addressed otherwise. To date this has occurred for only a few systems and in relation to a relatively narrow set of issues.

It is the latter two levels that are best placed to take account of broader payments system and public interests.

APCA is the principal industry body representing the payments industry in Australia, although its genesis is in management of specific clearing streams and it has no formal decision-making role in relation to significant elements of the payments industry as a whole. Nonetheless, under Core Principles adopted in 2007, APCA aims to improve the safety, reliability, equity, convenience and efficiency of the Australian payments system. APCA decision-making is based on a series of six management committees and a board, with representation related to clearing volumes and arrangements to provide collective representation for smaller participants. In the five clearing system management committees, voting is structured according to each member's share of ‘national transaction volume’ or ‘activity’. A similar method is used for the APCA board, except that the votes of members with larger shares are constrained. Members of the board are solely financial institutions, while two retailers are represented on the management committee for the Consumer Electronic Clearing System and Infrastructure Management Committee 1 (IMC1), by virtue of their role in acquiring card payments. IMC1 also includes representatives from technology, infrastructure and payment service providers.

APCA has methods to reach out to other stakeholders. Traditionally it has used a structure of advisory councils to provide views to the management committees, however in 2009 it reviewed its stakeholder arrangements and decided to replace the advisory councils for the Australian Paper Clearing System and Bulk Electronic Clearing System with the APCA Stakeholder Forum. This change was made to improve the expert advice to those management committees and to increase the number of stakeholder participants. APCA has also tried to gain broader industry input on strategic issues with the formation of the Australian Payments Forum. The Forum promotes discussion of industry policy on the efficiency of the Australian payments system. Its membership includes non-APCA payment systems and community groups, giving it a broader representation than that of the advisory councils and the Stakeholder Forum.

Nonetheless, the decision-making powers of APCA are focused on its core clearing system functions, with decisions made by clearing system participants. Any focus on innovation in this framework may therefore be constrained by the ‘business case’ for the main participants (as well as being subject to the co-ordination issues discussed in the previous section).

The broader public interest is explicitly the focus of the Payments System Board. In fulfilling this role, the Board consults widely with stakeholders of all types in an effort to gauge the public interest. But its role has been to address issues that are affecting competition and efficiency that the industry has been unable or unwilling to address. In general, it has taken the view that innovation should be driven by the industry itself unless there is a clearly demonstrated market failure.

One outcome of the current structure of industry decision-making is a perception that the needs of end-users for new or altered product offerings are not taken into account sufficiently. As discussed in the next section, there are a number of examples where the needs of the business community and government agencies are not being fully met and, while consumers do not have a collective voice on payments issues, there are products and features that could provide a benefit to them that are currently not offered.

There is also a perception that some industry players do not have an appropriate voice. For instance, the rules for the ATM system are largely set through the APCA processes, but some of the largest owners of ATMs have no direct input into these decisions, once again largely as a consequence of APCA's clearing mandate. Even more difficult to accommodate in industry governance are the interests of potential entrants to a system.

Once again these issues raise the question of whether there are changes to the governance model for the Australian payments industry that would be publicly beneficial. 

5.3 Meeting the Cost of Innovation

Successful governance arrangements might need to take into account the possibility that system-wide innovation can impose net costs on some participants, while providing benefits to others.

Where decisions in relation to an innovation are in the hands of a single entity, and there is a clear demand for that innovation from end-users, its provision will simply be a matter of the provider assessing the potential returns given the demand. In the absence of market failures, the innovation will most likely proceed if there is a net benefit. Where co-operation is required to provide that innovation, the type of co-operative failings outlined in Section 5.1 may prevent the innovation proceeding, including where the innovation will provide a return for some participants, but not others. A governance arrangement that allows such innovations to proceed if they are in the public interest may therefore impose costs on some participants unless a mechanism for redistributing benefits and costs can be found. It may be that such innovations require some form of mandating in order to proceed. The Board is interested in understanding whether there are other mechanisms for achieving the same outcome. For its part, the industry (through APCA) has suggested that co-operative innovation will be given the best chance of proceeding if both the ‘industry case’, including overall net benefits to end-users and participants, and the ‘business case’, including how the benefits and costs are distributed, are clearly articulated. The Board is also prepared to consider the possibility that there are circumstances where co-operative failings or incentive structures are such that innovations in the public interest cannot be delivered by the industry and should instead be delivered by the public sector, as occurred with the RTGS system, or with public sector involvement.

5.4 Impact of the Regulatory Framework

The current regulatory framework for the payments industry anticipates that that the industry will self regulate, with the Payments System Board intervening only where outcomes in the public interest cannot be achieved. Overlaid on this framework is the Competition and Consumer Act 2011, which, in the interests of preventing anti-competitive behaviour, places constraints on the ways in which industry participants can co-operate. It is clearly not the intention of the Competition and Consumer Act to prevent co-operation that is in the public interest, and mechanisms are in place to allow for such co-operation. Nonetheless, concerns about competition issues have hampered co-operative efforts and at times the Payments System Board has regulated to provide legal certainty where an industry solution might have been possible in the absence of competition concerns.

Alternative governance arrangements might encompass a framework that gives APCA or other industry bodies greater capacity to achieve co-operative outcomes, supported by the Reserve Bank, but without the need for the Reserve Bank to regulate to provide legal certainty. The Board is interested in views as to whether there is a case for legislative changes to support such a framework.

5.5 International Models for Industry Governance

Governance models for payments systems internationally are as varied as the payments systems themselves. In broad terms, there tend to be three types of functions performed by governance bodies:

  • system operation, e.g. Canadian Payments Association (CPA), Iberpay (Spain);
  • rule-setting and co-ordination of decentralised systems, e.g. APCA, Central Credit Committee (Germany), Payments Association of South Africa (PASA); and
  • strategic planning, e.g. the UK Payments Council, National Forum on the Payment System (the Netherlands).

However, the framework for performing these functions varies. Some bodies perform multiple functions and some functions may be performed by multiple bodies. A strategic planning function might not be explicitly performed by any body.

The interests of this review are largely in the rule-making and strategic functions. Rule-making bodies globally may be bankers associations, such as in Denmark, Finland or Germany, or specialist payments bodies, such as APCA, PASA, and, as of 2010, Payments NZ Limited. The latter allow non-bank participation, but membership of these bodies largely consists of system participants and sometimes includes the central bank. In a limited number of cases, accountability is improved by the inclusion of independent directors, for instance Payments NZ Limited incorporates an independent chair and two independent directors.

Some rule-setting bodies also play a strategic planning function, for instance PASA. However, there are now also a number of forums or councils that focus predominantly on non-commercial, longer-term strategies for co-operative development of payment systems. Representation is usually (but not always) diverse compared with other payments organisations, including consumer, business and other special interest groups. Some groups have the power to bind industry to their decisions (e.g. UK Payments Council) while others simply advise (e.g. National Forum on the Payment System). Some of these bodies have published road maps or plans for system development.

One example of a body focused on the strategic direction of the payments system is the UK Payments Council. The Payments Council co-ordinates the longer term development and strategy of the payments system. It was developed to meet the concerns of regulators that the payments system was poorly governed and uncompetitive. It has an independent chair, four independent directors, 11 industry representatives and a Bank of England observer. The independent directors come from a variety of non-payments-related backgrounds and have a collective veto on board decisions. The decisions made by the Payments Council are binding on the industry.

On the other hand, the National Forum on the Payment System in the Netherlands was established by De Nederlandsche Bank to discuss advancing the payments system, but does not have regulatory powers. Members include disability, retail, seniors and charity associations, with the Netherlands Bankers' Association representing payments industry participants. Other forums of this nature are the Payments Forum in Finland and the Payments Systems Committee in Sweden.

Issues for discussion

  1. Do current governance arrangements adequately promote payments system innovation?
  2. Are the needs of payments system users and non-ADI payment service providers adequately considered in decisions about the direction of the payments system?
  3. Are there ways of altering current governance structures to make innovation easier?
  4. Are there ways of altering current governance structures to take more account of the views of end-users?
  5. Could a new decision-making body with broad representation of payments system participants, service providers and end-users provide a better strategic focus for the payments system, taking adequate account of costs and the public interest?
  6. How could such a body have the capacity to reach decisions across a diverse group of members?
  7. Could such a group make binding decisions and how could they be enforced?
  8. Could formalisation of a broader mandate for APCA, coupled with broader representation, provide better industry-wide outcomes?
  9. What role should the Reserve Bank and the Payments System Board play in setting the reform agenda for the industry?
  10. Have concerns about breaches of the Competition and Consumer Act (formerly the Trade Practices Act) prevented the industry from achieving greater co-operative innovation? What approaches are suggested to deal with this in a way that does not undermine the intent of the Competition and Consumer Act? What are the advantages and disadvantages of each?

5.6 Structure of Clearing and Settlement Rules

In addition to the broader decision-making framework for the industry, it is appropriate to also consider whether the current structure of clearing and settlement rules and arrangements is the most conducive to innovation. In particular, clearing and settlement arrangements should ideally allow relatively straightforward access to players with new products and new business models, provided that any risks they bring to the system are appropriately managed.

Current structure

Settlement of interbank obligations arising from the payments system ultimately occurs across exchange settlement accounts (ESAs) of direct participants in RITS. Settlement of retail payments in most cases occurs the next business day via the 9am multilateral net batch in RITS, with high-value or time-critical payments settling individually on a real-time basis through RITS on the same day. RITS also provides for other batch settlements during the day. Currently, the equities settlement system, CHESS, settles in this way; individual payment systems or networks can also use this facility, including for same-day settlement. In the period immediately ahead, RITS will also have the capacity to settle bilaterally exchanged bulk files shortly after the time that the files are exchanged.

Currently, clearing of payments is largely focused in five clearing streams administered by APCA: cash distribution and exchange; paper; consumer electronic; bulk electronic and high value. Clearing of non-APCA systems, such as BPAY and the international card schemes, occurs separately, but the interbank obligations arising are incorporated into the APCA streams for settlement in the 9am batch.

These clearing and settlement structures are governed by rules at various levels. At the interbank settlement level, Reserve Bank policy and contractual arrangements govern the eligibility of parties to hold ESAs and become RITS members, and the rights and obligations that ensue. As discussed above, at the clearing level APCA rules govern the APCA clearing streams on a wide range of issues. In addition, non-APCA payment systems, such as BPAY and the international card schemes operate under their own rules. Recently, rules relating to the operation of the eftpos system were removed from the Consumer Electronic Clearing System and incorporated into separate eftpos rules under the administration of eftpos Payments Australia Limited (ePAL).

Issues arising from the current structure

The Board is interested in views on how well this structure accommodates innovation, in particular: the reliance on current APCA clearing streams for settlement of obligations of most payment systems; the varying role of APCA rules depending on the payment system; and the role of access to both payment systems and clearing arrangements in promoting innovation.

A useful perspective on current arrangements is to consider a case where a subset of institutions wished to provide a new type of retail payment with different characteristics to those currently cleared through the APCA clearing streams (for instance, incorporating near-real-time availability of funds, facilitated by same-day settlement, and the capacity to carry additional data). How easily could this be achieved? Such payments could not be accommodated through APCA clearing streams without significant changes to APCA rules, which may be difficult and time-consuming, particularly to the extent that it requires agreement from competitors. The new product could therefore only proceed in a timely fashion with its own clearing rules and settlement arrangements, outside the APCA framework, even though there might be significant overlap with APCA rules. This raises the question of whether there are ways of easily facilitating innovations of this type. A related issue is how well new uses of existing instruments by individual players are accommodated by APCA rules and whether there are cases where these unnecessarily constrain innovation.

A further issue is whether the delineations between different sets of rules – system-specific rules, APCA clearing rules and Reserve Bank rules relating to ESA/RITS eligibility – are appropriate, logical and provide the right degree of flexibility. One current inconsistency is that, in some cases, APCA rules govern the entirety of a system (such as the cheque system), but in other cases, notably eftpos, a separate set of system rules applies and APCA plays a residual role. In yet other cases, APCA plays a role only to the extent that final interbank obligations are incorporated with APCA clearing streams for settlement. The Board is interested in how these various rules should interact and whether greater uniformity in the treatment of different systems would be beneficial.

Finally, it is often new entrants to a market that bring innovation. Over recent years there have been some efforts to make access easier for new entrants to existing retail payment systems. This includes access codes/regimes for the MasterCard and Visa systems, the eftpos system and the ATM system, while clearing system rules have also been made more amenable to access. Despite these efforts, new entrants to these systems have been rare. For instance, little formal use has been made of the eftpos and ATM access codes and only a small number of entities have taken advantage of arrangements to allow more specialised players in the credit card systems.[14] Therefore, there may also be justification for the Board to consider whether access arrangements for existing systems are constraining innovation.

Issues for discussion

  1. Does the current structure of clearing and settlement adequately allow for the introduction of new payment products? How could this be improved?
  2. Is the current structure of rules applied to payment systems, including the five APCA clearing streams, the most appropriate?
  3. How should clearing and settlement rules change to take best advantage of upcoming functionality in RITS for same-day settlement of bilateral bulk payment files (and existing functionality for same-day batch settlement). Could rules be established for individual ‘settlement streams’, including for instance on the timing of availability of funds and the individual transaction values eligible for that stream?
  4. Are there alternative models for clearing rules? For instance, could a set of generic (but narrowly focused) clearing standards cover multiple payment systems, with more detailed system rules applied at the individual system level? Should such clearing arrangements be mandatory for all payment systems, including those not currently party to APCA arrangements?
  5. What other ways are there of allowing providers of new payment products or systems easy access to clearing and settlement arrangements. Is there a case for establishing a standard minimum payment message type that participants are obliged to accept from agreed counterparties?
  6. Do existing clearing arrangements allow sufficiently easy access for new participants? If not, what could be done to improve this?

5.7 System Architecture

System architecture can have a significant impact on both access and the capacity to innovate. The bilateral relationships and architecture that underpin some of Australia's main retail systems have been relatively effective in facilitating the initial establishment of payment systems, such as the ATM and eftpos systems, without requiring participation from all institutions from the outset. However, once established, such systems have tended not to be easily accessible and to have difficulty innovating. This is of course a function of decentralised governance as well as architecture.

The establishment of the industry COIN is resolving some of the complexity of access to payments clearing and settlement in Australia by allowing new entrants to establish just a single physical connection to the network, rather than individual connections to each other participant. Nonetheless, these arrangements maintain bilateral logical and business relationships between participants. Under these circumstances, there may be additional advantages to further centralisation in the form of a hub – centralised architecture through which payment messages are directed to the recipient.

In its simplest form, a hub has the ability to receive messages from any payments system participant and send messages to any payments system participant. In this way, a hub could remove the need for bilateral connectivity, security and testing and reduce the need for the same functionality to be built by all participants. This naturally reduces the cost of entry to the system, both for new entrants themselves and for the incumbents. And unlike bilateral arrangements, the cost to new entrants will not increase as the number of participants increases.

Hubs can take different forms and perform a range of different functions. Just as the traditional bilateral physical links between institutions in Australia have facilitated the exchange of both bulk payment files and real-time individual transactions (for ATM and eftpos), hubs could perform either of these roles, depending on their design. But in addition to simply relaying messages, more sophisticated hubs can perform more sophisticated functions for the network. For instance, if transmitting bulk payment files, a hub could split those files and direct payments to the respective receiving institutions. Importantly, a hub can allow communication between participants that choose to adopt different communication and security protocols and it can potentially translate between different message formats. This means, for instance, that migration to a new message standard could occur at different times for different participants or, indeed, that participants could remain on different standards indefinitely. In other words, in terms of the discussion in Section 5.1, a suitably designed hub can allow incomplete standardisation within a network, potentially reducing the barriers to innovation and facilitating more direct participation. On the other hand, a hub is a central point of failure and would require high levels of resilience and availability.

Of course, governance and contractual arrangements for a hub are also important. A hub could be governed by co-operative industry arrangements mirroring those for the APCA clearing systems – the approach taken for the industry COIN. Alternatively, the operator of a hub could be established as a separate entity that governs the terms of access to the hub, potentially centralising some of the bilateral business underpinnings of current systems, further reducing the cost of access and simplifying decision making. 

Several hubs already operate within the Australian payments system, including the SWIFT system for clearing high-value payments and the BPAY system. One focus for this review is whether there would be advantages from any additional use of hubs, with options ranging from simply an expressed industry preference for newly established systems to utilise hubs, to creating a hub that could be used by a range of systems, both existing and emerging. A possible model to take account of legacy arrangements could be to require participants in a system to be able to send and receive messages via a hub, but to allow them to retain existing bilateral arrangements where convenient. This would provide easy access to new participants or those wishing to take advantages of any more sophisticated services offered by a hub, without unduly disrupting established arrangements.

Issues for discussion

  1. Could greater use of hubs improve efficiency, access and innovation in the Australian payments system?
  2. In what areas would a hub or hubs be useful – for instance, for transmission of clearing files, or for real-time individual transactions? For what type of payments would a hub be useful? What functions could a hub or hubs provide? Could a hub be available for use by multiple payment systems?
  3. Should hubs be considered best practice for new payment systems? Should existing systems be migrated to a hub? Could hub services be offered in a way that allows participants to opt in, while providing full services to new entrants?
  4. What type of ownership, governance and management arrangements would be desirable for a hub?


There is a large body of literature on the economics of network markets and the related topics of standardisation and switching effects. Most of the points discussed here can be found in three surveys of the literature: Farrell and Klemperer (2007) provide a detailed survey; David and Greenstein (1990) give an account of the early literature; and Stango (2004) focuses on how network effects influence the standards-setting process. [10]

See, for example, Farrell (1996). [11]

Farrell and Klemperer (2007). [12]

Farrell (1996). [13]

In conjunction with the Access Regimes for the MasterCard and Visa systems, the Australian Prudential Regulation Authority has established a separate class of authorised deposit-taking institutions (ADIs), known as specialist credit card institutions (SCCIs), allowing such entities to conduct only credit card issuing and acquiring. [14]