A health plan for the payment system

Recent data shows Australian non-cash activity overtaking cash transactions for the first time. These days almost every economic act other than a small consumer purchase requires an electronic transfer of value through the payment system by card, direct credit, direct debit, BPAY or some other method. This means that the payment system has become to the economy what your arteries and veins are to you – critical for economic health. One might think, then, that keeping the payment system “fit” (that is, secure, efficient and competitive) would be the subject of a well-developed “health plan”. Curiously, in many countries this has not been the case.

Around the world, payment systems have developed organically as coalitions of bankers build networks to serve their customers, with central banks gradually developing wider responsibilities. Australia was one of the first countries in the world to have a dedicated industry payments association – APCA was founded in 1992 – and the Reserve Bank of Australia was one of the first central banks to be given statutory responsibility for the payments system – when the Payments System Board was formed in 1998. In many other countries, there is still no clear focus of thinking about overall payments system health and evolution. But things are changing.

In many of our Commonwealth counterparts, the idea of coordinated planning for the payments system has certainly taken hold. Payments planning bodies have been created, like the Payments Council in the UK or the Payments Consultative Committee created by the Department of Finance in Canada. There have also been a number of new plans and roadmaps for national payment systems. The UK, Canada, South Africa and New Zealand have all taken steps down this path, the most recent effort coming from the UK Payments Council in June with an initial report on their Payments Roadmap. In Australia, the RBA has been the main protagonist in relation to the cards system through a decade-long series of reforms following on from the Wallis Financial System Review in 1998, and in non-card payments APCA made an attempt in 2008 with its Low Value Payments Roadmap.

In many ways, all this coordinated planning activity can be seen as a planning cycle. When the system is stable and market activity is vibrant with plenty of competition and service innovation, coordinated planning seems unnecessary – and the chance of getting industry competitors to collaborate on centralised plans is fairly remote. This was our situation in Australian payments through the nineties and naughties – the system was expanding, people were happy to buy new payment services, so the regulator concentrated on identifying what it saw as market failure – e.g. card scheme competition reform – and did not attempt a comprehensive plan for the payments system.

But it was clear that sooner or later the underlying platform for competitive Australian payments would need renovation. We would need to replan. Market forces struggle to deliver platform renovation, because it requires collaboration amongst network users. So in the last five years or so (since the 2008 roadmap), we have had an industry focus on collaborative platform renovation – on health planning for payments, if you will. This includes the establishment of the COIN as an all-purpose TCP/IP communications backbone for payments, retooling by RBA of its payments settlement infrastructure, and now, the New Payments Platform (NPP) to be built by the industry in response to RBA’s Strategic Review of Innovation.

This highlights the central concept behind the NPP: it is NOT a payment service or payments scheme, but a piece of infrastructure, a platform for payment services and schemes. Below is an infographic that covers the key elements of the proposal.

All this renovation is going to keep us all busy for the next couple of years. But the really interesting part is what happens once it’s built. Here’s my prediction, based on past cycles: this versatile new platform will open up new vistas of competition and innovation, as all the clever people in Australian financial services work out how to offer new services and products using it.

So to my way of thinking, the health plan for the Australian payments system is more of a fitness programme than a rest cure: stand by for interesting times.