Payments – Delayed Treasury Report Released - Totally Misses the Mark

LONG AWAITED TREASURY PAYMENTS INQUIRY RELEASED TODAY

Australian payments will see more change in the next 10 years than the last 30 years combined.

Considering the economic and strategic importance of payments the Treasury Inquiry is critical, as it sets up the next two decades. This report is a lost opportunity.

It is most concerning that such a key Inquiry is being undertaken with such haste – announced in October 2020, with a completion date of April 2021 was unnecessary haste given the size and scale of the issues.

The report was delivered in June and released today – a truly rapid fire process and the report looks like it was done in a hurry.

Legacy Systems

Australia has an expensive US/Anglo legacy based payments system which will be challenged by new technology, new data uses, new players and the need to protect consumer rights and data.

The need for updating systems and change comes at a cost, who will pay?

Competition

The need for real competition is the single biggest issue – yet barely rates a mention. The UK made competition and consumers major requirements of its three year process in 2013, which has resulted in major changes in competition with a flood of new players including Fintechs.

COVID-19

Covid-19 has seen many consumers move to a ‘digital’ way of life accelerating key trends – both positively and negatively. Covid-19 lock-downs combined with many consumers realising it was safer working at home, have changed spending habits and usage.

The question is will these habits remain as permanent behaviour once Covid-19 is over? The evidence suggest this will not happen as once economies open up consumer returned to past payment habits – see the online chart below.

Digital Challenge

Since 2004 rest of the world has moved to innovate by using instant, low cost, real time ‘digital’ payments based on the global ISO 20022 standard.?

The US Federal Reserve digital payments in 2015 report classified Europe as having “mature adopters” while Japan, India, South Africa, Singapore, and Switzerland were “growing adopters” and Australia, Canada, New Zealand and UK “interested adopters”

Australia is lagging badly behind and this report does nothing to move the country forward.

Ask why is Australia not on this list??

?Interesting that Treasury only see fit to consider Canada, Singapore and UK as models - astonishing not considering the leaders in this area are mainland Europe or China.

Technology

Technologies influence on payments will expand dramatically in the next five years. The IoT, AI, biometrics, autonomous computerised cars and transport, all need to be understood and regulated as part the payments landscape – none of these even rate a mention or are discussed in policy terms.

Risk

Risks across the payment sector are elevated as governments responded to Covid-19. The stimulus combined with central bank actions will have unintended consequences as asset bubbles have been created and need to monitored closely and regulators need to act.

Fintech is an area of key risk, Wirecard’s dramatic collapse in June 2020 should be viewed as a warning for politicians and regulators – can a similar collapse happen in Australia? What is being done to prevent such a collapse? What can be learnt from Greensill collapse or Bill Papas fraud?

Innovation

The Treasury Payments Report fails to mention or consider key global innovations, for example the fastest growing payment system is Alipay and WeChat (TenPay) who have created true ubiquity in 10 years across 28 countries with annual sales of US$51 Trillion.

Visa, Mastercard, Amex, Discover, Diners, JCB, India's Rupay, Canada Interac etc etc had combined sales of US$23 Trillion in 2020 and that’s after 60 years (70 years in the case of charge cards like Amex, Diners, JCB, Carte Blanche)

The other major issue is cost - the 'china mobile' model is 70% cheaper than the expensive legacy Visa/MC model. This would mean annual savings of $22-23 billion per year in Australia - not insignificant and no even mentioned as a priority in this report.

Developments around cryptocurrencies, Saas tech and banking/payment models, shifting liabilities using shared risk will all be features of payments in the next decade and require regulation to avoid bubbles and consumer harm.

The Future

Payments in 2030?will revolve?around fully portable 'digital'?consumer and business IDs?which are supported in cyberspace and do not require a card, watch or phone --- rather a consumer 'calls up' the ID at any point of sale and confirms the sale using?bio-metrics and security features which work in?person or remotely for digital and ‘eCommerce’ transactions.?

Portability and convenience will be the key drivers while service levels, data and ID protection are critical deliverables.?This future poses key challenges for regulators who must be aware of the changes and react quickly to pre-empt excesses.

?Future Vision

Australia needs a future vision for payments supported by a strategy plan – what we have instead is a lawyer’s view of how regulation should be modified and politicized for short term goals.

?Nothing changes except adding another layer within Treasury and allowing a political appointee the power to dodge and weave around payment decisions.

The single license thing sounds great?-- but how is risk going to be controlled ( look at Greensill collapse, Wirecard and Bill Papas frauds).

The distraction is look over here and let’s nail Big Tech, but…. let’s leave BNPL alone - hardly what’s required.

Seems our past history will be our future – zombie payment companies owned and control in the dark backrooms and board rooms enabled by spin, politicians and regulators.

Treasurer to pull Apple, Google into line

AFR James Frost 30th August

?Treasurer Josh Frydenberg would be given new powers over the payments system including the ability to give Apple and Google orders under proposals for him to take control of the system from a network of financial regulators.

The proposals would clear up overlapping responsibilities and introduce a national-interest trigger to pull tech giants into line, and potentially be used to order Apple to open up the Apple Pay digital wallets to rivals such as the Commonwealth Bank.

Mr Frydenberg said the pace of development that had seen the likes of Apple Pay and Google Pay become intertwined in the $650 billion in payments made every day in Australia required a modern and flexible response.

“Ultimately, if we do nothing to reform the current framework, it will be Silicon Valley alone that determines the future of our payments system, a critical piece of our economic infrastructure,” he said.

Under the proposed changes the Treasurer would have the power to classify participants in the payments system such as digital wallets provided by Apple and Google as designated payment systems and deliver them binding directions.

?The power to designate payment services currently sits with the Reserve Bank of Australia. Shifting it to the Treasurer would be a significant trump card for a?government grappling with the question of how to manage the influence of powerful offshore platforms .

It follows hard on the heels of?a warning from the Department of Home Affairs that big companies such as Amazon and YouTube ?needed to do more to ensure they were not being used by violent extremists as an alternative funding source.

The Payments System Review does not advocate for a single regulator as some feared, but it pulls no punches, criticising the Reserve Bank for being reluctant to intervene and AUSTRAC’s narrow focus on compliance for creating a chilling effect on innovation.

The review was written by lawyer and financial technology expert Scott Farrell, who performed the open banking review of 2018. The government pledged to consider his 15 recommendations before delivering its final response.

The recommendations are spread across three key areas including the need for a strategic plan to be developed by the government with input from industry, renewed co-ordination between regulators and a single tiered licensing system.

Mr Frydenberg said there was significant confusion as to which regulator new entrants needed to approach with around one quarter of new applicants for an Australian Financial Services Licence taking around five months to be considered.

“The need to deal with multiple regulators is leading to delays which add to costs and increase barriers to entry for new players,” he said.

The development comes amid a stoush between Commonwealth Bank and Apple, with the bank accusing the technology giant of riding the coat-tails of Australian banks which have stumped up around $2 billion for improvements over the last five years.

The Matt Comyn-led bank zeroed in on the technology sector – including digital wallet providers like Apple and buy now, pay later players like Afterpay – in its submission to the review, saying the system was “increasingly burdened” by freeloaders.

“To remain viable, the maintenance and ongoing modernisation of critical payments infrastructure will need to become a shared responsibility of all parties that benefit financially, directly or indirectly, from its use,” CBA said in its submission to the review.

Mr Comyn stepped up his criticism of Apple in late July when he said it was not possible to compete with the maker of the iPhone without access to its near-field communication chip.?Apple shot back, saying the position was “misleading and false”.

The Minister for Superannuation, Financial Services and the Digital Economy,?Senator Jane Hume, ?said the review arrived at a critical time for the payments industry and it was important to address the gaps in the framework.

“There is a clear opportunity for improvement and innovation, especially in light of advancements in the digital economy,” she said.

The Reserve Bank is singled out in the report for being slow, rigid and narrowly focused. It states the RBA is more likely to use its powers of persuasion than intervene and questioned its appetite to act on buy now, pay later, digital wallets or issues of national security.

“Some stakeholders observed that the RBA has been reluctant to regulate and relied too much on its powers of influence. It was noted that the interventionist nature of the designation power often means that the RBA relies mainly on its powers of influence to achieve its outcomes,” the report states.

The difficulty of adding issues to the agenda of the Payments System Board experienced by stakeholders is also mentioned, with quarterly meetings criticised for being “not conducive to flexible decision-making” and preventing the body from responding quickly.

Following the $39 billion acquisition of Afterpay by US payments giant Square,?Reserve Bank governor Dr Philip Lowe accepted regulation of the sector was in dire need of review, saying it was “complicated” and “changing very, very rapidly”.

Financial intelligence regulator AUSTRAC also comes in for scrutiny. The report found its independence from other financial services regulators has led to inconsistencies in policy direction, creating uncertainties for stakeholders.

The report says AUSTRAC’s single-minded focus on AML-CTF compliance leaves it unable to “make appropriate trade-offs” between compliance and competition. The fines at AUSTRAC’s disposal were “excessive and create a chilling effect” on innovation.

“Such fines can also impact on compliance activities and lead to excessive amounts of resources being diverted to AML/CTF compliance over other priorities, including dedicating resources to improving payment systems,” the report says.

AUSTRAC has secured a combined $2 billion in settlements from Australia’s two biggest banks – Commonwealth Bank and Westpac – in 2018 and 2020 respectively, with both banks continuing to make significant investments in compliance each year.