Why PayTo will fail.

One of my early TV memories as a child, was watching a program called the Inventors on the ABC. It was a nicer version of the shark tank show, set way back in the 1970s. On this particular episode, someone came up with an idea of a stair-climbing trolley - used to lift heavy goods up flights of stairs. Invented in Australia (you won't find that in Wikipedia), instead of one wheel on each side, it had three, that rotated on a central shared axel. I remember thinking what a good idea it was, and I waited decades to see it climb up (figuratively). I was reminded the other day when I saw an older lady pulling a shopping cart onto a bus - with the same, three wheeled stair-climbing apparatus. That good idea took a long time, I thought.

PayTo is Australia's account-to-account payment solution for merchants. Account-to-account payments is a good idea too. It is based on PayID, aka Osko, aka New Payments Platform (NPP). PayTo is designed to allow you to use a mobile device or computer to pay for goods in a store or online, by transferring money directly from your account to the recipient. You can also pull money from an account. In many countries, similar concepts have been implemented as QR code payments, where you scan the merchant QR to get their account identifier, and send the money. It overcomes the problem of PCI compliance, where giving away our card number, expiry and cvv was like providing open access to your account. It is low cost, and allows us to move away from cards, and simplify the payments world. It will allow innovation through banks, merchants and fintechs to improve experiences. From a regulatory point of view it opens up the payment market, reduces costs and removes concentration.

Yes, PayTo is a good idea. But don't expect the world to change when it is available. Here is why.

?''you will observe with Concern how long a useful Truth may be known, and exist, before it is generally receiv'd and practis'd on."

31 July 1786 Benjamin Franklin

1. PayTo is Take Two

When NPP (aka Osko aka PayID) was first implemented it was known at the outset that real-time payments was a critical capability for efficient commerce. Before that, the bank-led initiative Mambo failed due to lack of broad bank support based on the cost and lack of perceived benefits. For many banks, they could not see the money in real-time payments. If people could move their money around faster, they would not keep lazy money in transaction accounts, which is currently a big money spinner for banks. Mambo, which was led by BPay, had a strong business case around bill payments. Commercial entities could speed up supply chains once money had been banked. The failure of Mambo, led to the regulators stepping in. NPP, the replacement, was not commercially focussed, though. Nor was it retail focussed initially, it was infrastructure. Many payments people knocked their heads together to think of use cases for the new payment mechanism. They found one: buying a second-hand car. Buyer has the money, recipient has the keys, they do their traditional dance (known as payment vs delivery) so that at no time does one person have both the money and the goods. Easy to do with cash, but not really possible with electronic transfers where we don't have plastic cards, unless you have real-time payments. NPP looked like the solution. NPP was touted to solve a number of things. Open Banking "write" access, account portability, and point of sale transactions using account-to-account payments.

Years after the original schedule, NPP was delivered. All our dreams came crashing down. A common experience of early adopters was that in a car sale scenario, the buyer sent the money but the recipient didn't get it. Perhaps because the bank holds first-time transactions between two people who have not transacted before, for one full day. Perhaps this car purchase is the biggest transaction the buyer has ever made and the transaction has been stopped by fraud. In fact in one short survey I conducted, 70% of consumer transactions failed on the NPP. Imagine how bad this experience is. Perhaps the largest transaction of their life, their money has vanished, and they don't know where. Will the recipient get it after the would-be-buyer walks away from the failed transaction? If they have enough money and withdraw the same amount from the ATM, will they end up double paying? If the recipient trusts the system, will they be out of pocket? These people were the early adopters. They are important for any product launch. They spread the word of a promising capability, and help it grow. Like the early users of the stair-climbing trolley. Now we had a whole generation of early adopters who, like me, advise people never to use NPP for important transactions. Don't use it at point of sale, don't send it unless you trust the recipient. Try not to do large transactions.

Indeed Carsales.com.au was the first non-financial adopter of NPP as reported in the AFR. What wasn't widely reported was their offering, PayProtect became associated with alleged scams and was quietly withdrawn. They now recommend cash. They probably won't be in a rush to implement PayTo.

There were lots of other problems with NPP 1.0. It was infrastructure as mentioned earlier, so the commercialisation was initially to throw a name and a logo at it "PayID". After some initial slowness, BPay came to the rescue with "Osko". Overlay services were meant to be the super nova of NPP, they would allow banks and fintechs to turn lead (NPP) into gold. However overlay services were not alchemy. Osko was an overlay service, but other than rebranding PayID and applying a service standard that was not widely adopted, it is now accepted that its impact is low. Brand penetration is low. Beam It, a competing offering from the major banks (now part of eftpos) provided a more slick and consistent user experiece, but even then was mainly focussed at a younger population for a narrow "split the bill" type use cases. The other challenge with NPP, is moving your PayID from one bank to another is harder than opening a new account. So much for account portability. And the ACCC and the Treasury have figured out that the Open Write-Data promised by NPP was not what they expected for the Consumer Data Right (CDR). So 4 years later, NPP is a white elephant for many. It will pick up but much slower than expected.

PayTo is an extension of NPP. Their fan club, their early adopters have moved on. Few will be rushing to give it a second go.

2. PayTo is not Designed for Merchants

"Build it and they will come" may be true, but be prepared to wait a long, long, time. PayTo is a technical capability. It is very sophisticated. It took me a while to fully understand it, and I am an expert. It is potentially as complex to understand as tokenisation in the cards space. If you don't understand or use tokenisation, then that's a good indicator that PayTo may be out of comprehension for most people. You authorise a merchant to use your PayId - that allows them to direct debit you - but it's a lot more sophisticated than direct debit: you can stop an arrangement, you can move your account, you can be notified, you can see all your arrangements. Consumers will struggle to figure out how it works. Does it add value for the merchant?

Card based payments have been around for a long time. For the mass-market, as long as the stair-climbing trolley. Most of us were born with them. Systems have evolved withT them. A merchant, sees the approved message from the terminal and knows that tonight the till will reconcile with the pinpad. They know that they will get the money for that reconciled amount. PayTo has no standardised merchant settlement mechanism. That has been left to implementers. Will the merchant know in real time they have been paid? Will it reconcile? How do disputes work? All of this has revolved to work for cards over decades. Many small merchants just reconcile once for all of their cards. Also what is the advantage in PayTo for a merchant? Interchange on debit cards is so low, and will continue to be driven lower by the regulators, thanks to the central bank, eftpos in Australia and scheme cooperation. One could argue that the small level it is at today is a small price to pay to avoid losses and issues associated with cash. If someone has money in their account, they can pay through a Visa or Mastercard debit card or eftpos. One mid-sized merchant I visited refused to take anything but cash, and kept an ATM in their shop, making an extra clip of the $2 fee charged on each withdrawal.

PayTo will make it easy to view and cancel direct debit arrangements at your bank. But is that what many direct debit merchants want? Think Gym memberships.

Basically the added advantage of PayTo as it is, offers nothing but inconvenience to merchants. Credit Cards and Buy Now Pay Later were successful at their inception because they gave customers of merchants more money than they had, and increased sales: fact. You may argue that PayTo could evolve to be something great one day, offer credit, and be fully integrated in a one-merchant-acquiring solution. I say don't hold your breath. It could happen. Just don't hold your breath.

3. PayTo is Already Outdated

At inception PayID (NPP, Osko etc) was way ahead of its time. A world first account-to-account real-time, multi-addressable, domestic transfer system.

Despite the best designs, be skepical at anyone who claims to future proof anything.

The world has moved on. First at its heart, NPP suffers the same design flaw plastic cards did. Back in 1960 plastic cards were cardboard and metal. They had an account number (Primary Account Number or PAN). That PAN has become the bane (or lifeblood, depending on which way you look at it) of information security. It is the reason you don't give you credit card details out, it has added $100 billions of compliance costs to organisations worldwide. The problem. As part of a transaction you are sharing something that is secret. In 1960 it made sense. Today it doesn't. NPP and PayID requires that you share your email, account number or mobile with the payer. This is a fundamental building block of PayTo.

The other thing that happened is the payments world is global. A tautology, one would think, but worth mentioning. PayTo is a domestic initiative, and not only have we implemented a solution that is different to proven solutions elsewhere like India, Thailand, Indonesia etc, we have a new solution that is trying to compete with well established international solutions like card payments, PayPal, AliPay etc. Meanwhile, elsewhere in the galaxy, international regulators are trying to solve a cross-border payment problem that Australia (and many other countries) have, till now, largely ignored.

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So who can really say what the future holds? Account-to-account payments will take off, but probably not through the current itteration of PayTo. A fintech may package it up and make it work. Largely many of us have used the real-time world and trust to solve the problem anyway, through for example sharing screen-shots of our Internet banking or mobile payments. Eventually, done right, account-to-account payments provides the most accessible, low-cost, integrated and inclusive solution to universal payments, but how we get there, is another story.