In a world where few countries have a clear
picture of the migration from cash to electronic payments Australia
is an exception. Encouragingly, all indicators point towards
electronic payments eroding cash’s position in Australia, to an
extent that a major upgrade of the country’s payment system is
being mooted.

A key measure of success of an electronics
payments system is its ability to entice consumers away from cash.
But data on cash use is generally inadequate, a shortcoming that
prompted the Reserve Bank of Australia (RBA) to undertake a major
study into how individuals make payments.

Undertaken in June 2007 over a two-week period,
the study, Household Payment Patterns in Australia, entailed
participants recording all their payments and was published in
April 2008. A particular focus of the study, which encompassed
17,000 individual payments, was the use of cash.

Among the study’s main conclusions was that
cash remains the most widely used payment instrument in Australia,
accounting for about 70 percent of everyday transactions in number
and 38 percent in value. Cash is particularly important for small
transactions, accounting for nearly all payments under A$10 ($6.70)
and close to 90 percent of transactions under A$25. Indicative of
the potential future role of contactless payments, about 75 percent
of cash transactions have a value of A$25 or less.

There is also strong evidence that cash use is
declining. Among indicators notes the Australian Payments Clearing
Association (APCA) is that in recent years growth in cash
withdrawals from Australia’s 25,680 ATM’s (June 2008) has slowed
considerably.

Indicatively, between 2004 and 2008 the number
of ATM cash withdrawals in May of those years grew from 61.6
million to 72.9 million, an increase of 18.3 percent (CAGR 4.3
percent). The total value of cash of withdrawals grew from A$10.2
billion ($6.8 billion) to A$12.5 billion, an increase of 22.5
percent (CAGR 5.2 percent).

Notably, between May 2007 and May 2008 growth
in the number and value of cash withdrawals was a mere 1.3 percent
and 2.5 percent, respectively. ATM’s account for 64 percent of cash
withdrawals by value, the country’s 657,500 (June 2008) electronic
fund transfer POS devices 10 percent, over the counter 20 percent
and other such as person-to-person payments the balance .

The APCA stressed that slowing in cash
withdrawals contrasts with strong growth in electronic payments,
indicating a trend away from cash towards non-cash payments
forms.

This conclusion is shared by the RBA which also
noted that providing further evidence of a slowdown in the growth
of cash for transaction purposes, the value of ATM withdrawals
since 2005 has been growing at a slightly lower rate than growth in
final private consumption.

Adding further credence to the view that there
is a swing away from cash is significant growth in direct debit
transactions. Using figures per business day in May of each year
the total number of direct debits between 2004 and 2008 grew from
1.5 million to 2 million, an increase of 33.3 percent (CAGR 7.5
percent). The total value of grew from A$10.5 billion to A$21.4
billion, an increase of 103.8 percent (CAGR 19.5 percent).

Direct credits also recorded strong growth
rising from 3.2 million per business day in May 2004 to 4.2 million
per business day in May 2008, an increase of 31.3 percent (CAGR 7
percent). Total value grew from A$13.7 billion to A$21.4 billion,
an increase of 56.2 percent (CAGR 11.8 percent).

In tandem with direct entry transactions the
use of payment cards in Australia has also grown vigorously with a
strong bias in recent years towards debit cards.

According to the APCA, between 2004 and 2008
the number of debit card transactions in May of those years grew
from 87.4 million to 144.6 million, an increase of 65.4 percent
(CAGR 13.4 percent). Value of transactions grew from A$5.8 billion
to A$9.8 billion, an increase of 69 percent (CAGR 14
percent).

Credit cards, though still holding a larger
share of total spending than debit cards, reflected a slower growth
pace with transactions up from 93.6 million in May 2004 to 119
million in May 2008, an increase of 27 percent (CAGR 6.2 percent).
Total transaction value grew by 43 percent (CAGR 9.3 percent) to
A$18.3 billion between May 2004 and May 2008.

In its study, the RBA found that debit and
credit cards account for 45 percent of transactions between A$25
and A$200 with usage fairly evenly divided between the two card
types. Though the use of cash declines steadily as the value of
payments rises it still accounts for about 30 percent of
transactions valued at between A$200 and A$500 and about 19 percent
of transactions valued at over A$500.

As transaction values increase the RBA also
found that credit cards begin overtaking debit cards and for
amounts over A$500 outnumber debit card payments by four to one.
The RBA pointed out that this partly reflects daily debit card
transaction limits which are typically A$800 or A$1,000. The RBA
added that between 2003 and 2008 the average debit card transaction
has risen by only A$3 while the average credit card transaction has
increased by around A$20.

As payment values rise the RBA’s study reveals
that other payment means also take on increased importance.
Cheques, for example, begin to become a factor for payments over
A$100 rising from about 5 percent of consumer payments between
A$100 to A$500 and to about 15 percent for amounts over
A$500.

The average value of payments using cheques for
retail purchases is A$271 according to the RBA which based its
estimate on a survey of 11 retailers which provided data related to
a total transaction valued at A$6 billion.

Use of personal cheques has, however, long been
in decline, the number of personal cheques written annually per
person halving between 1994 and 2007 to about eight while the
number of card-based payments increased more than fourfold to 135
per capita.

However, cheques remain popular with
businesses, noted the APCA. Despite this the total number of
business and personal cheques written each business day fell 32
percent from 2.2 million to 1.5 million between May 2004 and May
2008. The total value of cheques written per business day held
fairly stable at about A$7 billion between 2004 and 2007 before
falling in May 2008 by 10 percent to A$6.3 billion or about 13
percent of the value of total non-cash payments.

Another important feature of the Australian
payments landscape is BPAY launched in November 1997 as a telephone
bill payment service and later extended to the internet.

According to
BPAY, in 2007 its service covered 15,270 biller codes, including
those of companies, utilities and government departments, and was
offered by 180 banks, building societies and other financial
institutions. During 2007 BPAY handled about 11 million payments
valued at A$11 billion per month, an impressive figure given that
it has only 10 full time employees.

BPAY’s popularity continues to grow markedly
with the RBA reporting that the number of BPAY payments increased
by 14 percent and the value of transactions by 20 percent between
June 2007 and June 2008. The average value per transaction during
the 12 months increased from A$676 to A$709.

The trend in the use of BPAY’s service is also
strongly towards the internet with BPAY reporting a 26 percent fall
in payments via the telephone between 2003 and 2007. During this
period payments via the internet increased by 44 percent and
accounted for 77 percent of all payments via BPAY in 2007.

In addition BPAY noted that 70 percent of all
Australian bill payers had used its service during 2007 while the
proportion of all Australian bill payers using the internet to pay
bills had jumped from 36 percent in 2003 to 80 percent in 2007.
During the four years bill payments via the mail slumped from 43
percent in 2003 to 17 percent in 2007.

Time for an overhaul

Success of small value electronic payments in Australia has been
built on a foundation laid by the APCA’s bulk electronic clearing
system (BECS) formed from the merging of bank, building society and
credit union direct credit and debit entry systems in 1992.

In its 2008 payments industry review the APCA
highlighted that since the establishment of BECS Australia’s
electronic payments market has been in what it termed a “product
innovation phase,” driven by industry players striving achieve a
competitive advantage over their peers.

In the process BECS has had to accommodate a
growing array of new products including online retail banking,
business banking and bill payments. Perhaps most importantly, noted
the APCA, BECS now handles volumes and values well beyond anything
envisaged by its original designers and continues to enjoy
double-digit growth. BECS now handles some 5 million direct credits
and direct debits each day.

The APCA
continued that product innovation has not been accompanied by
fundamental innovation of the BECS network, stressing that BECS was
established at a time when computers were mostly large,
data-crunching mainframes and the internet barely existed.

Typically most industries tend to cycle between
long periods of product innovation and “bursts of collaborative
infrastructure development” noted the APCA.

“If the cycle holds true, ever-changing
customer demand will ultimately require fundamental platform work,”
added the payments association.

APCA pointed to what it termed “some emerging
issues” for direct entry debits and credits that call for “an
overhaul” of BECS.

In particular, while in the early 1990’s BECS’
24 hour clearing cycle looked good against a five day cheque
clearance cycle and three to five day cycles for automated payments
in other countries, things have changed and today real-time
settlement is often expected.

The need for real-time settlement is also
driven by the large value and volumes handled by BECS and the
increased settlement risk this entails.

With a view to a wide-ranging upgrade of BECS
the APCA this year undertook an extensive analysis of low value
payments and consultations with market players. The objective of
the exercise was to develop broad industry consensus around
directions for the future.

Among issues to be addressed is the industry’s
existing x.25 wide area network communications protocol which
predates the establishment of BECS and, as the APCA termed it, “is
approaching its end of life”.

Another complex issue is the future for paper
payment instruments, particularly cheques.

“Australia has already done much to optimise
clearing procedures through electronic exchange of value on cheques
and a three-day clearing cycle,” noted the APCA.”

“However cheque volumes are in steady decline
and the dilemma we face, in common with many cheque friendly
jurisdictions, is whether to invest in further, and increasingly
costly, optimisation for fewer and fewer cheques.”

Undoubtedly the upgrade of Australia’s already
impressive electronics payment system will be watched attentively
by payment industries worldwide and technology vendors eager for
the slice of what promises to be significant capital
expenditure.