challenges
In many respects, Australia’s electronic payments industry has
achieved huge success. However, in a number of areas such as the
adoption of contactless payments and smart card technology, it lags
many of its Asian neighbours. It is a challenge the payments
industry acknowledges and is taking steps to address.
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Every day, according to the Reserve Bank of Australia (RBA), 13
million non-cash payments valued at a total of A$145 billion ($121
billion) are undertaken in Australia, a country with a population
of only 20.4 million people. This reflects the dynamic adoption of
electronic payments by which volume of electronic payments
increased by 230 percent and their value by 390 percent during the
course of the past decade.
Growth has been driven in no small way by the government’s strong
backing, which began in earnest in 1997 with the launch of its
Investing for Growth initiative by which it committed itself to
adopting electronic payments on an extensive scale. It also sought
to encourage suppliers to use the internet as the preferred means
of invoicing government departments. Since 1997 additional steps
have been taken to promote electronic payments, including the
Commonwealth Electronic Procurement Implementation Strategy
launched in 2000.
World leader
The adoption of electronic payments by the private sector has also
played a significant role. Indicatively, the average number of
debit and credit card transactions per capita increased from 28
annually in 1994 to 131 in 2006, or 52 percent of all non-cash
retail payments, according to the RBA. Notably, at 52 percent,
Australia leads the world in the use of credit and debit cards for
non-cash retail payments and is ahead of Canada, France and the US,
which follow at 47 percent, 40 percent and 37 percent,
respectively.
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By GlobalDataAccording to the Australian Bankers Association (ABA), there are 18
million debit cards and 12 million credit card in issue, all of
which can be used at the 540,000 POS terminals and 24,000 ATMs in
Australia. Australia has 50 percent more POS terminals per 1
million inhabitants than the US and more per 1 million inhabitants
than any member country of the Bank for International Settlements,
which links reserve banks in 163 countries.
In the swing to electronic payments, cheques have been the big
losers in Australia, their use having declined from 55 per capita
in 1994 to 25 in 2006. This compares with about 100 per capita in
the US and 35 in the UK.
Use of electronic payments has also been encouraged by the
introduction of other products, one of the most notable being BPAY,
which was launched in late 1997 as a telephone bill-pay service and
later extended to the internet. According to BPAY, 160 Australian
financial institutions covering about 90 percent of the consumer
banking market belong to the scheme and more than 13,000 companies,
utilities and government departments accept payment via BPAY. Each
month 15 million bills worth A$11 billion are paid using BPAY, 76
percent of them via the internet. The total value of BPAY payments
now exceeds the total value of POS transactions.
Of the foreign service providers, PayPal in particular has grown
significantly in Australia in the last few years, primarily as a
payment method for use in the eBay online market. PayPal now has
about 2 million customers in Australia.
Room for improvement
Despite the success of electronic payments in Australia, there is
considerable room for improvement. In a study of the payments
system published by the RBA this year it noted: “Consumers and
businesses in some other countries are now being offered a greater
range of payment services, or more flexible services, than is
generally available in Australia.” Examples of these services,
noted the RBA, include the ability to pay for goods online using a
bank account in a secure environment, interfaces between payment
and invoicing systems for businesses, and the application of chip
technology to debit and credit cards.
A particular constraint on the adoption of electronic payments for
business-to-business payments is that the direct entry system has
remained largely unchanged since the 1970s, stressed the RBA. The
format allows only 18 characters for users to add their own
supplementary information after details, such as account numbers
and the payment value, are included. “This constraint on the amount
of additional information is one factor that helps explain the
continued reliance of Australian businesses on payments by cheque,”
said the RBA.
A study undertaken in late 2006 for the Australian government’s
Department of Communications, Information Technology and the Arts
(DCITA) by research company the Centre for International Economics
and consultancy Edgar, Dunn & Company came to a parallel
conclusion. According to the study: “A gap is apparent where there
is capability and demand for an electronic payment, but it is not
being supplied.”
A number of supply-side gaps were identified in the study:
• large-scale person-to-person payments are inefficient because
slow transaction times are becoming increasingly inadequate. This,
noted the study, is imposing costs on consumers and businesses that
could be reduced through the use of electronic payments;
• consumers and businesses cannot make real-time, online purchases
or transfers using funds from a demand deposit account;
• most non-cash payment products are costly when used for small
payments or micro-payments;
• a product that allows efficient movement of detailed remittance
information with the payment (for example, business-to-business
transactions and payments within the health care market) is not
available to consumers and businesses;
• there is limited scope to use electronic payments for those who
are not creditworthy and there is a significant proportion of the
population who do not have a credit card. While much smaller in
proportion, the people who do not have a bank account have limited
opportunity to use more convenient and lower-cost electronic
payments. Although prepaid products are available they do not have
widespread acceptance and are limited to a relatively small number
of transaction types. Australia’s prepaid card market is worth
about A$2 billion annually;
• electronic devices that allow for a truly mobile payment product
through initiating relatively secure, rapid interbank transfers, to
and from deposit accounts are not available, eg, using a mobile
phone as a payment device; and
• products that do not require interaction between consumer and
business at the point of sale are not available, eg, contactless
cards.
Cash still king
According to the DCITA study, cash remains the most widely used
payment method in Australia. The study estimated that in 2004 there
were about 1.1 billion cash withdrawal transactions for an average
amount of A$160, while the average purchase amount of a cash
transaction ranged between A$13 and A$20. Taking the higher end of
the transaction value range, the study noted that there were, on
average, eight payment transactions per cash withdrawal, leading to
an estimated 8.8 billion cash transactions in Australia in that
year.
When compared with a total of 4.1 billion transactions using other
payment products, cash payment transactions constituted about 70
percent of all payment transactions and yet constituted only about
2 percent of the value of all payments made in Australia.
An analysis of the total economic cost of Australia’s payment
instruments suggested the following, noted the study’s
authors:
• direct entry is the lowest-cost payment approach for all
transactions greater than A$20 and is the second lowest-cost type
for small transactions of around A$5;
• debit cards are the lowest-cost, real-time notification product
for payments greater than $20. It was apparent that debit cards
appear to be lower-cost than cash from around A$10 and appear to
involve lower costs than cheques up to transactions of around
A$300;
• cash is the lowest-cost payment method for small payments of
around A$5 and up to about A$10, particularly if real-time
notification is required in the transaction; and
• credit card transactions become cheaper to provide than cash at
around $60.
The authors of the study highlighted that drawing on the
information available, they estimated that a potential annual
saving of A$2 billion could be achieved by shifting payments above
A$20 from cash to lower-cost electronic payments options, such as
debit cards, lowering the threshold where electronic payments
methods are more efficient than cash, increasing electronic
presentment and payment of bills, and migrating cheques to direct
entry. The estimated cost saving is equivalent to an increase of 25
basis points in Australia’s GDP.
New developments
In a joint statement in August 2006, the Australian Payments
Clearing Association (APACS) and the ABA acknowledged the need for
continuous enhancement and noted that “in no sense can it be said
that the industry is resting on its laurels”. Indeed, a number of
new developments in the payment market indicate strongly that the
RBA’s and DCITA’s calls for improved electronic payments products
are not going unheeded.
In the contactless payments arena the first steps were taken in
2006 when the Commonwealth Bank, one of Australia’s four biggest
banks, and MasterCard teamed up to launch a pilot programme using
MasterCard’s PayPass system for payments of up to A$35. The trial
involved about 150 merchants including 7-Eleven convenience stores
and 35,000 customers. The target is to issue PayPass-enabled cards
to 3 million of the bank’s customers in a roll-out that began in
early 2007.
In January this year another landmark was reached when Transperth,
Perth’s public transport authority, launched SmartRider, a
contactless prepaid card for use on its buses, ferries and trains
following trials that began in 2004. Up to A$256 can be loaded via
BPAY or direct debit onto the card, which uses software developed
by Netherlands-based semiconductor manufacturer NXP
Semiconductors.
The next big step in contactless payments came in August this year
when Australian telecommunications company Telstra, National
Australia Bank (NAB) and Visa announced that they were joining
forces to launch a trial of Australia’s first mobile phone equipped
with Visa payWave contactless payment functionality. The trial
begins in Melbourne in early 2008 and includes an unspecified
number of Telstra and NAB Visa customers and merchants.
Chip and PIN challenge
Another challenge for Australia’s payments industry is the
migration from the current dominant magnetic stripe credit card to
EMV chip and PIN cards. PIN authorisation of credit card
transactions was first considered by the industry in 2001, when
APACS was asked by banks to co-ordinate an industry-wide project.
The RBA explained that because Australian cardholders were used to
authorising debit card transactions with a PIN, it was thought that
PIN authorisation for credit card transactions was a natural next
step.
However, APACS decided there was no business case for proceeding,
given the low level of credit card fraud in Australia. According to
Visa, the credit card fraud rate for signature-based transactions
is around 0.04 percent of transactions in Australia, compared with
0.09 percent globally.
So far, only a limited number of chip and PIN cards have been
issued. For example, Visa reported that as at 31 March 2007 it had
1.6 million EMV cards in issue out of a total of 8.2 million Visa
credit cards. However, Visa added that the number of EMV cards
represented a quarter-on-quarter increase of 12 percent and that
Westpac, another of Australia’s four biggest banks, would join two
other big-four banks, Australia and New Zealand Banking Group and
Macquarie Bank, as an issuer of EMV cards.
However, according to APACS, the introduction of EMV cards will
still be “a gradual one stretching over years”. APACS explained
that one of the complications for EMV card adoption arises from one
of Australia’s main technology breakthroughs, the universal
interoperability of the Australian systems – Combo Cards. The Combo
Card enables both credit card and proprietary debit card
transactions using a single piece of plastic.
“This convenience, rare by world standards but very common in
Australia, means the adoption of chip technology is relatively more
complex to facilitate here than it is in other countries. Industry
work on chip adoption has been delayed by this complication, but we
believe that the main difficulties are largely overcome,” said
APACS.
Overall, APACS and the ABA believe that Australia’s payments
industry suffers not because of lack of innovation but because of
the way industry decisions are made. To address this issue, the two
bodies have formed a joint working group to undertake research into
industry innovation processes and decision making. Where research
identifies shortcomings in the governance arrangements and
preferable models are identified, “it is our intention to promote
these solutions to our constituent members”, APACS and the ABA said
in a joint statement.
