We write in response to the Committee’s Report of June 2006, in which for the first time the Committee made recommendations on payments systems technology. Specifically, the Committee expressed concern that Australia has fallen “well behind” in terms of payments systems technology, and identified three specific areas where industry participants should work together to remedy this.
Australian Payments Clearing Association (APCA) and the Australian Bankers’ Association (ABA) together represent providers of payments services in Australia responsible for 99% of Australian non-cash payment transaction value. We welcome the Committee’s interest in Australian payments systems technology, and are keen to assist its enquiries. The purpose of this letter is to open a constructive dialogue on payments systems innovation, provide the Committee with additional factual information relevant to the recommendations, and to flag industry initiatives under way both to ensure Australia’s payments infrastructure continues to be enhanced, and to address concerns recently expressed by the Reserve Bank.
Overall Assessment of the Australian Payment System
As Chair, you comment on Australia’s “evident shortfall” in payments systems technology. We respectfully submit that care needs to be taken to distinguish perceptions about lack of innovation from perceptions about the underlying efficiency and utility of the payments system. The evidence is that Australia’s payments infrastructure provides a world-class retail payments service for Australian customers. Specifically, by global standards, Australian retail payments are:
We support these propositions mainly by reference to Australian data collected by APCA and the Reserve Bank, and international comparisons derived from the 13 major economies (including the United States, United Kingdom, France, Germany and Canada) covered in the Bank for International Settlements “Red Book” series.
Convenience is demonstrated by Australia’s level of payments interconnectedness. For example, every holder of a debit card (around 18 million) or a credit card (12 million) can use those cards in any one of the 540,000 EFTPOS terminals or any one of the 24,000 ATM facilities. Australia has more EFTPOS terminals per million inhabitants than all the BIS Countries – at least 50% more than most countries, including the United States.
Flexibility is suggested by the range of payment options available, and by statistics on the diversity of usage of different payment methods. International comparisons indicate that most countries show a heavier reliance on one or two payments methods. Australian payments systems traffic is relatively evenly spread across a range of instruments including credit cards, debit cards, direct credit, direct debit, electronic bill payment and cheques, suggesting the flexibility and choice available locally.
Australia has high usage rates per head of population for electronic transactions (including cards). Even so, growth rates in Australian retail payments broadly outperform international growth rates. In 2004, Australia had more card transactions (all kinds) per inhabitant than all the other BIS Countries. In the decade from 1995, growth in Australian credit card and direct debit volumes exceeded growth in the BIS Countries by more than 8%.
Australia has an enviably low credit card fraud level which is at least partly the result of significant investments in fraud prevention measures. According to Visa International, the credit card fraud rate for signature-based transactions is around 0.04% in Australia, as against 0.09% globally. The Australian PIN-based debit card system does even better, at around 0.008%. The level of sophisticated fraud detection technology was illustrated in 2005 when it was an Australian bank that was the first in the world to detect a major Russian online credit card fraud operation.
We submit on the basis of this data that Australian consumers and businesses are, by global standards, well served by electronic payments systems. This is not intended to suggest that no innovation is needed: merely that innovation proposals need to be considered in the context of a large, efficient and successful system. In fact, a recent report from DCITA on the payments systems showed that both retail and business customers were very satisfied with Australia’s payments systems.
Innovation in Payments Systems
Before commenting on the specific areas of concern raised by the Committee, it is worth presenting some evidence of technological investment and innovation in Australian payments systems that was not explicitly acknowledged by the Committee.
Ongoing commitment to security enhancement is demonstrated by the fact that Australian card issuers and acquirers are nearing the completion of a programme of security upgrades worth many millions of dollars, the overall objective being to ensure Australia’s infrastructure complies end-to-end with world’s best practice data encryption standards, known as triple-DES.
An example of customer service innovation was the establishment of the BPay system in the late 1990s and its subsequent addition of BPay View in 2003. The Committee considered the operation of BPay in connection with interchange, but did not acknowledge it as a significant payments systems innovation. Since 2002, BPay has had the fastest growth rate of any payments system in Australia; comparable services are still not yet in place in many countries such as the United Kingdom, for example.
Another recent example of cooperative processing innovation was the cheque processing joint venture known as ViPro which has significantly cut cheque processing costs for 3 major banks in the face of declining cheque volumes.
Of course, apart from industry system collaboration, financial institutions compete fiercely in product development and customer solutions. For example, many financial institutions have invested heavily in Internet banking, including the provision of convenient “pay anyone” functionality based on Australia’s existing payments infrastructure.
None of this is to suggest that there is not room for further innovation in Australian payments systems. APCA’s and ABA’s members acknowledge the importance of continuous improvement in payments systems, so long as such improvements lead to material enhancements in customer services at a price the customer is prepared to pay. In the following paragraphs, we address the specific areas of Committee recommendation to illustrate the industry’s engagement in each area.
PIN Authorisation for Credit Cards
The committee noted a concern that Australian credit cards still rely on signature-based, rather than PIN-based, authorisation. The committee considered that a move to PIN-based authorisation would be highly desirable in terms of fraud prevention. In addition, PIN-based authorisation would ensure that Australians’ credit cards remain functional in overseas markets where PIN-based authorisation has been adopted.
The first observation to make here is that the decision whether to require a PIN, a signature or indeed any other kind of authentication is currently a matter for the relevant card scheme or participant. Fraud loss is likely to be suffered by the scheme participant (issuer or acquirer) rather than the customer, and this gives rise to a complex, multilateral trade-off between customer service and utility, security and cost.
Where each scheme or participant establishes this balance is, in the first instance, a matter for them. The industry’s particular concerns are, firstly, to ensure an appropriate minimum level of security, and secondly, to ensure that the full interoperability of Australian card-acquiring, so valuable to Australian merchants and consumers, is preserved.
Unless the industry or its regulators form the view that the fraud risks are such that a mandatory minimum standard needs to be set for all schemes - something which the Reserve Bank has not so far suggested - the issue is properly dealt with at the scheme or participant level, because that is where the trade-off occurs.
In 2002, APCA’s members and the Visa and MasterCard schemes asked APCA to help in investigating the option of moving to PIN-based authorisation for credit card transactions. A decision was made by the industry, through the relevant APCA committees, not to proceed at that time, on the basis that the then low levels of fraud did not justify the potential costs and customer inconvenience of the change.
Since then, we have not in fact seen the kinds of rises in fraud experienced in other countries. However, the risk of fraud migration from overseas requires constant vigilance, and it appears that the card schemes are once again considering the matter. Visa has publicly indicated an interest in promoting PIN authorisation for its cards, and informal contact with MasterCard suggests a similar internal discussion. It goes without saying that if any of the card schemes decide to mandate PIN use, APCA and ABA stand ready (if requested) to facilitate the transitional process in the best interests of payment users and payment providers.
Debit Card use over the Internet
The Committee report expressed concern that EFTPOS cards do not offer the same functionalities as credit cards or scheme debit cards in Internet and over-the phone purchasing. Subsequent comments by the Reserve Bank at the Committee hearing on 18 August clarify that RBA’s concern is not necessarily to encourage online use of debit cards per se, but any form of convenient online payment out of a consumer’s bank account.
The strengths of the domestic debit card system are simplicity and security: All transactions are authorised online, in real time, using encrypted PIN. This offers a simple, uniform, cheap and outstandingly secure customer experience. Thus, the proprietary system:
-
is generally regarded as cheaper for merchants and consumers than other point of sale payment methods; and
-
has less than one fifth of the fraud levels experienced by Australian credit cards, themselves low in global terms.
The trade-off for these very substantial customer benefits is, as the Committee has observed, lower utility: proprietary EFTPOS is not available online or over the telephone, because PIN-based authorisation has not been considered sufficiently secure or convenient in these environments. All the evidence of usage, growth rates and device penetration mentioned above supports the proposition that this particular balance of utility, cost and security is an attractive one to payments users, arguably all the more so because it relates to a product that gives direct access to consumers’ own money, as opposed to bank credit.
Most financial institutions now have some proprietary form of online account access, usually including “pay anyone” functionality, although this may not be accepted as a method of payment by particular online merchants. It is our understanding that interoperable online “EFTPOS” functionality (as distinct from online scheme debit card functionality, which is already available in Australia) has only been introduced in a small number of countries, with limited success to date.
Nevertheless, as technology develops the industry must respond, and as security for Internet transactions is enhanced the feasibility of fully interoperable, convenient, secure online account access increases. For that reason, the members of APCA have funded a project in APCA’s Operational Plan for 2006-2007 to examine ways to offer interoperable telephone and internet EFTPOS functionality. We are happy to keep the Committee apprised of developments.
Chip Technology for Credit Cards
The Committee’s report noted the future importance of chip technology. The committee said it was of the view that widespread introduction of chips in the Australian payments system would be beneficial in terms of reducing fraud.
APCA and the ABA endorse the adoption of chip technology for credit cards. For more than 12 months, APCA has had in place “phase 1” standards to allow both the issue of chip cards based on the EMV specification and the conversion of acquiring terminal networks to accept chip cards. Industry participants have taken substantial advantage of these standards, with NAB, for example, announcing completion of their acquiring network conversion under the phase 1 standards.
However, apart from facilitating the competitive adoption of chip technology by industry participants, APCA’s central concern is the maintenance of full interoperability across all issuers, acquirers and card schemes in Australia. To that end, APCA has a significant project under way to assess the need for a full “phase 2” use of chip functionality for proprietary debit cards, including identifying the range of issuer alternatives for implementing this.
Ironically, one of the complications for chip adoption in Australia arises from one of Australia’s main technology breakthroughs, achieved through 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.
Further, a hasty introduction of chip technology may be undesirable in that Australian banks should only adopt a chip technology solution which meets not only the fraud reduction objectives but also meets long-term product enhancement objectives. Given there is no urgent fraud mitigation need to immediately introduce chip technology, the more thorough the research and technology development process, the greater will be the long-term benefits to customers.
We are happy to keep the Committee informed of developments.
Payments Systems Decision-making Processes
We hope that enough evidence has been presented for the Committee to appreciate that while Australia’s payments systems must be continuously enhanced over time, in 2006 they provide a world-class service to Australian consumers and businesses. Australia’s payment providers recognise the need for continuous enhancement and in no sense can it be said that the industry is resting on its laurels.
The industry notes the concerns about payments systems innovation articulated by the Reserve Bank, which no doubt were a key stimulus for the Committee’s recommendations in the area. However ABA and APCA believe that the most promising area for enquiry lies not in lack of innovation per se, but in the way in which industry decisions are made in this complex, multi-faceted area, including both how the industry and regulators develop a strong, shared repository of information for good debate and decision-making, and in what forums those debates and decision-making are conducted.
Accordingly, we have commenced a process to examine the underlying industry decision making processes that bear upon system technology investments - the payments systems governance structure. ABA and APCA have formed a joint working group to undertake research into industry innovation processes and decision-making models. It is our intention to work closely and cooperatively with the Reserve Bank on this.
Where this research identifies relevant shortcomings in the current governance arrangements and preferable models are identified, it is our intention to promote these solutions to our constituent members – banks, building societies, credit unions, and other payments providers.
ABA and APCA will keep the Committee updated on developments in this research. Please give either of us a call if you would like to arrange a meeting or need further information.
(end of text of letter)
For further information:
Heather Wellard
ABA Director, Public Relations
Phone: 02 8298 0411
Mobile: 0409 830 439
Ida Turner
APCA Corporate Communications Manager
Phone: 02 9216 4817
ENDS