Treasury releases strategic plan for Australia’s payments system

By John Bassilios

Treasury has released three publications about the Government’s strategic plan for Australia’s payments system, licensing of payment service providers, and reforms to the Payment Systems (Regulation) Act 1988 (Cth). This article deals with the Government’s strategic plan for Australia’s payments system.

You can also read our updates on licensing of payment service providers and on the Government’s strategic plan for Australia’s payments system. Treasury released all three publications on 7 June 2023.

Strategic Plan for Australia’s Payment System

On 7 June, the Government released its Strategic Plan for Australia’s Payment System (Strategic Plan) which presents its core priorities and initiatives that aim to fulfil its vision of ‘a modern, world-class and efficient payments system that is safe, trusted and accessible, and enables greater competition, innovation and productivity across the economy’.

As the Australian payments system continues to be digitised due to consumer demand, the Government has elected a set of core principles that will help achieve greater productivity and growth within the sector: trustworthiness, accessibility, innovation and efficiency. While many of the proposals reaffirm commitments made in previous payment reviews, some proposals could significantly influence the touchpoints payment providers have with regulation in the future.

The five priorities of the Strategic Plan include:

1. promoting a safe and resilient system;
2. updating the payments regulatory framework;
3. modernising payments infrastructure;
4. uplifting competition, productivity and innovation across the economy; and
5. maintaining Australia as a leader in the global payments landscape.

Within each priority, several supporting initiatives have been identified which lead to a series of ‘next steps’ the Government will take to achieve the initiatives.

Promoting a safe and resilient system

A record $3.1 billion was lost in scams in 2022, with payment redirection scams (business email compromises) causing $224 million in losses. Due to the increasing prevalence of scams, the Government is committing to a long-term, coordinated approach to reduce losses caused by scams. A National Anti-Scam Centre will be established to unite fragmented initiatives.

Further, as the Government develops the new payments licensing framework, it might incorporate options that strengthen consumer protections. The Government will also continue to invest in and introduce new technologies to prevent scams including other payee confirmation services.

The Government will also focus on controlling cyber risk through legislative tools and coordination with the sector. Operators of crucial infrastructure assets such as Mastercard/Visa debit and credit systems and the New Payments Platform (NPP) are required to follow stringent risk-management obligations that protect the ecosystem.

The Security of Critical Infrastructure Act 2018 was recently revised to reflect these priorities. Efforts in coordinating a unified national approach can be seen through the establishment of a National Coordinator for Cyber Security with the Department of Home Affairs and 2023-2030 Cyber Security Strategy.

The Government also highlights the industry’s role in ensuring a safe and secure payment system through requirements such as uplifting system-wide security policies and protocols relating to security standards and encryption methods for card payment systems. AusPayNet is in the process of creating a program to transfer the current Australian card payment system to a more secure Advanced Encryption Standard. The program will take 18 months to develop, with a view to commencing in 2025 and will take approximately 6-7 years to be fully completed.

Recently, the rate and length of operational outages of retail payment services has also increased with the least reliable services being online banking and NPP real-time payments infrastructures. The RBA and Payments System Board are working with the sector to expand their supervision of system resilience of payment systems that would cause significant economic disruption and damage confidence in the financial system should an outage occur.

Next steps

• the Government will establish the National Anti-Scam Centre, and consult on options for developing new industry codes across sectors, including for banks, telecommunications, and digital platforms in 2023;
• the Government will bolster consumer protections through the new payments licensing framework;
• the Government will release its Cyber Security Strategy 2023-2030 in 2023;
• the industry will begin migration to the Advanced Encryption Standard in 2025;
• the RBA will extend its supervision from systemically important systems to also include prominent payment systems, ie NPP, Visa, Mastercard and EFTPOS; and
• the RBA will in 2023 consult industry on the development and implementation of an updated framework for monitoring safety and resilience of prominent payment systems.

Updating the payments regulatory framework

New payment systems are challenging and, at times, they surpass the scope of the current regulatory regime. The Government will introduce a new payments licensing framework and update the Payment Systems (Regulation) Act 1998 (PSRA). Changes to the PSRA include updating the definitions of ‘payment system’ and ‘participant’ to capture all entities that are involved in transactions in the regulation and establish new Ministerial powers that can be used in the ‘national interest’.

The Government will consult on the new payments licensing framework later in 2023 and aim to introduce the legislation in 2024. It will include the recommendations made by the Council of Financial Regulators on the regulation of stored-value facilities, support regulations for the ePayments Code, common access requirements, and mandatory industry standards.

Payment service providers have flagged a lack of transparency in the current governance and regulatory framework and a lack of clarity on which regulators to contact for various topics. To improve this situation, Treasury established the Inter-Agency Payments Forum (IAPF) in July 2022 consisting of the RBA, APRA, ASIC, ACCC and AUSTRAC. The IAPF seeks to deter conflict in regulation by regularly collaborating on payments-related issues.

A greater dependence on debit cards has resulted in reliance on the international networks of Visa and Mastercard instead of their domestic networks, which in turn has significantly increased businesses’ payment costs. In addition, smaller businesses are paying twice as much as large businesses to process the same transaction. To relieve the pressure, the Government introduced least-cost routing (LCR) which allows businesses to select the cheapest payment network. While it is available for 85% of physical merchants, only 50% have enabled it. Further, availability for online and mobile wallet transactions is considerably lower. The Government will support the RBA’s efforts to maximise availability and adoption of LCR.

Next steps

• the Government is consulting on updates to the PSRA and the introduction of a new Ministerial designation power to inform the development of exposure draft legislation for these changes;
• the Government will introduce legislation to implement the PSRA changes and introduce a new Ministerial designation power by end 2023, subject to consultation outcomes;
• the Government is consulting on the new licensing framework for payment service providers. This will be followed by a second round of consultation in late 2023 on the obligations under the new licensing framework;
• the Government will introduce legislation for the new payments licensing regime in 2024, subject to consultation outcomes;
• IAPF will aim to strengthen collaboration and communication between payment system regulators;
• the RBA will continue to publish institution-level data on LCR availability and take-up;
• the Government is consulting on updates to the PSRA and will introduce legislation to expand the payments regulatory perimeter and bring into scope payment systems and participants such as mobile wallet providers by the end of 2023, subject to consultation outcomes;
• the majority of payment service providers to enable LCR for online payments by mid-2023, in line with the RBA’s expectations;
• mobile wallet providers, and other industry participants as necessary, to enable LCR on mobile wallet transactions by the end of 2024, in line with the RBA’s expectations; and
• the Government will continue to monitor payment costs for small businesses and will directly intervene if necessary.

Modernising payments infrastructure

The use of cheques now only comprises 0.2% of non-cash payments in Australia. As their use continues to rapidly decline over the past decade, the per-transaction cost of maintaining the cheque system continues to rise. Over the seven next years, the Government plans to remove barriers to the mandatory use of cheques, phase out government cheque use and finally wind down the cheque system by no later than 2030.

Similarly, the use of cash has significantly declined over the past decade, meaning an increase in per-unit cost in distributing cash across Australia. This has resulted in a closure of bank branches, ATMs, as well as Cash-in-Transit providers such as Prosegur and Armaguard downsizing and closing facilities. The Government will closely follow developments to ensure that the cash-economy continues to operate smoothly, fairly and with sufficient access to cash.

Bulk Electronic Clearing System (BECS) is a legacy payment system that enables the processing of Direct Entry payments in Australia. Modern systems such as the NPP have many benefits over BECS including faster, safer, and more data rich payments that are always available. With the support of the Government, AusPayNet is currently consulting the industry and main users on the future of BECS.

The most substantial hurdle in transitioning away from BECS is facilitating bulk payments made by businesses and government, which would require major capacity upgrades by participants. The RBA requires all financial institutions to report on the progress of connecting accounts to the NPP.

Another Government priority is reaching critical adoption figures of PayTo-enabled consumer accounts – a new alternative to direct debits on the NPP Direct Entry system that allows payers more control and transparency of recurring payments. The industry is expected to follow the October 2022 NPP Roadmap and make PayTo available on most NPP accounts.

Next steps

• Treasury will – in 2023 – commence engagement with relevant Commonwealth, state and territory government agencies, on transitioning away from the use of cheques;
• the Government will enable greater choice for Australians by removing barriers that entrench payment for goods and services by cheques;
• Treasury will – in 2023 – commence exploring changes to the Commonwealth legislation that entrenches the use and acceptance of cheques;
• the Government will release a consultation paper on the future of cheque use in Australia, and the support required to retire the cheques system, by the end of 2023;
• the Government is supporting an industry-led, phased transition away from BECS;
• the industry, through the ongoing work led by AusPayNet, to settle on a transition plan away from BECS by the end of 2023;
• NPP Australia and NPP Participants to consider how the process of transitioning bulk payments away from BECS could be made as efficient as possible for users in minimising the cost of internal systems changes. Treasury will engage with NPP Australia and NPP Participants in the lead-up to the next strategic plan to take stock of progress;
• following completion of AusPayNet’s work, Treasury will commence engagement with relevant Commonwealth, state and territory government agencies and other key users of BECS bulk payments on their needs and readiness to transition away from BECS. This, together with the work of AusPayNet, NPP Australia and NPP Participants, will inform the next strategic plan;
• the industry will – by mid-2023 – make PayTo available on most NPP enabled accounts, in line with October 2022 NPP Roadmap;
• financial institutions will report on progress to the RBA on their work connecting all relevant accounts to the NPP;
• the Government will support Australians having continued access to cash;
• the Senate Standing Committee on Rural and Regional Affairs and Transport will by 1 December 2023 release its report on Bank Closures in Regional Australia; and
• Treasury will in 2023 commence engagement with relevant Commonwealth government agencies and industry on options for maintaining adequate access to cash for as long as Australians want to use cash.

Uplifting competition, productivity, and innovation across the economy

Currently, the Consumer Data Right (CDR) allows consumers to securely access their data that is held by businesses and share it with accredited third parties. The Government wants to strengthen the CDR framework to generate more competition, innovation, and efficiency in the economy. This will be achieved through improving data quality and increasing adoption in the banking and energy sectors as well introducing CDR to the non-bank lending sector.

Digital ID has proven to be a secure and trusted verification method that minimises reliance on collecting and retaining personal information of individuals. As it stands, over 125 government services have adopted its use and more and more private sector businesses are implementing their own similar solutions.

The Government intends to prioritise reform and rely on legislation to ensure a nationally coordinated approach to modernising the country’s ID system. It is investing $26.9 million over the next year to support expansion of Digital ID.

To ensure society keeps up with the digital transformation of the economy, the Government is investing into improving digital and technical skills of Australians. This will in turn drive the successful adoption of digitalisation proposals in the payments space. By 2030 the Government aims to deliver 1.2 million tech-related jobs. It will invest in training the local labour force and attracting international talent.

The safe and responsible deployment and adoption of AI is pivotal to a successful economy and society in Australia. The Productivity Commission’s recent Productivity Inquiry report found AI to be a key transformative digital technology that can drive Australia’s productivity growth. However, adoption rate is currently low due to a lack of public trust and confidence in the technology. The Government has taken steps including providing funding to the National AI Centre to help bolster trust and confidence.

Next steps

• the Government will continue working with stakeholders on the potential interaction between the CDR framework and the payments system;
• under the CDR action initiation framework, the Government will carry out an assessment and publicly consult before bringing any action types, such as payments, into the CDR;
• the Government will continue to design the policy and legislative foundations to transition to an economy-wide Digital ID ecosystem with an independent regulator;
• the Government is identifying opportunities to build the digital skills needed for the Australian economy;
• the Government will consider a report by the Digital and Tech Skills Working Group, established at the Jobs and Skills Summit, on an ‘earn-while-you-learn’ model of training (akin to a ‘digital apprenticeship’). The Working Group is expected to provide the report to the Government in June 2023; and
• on 1 June 2023, the Government released a discussion paper entitled ‘Safe and responsible AI in Australia’. The Government will consult on how it can support the safe and responsible use of AI, and ultimately increase community trust and confidence.

Maintaining Australia as a leader in the global payments landscape.

Coordination can stifle and, at times, completely deter innovation. The Government seeks to foster a cooperative but effective payments system that attracts economic growth, foreign investment that is a pillar of Australia’s digital economy. To understand how and where it can best help, the Government plans to hold an industry stakeholder roundtable.

Cross-border payments are another paramount system that allows Australians to interact with the global economy. However, around the world, cross-border payments do not meet expectations for services to be affordable, fast, accessible and transparent. As a G20 country, Australia has agreed to follow a roadmap in achieving these expectations by 2027. Though there have been some marked improvements, the Government will continue to support regulators and the industry in meeting these targets.

To compete with the global economy, the Treasury and RBA are researching the impacts of introducing an Australian central bank digital currency (CBDC). With the support of the Digital Finance Cooperative Research Centre (DFCRC), several use cases have been selected for testing and a report will be published around mid-2023 commenting on their findings and potential policy case for such a unit of account. You can read more on the use cases in our earlier article.

Next steps

• the Government will host an industry stakeholder roundtable for the payments system;
• NPP participants will by 1 December 2023 join the NPP International Payments Business Service to enhance the speed and efficiency of incoming cross-border payments, in line with the October 2022 NPP Roadmap;
• NPP Identified Institutions will by 30 April 2024 provide international payment service functionality via the NPP to enhance the speed of inbound cross-border payments, in line with the October 2022 NPP Roadmap;
• the RBA and industry will, in 2023, explore issues associated with directly linking fast payment systems with other jurisdictions;
• AusPayNet, the RBA and industry will, by the end of 2025, fully migrate the High Value Clearing System to the ISO20022 standard;
• Treasury will monitor ACCC guidance on ‘Transport pricing of foreign currency conversion services’ to deliver full fee transparency, including FX margins;
• the RBA and DFCRC will publish a report on the outcomes of the CBDC pilot in mid-2023; and
• Treasury and the RBA will release a paper in mid-2024 that takes stock of the work to date by Treasury and the RBA on CBDC in Australia and outlines the forward workplan for Treasury and the RBA on CBDC in the broader context of the future of digital money in Australia.

The Roadmap for Australia’s Payments System

The Strategic Plan also includes the following roadmap for rolling out the supporting initiatives in order to achieve its key priorities.

Image source: page 36 of the Strategic Plan – ‘The Government’s Roadmap for Australia’s Payments System’

This article was written with the assistance of Sogand Shamsaria.