Introduction
The Reserve Bank of Australia has called for submissions to support their Strategic Review of Innovation in Australia’s Payment System.
Having been involved in the Australian payments industry since 1986 (working with a vendor for the world-leading EFTPOS initiative at that time), I have some gray hair and war wounds to support my own reflections on this subject. More recently as founder of online payments company Paymate, innovation against all odds is also a personal crusade!
Having been involved in the Australian payments industry since 1986 (working with a vendor for the world-leading EFTPOS initiative at that time), I have some gray hair and war wounds to support my own reflections on this subject. More recently as founder of online payments company Paymate, innovation against all odds is also a personal crusade!
My personal belief is that innovation results from either established players aggressively seeking market leadership or entrepreneurs attempting to change the rules of the game to achieve such leadership via market penetration and rapid traction.
Both drivers require the commercial opportunity to be attractive and returns attainable in the medium term, say 3-5 years for new venture capital and 18-24 months for incremental investment. For innovation in payments, which require the achievement of a 'critical mass' of payers and payees, ten years might be the more realistic time frame for 'success', as evidenced by the adoption of ATMs, EFTPOS and the BPAY system in Australia.
Both drivers require the commercial opportunity to be attractive and returns attainable in the medium term, say 3-5 years for new venture capital and 18-24 months for incremental investment. For innovation in payments, which require the achievement of a 'critical mass' of payers and payees, ten years might be the more realistic time frame for 'success', as evidenced by the adoption of ATMs, EFTPOS and the BPAY system in Australia.
Some history, lest we forget
For many years through the ‘80s and mid-‘90s, Australian banks believed payments were an arena for differentiation and competition. This view started to be challenged when collaboration on shared ATM networks became commonplace.
Joint projects to evaluate a shared services model for cheque processing were initiated, since these volumes were declining and proof equipment replacements were seen as an investment without competitive advantage.
Even EFTPOS networks, long owned and operated by banks as a differentiated platform for value-added services, started to be given away; Shell, Coles and Woolworths invested in their own terminal networks and switches.
While credit card issuance remains a competitive arena for consumer acquisition and fee income, the merchant acquiring business is often seen as only a necessary evil to retain larger (lending) corporate relationships and only marginally profitable. Some second tier banks have even given away this business to specialists.
The Direct Entry systems that support high volume, low value payments have long been popular with corporates and SMBs for their low cost and reliability (with only intermittent disasters in processing!). For this same reason, no major Australian bank has invested in replacement systems or value-added features – if you get paid 2-10 cents per transaction, where’s the business case for investment?
Competing or collaborating on payments?
Only one collaborative banking industry initiative has been successful in recent years – BPAY. This took heroic championing by one major bank in the early days and ten years of network marketing to achieve. In combination with third-party bank account payments made available online by individual banks, most SMBs and large billers can now get paid quite cost-effectively, especially when compared to expensive services in the USA.
Now the proposed MAMBO service, driven again by the RBAs directive (“innovate or be regulated?”) is to build on the BPAY platform to provide an online, real-time bank account payment service. How the banks will differentiate their offerings remains to be seen, but the network advantage will certainly be in their collective favour.
The drive to reinvigorate the dying EFTPOS network has come from the RBA and major retailers, leading to the creation of EFTPOS Payments Australia. As a home-grown payments ‘scheme’ the jury is out on how effectively this entity can replace cash payments (still 70% of volume) with EMV card acceptance and taking bank debit cards online in competition with scheme-branded debit cards.
Australian banks appear stymied on the question of innovation in payments – there is no strong case for investment when a network effect is required to build the critical mass that they fear they may not achieve on their own. So if a differentiated service and resulting incremental income cannot be guaranteed, in the current business case thresholds of an 18-month return on investment, which brave line manager is going to sponsor a start-up project with a 5-10 year timeline?
However, in the absence of greed, fear can be a great motivator!
For many years through the ‘80s and mid-‘90s, Australian banks believed payments were an arena for differentiation and competition. This view started to be challenged when collaboration on shared ATM networks became commonplace.
Joint projects to evaluate a shared services model for cheque processing were initiated, since these volumes were declining and proof equipment replacements were seen as an investment without competitive advantage.
Even EFTPOS networks, long owned and operated by banks as a differentiated platform for value-added services, started to be given away; Shell, Coles and Woolworths invested in their own terminal networks and switches.
While credit card issuance remains a competitive arena for consumer acquisition and fee income, the merchant acquiring business is often seen as only a necessary evil to retain larger (lending) corporate relationships and only marginally profitable. Some second tier banks have even given away this business to specialists.
The Direct Entry systems that support high volume, low value payments have long been popular with corporates and SMBs for their low cost and reliability (with only intermittent disasters in processing!). For this same reason, no major Australian bank has invested in replacement systems or value-added features – if you get paid 2-10 cents per transaction, where’s the business case for investment?
Competing or collaborating on payments?
Only one collaborative banking industry initiative has been successful in recent years – BPAY. This took heroic championing by one major bank in the early days and ten years of network marketing to achieve. In combination with third-party bank account payments made available online by individual banks, most SMBs and large billers can now get paid quite cost-effectively, especially when compared to expensive services in the USA.
Now the proposed MAMBO service, driven again by the RBAs directive (“innovate or be regulated?”) is to build on the BPAY platform to provide an online, real-time bank account payment service. How the banks will differentiate their offerings remains to be seen, but the network advantage will certainly be in their collective favour.
The drive to reinvigorate the dying EFTPOS network has come from the RBA and major retailers, leading to the creation of EFTPOS Payments Australia. As a home-grown payments ‘scheme’ the jury is out on how effectively this entity can replace cash payments (still 70% of volume) with EMV card acceptance and taking bank debit cards online in competition with scheme-branded debit cards.
Australian banks appear stymied on the question of innovation in payments – there is no strong case for investment when a network effect is required to build the critical mass that they fear they may not achieve on their own. So if a differentiated service and resulting incremental income cannot be guaranteed, in the current business case thresholds of an 18-month return on investment, which brave line manager is going to sponsor a start-up project with a 5-10 year timeline?
However, in the absence of greed, fear can be a great motivator!
The barbarians at the gate?
Payments, by their very nature, require a network to be successful, so are notoriously challenging for new entrants to build organically. The only recent outstanding success as an outsider has been PayPal (I admit ruefully as a competitor), given three critical ingredients that came together fortuitously for them:
Payments, by their very nature, require a network to be successful, so are notoriously challenging for new entrants to build organically. The only recent outstanding success as an outsider has been PayPal (I admit ruefully as a competitor), given three critical ingredients that came together fortuitously for them:
- The dot-com boom that allowed the raising of significant capital at a very early stage (in the USA);
- The global success of eBay and the critical need for payment facilities to support this C2C/B2C trading with an underwriting model not provided by banks;
- The more recent rapid growth in ecommerce with the rapid uptake of online purchasing by consumers and sales by SMBs and now larger retailers.
So why did Australian banks not jump on to this same opportunity in the late nineties? As one pitching to them in late 2000 (though in the post-crash drought), I found the opportunity was simply not recognised for it’s potential. When Paymate launched with eBay Australia in October 2001, their Gross Merchandise Value was around $60m; today it is likely close to $2 billion.
Compared to off-line (retail POS) sales and the $1.2 billion in credit card fees enjoyed by banks at that time, this risky online market opportunity simply could not stack up for investment. Several banks kicked the tyres of PayPal and Paymate - both seeking investment - and simply walked away.
So the PayPal juggernaut rolls on, now dwarfing most global banks and certainly Australian banks, in terms of online gross payments value ($70 billion and counting).
With the new customer fee-charging regime, new players have entered the ATM market, but recent statistics suggest consumers are now more likely to search out their own bank’s ATM to avoid the $2.00 fee, reducing the fee revenue potential.
With a changing industry structure, scheme operators such as Visa and MasterCard are playing new roles. The purchase of CyberSource (a provider of the Authorize.net gateway as well as risk management services) by Visa suggests a more direct engagement in the payments market. The new Payclick stored value service in Australia is a Visa initiative (with a major bank as partner). MasterCard operates the MIGS gateway and likely to follow suit with new initiatives. These companies, after their IPOs, are well-funded and motivated to champion innovation. Member banks can piggy-back on scheme initiatives, such as in the RFID/NFC POS payment solutions or new security protocols (‘son of Verified by Visa’).
With the increasing ubiquity of mobile phones and the popularity of ‘smart’ phones such as Apple’s iPhone, new networks are emerging, though primarily in the ‘un-banked’ or ‘under-banked’ markets of Africa, Asia and Latin America. The telecommunications providers may manage these payment services, though they are generally more reluctant to operate ‘bank-like’ schemes for fear of new regulatory and financial risk exposures. Collaboration of Telco’s with banks will likely be a more sustainable model, but in the short term we can expect many new hopefuls to enter the fray and muddy the waters.
Compared to off-line (retail POS) sales and the $1.2 billion in credit card fees enjoyed by banks at that time, this risky online market opportunity simply could not stack up for investment. Several banks kicked the tyres of PayPal and Paymate - both seeking investment - and simply walked away.
So the PayPal juggernaut rolls on, now dwarfing most global banks and certainly Australian banks, in terms of online gross payments value ($70 billion and counting).
With the new customer fee-charging regime, new players have entered the ATM market, but recent statistics suggest consumers are now more likely to search out their own bank’s ATM to avoid the $2.00 fee, reducing the fee revenue potential.
With a changing industry structure, scheme operators such as Visa and MasterCard are playing new roles. The purchase of CyberSource (a provider of the Authorize.net gateway as well as risk management services) by Visa suggests a more direct engagement in the payments market. The new Payclick stored value service in Australia is a Visa initiative (with a major bank as partner). MasterCard operates the MIGS gateway and likely to follow suit with new initiatives. These companies, after their IPOs, are well-funded and motivated to champion innovation. Member banks can piggy-back on scheme initiatives, such as in the RFID/NFC POS payment solutions or new security protocols (‘son of Verified by Visa’).
With the increasing ubiquity of mobile phones and the popularity of ‘smart’ phones such as Apple’s iPhone, new networks are emerging, though primarily in the ‘un-banked’ or ‘under-banked’ markets of Africa, Asia and Latin America. The telecommunications providers may manage these payment services, though they are generally more reluctant to operate ‘bank-like’ schemes for fear of new regulatory and financial risk exposures. Collaboration of Telco’s with banks will likely be a more sustainable model, but in the short term we can expect many new hopefuls to enter the fray and muddy the waters.
An Australian National Payments Network – A Platform for Innovation?
None of these developments is likely to be viewed as fundamental innovation in Australian Payments by the Reserve Bank, judging by the brief for their review:
“The goal is ultimately to identify projects that the Bank and other stakeholders could work on cooperatively to enhance the payments system in Australia.”
The much-debated Australian National Broadband Network might yet see the light of day and has its detractors. But I wonder if a similar approach to a national payments infrastructure might not be worth consideration and debate.
The heart of the current payments infrastructure today in any country is the clearing system – or systems, since they have to cater to different business requirements:
None of these developments is likely to be viewed as fundamental innovation in Australian Payments by the Reserve Bank, judging by the brief for their review:
“The goal is ultimately to identify projects that the Bank and other stakeholders could work on cooperatively to enhance the payments system in Australia.”
The much-debated Australian National Broadband Network might yet see the light of day and has its detractors. But I wonder if a similar approach to a national payments infrastructure might not be worth consideration and debate.
The heart of the current payments infrastructure today in any country is the clearing system – or systems, since they have to cater to different business requirements:
- Australian Paper Clearing System (APCS)
- Bulk Electronic Clearing System (BECS)
- Consumer Electronic Clearing System (CECS)
- High Value Clearing System (HVCS)
- Australian Cash Distribution and Exchange System (ACDES)
The banks connect their clients (corporates, SMBs, consumers) to these clearing systems via their own products and services and a ‘gateway’ model – Client A connects via their Bank A to transact with Client B via their Bank B. This equivalent to the ‘last mile’ connectivity offered by Telco’s is where banks invest for exclusive client ownership - via Internet banking, desktop packages or dedicated networks such as ATMs or EFTPOS. In reality, most clients have multiple banking relationships already, with a resulting duplication of these ‘last mile’ connections.
What if every client – consumer, SMB, corporate – was directly connected to the clearing systems via a ‘payment highway’ but needed a 'car and a driver' to travel farther and faster with more ease and convenience, more features tailored and integrated with their business or personal needs?
What if you could ‘plug and pay’ into multiple networks of interest – personal, business, corporate trading, electronic markets – with banks and other licensed providers offering the value-added services that sat atop the secure, reliable, authenticated, non-repudiable payment instruction and settlement services that operated on a shared network infrastructure (even the NBN itself)?
So that’s my ‘what-if’ scenario in concept, and I look forward to fleshing this out further based on inputs and criticisms on this forum and others.
Do comment here or email me on dilip@paymate.com.
What if every client – consumer, SMB, corporate – was directly connected to the clearing systems via a ‘payment highway’ but needed a 'car and a driver' to travel farther and faster with more ease and convenience, more features tailored and integrated with their business or personal needs?
What if you could ‘plug and pay’ into multiple networks of interest – personal, business, corporate trading, electronic markets – with banks and other licensed providers offering the value-added services that sat atop the secure, reliable, authenticated, non-repudiable payment instruction and settlement services that operated on a shared network infrastructure (even the NBN itself)?
So that’s my ‘what-if’ scenario in concept, and I look forward to fleshing this out further based on inputs and criticisms on this forum and others.
Do comment here or email me on dilip@paymate.com.
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