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Real time payments

The future of real time payments in Australia.

As countries around the world step up to implement real time, centralised payments systems, Australia is also exploring innovations in payments. The need to do so is being driven by burgeoning growth domestically in eCommerce, eTags, eTicketing, debit cards and surprisingly the highest open-loop contactless transactions per capita of any country- characterised by our card facilities such as paypass and payWave.

To enable further growth in the digital economy, our payments infrastructure has to continue to evolve. The current proposal is that the Reserve Bank of Australia and industry work together to radically redesign the Australian payments system, so that all ADIs can offer real time payments potentially through transition to a new infrastructure and an initial convenience service by the end of 2016.

A new hub

Consequently a portion of cheque, debit card, direct entry and cash payments will be likely to migrate to a new hub – the plumbing essential for a utility – that unlike our current systems will also facilitate material supporting payments. This technology system will be one part of the Australian Payments Clearing Association’s real time payments proposal with the aim of shifting our safe, but very old system, into a leading position that is capable of reaping similar economic benefits to those beginning to be experienced in the UK, and in various forms in eight other countries.

Typically today, most payments leave the payer’s account almost immediately, and although there are some five clearing batches throughout the day, the bulk is processed overnight. Most transactions are completed by the next working day, but if a weekend intervenes, the payee may wait up to three days for cleared funds.

The challenges

Two key challenges as we seek to give Australian consumers and businesses more choice making payments safely, will be to develop:

  • A utility that a range of core banking systems and service overlays can plug into at different stages, and 
  • a strategy around the cost challenges for industry through to the end customer.

The cost/value equation

Data compiled by the Reserve Bank of Australia and the Centre for Economics and Business Research (cebr) show that a real-time, centralised system is the least expensive method of processing payments per transaction.

Moving to a real-time centralised payments processing system is expected to generate a ‘producers’ surplus’ for financial institutions by significantly reducing their cost of processing payments and so the cost of doing business.

There are also likely to be additional economic benefits from fewer ‘exceptions’ to the payments clearing process.

For instance the cost savings from reduced failed payments due to real time are likely to be the largest potential saving from a real time infrastructure – estimated between $612 million and $1.7 billion in 2020 (cebr), depending on assumptions used.

Nevertheless while real time payments will help accelerate the shift away from cash and cheques, it may also impact revenue from other streams.

Managing these complex issues to achieve efficiency, integrity and broad access, as well as a sustainable, profitable payment services from financial institutions to their customers, won’t be easy. It will take agile collaboration and real co-design capability to work with a highly competitive industry to support next gen services. Services that foster competition and future innovation on a hub that offers no single player advantage over another.

Delivering for industry & customer

The UK Office of Fair Trading (OFT) surveyed bank customers’ willingness to pay for a faster, same-day payments system. Based on the OFT survey, bank customers – largely small businesses, but also households – were willing to pay as long as they would experience higher levels of economic welfare from faster retail payments. This is likely to be achieved in the long term by the additional benefits from enabling innovation and its dissemination. They could be significant.

A central hub, as opposed to a series of bilateral links, will enable faster diffusion of new products and be cheaper to upgrade. The costs savings for the financial sector are estimated to reach between $586 million and $773 million by 2020 (cebr). In addition there will be substantial welfare gains for consumers especially if adoption of real-time payments processing is swift and widespread.

Customer needs supported by tech

With a robust centralised payments system, technologies can be pulled into the payment strategy as needed, rather than building the strategy around the acquisition of an asset or capability.

As we shift from technology acquisition to technology use, it makes sense to streamline the buying journey to enable customers to transact when and how they want, rather than build a payment strategy around technologies that are changing quickly due to intense global competition (such as Near Field Communications – NFC).

This will require a design-led approach, which focuses on the overall problem the customer is solving and its context.

Let the conversation begin

To succeed, a real time payments system needs to be co-designed in collaboration with industry. It needs to be robust, sustainable and scalable so that our Australian consumers can enjoy an innovative, stable and safe payments system. What comes next will be shaped by the calibre of these conversations. The strategy to create a dynamic online payments system is yet to be determined. Let the informed conversations begin.

Robert Hillard is Deloitte’s Technology Agenda Managing Partner. He is a co-founder of www.openmethodology.org which provides a standard approach for information and data management projects and authored Information-Driven Business – How to Manage Data and Information for Maximum Advantage – published by Wiley. Co-author Arturo Mauleon is a Financial Services Partner in Deloitte’s Strategy and Operations Consulting practice with a deep understanding of how to achieve the most value from complex financial services projects.

This article was first published in Australian Banking & Finance May 2013.

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