There isn’t a business operating that doesn’t want to be paid faster. But for many years, banks have been hiding behind market dominance and old technologies to passively resist the faster payments push.
In Australia, the so-called "Big Four" banks of ANZ, CommBank, NAB, and Westpac have had transactional banking pretty much to themselves for decades. It took a carrot and stick - and ultimately a stick - approach from regulators and the Reserve Bank of Australia (RBA) to get any action from them on the payments market.
After years of glacial progress, 2020 might be the year that Australian payments really start to get turbocharged. New infrastructure and a new regulatory regime around Open Banking could finally break down the barriers and give long-suffering businesses what they have wanted all along: instant, if not, same-day payments to free up their cash flow.
How the “tax gap” jolted the Government into action
Banks are always investing in new technology, for sure. But there was no real commercial imperative to invest in payments while the competition was also sitting on its hands.
The temptation for major institutions to leave funds in their accounts for just that little bit longer seemed to outweigh other considerations. Banks were happy to roll out digital solutions that took cash out of the system faster and more efficiently but were less enthusiastic about investing in an infrastructure that would move money around the system more rapidly.
The widening "tax gap" woke up the regulators to the need for faster payments.
Ultimately in Australia, the regulators had to move, both to promote competition but also as part of the Australian Government’s bid to narrow the “tax gap.” This is the difference between what it should receive and what it actually receives.
The last estimate from the Australian Taxation Office, for example, was that small businesses only paid 87% of total theoretical tax in 2015/6, the year for which the most recent calculation was made. That equates to a tax gap of more than AUD 11 billion.
In terms of infrastructure, agitation from the RBA saw the major financial institutions invest in the New Payments Platform (NPP), which launched in early 2018. It has been a slow start, but as RBA Governor Philip Lowe said in a recent speech, the platform is now processing an average of 1.1 million payments each day, worth around AUD 1.1 billion.
There are now 86 entities connected to the NPP, and at least six non-bank fintechs are using the NPP to create new services to the 66 million Australian bank accounts connected to the platform.
The NPP enables electronic invoicing by businesses and can support improvements in business processes as more data moves with the payment.
Real-time settlement and posting of funds, says Lowe, also enables some types of delivery versus payment arrangements, where the seller can confirm receipt of funds and be confident in delivering goods or services to the buyer. All of this is financial grease for the supply chains of businesses.
Sizing up PayID and “tap and go” impacts
Also important has been the introduction of the new PayID service, which replaces the old system of account numbers. This is a portable identification system which can be changed as individuals and businesses change accounts. It is significantly easier and definitely faster to use than the old system.
Another major trend has been the rapid uptake of “tap and go” payments based on near-field communication (NFC) technology. Not so long ago, most Australians were happy to swipe credit and debit cards for larger payments, but produce cash for smaller transactions such as coffee, magazines, or lunches.
RBA is pushing for portable digital identity services to reduce vulnerabilities and inconvenience.
"Tap and go" has changed all that. The RBA now estimates that around 80% of point-of-sale transactions are now made this way, which is higher than in other markets.
Cash, the RBA says, now accounts for only a quarter of day-to-day payments, and that is falling rapidly. There is already talk of doing away with cheque payments this decade.
The RBA is still agitating, and one of its current issues is to promote the better provision of portable digital identity services, which “allow Australians to securely prove who they are in the digital environment.”
"Today, our digital identity is fragmented and siloed, which has resulted in a proliferation of identity credentials and passwords," Lowe says.
"This gives rise to security vulnerabilities and creates significant inconvenience and inefficiencies, which can undermine the development of the digital economy."
Personalization of payment coming this year
As PwC notes, “digital natives” who are oriented towards convenience and practical usability are set to become the majority of clients. They will expect a differentiated experience from banks, which is "always-on, personal and proactive."
PwC sees the big banks’ stranglehold on payments weaken in 2020.
The big banks may have had a stranglehold on payments, which PwC estimates generate around 25% of all revenue in the Australian financial system, but 2020 will see that dominance weaken.
According to PwC, “innovative and non-traditional competitors will be increasing their market share to up to 10% of revenues by 2020.”
This is the challenge the banks actually need. When they divided and ruled the market between them, there was little incentive to change.
In 2020, the dam walls are leaking, and change is coming under pressure from regulators and new technologies.
Disintermediation is a positive, but even more positive change will come if the banks get on board and help to drive the change, rather than letting change reluctantly drive them.
Photo credit: iStockphoto/z_wei