Tap & Go

Digital payments are dramatically transforming consumer and business behaviour as new competitors meet changing consumer preferences. We meet some of the new entrants.

Payments technologies may not be on every board’s radar, but the upgrades to the effectiveness and regulation of these vital systems will touch most industries. In a December speech, Reserve Bank of Australia Governor Philip Lowe said that payments used to be referred to as the “plumbing of our economy”, now the changes in the payments industry are “reshaping our financial systems”.

Lowe identified five trends he expects to continue to grow and redefine the industry:

• Declining use of banknotes and the increasing use of electronic forms of payment
• Greater use of digital wallets
• Growing involvement of the “big techs” in payments
• Increasing specialisation within the payments value chain and emergence of new business models
• Growing community and political interest in the security, reliability and cost of payments

According to Treasurer Josh Frydenberg, in Australia, about $650 billion changes hands as approximately 55 million payments are made via tap-and-go payments, online transactions and digital wallets every day. Half of us tap our mobile phones to access digital wallets, which operate outside national payment regulations.

Apple Pay, Samsung Pay and Google Pay are used to make contactless payments just like debit cards issued by a bank, but these overseas giants are subject to different regulatory settings than our local banks. Lowe says the increasing interest of big tech firms in payments will continue, with some already exploring how digital wallets could be used for non- traditional payments. Their large networks can be leveraged quickly to build payments businesses, according to Lowe, where they can also combine payments data with other data from their platforms, often with state-of-the-art technology. And more than five million Australians also hold BNPL (buy now pay later) accounts like AfterPay and Zip, which make up about 20 per cent of online retail transactions by value, according to to a new report from SaaS cloud banking platform Mambu.

The booming cryptocurrency sector only further complicates the payments sector.

Fintech innovation

Despite the ability for businesses to accept payments in more ways than ever before, new fintech players continue to bring quicker, better and more readily available technology to market — and they’re giving the global giants a run for their money. Each fintech has a nuanced take on how it can cash in on the payments sector. Stripe, Wise, Wiremoney, Coinjar, Shouta, InDebted, Till Payments and Bleu are among the names snaring a growing slice of the payments pie away from the incumbents.

DiviPay has captured the hearts of the nation’s SMEs, who often struggle to access traditional cards via banks, growing by 300 per cent in the past year. It has just raised $20m to expand overseas and bolster its product offering.

Increased competition is also pushing incumbents to innovate. BPAY, eftpos and New Payments Platform (NPP) Australia combined into Australian Payments Plus after approval by the ACCC in September last year. The merger enables the three payment schemes to coordinate investment proposals and avoid inefficient duplicative spending.

When approving the merger, ACCC chair Rod Sims AO noted that the move will hasten the likelihood of major banks and other shareholders investing in domestic payment services. “This is likely to result in public benefit, by placing them in a better position to deliver payment service initiatives more quickly and successfully, for the benefit of consumers and businesses,” he said.

Meanwhile, Commonwealth Bank has a trial in place offering customers crypto assets via its CommBank app.

Banks and fintechs have an increasingly collaborative relationship, explains FinTech Australia chair Simone Joyce MAICD. “The payments landscape is evolving so quickly. In a very short time, we could be paying for a coffee at the counter in real-time from our bank account as easily as we do today by using a card,” says Joyce. “Or we could have triggers to make investment payments set up to happen without our intervention.”

Zepto (previously Split Payments) creates real-time merchant payments for the on-demand economy. Its chief commercial officer Carolyn Breeze GAICD argues that Zepto’s “choose-your-own-adventure” approach to building an embedded finance user experience sets it apart. However, she concedes that money and value are moving faster through the economy than at any time in history.

“We’re in blink and you’ll miss it territory, which makes regulators understandably nervous,” says Breeze.

In fact, many innovators accept the need for regulatory change, and hope the new landscape paves the way for more payment inventions in the future.

Reviewing the landscape

The federal government knows it needs to make changes to avoid leaving decisions on the payments landscape up to Silicon Valley. It has stepped in and earmarked sweeping legislative changes. A major shake-up of the increasingly complex regulatory and licensing framework governing the payments sector is under way, marking the first change since the 1997 Wallis inquiry.

The government’s proposed reforms have been informed by three major reports — the Review of the Australian Payments System, the Senate Select Committee on Australia as a Technology and Financial Centre Final Report, and the Parliamentary Joint Commission Corporations and Financial Services Report: Mobile Payment and Digital Wallet Financial Services.

Collectively, these reviews found that the nation’s payments system framework needs to be modernised to help drive innovation and spur competition; that without reform, businesses would be transacting in largely unregulated environments, with any rules determined by foreign governments and large multinationals. The three reviews made a total of 41 recommendations with a focus on centralising the payments ecosystem, including enhancing government powers to set policies and reforms.

The government is responding to all recommendations as it works to centralise the payments system, including enhancing the powers of the Treasurer to set payment policy and fundamental reform to strengthen business and consumer protections.

King & Wood Mallesons global payments expert Scott Farrell, who led the Review of the Australian Payments System, was clear that payments have evolved well beyond the systems that existed at the turn of the century when the current regulatory architecture was established. His review found that the nation’s regulatory architecture is crying out for new government powers to protect the payments system, greater coordination between payments regulators, and a single licensing framework that scales up with businesses as they grow. Currently, regulators have overlapping mandates, which creates ongoing confusion as to which regulator a new entrant applies to for authorisations. Farrell recommends a single, tiered licensing framework to address this.

Building an ecosystem

Reforms announced in December 2021 set out to modernise the rules governing how consumers transact. They will progress in two phases, with the most urgent being ushered in in the first half of 2022 and the remainder by the end of this year. The changes set out to make sure the sector is better monitored and licensed appropriately, while still encouraging product innovation.

As part of these reforms, the government is considering setting up a central bank digital currency (CBDC), which could be extended to a range of participants, including those who would not ordinarily have access to accounts at the Reserve Bank. As significant investors in the nation’s payments infrastructure, the Australian Banking Association welcomes the reform — its CEO Anna Bligh AC noting CBDC will modernise the rules governing consumer transactions.

However, NPP Australia CEO Adrian Lovney warns that while innovation can bring many benefits, it’s important the pace of change doesn’t leave some members of the community behind. “We have to be mindful that progress is inclusive and responsive to diverse needs,” he says. “A key challenge for the payments landscape is ensuring open access to platforms, while safeguarding security for the movement of real-time funds and data.”

Global brands dominate

Homegrown innovation is alive and well, with local fintechs still pushing ahead with innovations. Regardless, global brands dominate the sector locally, with Apple, Google, Samsung, Mastercard and Visa ruling the roost, as eftpos Payments Australia chair Leigh Clapham GAICD points out.

While he’s all for technology that simplifies people’s lives, he says merchants are being forced to accept Mastercard or Visa transactions through an Apple Wallet and are paying more than they need to.

“Merchants should have the right to choose a cheaper way to transact as a secure and safe alternative,” says Clapham. The Council of Small Business Organisations Australia shares his concerns, holding a payments summit last December to explore how payments can be made fairer for all. Routing debit transactions through the cheapest payment network (least cost routing) was touted, which would enable businesses that have set up contactless debit card payments across the Visa and Mastercard networks to save on fees.

Open banking onslaught

What’s likely is that the payments sector will continue to fragment, particularly as businesses and their customers get used to the concept of continual change. Innovators are up against a particular challenge in that Australian consumers are “sticky”. The average Australian has kept their savings with the same provider for 13 years, according to Finder.

Zepto’s Breeze isn’t convinced that consumers are sticking with the big four banks out of love, either. “For many, it’s simply that assessing alternatives and leaving is extremely difficult,” she says. “Transactions are about trust. They’re a moment for merchants and their customers to cement their relationship, to create something great and enduring, something that connects the two parties intimately. It’s not just doing business; it’s a critical moment between two parties. Businesses are going to have to work hard to articulate those benefits to build trust and bring consumers along on the journey of trust.”

By permitting access to their personal data through the consumer data right (CDR), open banking (which enables individuals to share banking data with accredited third parties) fundamentally changes the dynamic. CDR makes it easier than ever for consumers to shop around or have providers bid for their business with tailored offers. Its potential is still being unlocked, says Breeze. 

But Zepto’s research has shown that the very idea of open banking makes the majority of consumers uncomfortable. “They’re apprehensive about sharing their personal data, even for the provision of tailored offers that will benefit them,” says Breeze. “Few currently see fair value in the exchange of personal financial data in return for tailored offers.”

Even Lowe publicly admits that “making specific predictions is difficult, as none of us has a crystal ball”.

The rapid change in the world of payments raises a range of issues, such as ensuring that banknotes remain widely available for those who want to use them. Cross-border payments remain issues in the payments arena. Downward pressure on costs of electronic payments and competition issues are also on the RBA’s radar to address, says Lowe.

According to futurist Tom Cheesewright, the pandemic sped up the digital shift toward online and digital banking, which had been predicted to take years. His global survey for Mambu suggests a fresh generation of consumers has bought new behaviours for financial institutions to grapple with. “The big question is: who will pick up the gauntlet consumers have thrown down to the industry,” says Cheesewright. “Can those with a long legacy of trust turn their supertanker-sized infrastructure and systems around and make them as agile and modern as the hot new industry challengers?”

Or, he wonders, will new market entrants chip away at the established names until the incumbents are all but extinct?

Collaboration here to stay

The big test will be seeing which of the 41 recommendations the Federal Government decides to unveil, and how that affects the playing field. One thing for certain is that banks and fintechs are working together more often. In fact, notes Joyce, fintechs view banks as potential clients far more than competitors now than in years past.

“This is a positive thing,” she says. “Without banks participating and supporting the innovation at an infrastructure level, the ecosystem would not be as rich or as functional. FinTech Australia will be taking a keen interest in ensuring that holding one of the new licences comes with a certain amount of assurance the fintech will be able to more easily access critical payment services.”

But regulations rarely keep up with the pace of technological change, adds Breeze. “It’s really important that the new regulations deal with the now, and set us up for the inevitable future of a faster, freer flow of funds — and not-yet- imagined stores of value.”