Strategic Review of Innovation in the Payments System:
Conclusions – June 2012
2. Innovation and Efficiency
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The conclusions of the Strategic Review represent a change in direction for the Payments System Board in relation to innovation. While the Board has sought to help shape industry developments in a number of areas over the years, it has not sought to play any formal role in respect of innovation. This has reflected an assumption that innovation is best driven by market forces. In deciding to take a more active role, the Board is guided by two factors. First, it is satisfied that there are some market failures that may prevent innovation in the payments system. In other words, market forces might not be sufficient to produce some types of innovation that are in the public interest. Second, it believes that innovation is important to its mandate, that is: controlling risk; promoting efficiency and promoting competition in the market for payment services.[1]
The market failures that can hold back innovation were discussed in both ‘Strategic Review of Innovation in the Payments System: Issues for Consultation’ and ‘Strategic Review of Innovation in the Payments System: Summary of Consultation’. In large part they consist of coordination problems that make it difficult for industry players to agree to implement an innovation that requires collective effort to succeed. It is also possible that existing commercial arrangements might make it difficult to build a business case, for instance because new services will attract business away from existing profitable business streams.
Regardless of any market failures, the Board would not have undertaken this Review had it not considered there to be a strong link between innovation and its mandate. Innovation can potentially benefit competition and the management of risks, but its most obvious benefits are in terms of efficiency. Several related concepts of efficiency are relevant, but this Review is principally focused on allocative efficiency, which refers to the characteristic that goods and services are produced so as to best match consumers' needs, taking into account their relative costs, and dynamic efficiency, reflecting the need for firms to make timely changes to production methods and products/services in response to changes in consumer tastes and in productive opportunities.[2]
It is the Board's view that the market failures noted above have meant that decisions about the payment services provided by the industry have not sufficiently accounted for some key factors valued by end users. For consumers, the availability of alternative or improved payment services might result in greater welfare through, for instance, greater convenience, savings in time, or certainty about the availability of funds. For a business, benefits would typically flow from greater efficiencies in their own systems arising from more appropriate payment options and improved cash flow associated with more timely availability of funds. For instance, significant use continues to be made of cheques, which can be very costly for businesses to process. If greater resources were directed towards electronic payment methods that better provided the features of cheques, business payment costs – particularly in industries that rely heavily on cheques – could be reduced significantly.
While greater efficiency is expected to be the primary outcome of the Review, the Board believes that the approach to innovation should at all times be tested against competition considerations. Industry-wide innovations should to the extent possible provide fair and open access to potential participants and proprietary innovation should not be used as a tool for the exercise of market power. The Board believes that some of the innovations discussed in this paper have the potential to provide a more competitive environment in facets of the payments system than has existed in the past. It will seek to ensure that these changes in the environment eventuate.
2.1 Key Attributes of Payment Systems
In its Issues for Consultation paper, the Bank articulated a number of attributes valued by end users of the payments system. These provide an indication of the type of payment system features that have the potential to provide efficiency gains as discussed above.
Attributes valued by end users include the following.
(i) Timeliness
Timeliness has at least two elements. In some cases, such as emergency government payments, the timing of the availability of funds to the recipient is critical. In other cases, such as point-of-sale or online purchases, it is important that the merchant has immediate confirmation that the payment has been authorised and funds will be received, even if they will not be available until some later time. With this knowledge the transaction can be completed and goods or services supplied. This is an existing capability among a number of retail payment instruments.
(ii) Accessibility
Ideally, everyone who needs to make and receive payments should have ready access to the payments system. This includes the ability to access the payments system when and where required and to be able to make payments to whomever required. Innovations over recent years have dramatically improved access, with first telephone, then internet banking, and more recently mobile banking and payments. Another element of accessibility is the availability of accounts through which payments can be made and received. Australia has a highly banked population, which means that access to financial institution-based payment methods is ubiquitous.
(iii) Ease of use
Ease of use can reflect factors such as the number of steps in the payment process, the amount of information that must be provided (such as account and BSB numbers), and the process by which it is provided (for instance by manual entry or by use of a card). These might not simply be issues of convenience; they might also contribute to errors that can be costly to correct and can discourage use.
(iv) Ease of integration with other processes
Payments are often made as part of a process that requires some form of information exchange and reconciliation. Payment systems should be able to integrate efficiently with these processes. Key examples are the capacity of payment systems to carry additional information relevant to the payment and the ability of payment messages to be easily integrated with accounting and other business systems.
(v) Safety and reliability
End users of a payment system need to have confidence that the system will be available when expected and that payments will reach the intended recipient at the time promised. They also need to be confident that the system is secure, so that using it will not expose them to future losses as a result of information being fraudulently obtained.
For any given set of attributes, the payment service should be provided at the lowest resource cost to the system as a whole. Pricing arrangements should be such as to encourage cost-effective deployment of resources in this sense.
The Issues for Consultation paper also identified low and transparent prices among the attributes valued by end users. This does not necessarily contribute to efficiency, however. Given the two-sided nature of payment systems, prices are often skewed in favour of the party with the greatest decision-making power. For instance, the price faced by a cardholder for a credit card transaction tends to be very low or negative and does not reflect the resource costs of providing the payment. In this case consumers' decision-making might not lead to the most efficient use of resources.
While the attributes above can enhance welfare, the Board does not wish to suggest that they need to be provided in equal measure (or indeed at all) by each system. A system that could provide all of the above attributes may well be prohibitively expensive. Rather, if an end user of the payments system has a demand for a particular attribute, the Board believes that attribute ought to be available in at least one system. It is also possible that the attributes will be available in varying degrees in different systems, such that an end user might be able to trade off attributes, for instance balancing the speed of funds availability against the quantity of data that can be carried. Accordingly, end users should have access to a menu of payment options (including at different costs) that will allow them to best meet their particular needs. The ability to do this is a measure of the efficiency of the payments system.