Transcript of Question & Answer Session Opening Panel Remarks on the Regulatory Landscape for Payments

Alright, now I'd like to call the panellists and Nancy Bryla, general counsel of the Australian Payments Network who will moderate and introduce the panel.

Thank you. So, thank you very much, Tony, that was a very insightful introduction. And there are so many points coming out of your remarks that I'd really like to explore on the panel, today. There's actually a perfect segue into our discussion on regulatory reforms. Joining us today we have Melisande, who is a general manager of licensing at APRA. She is also the Fintech lead at APRA.

And we have Stephen King, who's a commissioner with the Productivity Commission. Stephen was actually part of the team that wrote the report, around competition into financial services. So, drawing from your report, one of the overarching themes was actually around the regulators, and the fact that they had focused on stability, perhaps at the expense of competition.

And APRA, earlier this year, actually introduced a new framework, which was actually aimed at initiating competition, and trying to strike a bit of balance, between competition and stability. And that was the restricted ADI framework. So, I'm going to start by asking Melisande about that framework, and particularly, whilst I know it's still early days, can you tell us about whether it has successfully met its objectives, or is likely to successfully meet those objectives?

Thanks, Nancy. So, as Nancy said, we released a restricted ADI framework in May, this year, and we, the day after, licensed the first restricted ADI. Since that time, we have been engaging with a large number of other applicants, both for restricted ADI licences, but also for a broader range of ADI licences as well. So, while I would say, the restricted ADI framework has provided this additional path, and in that sense, I think it has been successful, in flushing out some new people to come and talk to us, I also think it's actually opened people's eyes to the fact that, it is available to become a bank, either through the restricted path, or more broadly.

The actual framework has also been supported by the fact that APRA centralised its licensing function in the last year. And, having one central team who's dealing with all the new applicants, who is dealing with all the issues, has really helped.

So, just picking up on your point, so you've had a few new applicants for ADI licences. So we're likely to see some new ADIs entering the markets of neo-banks. And so, I guess my next question to the panel is, do you see these new ADIs actually having an effect on competition in our market? Will they innovate? Will they challenge the big four? What are your perspectives on that?

Well, okay, thanks Nancy. If I can start on that. It's really good to see a new pathway, or an improved pathway, for innovative companies to be able to become ADIs, restricted ADIs, then potentially become full ADIs. But the problem in Australia isn't a lack of ADIs. We've got ADIs coming out our ears. Many of those ADIs are working with innovative start-ups. There are issues of legacy systems in some of those ADIs, but, in reality, the big four are not going to be challenged by those ADIs.

The big four will gobble up, quite frankly, anything that becomes innovative. We've seen it in other industries. Just to give you the perspective here. If you take Macquarie and every other ADI, and add them up, by the value of their assets, for example, their balance sheets, assets, you only get to the size of a Westpac or a CBA. So put them all together, and you might have a challenger for one of the big four. And that's not going to happen.

So, this is competition, it's really important competition, but it is around the edge. Don't expect a revolution.

So, I think, one thing I would say, which is potentially different to that, is … that would rely on the big banks not innovating themselves. Because one of the things we are seeing, with these new entrants, the new neo-banks, some of the other models that are starting up in this space, such as Up, who will be speaking to you afterwards, is actually a completely different mindset, and a different sort of approach to providing a service, that I think is going to be … it's not impossible, but it's difficult for the major banks to replicate sometimes, because of their legacy systems, and the frameworks they've got.

So, therefore, I think the actual competition that is starting … as you say, it's not just about numbers … it's actually that there is going to be a different service on offer.

Would you like to add to that?

I think I'd agree with Melisande in a few respect. The Governor commented yesterday that the banks had been disappointed with the progress that some of the major banks had been rolling out functionality and the NPP and least cost-routing. I think, to a significant extent, that reflects the complexity of some of their systems. Some of the stories we hear about the difficulty that banks have got, in modernising their systems, are almost hair-raising. So, to the extent that the challenger banks are all using incredibly new platforms, can be much more agile, I hope that you can see more competition than just at the edge.

I just had one extra, final thing, as well. If you look at some of the international players. Some of the Fintechs have got very big, very fast, if they have managed to nail the offering that they're doing.

Yeah, the big advances though, when you're looking, particularly at payments are in those countries that are under-banked. So, if you start … Alipay is the obvious example, where people say, 'well, look at what Alipay has done, look at that sort of innovation.' That was in a country with a highly regulated banking system where, quite frankly, people didn't put their money into banks. It was a massively under-banked society. You look at M-Pesa in Kenya, same driving forces.

In Australia, we're in the very fortunate situation that, we're well and truly not under-banked, and we've actually, particularly in the payment space, seen the sort of innovations that makes it hard for that leap frog. That in some ways you need for innovation to really displace current competition.

Are we going to see an Alipay sort of disruption here? I don't think so, because we already have the disruption, when people pull out their MasterCard, Visa or Eftpos card and go tap and pay and go. And that's the sort of innovation we've seen, that's driving things like the reduction in cash in this country. It's exactly the same as what happened in Sweden. Everyone talks about Swish as a new entrant, Swish is tiny in Sweden. Reduction in cash is all driven by traditional debit card. It's not driven by the new payment instrument. That's at best marginal in Sweden.

So I think Alipay is really interesting, because on a transaction basis, it's certainly had a lot more transactions than the largest card scheme in China being Union Pay. And so, do the other panellists think that we'll similarly see some kind of disruption from a similar type of stored value facility, or digital wallet, here in Australia?

I'd agree with the point Stephen made a little while ago, about the fact that the markets where you've had these huge growth of disruptors have been ones where the banks haven't been providing particularly good services, and where they've been under-banked. So China, Kenya are examples of that, and in Australia we're fortunate that we've got a very highly-banked population.

But on this question of stored value facilities, and Alipay type things, it's interesting that 20 years ago people thought that there was going to be growth in this area and we put a regulatory framework in place that envisaged that there'd be lots of these purchase payment facilities or stored value facilities. And it hasn't really happened. Twenty years ago they thought there'd be things like Mondex, et cetera, we'd all be carrying around electronic purses that would replace cash, and it wouldn't be bank account to bank account payments, but that hasn't happened.

But one of the interesting things happening at the moment is that the council of financial regulators has got a consultation going on these stored value facilities, and might be something Melisande might want to talk about.

Yeah, so I think the only current PPF that we have is PayPal. And so it is fair for people to say that there's not been much competition in this space. But I actually think that some of this is actually driven by technology, and we're starting to see a lot more interest, there's a lot more people coming and speaking to us. But also, if you look at the other markets, and so forth, Singapore is highly-banked, and I was there for the FinTech festival a week and a half ago, and there were a 150 digital wallets. I couldn't even tell you how many there were, what they were all doing, but they've still taken off in that type of market.

So it would be interesting to see what actually happens here. Maybe it will be more niche services. But I don't think we can rule out that just because we're currently banked, that something couldn't take off. And the type of things that we're seeing, now, hitting this PPF framework, are not actually the same as I think what was originally envisaged by … or maybe the digital wallet thing has really only just recently been something that can actually be done in some fashion.

So, in my world, it's actually quite interesting, because there's quite a lot of competition, I see, between the neo-banks, which are going to be just an app, and the digital wallets, which are also just an app. But they're both under a different framework. So, trying to get the right balance in this PPF framework, is actually going to be really important. Not just for the digital wallets, but also for the neo-banks.

So there absolutely has been a massive growth in digital wallets in overseas jurisdictions, and I know that the review is currently underway. But, is there any real impediments that you can see, at the moment, that will stop the growth of digital wallets in Australia?

I think one thing which is very clear is there's no international standard for this type of space. So if you look at the … a lot of countries and jurisdictions have actually just been reviewing this area, and they've changed their framework, but they haven't coalesced around one type of framework. And that's actually challenging for us, because, typically it's better not just for us, but for players as well, if you can have some sort of international consistency.

Within Australia, we have challenges in terminology, which makes it very difficult to engage with people. Because you're not speaking the same language and I think the actual framework is just old. It was designed in 2006. We didn't have the actual examples in front of us. We now have examples in front of us, under lots of different business models, and that's actually the ideal time to review the framework. Because you're not just reviewing it with one business model in mind, you're trying to get a framework that actually applies to a large number of business models, and will help to get the right balance.

I think there's lots of good innovation, you want to encourage that innovation, and get it out there in the market, but you also want to make sure that it's fair and that it's safe. I probably do need to make a plug for safety, given the previous comments. I do think safety is important, both for digital back wallets and also for the neo-banks and the new ADI entrants, while we're trying to help facilitate new entrants come in, and understand the framework, and work through our requirements and so forth. I think if we have a failure, particularly in these early stages, that's actually going to impact all the new entrants and have a detrimental impact on competition. Ultimately, at the time, I think it would healthy if there were a few failures with some of the new entrants, but for these first few, I think it would be damaging.

Yeah, I'd do a different take on that, which might you surprise you, Melisande. I agree, entirely, that we've got a very, an out of date framework, I think I'd call it, for the digital wallets, for the PPFs, and that being updated, that's fantastic. I would suggest though that an emphasis on let's not make sure anyone fails, is likely to strangle the innovation at birth. It will be a cost that outweighs the benefit.

I'm not saying it's an emphasis, I'm saying it's important.

So we need to make sure though that the sort of constraints that we put on the digital wallet, in terms of the prudential requirements that we put on them, if we decide that there are prudential requirements and we may decide, look, for ones that hold less than an individual can't hold more than a thousand dollars in an account, we may say, "Actually, that's fine. That's going to be outside the standard prudential framework." So, we could go down that sort of route. Because the more you put the prudential regulation on the PPFs and the digital wallet at the beginning, the more you're going to constrain the sort of innovation that can occur. And that necessarily occurs when you put regulation on, you're putting a framework that will direct the innovation.

Now I'm not saying we want to go down the Alipay route, and I mean, as you'd be aware, Alipay is also the biggest money market that holds the deposits in money market accounts, was actually outside the prudential regulatory measures in China, I think until about six months ago when suddenly the Chinese central bank said, "Well hang on, you guys had better come into the net, because there's a significant stability risk here." So we don't want to go down that path. We've got to be somewhere in between. But I would caution, let's not strangle the innovation at birth with [overtalking 00:15:34].

I think we're actually in furious agreement. Because what we're finding at the moment, is we're capturing too many people, in some senses and that's making it harder. And so one of the things we're trying to look at is the thresholds. But how can you actually make sure that you're allowed to operate outside of the prudential framework as long as it's within these bounds? And then capture the right parts in there. And that's really the crux of what we're trying to work out at the moment. What should be in? And actually, we don't want huge numbers in. We'd love there to be things that can happen outside of that, our environment. Because it's annoying for us and for them.

And let's be clear that there will still be forms of regulation on the smaller entities, but it'll be ASIC based stuff. It'll be things like fit and proper tests, restrictions on what can be on the client monies, things like that.

You don't want Ponzi schemes.

And that aligns with the Governor's speech yesterday, where he talked about the shift to electronic payments, and the greater importance of actually ensuring that there is safety and reliability built in. Tony, you mentioned your current collaboration with the ACCC on NPP access and functionality. I know that's still underway, but I just thought I'd ask the question, because I know lots of audience members have also asked me this question. In terms of access to NPP, we know that the shareholders have invested so much money into this, and so is it too early to even be talking about access? Should we not just be waiting to see how things play out in terms of competition? Any thoughts on that?

We are hearing from some smaller entities, some newer entities that they think that there are access issues to be dealt with. We're not starting with the presumption that there is, but we want to better understand the issue. It may be that what the entities that are complaining about really want is just better services from their banks. So initially, the major banks have been fairly slow to roll out NPP functionality that take full advantage of the richer data, the easier addressing, et cetera, through the NPP. So, it may be that the major problem is with NPP functionality, rather than access.

But you did refer to the fact that the existing shareholders have invested a lot in the NPP a

nd I think there is some precedent outside of the payment system, for new systems to have rules that new entrants are required to become shareholders. Because you want to encourage people to sign up to fund the build of the new system. And if you tell people that you don't have to pay a subscription fee, you can join on day two and not pay anything, then you won't get anyone to sign up and fund the build on day one. And Stephen might be able to tell us more about what happens in other industries, but we will have to look at a number of issues, but we certainly do acknowledge the fact that the industry spent a lot of money building this thing. And one of the reasons they did it was because they knew that they couldn't avoid the subscription fee by waiting to join on day two.

I know you've got some comments on that topic as well, Stephen.

Yeah, so let me start on the equity investment. And that is done in other areas involved in the airports review that the Productivity Commission's doing at the moment, and jet fuel facilities go through a common facility at airports, which is owned by the fuel companies. And to get access, for example, here in Sydney, you need to buy an equity share in that. As you'll see when our draft report comes out, we don't think that works very well. And for the same reasons, I think we have concerns about the NPP. And that is that you've got a structure where the parties that will be most damaged by successful competition of the exact same parties who own the facility, and will set the terms and conditions for the equity investment.

And even if the price is made transparent, experience in other utility industry shows that it's very hard for parties that really will be innovators and disruptors to get in, even when the rules appear clear. Because they've still got to get past the exact same people that they will be disrupting. And I think telecommunications in Australia showed us at least 25 years' worth of failed disruption because the structure of the network, or of the bottleneck part had never been properly resolved in this country until we tried to roll out the NBN, and we all know where we are.

Not a great model to go down. And that's the Productivity Commission's fear with the NPP. We see parties, even though it's early days, and it's very easy to say, "Look, the parties that want access now, rules are still being made, terms and conditions are still being constructed. They can get access, they can go through Cuscal and get access. There's information issues about, if you're an overlay service provider, what information can you get about the customers using your own overlay service from the financial institutions." That's not clear at the moment. It's not clear, but you can get the information you will value.

It's not clear exactly, even if you've got access to the NPP, what other things innovators need around it. So, for example, an exchange settlement account at the RBA. Having direct access to an exchange settlement account may be what you need to actually be a real innovator in this space. There are all these things, and they're questions, we can't answer today. But we do from experience, that when you have the parties that will be most hurt by the disruption owning that bottleneck, then you're unlikely to get those questions resolved in a way that promotes competition without some form of regulatory intervention. May be light handed, may be an access regime, but there's got to be a regulator in there cracking the whip.

Think that's a huge topic, and I'm sure we can discuss it so much longer. I'm going to actually go to one of the audience members on the screen, around interchange fees, which looks to be a very popular question. And this is something that the Governor touched on in his speech yesterday. And, Tony, you also mentioned the cost to merchants in your remarks in your introduction today. I might just add to that, what are some of the lessons that we can take from overseas experience in terms of looking at interchange in our market? So, who wants to start with that?

We've got the PC called for interchange fee, so, I'm happy to start with that. Why? Australians led the world on interchange fee regulation. I mean, the Reserve Bank from, I think was 2006, was effectively the first country in the world to go down this track. We're being followed internationally. So when you say, "Can we learn from overseas?" The Reserve Bank are leading the world in this. The Payment System Board is leading the world in this. At the same time, we have seen a gain of regulatory whack-a-mole in interchange fees. Which is because the RBA and the Payment System Board have quite correctly followed a standard regulatory model of attempting to say, "Let's try and work out what the relevant costs are and set an interchange fee to reflect those costs." Perfectly said, and we see it in other regulated industries.

However, payments are different. They're not like other regulated industries. They are a two sided platform. And you're dealing with three party and four party card networks. So three party do not have an interchange fee as such. So, what's happened is, every time the Reserve Bank set iits interchange fee regulation, there's been loopholes that parties have happily jumped through. And if you're like me, and have just had your American Express Companion card wiped out by the bank, my wife's very upset because we no longer get bribed, I mean, sorry, rewarded through numerous Qantas frequent flyer points for using that card. Of course, the merchants pay a lot more. The reward points don't come from nowhere, it comes out of the price everyone pays if a merchant doesn't surcharge.

So, our view is, we need to simplify the interchange fee regulation, and zero is a very simple easy simplification. There is no good case in mature card systems to have a positive interchange fee. We've seen situations such as Eftpos in its earlier days, where the interchange fee went the other way. So the idea that we have to have an interchange fee, because otherwise Visa or a MasterCard will collapse is complete nonsense, in my view. What I do think we need to do though, is to make sure, that by focusing on the interchange fee, we're actually focusing on the right place in a world where we have three party card schemes. So, our recommendations were zero interchange fee, and that the ACCC, investigate the broader payment system, both merchant service fees, interchange fees, and the relationship back to consumer rewards, and work out, are we actually looking in the right place? Have we got the right approach, and focus, to regulatory structure? Or should we, actually, be looking somewhere else? For example, should we be looking at merchant service fees? And, is that a better place to regulate? But, whilst we're wanting to change regulation, zero is the right answer.

Any response from you, Tony?

Who's been to the United States recently? They've got high interchange fees so they should have a very innovative payment system, or the last time you went there you probably tried to tap your card and no, couldn't do that. So you probably tried to do a pin. Couldn't do that either, you ended up signing. So, I don't think there's any evidence that you need high interchange fees to have an innovative card system.

And in Australia, for example, we lead the world in contactless adoption. And so I think you can have a dynamic, innovative, flexible card system with low interchange fees. So, as Stephen said the Reserve Bank led the way here and we're very comfortable with what we've done and we think that the Bank's actions over the past 15 years have resulted in a more competitive and efficient payment system.

Does that mean we should go further and lower them even further? In medicine, I think it's probably the case that some doses of medicine are very good for patients up to a certain level, but that doesn't mean that giving the patient even more of the medicine is necessarily going to be even better for the patient. And it may be the case on interchange fees.

We do reviews of the card payments regulation system periodically, and we will certainly look at the arguments for a further reduction in the caps when we do that. But it would be taking a holistic view of the regulatory system. Looking at the surcharging rules. Looking at both the three-party and the four-party systems. And I think it's too early to foreshadow what we might find there. But at the moment I think we're pretty comfortable with the way that the regulatory framework is working.

But we appreciate that the Productivity Commission's done a thorough piece of work, and has given us some recommendations to look at.

So we're very quickly running out of time, so I might just ask the audience if anyone has any questions, because I know that not everyone has access to the app, to be able to send their questions through there. We have one question here, is there a roving mic that we can …?

Hi. I think the question is also up on the screen, too. I was going to inquire about – it's sort of related to the interchange aspect, too, and Apple Pay. What are your thoughts about QR codes as a mode of payment that have significantly taken off across the Asian market? Or more so, the developing markets. And, as you can see, there's a big dilemma with Apple Pay, and the majors, and it revolves around interchange, mainly. So, I guess, what are your thoughts about QR, or other mode of payments, other than the traditional [unclear 29:35]?

I can start on that. QR codes are really just a way of transmitting information. But the way that QR codes have been used in China, for example, is to facilitate transactions within wallets, like Alipay, et cetera. In principle, there's no reason why QR codes couldn't initiate account to account transactions. So, at some point in the future, potentially QR codes could be used in the NPP, in some point of sale type environments.

I can easily imagine that at a market on a Saturday morning, a small grower's market or something like that, a small merchant might say I'd like you to make an account to account payment, rather than a card payment, and that account to account payment might do that by giving the customer their pay ID and asking the customer to make a payment. Or maybe there will be a QR code type arrangement to facilitate that.

So, we can certainly have QR codes. But it might be to initiate card payments. It might be to initiate bank account to bank account transactions. Or, potentially it might be wallet transactions. Who knows?

My only addition, I think you're dead right. I think that there will be an app available, a service provider, using the NPP, will make a situation where QR codes can be used for those direct transfers. However, again, from what we've seen overseas from countries that are ahead of us … so, if I was square, and I made my business out of different markets, with people putting in little card readers into my mobile phones, I'd be worried.

If I was Visa or MasterCard, would I be worried? No, because in this country, we've got the situation where you go up, tap pay, it's already very convenient. And even in countries where it's not as convenient as the card systems in Australia, you haven't seen those QR code, NPP type processes taking off. Because we already have a widely adopted, easy to use, payment system.

That's why I tend to focus so much on things like the interchange fee. Because I see a payment system going more and more electronic, less cash, but more focused on Visa, MasterCard, Eftpos. And that really worries me. Because, those three networks will be controlling the cost of our payments network and I think we need to think hard about that.

So I might just turn to another question from the board, around open banking. So, we've had a few sessions on open banking, over the last couple of days. But, I'm very interested in whether, from a regulatory perspective, the reforms that have been put in place, do you have any perspectives around whether that is actually going to increase competition?

I'm happy to … all right. I'll be very quick, then. To a degree, yes. Again, we've seen open banking reforms overseas, the UK is an obvious example. The first thing that happens is, all the information gets used and you have a nice app on your phone, where you can just look at all your bank accounts and all your other investments at once, and that's very nice, and so on. Not revolutionary. We haven't seen revolutions coming out of open banking, we've again seen competition around the margins.

So I think one of the things we need to think of, is how can we make sure that parties who want to use the information or the access to customer information created by open banking, they want to use that for innovation, how do we make sure that there aren't other barriers to them innovating and being able to benefit customers in the way that we want? So open banking I look on is one element. But there are other elements, such as NPP access, such as thinking about exchange settlement accounts, and so on.

And I think it's thinking of all of those elements together, that's where the innovation will come from.

I would have to agree, I mean, from our conversations with entities … open banking can't hurt. But a lot of these other issues crop up, as things that are very important.

Okay, thank you. So, with only half a minute left, do any of you have any final remarks or comments that you'd love to leave the audience with?

I think – why don't I just say, from APRA's perspective, we're open to all variety of different business models. Whether they come with QR codes, whether they come as a digital wallet, that needs our sort of regulation, or what have you. As long as people can meet our standards, we can help people get through. So, some of the questions that were on the screen were, would we accept this type of bank? Or would we accept like WeChat bank or something coming to Australia?

Well we would, if they met our standards. We don't have a particular business model that we're trying to push.

Any closing comments, Tony?

Just an observation that we deal with a lot of you, and particularly those of you who are in the larger financial institutions know you can come to the Reserve Bank and talk to us when you have issues regarding the payment systems. But I'd encourage those of you who are in newer entities, fintechs, et cetera, that we've got an open door and are always happy to hear about your issues, thank you.

Stephen?

And I guess I'd just repeat, we're setting up all the elements for some real innovation, and potential competition. I'm a damn squib, but I think it's going to be around the edge, but it's still going to be exciting. And it's going to mean that in ten years' time, we're going to be in a lot better place in terms of payments than we are now. But we've got to be able to get it right. And the regulators, the RBA, and APRA are going to have a key role in this.

I've greatly enjoyed this discussion, and I hope you have as well. Please join me in thanking our wonderful panel.