Payments System (2024)

The ‘payments system’ refers to arrangements which allow consumers, businesses and otherorganisations to transfer funds usually held in an account at a financial institution to one another. Itincludes the payment instruments – cash, cards, cheques and electronic funds transfers –which customers use to make payments and the usually unseen arrangements that ensure that funds move fromaccounts at one financial institution to another.

Cash

The use of cash as a payment method has declined in recent years. One of the most comprehensivesources of data on individual cash payments is the Reserve Bank's Consumer Payments Survey. Thisstudy was first undertaken in 2007 and was repeated in 2010, 2013, 2016, 2019 and 2022. Thelatest survey showed continued substitution away from cash use and towards electronic methods.Overall, cash payments accounted for 13 per cent of the number and 8 per cent of the value ofall consumer payments in 2022.The most common way consumers withdraw cash is through ATMs, which accounted for 72percent ofthe total number of cash withdrawals and 66 per cent of the value of withdrawals in 2023.

Non-cash Payments

Non-cash payments account for most of the value of payments in the Australian economy. Onaverage, in 2023 non-cash payments worth around $300 billion were made each business day,equivalent to around 11percent of annual GDP.

Around 70percent of the value of non-cash transactions is accounted for by a small number ofhigh-value payments made through Australia's real-time gross settlement (RTGS) system. Most ofthe value of these payments relates to the settlement of foreign exchange and securities marketstransactions.

The migration of large business payments to the RTGS system saw a decline in the importance ofthe cheque as a payment instrument.In 2023, less than 1 cheque was written per person in Australia, down from close to 50 in the mid 1990s.A significant share of cheque use is relatedto commercial payments, and financial institution ('bank') cheques for certain transactions suchas property settlements, although the latter have been declining with moves to electronicproperty settlement.

In contrast to the declining importance of cheques, the use of electronic payment instruments atthe retail level has been growing rapidly. In 2023, transactions (both purchases and cashwithdrawals) undertaken using either credit or debit cards averaged about 540 per person, anincrease of around 50 per cent on the level of five years earlier.

For many years, Australian governments and businesses have made extensive use of Direct Entry credits forsocial security and salary payments. Consumers and businesses also establish direct debits for billpayments. Direct Entry payments are an important part of the payments landscape. These payments continueto account for the bulk of the value of non-cash retail payments (i.e. non-RTGS transactions).

Payments Clearing

Most payment systems involve two or more financial institutions and/or other payments providers, requiringpayments to be ‘cleared’ between them. For instance, details of a cheque drawn on onefinancial institution and deposited at another must be returned to the first financial institution sothat it can debit its customer's account and verify that the customer has sufficient funds.

Arrangements for clearing most payment instruments in Australia are coordinated by the Australian PaymentsNetwork (AusPayNet). AusPayNet is a limited liability company with a board of directors drawn from itsshareholders – banks, building societies and credit unions. AusPayNet manages clearing for cheques,direct entry payments, ATMs and debit cards and high-value payments.

Other payments clearing systems independent of AusPayNet include credit cards (Mastercard and Visa), thedomestic debit card system managed by eftpos Payments Australia Limited (ePAL) and the BPAY system forpayment of bills. Following the Conclusions of the StrategicReview of Innovation in 2012, the industry worked on a project to build a new real-time retailpayment system – the New Payments Platform (NPP). The NPP began operation in February 2018. Thereare also two securities settlement systems with separate payment arrangements. They are the AustraclearSystem which settles trades in CGS and other debt securities and the Clearing House ElectronicSub-register System (CHESS) for settlement of equity trades.

Payments Settlements

When payments are cleared between institutions, they accrue obligations which must be settled. InAustralia, final settlement of obligations between payments providers is by entries to their ExchangeSettlement Accounts (ESAs) at the Reserve Bank. Large-value payments are settled one-by-one on areal-time gross settlement (RTGS) basis, while retail payments are settled on a net settlement basis. TheReserve Bank has established a policy setting out criteria that payments providers must meet to open anESA.

Role of the Reserve Bank

A safe and efficient payments system is essential to support the day-to-day business of the Australianeconomy and to settle transactions in its financial markets. Accordingly, the Reserve Bank of Australiahas important regulatory responsibilities for the payments system and plays a key role in its operations.

The Payments System Board (PSB) of the Reserve Bank oversees the payments system in Australia. It isresponsible for promoting the safety and efficiency of the payments system and through the PaymentSystems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998, theReserve Bank has one of the clearest and strongest mandates in the world in relation to payments systems.

The Bank consults closely with participants in the payments industry. The Bank is represented on a numberof industry committees responsible for the day-to-day management of payments clearing systems and Bankstaff regularly meet with industry representatives and other regulators.

Detail on the structure and operations of the Australian payments system can be found in Payment Systemsin Australia (Red Book, 2011) and the activities of the Bank's Payments System Board are reported inits Annual Reports.

Controlling Risk in the Financial System

The Reserve Bank's responsibilities for stability build on the long history of central banks'involvement in this area. The introduction of real-time gross settlement (RTGS) in 1998 eliminated thebuild-up of settlement exposures between financial institutions as a result of the exchange of high-valuepayments and transactions in debt securities. In 2002, Continuous Linked Settlement (CLS) joinedAustralia's RTGS system, allowing foreign exchange transactions involving the Australian dollar to besettled through CLS. The Reserve Bank, and other central banks whose currencies are settled through theCLS arrangements undertake cooperative oversight of CLS under an agreed protocol.

Under Part 7.3of the Corporations Act 2001, the Reserve Bank has a formal regulatoryrole to ensure that the infrastructure supporting the clearing and settlement of transactions infinancial markets is operated in a way that promotes financial stability. The Bank's powers underthat Part include the power to determine financial stability standards for licenced clearing andsettlement facilities. The Reserve Bank implemented revised FinancialStability Standards for central counterparties and securities settlement facilities in 2013. TheStandards seek to ensure that clearing and settlement facilities identify and properly control risksassociated with their operations, thereby promoting the stability of the Australian financial system. TheStandards replaced previous standards determined in 2003 to incorporate changes to internationalstandards for clearing and settlement facilities. The Standards for securities settlement facilitiesapply only to facilities that settle obligations in excess of $200million in a financial year. Thisensures that the Standards apply only to securities settlement facilities that could potentially pose arisk to the stability of the financial system, exempting small systems from unnecessary regulation.

Efficiency of the Payments System

Australia was among the first countries in the world to make efficiency of payment systems a statutoryobjective of the central bank. In pursuit of this mandate, the Reserve Bank has encouraged a reduction incheque-clearing times and the take-up of direct debits as a means of bill payment, and taken a number ofsteps to improve the competitiveness and efficiency of card systems. Initially the latter focus was oncredit card systems. In 2001, the Bank designated the Bankcard, Mastercard and Visa credit card systemsas payment systems under the Payment Systems (Regulation) Act. Designation is the first step in thepossible establishment of standards and/or an access regime for a payment system. After extensiveconsultation, the Bank determined Standards for the designated schemes which lowered interchange fees andremoved restrictions on merchants charging customers for the use of credit cards, and imposed an AccessRegime which facilitates entry by new players. Since then, the Bank has implemented a number of otherreforms to promote competition and efficiency in the card payment system as it has continued to evolve.These have included extending interchange fee regulation to debit and prepaid card systems andintroducing caps on individual interchange fees, and removing restrictions that require merchants toaccept the credit cards of a scheme if they accept that scheme's debit cards and vice versa.

Interchange fees

The Bank has two standards that relate to the setting of interchange fees and net payments to issuers indesignated credit and debit & prepaid systems. These standards set weighted-average interchange feebenchmarks of 8cents per transaction for debit cards, and 0.50percent of thetransaction value for credit cards. The weighted-average benchmarks are supplemented by ceilings onindividual interchange rates to keep payment costs down for smaller merchants (which do not benefit fromlower ‘strategic’ interchange rates). No credit card interchange fee is permitted to exceed0.80percent and no debit card interchange fee is permitted to exceed 10cents if leviedas a fixed amount, or 0.20percent if levied as a percentage amount.

In addition, following the 2019-21Review of Retail Payments Regulation, the debit interchangestandard was amended to introduce a ‘sub-benchmark’ for single-network debit cards (SNDCs),which only allow payments to be processed through one debit network, such that the weighted-averageinterchange fee for SNDCs from a given scheme must be no more than 8cents. Both standards were alsoamended to require designated schemes to publish interchange fees on transactions on foreign-issued cardson their websites.

Schemes are required to comply with the benchmarks on a quarterly basis, based on weighted-averageinterchange fees over the most recent four-quarter period. To prevent circumvention of the debit andcredit interchange standards, there are also limits on scheme payments to issuers that are not capturedwithin the interchange benchmarks.

See the Regulationspage for the current interchange fee standards.

Surcharging

The Bank's surcharging standard preserves the right of merchants to surcharge for accepting moreexpensive payment methods. Prior to 2003, when the RBA first set a standard for surcharging, the rules ofthe Mastercard and Visa schemes prohibited such charges. Consistent with the Competition and Consumer Act2010, the surcharging standard ensures that consumers using payment cards from designated systems (eftposand the debit and credit systems of Mastercard and Visa) cannot be surcharged in excess of amerchant's cost of acceptance for that card system.

The Australian Competition and Consumer Commission has enforcement powers under the surcharging framework.Further information about the surcharging framework is available on the Questions& Answers - Card Payments Regulation page.

Debit Card Regulations

As noted above, the Bank has a standard covering debit and prepaid card interchange fees and net paymentsto issuers; it limits the weighted-average interchange fee benchmark in the designated debit card systemsto 8cents per transaction, with no individual debit card interchange fee able to exceed10cents if levied as a fixed amount or 0.20percent if levied as a percentage amount.This standard applies to the eftpos, Debit Mastercard and Visa Debit systems.

In addition, following the 2019-21Review of Retail Payments Regulation, a‘sub-benchmark’ was introduced for transactions using single-network debit cards (SNDC),which only allow payments to be processed through one debit network, such that the weighted-averageinterchange fee for SNDCs from a given scheme must be no more than 8cents. The Bank has also set anexplicit expectation that all debit card issuers with more than 1percent of the total valueof debit transactions should issue dual-network debit cards (DNDCs), which allow domestic debit paymentsto be processed via either the domestic scheme (eftpos) or one of the international debit networks (DebitMastercard or Visa Debit).^[1]

Credit Card Access Regimes

The introduction of Access Regimes in 2004 allowed specialist credit card institutions (SCCIs), authorisedand supervised by APRA, to apply to participate in the credit card schemes, as issuers or acquirers.Formerly, the scheme rules required that participants be deposit taking institutions authorised by APRA.In 2014, the Board determined to vary the Access Regimes. This reflected its conclusion that, while theoriginal Access Regimes were appropriate when introduced, changes in industry structure and in theownership of the card systems meant that the regimes might be unduly restricting access. The variationscame into effect from 1January 2015 and provide the Mastercard and Visa card systems with theflexibility to expand membership beyond existing participants.

The ATM System

In 2008, the Reserve Bank designated the ATM system as a payment system under the Payment Systems(Regulation) Act. After extensive consultation, the Bank determined an Access Regime for the ATM systemwhich supported complementary industry-based reforms. The Access Regime sets a cap on the connection costthat can be charged to new entrants to the ATM system and prohibits the charging of interchange feesexcept in specific circ*mstances. It also includes a prohibition on the charging of fees for establishingdirect clearing/settlement arrangements and allows the Bank to exempt certain arrangements fromcompliance with aspects of the Regime where this is in the public interest.

The ATM reforms, which came into effect on 3March 2009, were designed to: make the cost of cashwithdrawals more transparent to cardholders and place downward pressure on the cost of ATM withdrawals;help to ensure continued widespread availability of ATMs by creating incentives to deploy them in a widevariety of locations, providing consumers with choice and convenience; promote competition betweenfinancial institutions; and make access less complicated for new entrants, and therefore strengthencompetition.

In October 2021, the Payments System Board granted an exemption from certain aspects of the ATM AccessRegime to enable card issuers to access other participants' ATM fleets (see media release). This decision was taken to enable cardissuers to provide cardholders with wider access to fee-free ATMs, which will help to maintain broadcoverage of ATMs amid the challenges of declining cash and ATM use.

Retail Payments Studies

The Reserve Bank has undertaken a series of significant studies to gather information on theAustralian payments system. The Bank undertook its sixth survey of consumers' use of, andattitudes toward, different payment methods in late 2022. As with the previous studies in 2007,2010, 2013, 2016 and 2019, an important goal of the survey was to measure the use of cash in theeconomy, given that there are few direct sources of information on this important segment of thepayments system.

Over the course of 2014 the Bank undertook a large-scale study of the costs of different paymentmethods for financial institutions and merchants. This study updated and extended the analysisundertaken as part of the 2007/08 review of the Bank's payment system reforms.