23 August 2016

10 things you need to know about digital payments

This article was written by Patrick Gunning, Kate Jackson-Maynes, Nick Valentine and Charles Davies.

10 points on the impact of digitisation on payments systems

10 things you need to know about digital payments
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1. The payments mix is increasingly digital...

The use of cash and cheques is diminishing in modern economies. Traditional payment cards are being challenged by digital wallets.

2. Payments systems rely on network infrastructure...

To support many-to-many payments, there must be network infrastructure to which payment service providers have access. Competition amongst service providers should lead to greater choice for users of the payment system.

3. There are many kinds of participants in the system…

The major card scheme operators have massive penetration worldwide, and banks play an essential role in clearing and settling payments. But there are many other important and emerging roles. These include switching, payment gateways, payment initiation, account consolidation and information services and, of course, the development of technology and communications services to integrate these various functions.

4. Regulation comes from a mix of governments and participants themselves...

While government agencies with responsibility for prudential supervision of financial institutions, licensing of providers of financial services and competition (antitrust) issues have regulatory oversight of the industry, many of the rules are created and enforced by participants themselves, typically through a network of bilateral contracts between acquirers, issuers, switches, and clearing and settling agents, or agreed codes of conduct like the PCI Data Security Standards, or membership rules of various industry groups and schemes.

5. These regulations are changing in response to innovations in technology and business models…

For example, in Europe the Payment System Directive was overhauled substantially between 2013 and 2015, giving member states until the end of 2017 to conform their national laws, and in Australia the Productivity Commission’s inquiry into Data Availability and Use will consider whether banks should be required to provide transactional data to fintech businesses.

6. Fraud and cybersecurity risks increase alongside the success of online payments…

As the number and value of payments made at a distance increase, so too does the level of fraud.

7. There’s value in the data...

Improvements in digital communication protocols allow more data to be exchanged, and at greater speeds, than ever before. Digital payments companies can collect this data to provide insights to their merchant clients, or package rich data with digital transactions in the form of overlay services, such as providing payslip information and payroll deposits in the same digital transaction.

8. The industry-developed ‘Australian Payments Plan’ identifies ‘desirable characteristics’ for the Australian payments system…

They are: resilience (stability, reliability, security and trust), efficiency (resources are allocated for maximum stakeholder value, to support sustainable business models, in an integrated manner supporting interoperable, standardised, automated processes to minimise cost and risk and to allow value to circulate rapidly at minimal frictional cost), accessibility (ease of access, to support a wide reach and to promote competition and choice, with transparency) and adaptability (encouraging innovation, governance frameworks to encourage co-operation where there are strong network effects, regulatory clarity that is supportive of both competition and cooperation and flexibility).

9. The Australian Payments Plan also identifies three areas for further exploration…

To enhance security and trust by understanding the opportunities presented by digital identity management and cyber security, managing the payments mix as digital payment habits increase, and enabling the next wave of technology innovation.

10. Australia’s New Payments Platform is on track to become operational in the second half of 2017…

The NPP basic infrastructure is designed to provide a fast, versatile, data rich payments system for making everyday low value services, and to promote competition and drive innovation in ‘overlay’ payment services.

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