COMMONWEALTH BANK OF AUSTRALIA - SUBMISSION TO THE AUSTRALIAN PAYMENTS CLEARING ASSOCIATION LOW VALUE PAYMENTS INDUSTRY DIRECTION - CHALLENGES IN ...
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SUBMISSION TO
THE AUSTRALIAN PAYMENTS CLEARING ASSOCIATION
LOW VALUE PAYMENTS INDUSTRY DIRECTION
– CHALLENGES IN INNOVATION
COMMONWEALTH BANK OF AUSTRALIA
29 JULY 2008INTRODUCTION
Commonwealth Bank of Australia is pleased to make this submission to the Australian Payments
Clearing Association (APCA) for its Low Value Payments Industry Direction project. The discussion
paper “Low Value Payments – Challenges in Innovation” published by APCA makes an important
contribution to the consideration of future developments in low value payments systems.
All information technology infrastructures have limited lives, and participants in payment systems
routinely make significant investments in new and replacement technology. We are aware that
several members of APCA’s payment systems are currently undertaking significant technology
redevelopment projects. The development of an industry road-map is important to ensure that those
ongoing investment decisions are consistent with a planned and coherent direction. To this end, we
encourage APCA not only to develop the proposed road-map now, but also to ensure that it
continues to update the road-map into the future to ensure the road-map’s ongoing relevance. The
scope of the road-map should include a vision of the future state, as far into the future as it is
possible to see, with an outline of the more immediate changes required to achieve that vision.
Provided that concrete and significant improvements are planned within a much shorter time-frame, a
time frame of up to 10 years may be appropriate for the “big-picture vision”.
To date, payment systems in Australia have largely grown up with payment system members building
(or buying) a separate technology system to support each payment clearing system. Many of those
systems are being replaced or will require replacement in the foreseeable future. Investing in new
information technology systems presents an opportunity to develop new capability to meet our
customers’ needs, rather than simply replicating existing capability. The business case for
implementing new capability may come from cost savings, new revenue, or a combination of both.
The needs of our customers must be paramount in considering all developments in payment
systems. While APCA has endeavoured to obtain input into the current process from selected
customers of payment services, necessarily not all customers are able to have input into the current
debate. For that reason, where appropriate, we have included comments to reflect needs and
preferences previously expressed by our customers in order that those needs and preferences may
be considered as part of APCA’s process to develop a road-map.
USAGE AND TRENDS
Questions for Payment Services Customers
3-1 How do you anticipate your usage of cheques in (say) 5 years time will compare to your usage
today? What factors would influence this?
An ongoing steady decline of cheque volumes is apparent from data presented in the discussion
paper, but the volume of cheques remains significant. At least some of that remaining volume seems
to be attributable to a lack of electronic services which effectively meet the needs of customers. If so,
then providing a broader range of services to meet those needs would be expected to further reduce
the volume of cheques.
The future customer demand for cheques will be largely determined by the availability and pricing of
more effective substitute services, the efficiency of processing arrangements for cheques at relatively
low volumes, and related to that, the cost of cheques to customers.
Given a relatively high fixed cost for existing infrastructure to support processing of cheques, the
average processing cost per cheque is likely to increase as the volume declines. Increasing cost
would be expected to reduce demand, so an orderly migration away from cheques may be
appropriate, perhaps resulting in withdrawal of cheques from the Australian market. Alternatively,
developments considered in the current review could provide a more efficient means of processing
cheques at relatively low volumes without payment system members exchanging the actual paper,
1with potential to viably support low volumes of cheques as an ongoing payment method at a cost
acceptable to customers. In completing the road-map, APCA should assess each of these two
possible outcomes, and include in the road-map the steps required to achieve the preferred outcome.
3-2 What is your view of the merits and shortcomings of direct credit as it is today in meeting your
payments needs? Similarly for direct debit and BPAY if you are a user of these services, what merits
and shortcomings do you see?
Direct Credit, Direct Debit and BPAY all reliable and useful transactions, which effectively meet the
needs for which they were initially developed. However, it is clear that there are other needs for
which they are not so effective, which may be able to be addressed through future developments
proposed in the discussion paper.
Direct Credit is useful for many purposes where payment needs to be initiated by the payer.
Strengths of Direct Credit include:
Ubiquitous use of the Direct Entry file format by Australian businesses,
Widespread availability of services for business and consumer customers to initiate Direct
Credit payments, whether by importing bulk files or manually keying individual transactions
into internet banking channels; and
Low cost per transaction.
Direct Debit is suitable for purposes where the payment can be initiated by a trusted payee to collect
funds from the payer. It is effective for many purposes with low to moderate payment values, and
low risk profiles. Strengths of Direct Debit include:
Public confidence in the ability of trusted third parties (Direct Debit Users); and
Low cost per transaction.
The key shortcoming of the existing Direct Credit and Direct Debit products is their lack of detailed
remittance information. Another shortcoming is that those payments currently use formats which are
very different from formats used for international payments, and from formats used domestically in
other countries. Developments to address those shortcomings, without excessive cost, would be
ideal.
While considering proposals for enhanced payments capability, especially for Direct Credit and Direct
Debit, it is important to ensure that they maintain their existing strengths for the bulk of transactions
already processed through those systems.
BPAY is suitable for bill payment transactions, and usage has grown over time to encompass a range
of transactions other than bill payments. BPAY provides the payee (biller) with a validated Customer
Reference Number for each payment, resulting in easy reconciliation for the biller, but limited other
data regarding the payment. There is potential to enhance BPAY with a range of new services,
including ability to make payments to a larger number of payees (billers), and expand the
functionality of BPAY View.
3-3 What facilities associated with these electronic payment types would make them more attractive
for you?
We have seen demand from our customers for the following additional features for Direct Credit:
More detailed transaction reference information with each payment;
Faster availability of funds to the recipient;
Processing of payments on weekends and public holidays; and
Ability of payers to verify the correctness of account details prior to payment.
Direct Debit Users have expressed interest in the following enhancements:
More timely confirmation of successful payment;
2Greater control over the timing of payment throughout the day – for example, some Direct
Debit Users have shown interest in being able to debit funds at the beginning of the payment
day;
Ability of Direct Debit Users to verify the correctness of account details prior to debiting; and
Ability for Direct Debit Users to obtain positive confirmation of the validity of their authority to
debit an account, prior to debiting, especially where the authority is the basis for relatively
high value transactions, or transactions with a higher than usual risk profile.
A number of enhancements could provide benefits for account customers. For example:
For Direct Debit, greater visibility of the authorised Direct Debit authorities on their account;
and
For Direct Debit and Direct Credit, payments clearing arrangements should support efficient
means to facilitate account switching on behalf of customers. Payments sent to closing
accounts could perhaps be automatically returned to the sender with details of the customer’s
new account to allow the payer to promptly update their records and redirect the payment.
Some BPAY billers have expressed interest in additional capabilities, including real time notification
of payment. Small businesses have expressed interest in easier availability of BPAY to collect their
payments.
Widespread availability of customer channels to support electronic payments has been an important
development in recent years. Any new payments capability developed in future needs to be
supported by appropriate services provided by financial institutions for their customers to take
advantage of those capabilities. Those services should make use of whatever appropriate
technologies are available and widely used at the time.
When assessing demand for additional services, care should always be taken to assess the likely
cost of those additional services, and the impact of cost on demand.
Questions for All
3-4 What is your view as to why cheques are used in preference to electronic alternatives? Do you
anticipate these factors changing over time?
Our customers choose to pay by cheque for a number of reasons, some (but not all) of which would
change over time as alternative payment methods are developed. Examples include:
Cheques remain a low cost payment method for customers, despite falling volumes over the
past decade and a relatively high cost to process cheques;
Direct Credit allows only minimal information to be sent with each payment. Where paper
documents already need to be delivered, attaching a cheque is relatively easy and
inexpensive. This factor would diminish if additional information (or electronic documents)
could be delivered electronically with the payment;
Cheques are easy to use and can be readily delivered to a recipient face-to-face, or mailed to
any known address, without needing to know the payee’s account number. This is related to
the relative incidence of payees showing their BSB and Account number (or an alternative
payment identifier) with each invoice or other payment request - if more payees routinely
showed their BSB and Account number or alternatives on invoices, then more payers would
be able to make an electronic payment rather than mail a cheque. Customer feedback
indicates that a key barrier to quoting BSB and Account Numbers on invoices is the ability to
reconcile electronic payments received – therefore usage of electronic payments would be
expected to increase if more (and better) information were provided with each payment.
Delivery of a cheque to a payee does not rely on access to electricity or any form of electronic
network. The evolution of easily accessible electronic devices such as mobile phones, and
the evolution of more easily accessible networks such as wireless internet capability, may
facilitate a range of electronic payment services which overcome the reliance on existing
physical networks, and therefore may provide convenient alternatives to cheques. However,
3some demand for cheques may remain, even if only as a “fallback” payment mechanism in
the event of a network failure; and
Some customers are comforted by the ability to stop payment on cheques in some
circumstances.
3-5 What additional aspects of the current situation would you wish to see considered in support of
any case for change?
Current cheque processing arrangements require physical cheques to be delivered to processing
centres in capital cities, presenting challenges in providing a high level of service to customers in
remote locations. When considering the case to develop new electronic payments capability, it is
appropriate to take into account the need for financial institutions to provide services to customers in
remote locations. While this is primarily an issue for financial institutions, it is also important for
customers where clearance times are affected, or where services are unavailable in some remote
locations.
There may be opportunities for financial institutions to electronically present cheque images without
also presenting physical paper, especially for small numbers of cheques deposited in remote
locations. Similar capability may also support “special answer” processing from all locations, and
may provide a low cost means to processing cheques as the volume of cheques continues to decline.
3-6 What additional commentary would you like to provide?
“Payments” rely on the transfer of both value and information. While the Bulk Electronic Clearing
System (BECS) is very effective at transferring value for low cost, much of the information related to
a BECS payment is often delivered through some extraneous method such as a mailed, faxed or e-
mail payment advice. The cost of delivering payments data is therefore not currently seen by
payments system members. When assessing the case to replace BECS with a new clearing system,
consideration should be given to the high cost of those extraneous methods of delivery payments
data, and the related cost to customers of reconciling the value transfers with the relevant data.
Conversely, many customers will expect new payment services to be available at a cost equal to or
less than the cost of current services, so developments which increased the cost of payments to
customers may be unlikely to succeed. For this reason, the potential to achieve cost savings within
financial institutions should be a key priority of any business case assessment.
NETWORK ARRANGEMENTS
Questions for Payment Services Providers
4-A1 What factors do you consider most important to the selection of a network architecture for inter-
FI payments traffic?
Networks used for payments need to be:
Capable of facilitating the underlying transaction requirements of our customers;
Capable of handling all volumes of payments and related messages required by our
customers;
Capable of delivering messages in the speed required for each payment system, including
(for some payment systems) supporting near real-time delivery of payments from sender to
recipient;
Robust;
Resilient, or capable of recovering promptly after stress;
Secure from fraud and breaches of privacy requirements;
Technically efficient;
Easy to use, maintain and modify; and
Cost effective.
44-A2 What additional high level requirements would be important to assess between alternatives?
In addition to the requirements stated in response to 4-A1 above, the ability of a prospective network
to support foreseeable future requirements should also be considered.
Networks currently used by APCS, BECS and CECS need replacement in the short-medium term. In
considering replacement networks, consideration should be given to the appropriateness of proposed
new networks to support exchange of future message types such as ISO20022 messages.
4-A3 Apart from transition, what other implications would there be if a change was made from
bilateral network arrangements to COIN or VPN arrangements?
A “Community Of Interest Network” (COIN) or Virtual Private Network (VPN) to replace existing
bilateral physical connections has potential to substantially reduce the cost of connection for payment
system members, whether existing members or prospective new payment system members.
Governance arrangements are an important component of any proposed network. Governance
arrangements should be the minimum necessary to provide for efficient functioning, safety and
stability, and transparency of decision making, without creating unnecessary bureaucracy.
Legal membership arrangements for BECS have been revised in recent years to permit new
members to join by completing a single application to APCA, rather than requiring bilateral
negotiation with each other Tier 1 member. Once a prospective member of a payment system has
met the membership criteria, participation in a network should be automatically permitted without
requiring negotiation with or consent from existing members, but subject always to the prospective
member being able to comply with the ongoing technical and operational requirements for
membership of the payment system or network.
4-A4 What do you consider to be the relative merits of a hub based service (the ACH model) vs a
VPN type model?
With the range of network solutions and information technologies currently available, new payments
capability can be delivered effectively through either centralised or decentralised models. Both
models exist in the Australian market today – APCS and BECS are decentralised, while BPAY uses a
centralised model. The decision whether new payments capability should be developed using a
centralised or decentralised model will depend on the costs and relative benefits of the alternative
solutions.
To ensure the ongoing efficiency of payment systems, providers of hub services must remain
competitive, and the existence of a hub need not create a monopoly for the hub provider.
Competitive tension can be achieved by payment system members exercising a choice in switching
arrangements, between alternative hub providers, or between a hub provider and bilateral
arrangements. Indeed, even in those systems where bilateral exchange arrangements currently
exist, potential exists for a hub provider to offer services to members on competitive terms. Choice of
switch is important for maintaining the efficiency of payments systems, and is in line with recent
comments from the Reserve Bank of Australia1.
For APCS and BECS, renewal of network arrangements in the near future need not require
wholesale changes to information systems, and migration to a hub would be unnecessarily disruptive.
For that reason, we do not see a case for development of a hub for APCS and BECS.
If new clearing arrangements are adopted in future to supersede BECS and APCS, then the choice
of network arrangement to support that proposed system should be assessed at the time based on
the relative costs and benefits of the alternative solutions. Regardless of the choice at that time
1
Insert references to the 2007-08 Review discussion paper and preliminary conclusions.
5between a hub and a decentralised/VPN model, standardisation should be pursued wherever
possible to achieve efficiency and consistency of customer experience.
4-A5 What further suggestions or variations would you add for this component?
A number of solutions exist to replace existing network arrangements. APCA through its members
should thoroughly assess all available solutions to determine the most appropriate solution for each
clearing system.
SETTLEMENT PROCESSES
Questions for Payment Services Customers
4-B1 What proportion of your inwards payments would benefit from faster access to the funds
received? Similarly, what proportion of your outwards payments would benefit from being recognised
faster by the payee? Why? What specific timing issues or problems affect you?
Based on feedback received from our customers over time, there is very significant demand both for
faster access to funds for the payee, and for faster notification that a payment has been made (even
in the absence of access to those funds). However, we are unable to quantify the proportion of
payments for which such demand exists.
Questions for Payment Services Providers
4-B2 Do you believe intra-day settlement would reduce your concerns over settlement risk
satisfactorily?
Given the relatively large payment values processed through BECS would seem to be a “systemically
important” payment system, so intra-day settlement should be a priority in accordance with the BIS
Principles for Systemically Important Payment Systems. While settlement exposures are often
moderate, the need for intra-day settlement is driven by increasing exposures on peak days.
Moving to intra-day settlement of BECS would allow for settlement prior to posting, which would
effectively eliminate most settlement risk for BECS members. Some residual risk may remain for
exception items. Funds can be safely made available to the recipient after settlement has occurred.
Systems which provide real time value to customers (such as ATM and EFTPOS) will always require
settlement to occur after value is given to the customer. In such systems, settlement risk will never
be entirely eliminated. However, the value at risk for those systems is very small in comparison to
the value at risk for other systems such as BECS.
Where future payment systems are developed with capability for real time posting of payments to the
recipient, “settlement after posting” may remain appropriate for genuinely low-value payments
provided that settlement still occurs frequently intra-day. Larger value payments should always be
settled prior to posting of value to customers, to avoid excessive settlement risk.
While intra-day settlement would reduce or remove the existing overnight settlement risk, there are
significant issues yet to be resolved, especially issues related to liquidity management. In particular,
care must be taken to ensure that significant volumes and values of payments are not withheld until
late each business day. Those issues need to be thoroughly investigated and resolved in the
process of developing a detailed proposal for intra-day settlement of BECS. Similarly, consideration
should be given to the fraud and other operational risk issues arising from any detailed proposal.
64-B3 What respective merits do you see in being able to support real time file by file settlement
versus adoption of (less frequent) intra-day settlement windows? What other dependencies do these
alternatives introduce?
BECS Settlement:
Our preference is for BECS file exchanges to be completed as soon as possible to reduce
operational risk, with multilateral batch settlement before the end of the day. At a minimum, we
would like to see two batch settlements per day, as follows:
Once at the commencement of each business day, for value same day, to permit prompt
posting of all items received overnight; and
Once at the end of each business day, also for value same day , to achieve settlement prior
to posting of those payments (posting overnight at the latest).
Earlier investigations of intra-day settlement for BECS have identified significant intra-day imbalances
in the timing of exchange file delivery between payment system members. Once those imbalances
have been removed, then additional multilateral batch settlements may be added through the day.
Settlement on a “file by file” basis has some drawbacks, notably that the files cannot be physically
exchanged between members until sufficient liquidity is available to cover the specific file.
Processing of potentially large payment files could be substantially delayed by a lack of liquidity by a
single member. Further, file-by-file settlement does not permit multilateral netting of obligations.
However, there may be some case to use file-by-file settlement on an exception basis.
Existing “Failure to Settle” provisions for BECS and other clearing systems are based on the
availability of multilateral netting to minimise exposures of individual payment system members.
Selective use of preferential settlement arrangements by a few members would undermine those
Failure to Settle rules. For this reason, we would prefer to see same day settlement of BECS
introduced consistently across the industry, and in a coordinated manner.
Settlement of future clearing systems:
If or when new clearing arrangements are introduced for new payment formats, possibly using
messages within the ISO20022 framework, then settlement arrangements for that system should
permit intra-day settlement from commencement. As set out in section 4D below, we support APCA
proceeding to develop a detailed proposal for introduction of new clearing arrangements for new
payment formats.
Given the potential for convergence between payment systems, it may be possible to have the
clearing system process payments with different settlement arrangements depending on the
attributes of the payment. For example, genuinely low value payments could be exchanged in real
time with a very frequent periodic multilateral batch settlement, while high value payments through
the same system could be queued for real time gross settlement prior to delivery to the sender.
Questions for All
4-B4 What further suggestions or variations would you add for this component?
Revised arrangements for BECS settlement should be structured to permit same day settlement of
customer payments submitted to financial institutions at least as late as 7.00 pm Sydney time
throughout the year, regardless of daylight saving. The end of the RITS day needs to be consistent
with that requirement.
7TRANSACTION REFERENCE INFORMATION
Questions for Payment Services Customers
4-C1 To what extent would extended transaction information improve operational efficiency for your
business? Is STP (straight through processing) on your agenda?
Some customers have indicated interest in measures to improve straight-through processing of
electronic payments, and we expect that the potential benefits would be significant. However, we are
unable to quantify the extent to which extended transaction information would improve operational
efficiency for businesses. The extent of this and other benefits should be assessed while developing
a business case for proposed enhancements.
4-C2 Would initiatives such as these encourage greater use of electronic payments in lieu of
cheques?
As per comments in response to question 3.3 (above), the availability of extended transaction
reference information would encourage greater use of electronic payments in lieu of cheques. This is
especially the case if that transaction reference information were structured according to some
standard format, rather than “free format”.
Questions for Payment Services Providers
4-C3 What is your view of the potential offered by ISO20022 as a payments framework both for inter-
FI and FI-customer services? What alternatives should be considered?
ISO20022 is a framework within which standards have been (or can be) developed for a range of
specific transaction types. ISO20022 messages as “extensible”, allowing the payer to expand the
payment message to carry a variable amount of data depending on the needs of the payer and/or
recipient. The flexibility inherent in the ISO20022 payment messages can be valuable to both
financial institutions and our customers.
We believe the Australian market must move towards international standardisation within the
ISO20022 framework, both for inter-FI payments traffic, and for services we provide to our
customers. Work toward achieving that outcome should start without delay.
4-C4 Do you perceive benefit in introducing an interim capability on existing BECS messages before
adoption of (eg) ISO20022? Is this realistic for you?
Introducing any new payment format for BECS will require substantial investment for all payment
system members, and many customers. An interim measure such as adding limited additional fields
to the existing BECS format does not appear to be desirable or realistic, so we do not support an
interim solution.
Questions for All
4-C5 What are your views regarding the adoption of international standards vs the development of
local standards for payments and payments integration?
In the absence of compelling reasons for localisation, international standards are strongly preferred.
Local standards may be necessary or appropriate in order to comply with local legislative
requirements, or other similar peculiarities of the local market.
The ISO20022 framework provides flexibility for some data components to be localised, where
necessary to reflect industry practice and infrastructure. For example, an Australian standard may be
adopted for various payments within the ISO20022 format, which defines institution and/or branch
8identifiers and valid ranges for account numbers, without departing from the underlying message
structure.
If migration from legacy local standards to new international standards were forced in too short a
time, the cost of migration could be excessive. Any migration roadmap needs to be carefully planned
to minimise the cost and disruption of change. APCA must define a standard mapping between new
standard formats and legacy formats to provide “backwards compatibility”, so that the cost and
disruption to customers can be minimised.
4-C6 What other commentary would you provide on this component?
Many features of the existing payments landscape are determined by legacy standards. For
example, financial institution account numbers are currently restricted to no more than 9 characters
because of the existing BECS file format. Relevant standards should be reconsidered in advance of
future payment system developments, to ensure that an appropriate degree of flexibility is retained in
future. Similarly, the potential to use IBANs or retain BSB/Account Numbers should be reconsidered
prior to development of new payment systems, recognising that migration to IBANs could take some
time.
CLEARING PROCESSES
Questions for Payment Services Customers
4-D1 What advantages would real time or faster authorisation / notification processes provide you?
Some of our Direct Debit Users have stated a preference for real time authorisation of Direct Debit
transactions, or positive confirmation that funds are available for a payment. When a new real time
Direct Debit product is developed (as we believe it must), it would need to be able to be differentiated
from the existing Direct Debit product for the majority of customers who currently use that product
and expect that they have until the end of the due date to deposit funds to their account. Of course,
any proposal for new Direct Debit services would need to include risk mitigants appropriate to the
nature of the proposed services.
We have also had customers keen to receive prompt payment of Direct Credit transactions. Once
arrangements are implemented for real-time (or near real-time) clearing and prompt intra-day
settlement, payments should be posted promptly to customer accounts with all details visible to the
customer. Where payments are delayed pending settlement, there may still be value in providing
visibility to customers through some sort of real-time notification, however the key demands seems to
be for confirmation that payment has completed, and/or for prompt access to funds.
Questions for Payment Services Providers
4-D2 Are there other clearing related requirements you would suggest?
Future clearing arrangements could include the following features:
Real time clearing capability for all message types, whether initiated as single messages or
as a large batch file;
Ability to send payments with a “future date”, at least for payment on the next business day
once settlement has completed;
Ability to exchange messages 24 hours x 7 days a week;
Support for different settlement arrangements for payments delivered through a single
clearing system, with the mode of settlement (real time, deferred batch, etc) determined by
customer choice, payment value and other risk issues; and
Support for a range of “payment-related” non-value messages, such as requests to validate
account details, request to confirm a direct debit authority, and request for payment, using the
same clearing infrastructure as “for value” messages.
94-D3 What additional impacts would these concepts present?
Real time availability of payments to customers would require that receiving financial institutions have
the ability to promptly post transactions to customers’ accounts, preferably with the appropriate
information available to the customer from the time of posting.
Questions for All
4-D4 What further suggestions or variations would you add?
There is strong appeal in developing the capability to clear ISO20022 Direct Credit and Direct Debit
transactions. Development of the road-map should include a business-case assessment of the cost
and benefits of introducing those transaction types, and assessment of the possible time-frames for
that development to occur (preferably sooner rather than later). Developing this capability would
effectively create a new clearing system, but with potential for legacy payments clearing systems
such as BECS and APCS (and possibly the High Value Clearing System, HVCS) to be subsumed
into the new clearing system over time. Once those transaction types have been adopted as the
foundation, a range of other message types within the ISO20022 framework can be added over time.
For international transactions, SWIFT undertakes regular updates to its message formats, and
requires its members to implement those changes as they are introduced. A similar approach to
routinely scheduled enhancement of a domestic payments system would be positive for ongoing
innovation, and should be considered as part of the business case assessment for adoption of new
clearing arrangements. Alignment of domestic and international payments capability is a worthy
objective, given the increasing globalisation and standardisation of business activity, provided that
proposed developments are subject to business case assessment.
To illustrate the potential for new clearing arrangements to permit retirement of many legacy
systems, diagrams included in an appendix to this paper show at a conceptual level how payment
system members could configure a single payments engine to support several payments clearing
systems.
While payments clearing arrangements must be robust and reliable, it is unavoidable that operational
issues will occur from time to time. Any new clearing arrangements must made adequate provision
for handling operational issues such as delayed payments, to ensure that the customer experience
remains as consistent as possible despite operational incidents. This requirement extends equally to
processing of initial payments and to handling of subsequent exception items such as dishonours
and fees.
TRANSACTION FACILITATION SERVICES
Questions for Payment Services Customers
4-E1 To what extent is electronic support for invoicing on your business horizon?
Many of our customers have expressed interest in electronic invoicing as a means to improve the
efficiency of their operations. We recognise potential to establish a national approach to electronic
invoicing, consistent with emerging global standards, over the period of the road-map, and we
strongly support the road-map including the development and assessment of specific proposals.
4-E2 To what extent would a service such as described attract you to adjust your business processes
to take advantage of it? Would it influence take–up of electronic payments for commercial
transactions for you? Why?
Development of a more detailed proposal would be necessary before providing detailed responses
regarding adjustments to business processes. However, consistency of processes for payments and
10non-value payment-related messages may be achievable using the ISO20022 framework, with all
messages cleared over the same infrastructure.
Questions for Payment Services Providers
4-E3 How familiar are you with the Finvoice model or equivalents elsewhere? What additional
lessons do you believe we could derive from these?
No response.
Questions for All
4-E4 What is your view of wider services such as these being provided to customers through
payment services providers?
We believe payment service providers are well placed to provide additional services to our customers
to facilitate their transactional needs. However, we recognise the need for close cooperation with
others, especially with software vendors and other business service providers. Software vendors will
need advance notice of new payment formats in order to develop systems in time for the launch of
new services utilising those formats.
4-E5 What other segment based solutions could take advantage of a transaction facilitation service
coupled to payments? What would drive the case for action for these segments?
Without commenting on specific solutions, the extensible and flexible nature of the ISO20022
framework appears to promise opportunities for specific market segments to adopt their own
standards within the ISO20022 framework. The key for payment service providers will be to maintain
standardisation of their own services, so that solutions adopted by specific customer segments do
not require incremental cost and complexity.
4-E6 What other comments would you like to make regarding this proposition or variations?
We also see potential for the following new services:
Verification of Account/Name details prior to payment (for Credit and Debit transactions); and
Verification of authority to debit, including verification of Account/Name details, prior to
debiting;
Availability of these services would help address concerns regarding mistaken payments, and reduce
fraud risk for Direct Debit users. For privacy reasons, such services could only “confirm” details
provided by the requestor, and not provide new information not already held by the requestor. We
understand that a range of appropriate messages have been contemplated with the ISO20022
framework which could support such services.
Verification of Account/Name details and verification of authority to debit are likely to be manual
processes for Ledger Financial Institutions. Appropriate commercial arrangements would be
required.
CUSTOMER INTERFACES
Questions for Payment Services Customers
4-F1 What are your views on the importance of the “standardised” integration of payments with
customer software?
Standardisation is very important to achieving a consistent customer experience, reduce costs, and
achieve high take-up by customers. One of the key features of BECS is the widespread availability
of systems capable of producing a standard BECS file containing Direct Credit or Direct Debit
transactions. In contrast, the lack of capability for businesses to produce data files containing
11MT103+ messages has contributed to the reluctance of businesses to use the High Value Clearing
System where appropriate (although price, and access to customer payment channels, are
undoubtedly also relevant factors).
For a new payment format to be effectively adopted by clients, a number of things need to happen,
as follows. Payers need to be able to:
create payment files in the correct formats out of their business IT systems – regardless
whether the payer is a large corporation or payroll bureau with specialised ERP systems, or a
small business with “off the shelf” business software;
import a payment file into their electronic banking service, such as a business internet
banking service; and
manually key in single payments through their electronic banking service.
Recipients of payments need to be able to:
view single payment details, on electronic banking services and/or statements (for payments
with large amounts of data included, account statements may contain only selected data); and
export payment details to an electronic file for uploading to their business IT systems.
If a new payment format is to be adopted, the industry will need to work with software vendors to
ensure that business software systems are able to support the new formats. Adopting international
standards should reduce the effort required for global vendors.
4-F2 What proportion of your payments would you see being enacted in real time as opposed to
being batched for bulk submission?
Without commenting on proportions of payments in various categories, our customers have a range
of needs including the following:
ability to process payments immediately, or defer processing to some later time such as
overnight. Some large payment files are available a day or more in advance of the required
payment date, while other files are produced “just in time” for processing before the end-of-
day cut-off; and
ability to make payments by uploading a batch file from their systems, or manually keying
payments into an electronic banking channel. If real time processing of payments were
available, we would also expect some clients to demand real time initiated of payments
directly from their IT systems to the payment system through their financial institution.
Questions for All
4-F3 What other commentary would you provide regarding this component?
Standardisation is an important driver of costs. Customer interfaces are an important area of
competition between financial institutions, and competition is an important driver of innovation.
Standardisation should be pursued wherever it is appropriate to deliver a consistent customer
experience, and to reduce development costs for software vendors and customers without
diminishing competition between financial institutions.
DIRECTION AND PRIORITIES
Questions for All
5-1 What is your view of the respective priority of initiatives?
The focus of the road-map needs to be on delivering what our customers need and want, in a safe
and efficient manner, and having regard to all relevant costs and risks. The road-map will only be of
value to the industry if it is customer-focussed.
12The high priority given in APCA’s discussion paper to managing settlement risk and reviewing
network arrangements is appropriate. We support APCA promptly pursuing same-day settlement for
BECS and modern network arrangements, both of which will improve the reliability and efficiency of
existing payments capability. Same day settlement of BECS is likely to lead to faster payment
processing for customers. Neither of those initiatives need wait for other developments.
Further work is required to develop a detailed proposal for adoption of new payment formats within
the ISO20022 framework. We support APCA promptly continuing work on these proposals, in
parallel with the other initiative identified above. The next phase of this work should be to produce a
detailed road-map for future developments, focussing on the ability to provide new services to
customers, opportunities for convergence between payment systems, and opportunities for cost
savings. Following development of the road-map, the following phase should be to develop a
business case to demonstrate the viability of the proposed developments.
To date, the Australian market has participated in the development of message standards within the
ISO20022 framework through the SWIFT National Member Group (SWIFT NMG). While the SWIFT
NMG is the appropriate body to lead that work, APCA should take a closer interest in, and participate
in, that work as it relates to Australian domestic payments.
International standardisation is important. APCA should work with external payments organisations
to ensure that APCA’s roadmap is consistent with ongoing convergence of international standards.
While recent and ongoing developments in Europe and North America are important, APCA should
encourage close collaboration with our neighbours in New Zealand and Asia to ensure that future
developments are consistent with global standardisation.
5-2 What is your view of the “case for action”? Where would you look for benefits?
To date, payment systems in Australia have largely grown up with payment system members building
(or buying) a separate technology system to support each payment clearing system. Many of those
systems are being replaced or will require replacement in the foreseeable future. Investing in new
information technology systems presents an opportunity to develop new capability to meet our
customers’ needs, rather than simply replicating existing capability. The business case for
implementing new capability may come from cost savings, new revenue, or a combination of both.
Cost savings for payment system members may be achievable by removing the need to support
multiple IT systems for each payment format, provided that IT systems implemented to handle
ISO20022 format payment messages can also support legacy payment formats. Electronic
exchange of cheques may also present opportunities to remove operational costs associated with
delivering physical cheques to processing centres.
Standardisation offers substantial benefits for financial institutions as well as for our customers.
APCA must progress with the development of detailed proposals for new clearing arrangements
without delay.
5-3 What is your view of the “emergence of convergence” in electronic payments?
Fragmented and highly localised payment systems come with a high cost. The emergence of new
standards under the ISO20022 framework has potential to achieve substantial convergence, with the
possibility of cost savings as a result. Convergence may occur across several dimensions, including
across jurisdictions, and across functions within a jurisdiction.
Adoption of ISO20022 messages for domestic use within Europe recently, proposals for adoption of
similar messages in many other countries or regions, and likely adoption of similar messages by
SWIFT for cross-border transactions indicate potential for the ISO20022 framework to emerge as a
truly global standard in practice not just in theory. Adoption of global standards will thus allow
13Australian financial institutions and customers to use a single range of message formats to all
domestic and international transactions.
Provided that the range of message formats is sufficiently flexible, as appears to be the case with the
ISO20022 framework, and provided that the network infrastructure is sufficiently fast and robust, the
information technology systems deployed within a financial institution to process those messages
should be able to effectively handle many different services for customers. For example, a single
payment system may be able to handle a range of transactions such as Direct Credit transfers, ATM
and EFTPOS withdrawals, and cheque transactions including “special answer” requests. Credit
transfers could be processed using the same system regardless of value, with only the settlement
arrangements changing for high value payments (for which real time gross settlement is appropriate).
Convergence of this type has potential to reduce multiplication of payment systems. As a step
towards achieving international convergence, convergence of payments standards between Australia
and New Zealand in line with emerging international standards is a priority given the existing close
relationship between our economies and banking systems.
5-4 What is your view of the future of the cheque as a payment type?
Decisions regarding future direction for the industry must be firmly based on the needs of our
customers. Despite significant decline in cheque usage over the last decade, a significant number of
our customers continue to use cheques, and report enjoying the convenience of cheques. A decision
to remove cheques from the Australian market would be premature while cheques provide
convenience not yet available through electronic alternatives.
Where there is viable demand for enhanced electronic services to replace cheques, appropriate
services should be developed. For the remaining demand for paper cheques, new arrangements for
electronic delivery of cheques inside an ISO20022 message may allow for cost savings to be
achieved, possible in remote locations only, or perhaps across the industry.
The road-map should consider two possible outcomes for the future of cheques, being either to
achieve a managed withdrawal of cheques from the Australian market, or to develop new clearing
arrangements which can efficiently support cheques as an ongoing payment method at relatively low
volumes.
5-5 What final comments would you like to make on the future of Low Value Payments in Australia?
We commend APCA for its current work to develop a roadmap for the future development of Low
Value Payments in Australia, and look forward to ongoing participation in that work.
Prepared by:
Paul Franklin
Executive Manager, Industry Developments & Regulation
Payments & Business Technology
Premium Business Services
Commonwealth Bank of Australia
14Appendix: Conceptual diagrams to indicate potential for payment system members to replace many
information systems with a single payments engine.
Figure 1: Current state.
ILLUSTRATIVE ONLY
Payer’s Financial Institution Payee’s Financial Institution
Bill Payment BPAY Central Bill Payment
BPAY Application Interchange BPAY Application
(BPAY Format) Processor (BPAY Format)
Cheques presented in clearing file (EP/ED Format)
Cheque Clearing Cheque Clearing
Application Application
Cheques presented for Special Answer
Account Ledger Direct Credit (BECS Format) Account Ledger
Systems and Direct Entry Direct Entry Systems and
Customer Application Application Customer
Channels Direct Debit (BECS Format) Channels
ATM Withdrawals (AS 2805 Format)
ATM EFTPOS ATM EFTPOS
Switch Switch
EFTPOS Purchases (AS 2805 Format)
AUD High Value AUD High Value
SWIFT Payment SWIFT Payment
(SWIFT MT 103+) SWIFT (SWIFT MT 103+)
Engine Engine
FX / International FX / International
International Payment
Each payment system has separate
message formats and separate payments
engines. Many payments engines are Reserve Bank of
legacy systems which require replacement in Foreign Banks
Australia
the medium term.
15Figure 2: Potential future state.
ILLUSTRATIVE ONLY
Payer’s Financial Institution Payee’s Financial Institution
BPAY HUB
BPAY Payment BPAY Payment
Cheque Record (Image embedded)
Enhanced Direct Credit with detailed data
Account Ledger ISO 20022 Enhanced Direct Debit with detailed data ISO 20022 Account Ledger
Systems and Payments Engine Payments Engine Systems and
Account Validation Request and Answer (new)
Customer for all (or selected) for all (or selected) Customer
Channels payment systems payment systems Channels
ATM Withdrawal
EFTPOS Withdrawal
EFTPOS Credit Transaction (new)
AUD High Value AUD High Value
SWIFT
FX / International FX / International
AUD Settlement AUD Settlement
summaries for summaries for
other payment other payment
systems systems
All payments in formats are within the International Payments
ISO20022 Framework /
SWIFT MX Message series
Reserve Bank of
Foreign Banks
Australia
One payments engine able to handle all
outward and inward payments.
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