Reserve Bank mulls central payment hub

The Reserve Bank of Australia (RBA) has proposed to create a central payments hub by the end of 2014 in a bid to speed up availability of real-time payments between local banks.

The proposal followed a two-year investigation into potential areas for sector-wide innovation within the payments system.

In a final report (pdf) released this month, the RBA identified gaps in payment innovation and set deadlines for banks to establish specific functionality over the next four years.

It suggested banks should be able to achieve same-day settlement of bulk and direct payments by the end of next year.

Real-time retail payments, the ability to finalise low-value payments outside banking hours and the ability to send more complete remittance information were expected to be in place by 2016.

By the end of 2017, the RBA hoped banks would be able to "address payments in a simple manner", effectively ditching the ageing BSB/account number system for a single identifying number for those receiving payments.

Although all its proposals in the RBA's report were expected to significantly improve innovation in Australia's banking sector, it focused particularly on real-time banking -- a key promise to many of the core banking system overhauls currently being undertaken by most banks.

The Commonwealth Bank in April boasted that it had delivered real-time banking and seven-day clearances to 11 million customers under a $1.1 billion core banking modernisation project.

However, full ability to use the functionality would require the same feature to be available at all Australian banks an individual customer dealt with for payments and clearances.

Centralised architecture

The RBA suggested creating a central payments hub to replace the current "web of bilateral links".

The hub would theoretically centralise credit transfers at first but move onto debit and other payment types in future.

It could also form the basis for a centralised architecture for all other aspects of innovation outlined in the payment, spurring on adoption of simplified bank payment systems and other forms of payment settlement.

"The [Reserve Bank] Board believes that there should be a general presumption in favour of establishing more centralised systems when the opportunity arises, particularly in the establishment of new systems," the paper noted.

"The Board considers that the possibility of advances is most apparent in two areas – the [direct entry] system and real-time payments."

The central bank said it would consult more widely on the concept before moving ahead with construction of the hub by the end of next year.

The ability to process high speed and high payments through the hub would be available by the 2014 before becoming fully operational two years after.

All payments under a centralised hub would likely be routed through the Reserve Bank Information and Transfer System (RITS), the central bank's core settlement infrastructure.

To date, the system has primarily been restricted to settling high-value transactions, totalling $176 billion and settling more than 60,000 daily transactions during the 2010/2011 financial year.

A low-value components of the RITS system was made available in 2010 but had been restricted to a small sub-set of institutions to date.

The bank suggested a central hub would be provide a more efficient way of transferring and settling payments between banks that would also "remove the need for participants to provide credit in order to provide funds in real-time to end users".

Though central and largely separate from commercial banks, the RBA suggested the hub or hubs could be run commercially and potentially compete with one another. However, "the Board's presumption is that a single hub would be most efficient".

Industry response

The notion of a central hub was largely accepted by the major banks as a more efficient means of settling external payments, with many pointing to a similar albeit physical interpretation of the hub model - the Community of Interest Network, which allows banks to interconnect through one physical network link - as a foundation on which to build the hub network.

"We consider the adoption of appropriate and flexible global standards to be vital in payment system design. This is more important than the adoption of a conventional hub," the Commonwealth Bank noted in its submission (pdf) to the Reserve Bank's inquiry last year.

"So long as the behaviour and operations of all system participants are uniform and mandated to comply with agreed standards, system access and development is simplified."

It noted, however, that the commercial business case behind moving away from the current bilateral links model "may be difficult to justify".

The hub concept was also slammed as inefficient and costly by external payment clearance outfits Australian Settlements and the Australian Payments Clearing Association. The latter company (pdf) suggested the decision either way "should be driven by market dynamics, not by public policy".