Australia’s banks and payment services providers have copped the strongest warning yet from the Reserve Bank of Australia that regulatory tolerance for outages on payments systems has reached its limit.
In a speech delivered in Shanghai overnight, the RBA’s Assistant Governor for Financial Systems, Michelle Bullock, signalled that Australia’s financial regulators are prepared to get their hands dirty to ensure banks and payments schemes are sufficiently reliable to mitigate economic risk.
“These sorts of outages disrupt commerce and erode trust of consumers in payment systems,” Bullock told the Bund Summit on Fintech.
“Regulators are therefore starting to focus on the operational risks associated with retail payment systems and whether the operators and the participants are meeting appropriately high standards of resilience.”
The unambiguous comments from the RBA highlight the regulatory challenge of electronic network dependency and uptime when the broader economy moves to a largely cashless footing.
At the core of the issue is what degree of responsibility and potential liability banks and payments providers might be required to wear for outages as cash is deliberately forced out of the transactional mix.
New economy, old excuses
Bullock’s comments over the erosion of consumer trust are significant because they open the door to new ways regulators could prompt banks and providers to address the overall cost and impact of payments outages.
While merchants would likely prefer that banks cop the cost of their lost business, a more practical option that could be be put on the negotiating table is some sort of structured and verifiable compensation scheme that would act as an incentive to up-spend on resilience.
Banks already use a routing mechanism known as “stand-in” where payments can continue by routing payments via rails run by card schemes like Mastercard and Visa to get around breakdowns on the bilateral network.
A significant change to Australia’s payments is also occurring under the New Payments Platform (NPP), the transactional hub instigated by the RBA to break the lack of innovation in Australia’s payments system that resulted from a lack of renewal by the big four banks and multinational card schemes.
The NPP also came in for conspicuous mention in Bullock’s Shanghai speech, namely in the context that the banking sector can’t always be relied upon to put other interests before their own.
“[The NPP] wasn't a spontaneous creation of the industry. It was developed in response to a number of strategic objectives for the Australian payments system set by the Reserve Bank,” Bullock said.
Bullock also offered a candid assessment of who the RBA sees as reshaping the global and domestic payments landscape.
Aside from the usual challengers to incumbent banks and card schemes like pure digital banking plays dubbed “neobanks” and the fintech sector, financial services from global platforms are also counted in the mix.
Put simply that’s the likes of Facebook, Apple, Google but it also includes far more tightly integrated non-western plays keen to create major markets outside payments systems dominated by US and European interests.
Bullock said that large global technology companies can now “leverage their already extensive networks to offer proprietary closed loop payment services”.
“In China there are two at the forefront of this – AliPay and WeChat Pay,” she said.
Platforms bypassing cards
The emergence of those two payment channels, in conjunction with China Union Pay (CUP), has largely meant that the Chinese domestic economy has leapfrogged the use of card schemes and gone direct to mobile payments even for the smallest of transactions like street food.
Noting the rise of ‘stored value’ payments products and services, and their entry into Australia, Bullock observed that regulatory policy settings around such entrants was still developing.
“This raises a number of policy questions. Should the funds being held be treated like deposits? If not, do the firms holding the funds need to be regulated in some other way to protect consumers?” Bullock said.
The RBA’s financial systems chief also called out the influence of big digital platforms on this phenomenon, noting the shift it could make to the payments landscape.
“If the new entrants are very large, like the big technology companies, they could potentially hold substantial amounts of value in their closed systems,” Bullock said.
“What are the implications for systemic risk of such a market structure? Regulators are still working through these questions.”