How Australia's late entry to faster payments paid off
Australia is the latest country to enable faster payments with the February launch of the New Payments Platform. It's 10 years behind the U.K.'s version, but benefits from a decade of experience and observation.
For one, NPP Australia is looking to find new use cases and talking to various industry verticals about how they can leverage the NPP’s rich data capabilities to solve their business problems. Hundreds of thousands of transactions a day are taking place over the NPP, and there have been over 4 million payments since launch worth over A$2 billion.
The NPP offers significant potential for innovation through its remittance data capability and layered architecture built to support multiple, competing services, says Adrian Lovney, NPP Australia’s CEO. “We’ve included support for ISO 20022 messaging, whereas the U.K.’s Faster Payments system is having to retrofit this capability,” he says.
In the Netherlands, Lovney says, 80% of online payments are made through the iDEAL bank account transfer service. This is a target for Australia's NPP, which enters a market dominated by credit and debit cards.
"Currently, in Australia 80% of online purchases are made by network-branded debit and credit cards," he notes. "There’s a cost differential between the NPP and cards so we think e-commerce could be an opportunity for us to grow.”
The first overlay service to be launched in February was Osko, a real-time P2P/B2B/C2B transfer service. Osko was developed by BPAY, the Australian bill payment system, and operates through its supporting banks’ digital banking services.
Osko has a lot of potential use cases, which may mean there is less need for companies to create new overlay services.
“For example, Osko could be used for e-commerce, for funding stored-value wallets like PayPal, for point-of-sale payments, or for sending or receiving international remittances,” Lovney says. “We’re having conversations with organizations which want receivables solutions about Osko’s ability to attach invoices and support Request to Pay.”
“Key areas of focus are electronic invoicing plus insurance companies and the Stock Exchange for data,” Lovney says. “There will also be new payment streams due to Osko’s social media nature, and we think online merchants could accept NPP transfers instead of card payments."
Although ISO 20022 offers limitless capacity for data fields, which will be useful for NPP overlay services, Osko only allows 280 characters in its data fields, including emojis.
“We envisage people using Osko via social media messaging,” says Lovney. “We’ll also allow documents such as invoices or receipts to be attached to Osko payments, along with a request-to-pay facility.”
The NPP offers real-time interbank transfers 24/7 using Pay IDs based on bank account-linked identifiers such as the recipient’s email address or mobile phone number. The platform was designed to enable new, innovative services to be overlaid on its core infrastructure.
The NPP was developed by NPP Australia, which is owned by its 13 founding members including the top four banks, under the auspices of the Australian payments clearing association Australian Payments Network and the Reserve Bank of Australia (RBA).
In February, Lukas May, head of banking at TransferWise wrote an article in The Australian claiming the NPP is a “members-only club” that set the entrance barriers too high for new entrants to protect incumbent banks.
May contrasted the NPP’s access regime with the U.K., where TransferWise just became the first nonbank to become a direct member of Britain’s Faster Payments system, clearing directly through the Bank of England’s Real-Time Gross Settlement System (RTGS).
Lovney counters that the NPP has a fair access regime balancing the need to safeguard financial stability while ensuring access. All of Australia’s 150 prudentially regulated authorized deposit-taking institutions (ADIs) are eligible to become NPP direct members with an ADI licence, he says.
“The NPP access regime caters for different categories of payment service provider,” Lovney says. “Australia’s banking industry is similar to Canada’s, in that both countries have relatively small populations and a limited number of top banks – four in Australia and six in Canada. … In addition, we have around 100 smaller banks, building societies and credit unions. This means access to the NPP is less of an issue than it is in bigger markets like the U.K.”
On the first day, 60 of these smaller FIs went live with the NPP, sponsored by three payment service aggregators, Lovney said.
Another route for NPP access involves “connected institutions,” typically organisations generating large numbers of payment transactions, Lovney says.
“They just need to find a settlement partner to sponsor them into the NPP,” he says. “So NPP access seekers like TransferWise would need to make only one connection via one participant and they can access the whole network including Pay ID. We’ve designed a range of graduated access regimes to let different counterparties exhibiting different risk characteristics access the NPP in various ways, depending on what they want to do. The U.K.’s Faster Payments model is more binary – you’re either a member or you’re not a member.”
Lovney says that NPP Australia and the RBA believe that allowing unregulated fintechs to access the NPP’s payment infrastructure, real-time settlement obligations and addressing database is unwarranted. “This would be a bridge too far, in our view,” he says.
Having launched Osko as its first overlay service, NPP Australia will create additional overlay services using a layered architecture, Lovney says.
“The U.K. is now having to retrofit a layered architecture on its Faster Payments system,” he says. “But, with a population of 25 million, it’s not efficient for Australia to create brand-new clearing streams every time we want to create a new use case.”
Australia’s four existing payment systems are its EFT-POS proprietary domestic debit scheme; the RTGS; Direct Entry, the domestic ACH; and BPAY.
All four systems are owned by the same counterparties and are independent of each other, Lovney says, adding that the NPP won’t lead to the four existing systems being rationalized. Systems such as checks will be cannibalized by NPP, he says.
NPP Australia is developing an open API framework for launch in a few months’ time.
“We see it as core to the NPP’s future growth to provide standardized access points,” Lovney says, “so we have plug-and-play between different service providers, and offer a degree of standardization as the platform’s capability develops over time.”
The NPP’s initial focus has been retail customers, but the platform is now becoming available for B2B payments.
The Australian banking industry is having discussions about developing secure digital IDs which can be used to authenticate their customers online across a wide range of use cases, similar to FIDO or to Canada’s SecureKey.
“The NPP can take advantage of these secure ID developments when they occur,” Lovney says. “At the moment, our banks identify their customers in a proprietary manner and cannot lend their ID verification to third parties.”
Fraud prevention has been a big focus.
“People were concerned as to whether real-time payments are susceptible to fraud,” says Lovney. “Our experience since launch is that fraud rates are lower than expected. The bulk of the activity we’ve seen is customers being scammed out of their login credentials via phishing emails. We’ve seen NPP participants work collaboratively to share fraud intelligence and information to shut down different types of attacks.”
FIS supplied its Open Payment Framework (OPF) to three leading Australian banks for connecting to the NPP.
“FIS’s OPF solution is used by 40 of the world’s largest banks to transform their legacy payments systems from siloed platforms to streamlined enterprisewide payments utilities, and enabled faster payment capabilities in numerous countries,” says Serena Smith, head of international payments at FIS.
“With any new payment networks like the NPP, there will always be challenges the industry has to manage,” says Smith. “FIS was able to help our Australian FI clients address some key issues that came to light midstream. Firstly, scheme SLAs for end-to-end processing in Australia rely on the core banking system to provide high concurrency and rapid responses. Within the NPP product, FIS built a component called Core Banking Integration Services (CBIS), which caches accounts, statuses and balances to provide necessary real-time responses. This layer of abstraction enabled our FI clients to easily meet required SLAs imposed within the industry.
Other issues included enabling flexible overlays and adapting to rule changes, Smith says.