Building a financial system for a cashless age

Electronic payments will eventually trump cash. Dan Peled/AAP

If the Financial System Inquiry is to achieve its aim of helping to promote growth and productivity in the Australian economy it will need to focus strongly on electronic payments.

Submissions to the inquiry will be officially released today, offering several pieces of advice for FSI chairman David Murray on how to promote competition in the system and how technology is affecting and changing it.

Electronic payments is one area where both increases in productivity and promotion of competition could be achieved via the FSI, but to do so Murray will need to guide the sector towards true competitive neutrality.

The increased use of electronic payments and consequent reduction in the use of cash facilitates economic growth, according to recent research from Melbourne University. This is because electronic payments are less costly then non-electronic payments, and this applies for all participants in the payments value chain including consumers, businesses and government.

This Australian research is reinforced by similar studies conducted in Canada, Germany, South Africa and the US, which all underline the costs of cash in both developed and emerging economies and highlight the positive role that electronic payments play, in both increasing economic activity and heightening levels of consumer empowerment and choice.

Daniel Mminele, deputy governor of the South African Reserve Bank has claimed that every 1% increase in payment card use would increase consumption by 0.06% and GDP by 0.03%, as this would mobilise household savings and hence productive opportunities.

The NBN of payments?

In Australia the Reserve Bank has encouraged the development of a real-time payments infrastructure, which will be the banking equivalent of the National Broadband Network in that it will allow fast electronic payments for both consumers and business and hence more immediate availability of funds.

It has been described as the “rail tracks” which will provide the infrastructure upon which instant payments can be made. It is also designed to lower the network barriers to entry, opening up competition in payment services, particularly for new payment startups. These could include Apple and Google, who could use their brand recognition to potentially enter the retail banking market, without having to build a branch network.

The possible entry of new players into the financial services market has the industry debating the regulatory framework under which all participants, both new and existing, will have to operate.

The Funding Australia’s Future Project, released in July 2013 by the Australian Centre for Financial Studies (ACFS), considered the appropriate balance between stability and efficiency within the Australian financial sector. It concluded that “regulation should not impede competition and the efficiency of markets”, that “the regulatory system should also have a brief for neutrality” and that “one sector is not favoured over another at the expense of competitive forces”.

Differing agendas

In their submissions to the FSI, Australia’s regional banks and non-bank lenders have called for a “level playing field”, to reduce the advantages that the big banks have gained from the regulators’ focus on stability in the system.

They also argue that consumers should be empowered to switch deposit accounts and mortgages more easily between providers. The Consumer Owned Banking Association (COBA), which represents credit unions and building societies in Australia, has also argued for “competitive neutrality” and has described regulation of the financial sector as being, “overly prescriptive and inconsistent”.

One example of this inconsistency is in the payments system market where the regulator, the Reserve Bank of Australia, has intervened extensively since 2002. These interventions have been largely focused on the payment card acceptance marques of MasterCard and Visa and they are described in detail in a paper, Regulatory Interventions and their Consequences in the Australian Payment Card System, released by the ACFS in October 2013.

Other payment card acceptance marques, such as American Express and Diners Club have received far less regulatory attention and this has led to distortions in the market, which it could be argued have driven up the costs of paying by payment cards for consumers.

An additional aspect of this absence of competitive neutrality is the lack of any meaningful regulation of new and emerging entrants into the payments market. As an example, PayPal now competes against the traditional payment card players and yet it is not regulated as regards the fees that it charges, nor does it have to bear the same compliance costs of regulation.

The FSI therefore represents a good opportunity to achieve competitive neutrality in all the financial services markets, and achieve the economic growth and productivity gains that are embedded in its terms of reference and which would benefit all sectors of Australian society.