Payments System

The ‘payments system’ refers to arrangements which allow consumers, businesses and other organisations to transfer funds usually held in an account at a financial institution to one another. It includes the payment instruments – cash, cards, cheques and electronic funds transfers – which customers use to make payments and the usually unseen arrangements that ensure that funds move from accounts at one financial institution to another.

Cash

The use of cash as a payment method remains widespread. One of the most comprehensive sources of data on individual cash payments is the Reserve Bank's Consumer Payments Survey. This study was first undertaken in 2007 and was repeated in 2010, 2013, 2016 and 2019. The latest survey showed continued substitution away from cash use and towards electronic methods. Overall, cash payments accounted for 27 per cent of the number and 11 per cent of the value of all consumer payments in 2019. The most common way consumers withdraw cash is through ATMs, which accounted for 72 per cent of the total number of cash withdrawals and 64 per cent of the value of withdrawals in 2021.

Non-cash Payments

Non-cash payments account for most of the value of payments in the Australian economy. On average, in 2021 non-cash payments worth around $260 billion were made each business day, equivalent to around 12 per cent of annual GDP.

Around 75 per cent of the value of non-cash transactions is accounted for by a small number of high-value payments made through Australia's real-time gross settlement (RTGS) system. Most of the value of these payments relates to the settlement of foreign exchange and securities markets transactions.

The migration of large business payments to the RTGS system saw a decline in the importance of the cheque as a payment instrument. In 2021, less than 2 cheques were written per person in Australia, down from close to 50 in the mid 1990s. A significant share of cheque use is related to commercial payments, and financial institution ('bank') cheques for certain transactions such as property settlements, although the latter have been declining with moves to electronic property settlement.

In contrast to the declining importance of cheques, the use of electronic payment instruments at the retail level has been growing rapidly. In 2021, transactions (both purchases and cash withdrawals) undertaken using either credit or debit cards averaged about 460 per person, an increase of around 60 per cent on the level of five years earlier.

For many years, Australian governments and businesses have made extensive use of Direct Entry credits for social security and salary payments. Consumers and businesses also establish direct debits for bill payments. Direct Entry payments are an important part of the payments landscape. These payments continue to account for the bulk of the value of non-cash retail payments (i.e. non-RTGS transactions).

Payments Clearing

Most payment systems involve two or more financial institutions and/or other payments providers, requiring payments to be ‘cleared’ between them. For instance, details of a cheque drawn on one financial institution and deposited at another must be returned to the first financial institution so that it can debit its customer's account and verify that the customer has sufficient funds.

Arrangements for clearing most payment instruments in Australia are coordinated by the Australian Payments Network (AusPayNet). AusPayNet is a limited liability company with a board of directors drawn from its shareholders – banks, building societies and credit unions. AusPayNet manages clearing for cheques, direct entry payments, ATMs and debit cards and high-value payments.

Other payments clearing systems independent of AusPayNet include credit cards (Mastercard and Visa), the domestic debit card system managed by eftpos Payments Australia Limited (ePAL) and the BPAY system for payment of bills. Following the Conclusions of the Strategic Review of Innovation in 2012, the industry worked on a project to build a new real-time retail payment system – the New Payments Platform (NPP). The NPP began operation in February 2018. There are also two securities settlement systems with separate payment arrangements. They are the Austraclear System which settles trades in CGS and other debt securities and the Clearing House Electronic Sub-register System (CHESS) for settlement of equity trades.

Payments Settlements

When payments are cleared between institutions, they accrue obligations which must be settled. In Australia, final settlement of obligations between payments providers is by entries to their Exchange Settlement Accounts (ESAs) at the Reserve Bank. Large-value payments are settled one-by-one on a real-time gross settlement (RTGS) basis, while retail payments are settled on a net settlement basis. The Reserve Bank has established a policy setting out criteria that payments providers must meet to open an ESA.

Role of the Reserve Bank

A safe and efficient payments system is essential to support the day-to-day business of the Australian economy and to settle transactions in its financial markets. Accordingly, the Reserve Bank of Australia has important regulatory responsibilities for the payments system and plays a key role in its operations.

The Payments System Board (PSB) of the Reserve Bank oversees the payments system in Australia. It is responsible for promoting the safety and efficiency of the payments system and through the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998, the Reserve Bank has one of the clearest and strongest mandates in the world in relation to payments systems.

The Bank consults closely with participants in the payments industry. The Bank is represented on a number of industry committees responsible for the day-to-day management of payments clearing systems and Bank staff regularly meet with industry representatives and other regulators.

Detail on the structure and operations of the Australian payments system can be found in Payment Systems in Australia (Red Book, 2011) and the activities of the Bank's Payments System Board are reported in its Annual Reports.

Controlling Risk in the Financial System

The Reserve Bank's responsibilities for stability build on the long history of central banks' involvement in this area. The introduction of real-time gross settlement (RTGS) in 1998 eliminated the build-up of settlement exposures between financial institutions as a result of the exchange of high-value payments and transactions in debt securities. In 2002, Continuous Linked Settlement (CLS) joined Australia's RTGS system, allowing foreign exchange transactions involving the Australian dollar to be settled through CLS. The Reserve Bank, and other central banks whose currencies are settled through the CLS arrangements undertake cooperative oversight of CLS under an agreed protocol.

Under Part 7.3 of the Corporations Act 2001, the Reserve Bank has a formal regulatory role to ensure that the infrastructure supporting the clearing and settlement of transactions in financial markets is operated in a way that promotes financial stability. The Bank's powers under that Part include the power to determine financial stability standards for licenced clearing and settlement facilities. The Reserve Bank implemented revised Financial Stability Standards for central counterparties and securities settlement facilities in 2013. The Standards seek to ensure that clearing and settlement facilities identify and properly control risks associated with their operations, thereby promoting the stability of the Australian financial system. The Standards replaced previous standards determined in 2003 to incorporate changes to international standards for clearing and settlement facilities. The Standards for securities settlement facilities apply only to facilities that settle obligations in excess of $200 million in a financial year. This ensures that the Standards apply only to securities settlement facilities that could potentially pose a risk to the stability of the financial system, exempting small systems from unnecessary regulation.

Efficiency of the Payments System

Australia was among the first countries in the world to make efficiency of payment systems a statutory objective of the central bank. In pursuit of this mandate, the Reserve Bank has encouraged a reduction in cheque-clearing times and the take-up of direct debits as a means of bill payment, and taken a number of steps to improve the competitiveness and efficiency of card systems. Initially the latter focus was on credit card systems. In 2001, the Bank designated the Bankcard, Mastercard and Visa credit card systems as payment systems under the Payment Systems (Regulation) Act. Designation is the first step in the possible establishment of standards and/or an access regime for a payment system. After extensive consultation, the Bank determined Standards for the designated schemes which lowered interchange fees and removed restrictions on merchants charging customers for the use of credit cards, and imposed an Access Regime which facilitates entry by new players. Since then, the Bank has implemented a number of other reforms to promote competition and efficiency in the card payment system as it has continued to evolve. These have included extending interchange fee regulation to debit and prepaid card systems and introducing caps on individual interchange fees, and removing restrictions that require merchants to accept the credit cards of a scheme if they accept that scheme's debit cards and vice versa.

Interchange fees

The Bank has two standards that relate to the setting of interchange fees and net payments to issuers in designated credit and debit & prepaid systems. These standards set weighted-average interchange fee benchmarks of 8 cents per transaction for debit cards, and 0.50 per cent of the transaction value for credit cards. The weighted-average benchmarks are supplemented by ceilings on individual interchange rates to keep payment costs down for smaller merchants (which do not benefit from lower ‘strategic’ interchange rates). No credit card interchange fee is permitted to exceed 0.80 per cent and no debit card interchange fee is permitted to exceed 10 cents if levied as a fixed amount, or 0.20 per cent if levied as a percentage amount.

In addition, following the 2019-21 Review of Retail Payments Regulation, the debit interchange standard was amended to introduce a ‘sub-benchmark’ for single-network debit cards (SNDCs), which only allow payments to be processed through one debit network, such that the weighted-average interchange fee for SNDCs from a given scheme must be no more than 8 cents. Both standards were also amended to require designated schemes to publish interchange fees on transactions on foreign-issued cards on their websites.

Schemes are required to comply with the benchmarks on a quarterly basis, based on weighted-average interchange fees over the most recent four-quarter period. To prevent circumvention of the debit and credit interchange standards, there are also limits on scheme payments to issuers that are not captured within the interchange benchmarks.

See the Regulations page for the current interchange fee standards.

Surcharging

The Bank's surcharging standard preserves the right of merchants to surcharge for accepting more expensive payment methods. Prior to 2003, when the RBA first set a standard for surcharging, the rules of the Mastercard and Visa schemes prohibited such charges. Consistent with the Competition and Consumer Act 2010, the surcharging standard ensures that consumers using payment cards from designated systems (eftpos and the debit and credit systems of Mastercard and Visa) cannot be surcharged in excess of a merchant's cost of acceptance for that card system.

The Australian Competition and Consumer Commission has enforcement powers under the surcharging framework. Further information about the surcharging framework is available on the Questions & Answers - Card Payments Regulation page.

Debit Card Regulations

As noted above, the Bank has a standard covering debit and prepaid card interchange fees and net payments to issuers; it limits the weighted-average interchange fee benchmark in the designated debit card systems to 8 cents per transaction, with no individual debit card interchange fee able to exceed 10 cents if levied as a fixed amount or 0.20 per cent if levied as a percentage amount. This standard applies to the eftpos, Debit Mastercard and Visa Debit systems.

In addition, following the 2019-21 Review of Retail Payments Regulation, a ‘sub-benchmark’ was introduced for transactions using single-network debit cards (SNDC), which only allow payments to be processed through one debit network, such that the weighted-average interchange fee for SNDCs from a given scheme must be no more than 8 cents. The Bank has also set an explicit expectation that all debit card issuers with more than 1 per cent of the total value of debit transactions should issue dual-network debit cards (DNDCs), which allow domestic debit payments to be processed via either the domestic scheme (eftpos) or one of the international debit networks (Debit Mastercard or Visa Debit).^[1]

Credit Card Access Regimes

The introduction of Access Regimes in 2004 allowed specialist credit card institutions (SCCIs), authorised and supervised by APRA, to apply to participate in the credit card schemes, as issuers or acquirers. Formerly, the scheme rules required that participants be deposit taking institutions authorised by APRA. In 2014, the Board determined to vary the Access Regimes. This reflected its conclusion that, while the original Access Regimes were appropriate when introduced, changes in industry structure and in the ownership of the card systems meant that the regimes might be unduly restricting access. The variations came into effect from 1 January 2015 and provide the Mastercard and Visa card systems with the flexibility to expand membership beyond existing participants.

The ATM System

In 2008, the Reserve Bank designated the ATM system as a payment system under the Payment Systems (Regulation) Act. After extensive consultation, the Bank determined an Access Regime for the ATM system which supported complementary industry-based reforms. The Access Regime sets a cap on the connection cost that can be charged to new entrants to the ATM system and prohibits the charging of interchange fees except in specific circumstances. It also includes a prohibition on the charging of fees for establishing direct clearing/settlement arrangements and allows the Bank to exempt certain arrangements from compliance with aspects of the Regime where this is in the public interest.

The ATM reforms, which came into effect on 3 March 2009, were designed to: make the cost of cash withdrawals more transparent to cardholders and place downward pressure on the cost of ATM withdrawals; help to ensure continued widespread availability of ATMs by creating incentives to deploy them in a wide variety of locations, providing consumers with choice and convenience; promote competition between financial institutions; and make access less complicated for new entrants, and therefore strengthen competition.

In October 2021, the Payments System Board granted an exemption from certain aspects of the ATM Access Regime to enable card issuers to access other participants' ATM fleets (see media release). This decision was taken to enable card issuers to provide cardholders with wider access to fee-free ATMs, which will help to maintain broad coverage of ATMs amid the challenges of declining cash and ATM use.

Retail Payments Studies

The Reserve Bank has undertaken a series of significant studies to gather information on the Australian payments system. The Bank undertook its fifth survey of consumers' use of, and attitudes toward, different payment methods in October/November 2019. As with the previous studies in 2007, 2010, 2013 and 2016, an important goal of the survey was to measure the use of cash in the economy, given that there are few direct sources of information on this important segment of the payments system.

Over the course of 2014 the Bank undertook a large-scale study of the costs of different payment methods for financial institutions and merchants. This study updated and extended the analysis undertaken as part of the 2007/08 review of the Bank's payment system reforms.