I must stress, before you start reading, this article then represents my own thoughts and no ‘corporate’ hypothesis. This Blog has been in draft for too long, and I’ve sought a fair degree of feedback along the way (thanks to those who helped mould my thoughts).

There is a new payments system coming into Australia in November 2016. Its called the New Payments Platform (original huh!) or NPP.

Why is it new?

Because the last payments stream introduced into Australia was Real Time Gross Settlement (RTGS) in 1998 some 16 years ago. The year before we had the introduction of BPAY (which isn’t actually a clearing stream, rather a product residing on top of a clearing stream). Both are still in use today, RTGS being more used in the corporate scene (consumers can use it over the counter at their bank branch), because BPAY was intended and is used for consumers to pay Bills. So, NPP is new, well, because in comparison the other stuff is old.

You can go to the Australian Payments Clearing Association (APCA) site to view the history of payments in Australia and look at how ‘old’ the other payments systems are.

Perhaps the other reason its ‘New’ is because the intent of the system is to be 24×7, with payments being settled between bank accounts at different banks within seconds rather than the current scenario of up to 30 minutes for RTGS and next day for Direct Entry. Additionally – and perhaps more importantly – the NPP will allow a significantly greater amount of ‘data’ to flow with each payment. NPP will be based on the ISO20022 standard for payments. Presently the payments streams only allow a very limited amount of ‘data’ to flow with the payment and over the years this has presented significant challenges to the industry especially in areas of payments reconciliation and the like.

For example – have you ever wondered why your bank only allows you 18 characters of ‘remittance’ information when you make a payment? It’s not because their on-line banking systems are unable to – rather it’s because the payments system that underpins your EFT transfer was built in 1974.

Back in 1974  – Gough Whitlam was PM of Australia, The Number 1 song was from Barbra Streisand (“The way we were”), Australia’s first Credit Card (Bankcard) was introduced and John Lennon made what would be his last stage performance in New York with Elton John. Oh, and 200 MB of Disk Storage cost the equivalent of US$186,000 today. In 1974 the storage in the most basic level iPhone would cost you nearly $6 million today! Try and get that on a 24 month plan from your Telco.

The point being that when the Banks designed the EFT clearing system, disk storage cost lots – and so you only got 18 characters to tell the person you were paying what the payment was for. And that same system is still in use today. In fact, it underpins the current on-line banking systems of most banks, credit unions and building societies in Australia processing 7.9 Million transactions per day worth $44.2 Billion (Source: APCA)

But what will happen when NPP commences? What payments systems will it kill on the way to Glory?

A few factors need to be taken into consideration;

1. Will the industry impose transaction or processing limits for NPP?
2. What will a payment cost?
3. Will both parties (the payer and the receiver) be able to participate in NPP even if only 1 party has ‘paid’ for NPP enablement.

What would happen in Australia if there were to be no limits for a NPP Payment?

Most countries that have introduced a ‘faster’ payments system have also introduced a ‘system’ limit (or a set of system limits) for the use of that system.

Each day in Australia, on average over the last 12 months, (according to the RBA) the ‘system’ processes ~41,500 RTGS payments. If the context of a RTGS payment is to ‘make a near real time, non reputable and settled transaction to a beneficiary’, and the context of a NPP payment is more or less the same – what would be the continued need for a RTGS payment?

Perhaps not. Casualty number 1 – the RTGS system. Hold on a minute…don’t Banks charge for RTGS .. a search of all the big 4 banks shows that the average price a retail client can get a domestic RTGS transaction for is around $35 for a customer of that bank (See example here on page 25). Now assuming that the Bank doesn’t charge the same fee to its business clients as it does its consumer clients – lets apply a generous discount of 50%. That still means that, combined, and conservatively, the Banks are set to lose around $190Million per annum in RTGS fee income if that channel is cannibalised.

I think that if the system doesn’t impose a limit, the commerciality of the Banks probably will. $190M is a lot of dough …. RTGS will be hit, and perhaps hit hard. You can argue that the ‘context’ of the payment will determine the clearing stream – perhaps – but there are lots of variables here – intra day limits, intra day liquidity requirements, outside normal trading hours liquidity, RBA Exchange Settlement Account balances etc. etc. Time will tell, but the RTGS stream is almost guaranteed to be hit.

What will a payment cost?

Interestingly this has relevance to the last question. My answer though had a hypothesis based not on cost but on context – in that a NPP payment had the same ‘context’ or put another way, the same ‘characteristics’ as an RTGS payment. Why wouldn’t you charge the same amount for the payment as you did for an RTGS payment?

The answer I feel is in the target market.

NPP plainly has a market in consumer payments, (Person to Person (P2P) payments are ideal for this new mechanism) but the market becomes a little more cloudy as you make your way up the value chain into Institutional type payments. Payroll and large batch runs of direct debit and creditor payments for example will more than likely continue in the short to medium term to be effected via Direct Entry or CS2 – as it’s the most efficient low-cost and high volume system that we have. Also, these payments are due (traditionally) during a working week (Monday to Friday). Use cases for Institutional type clients are less clear.

If we decide to concentrate on P2P payments then these are more than likely made via consumer on-line banking – either from a desktop or from a mobile device. How much do you pay for a payment on that channel today? … probably zero, nada, squat. Is the convenience of a 10 second payment 24×7 going to spur you to hand over more cash to your bank for making the payment? Probably not. People are lazy and most don’t even understand or care how a payment is made. What I can tell you is that people start to care when they have to pay for stuff, and if an on-line payment costs ZERO today compared to SOMETHING tomorrow most people will start rubbishing the banks. The banks might say that you are getting a better service with NPP compared to before .. some might buy that .. but most won’t care and therefore won’t pay and will then shop around.

I’d expect most banks to replace their on-line banking clearing systems with NPP. Casualty Number 2 – Direct Entry. It won’t be a big casualty though. Not initially at least. But in time. Firstly however lets see what the banks price NPP at, as that will be a big determinant and maybe, just maybe, Banks could charge for NPP if they start to differentiate their payments to ‘immediate’ (NPP) and ‘delayed’ (Direct Entry). Perhaps people will be prepared to pay for an enhanced service when compared to the old way. Everyone nowadays wants stuff ‘now’. A friend recently reminded me how people get annoyed these days because you don’t immediately respond to ‘iMessages’ when the sender can see that you’ve ‘read’ the message. We are evolving into a ‘now’ community – this has relevance to NPP. People will want to see their money ‘now’ too.

I’d expect though that P2P payments for consumers will be fee free. The first bank to do this will set the market, and others will have to follow.

Will you be able to take part?

That’s interesting, and perhaps depends on the ‘what will it cost’ question. If there’s a charge – what happens if you’ve paid for the payment to be made and the receiver hasn’t paid his/her bank to make the service available? Will that bank put the money into the account immediately, or will they defer it?

Bank’s will want pay back on the massive investments made in a new clearing system, unless the ‘system’ determines that the cost is zero … and if there’s no charge then the point is moot as differentiation (as a fee for service) disappears.

Fraud

Another factor needs to be taken into account for NPP also – fraud. In a system that offers immediate non repudiable payments, from bank to bank, you can bet that the fraudsters will be out there trying to hack a way in. I can see them now just waiting at ATM’s for the money to arrive. Bank’s will need to invest in a lot of state of the art fraud prevention systems to protect themselves and their customers from fraud. It’s a big deal. BIG.

Data Services

Having said all of this, lets revert back to something I mentioned up front of this article – Data. NPP is based on ISO20022. Lots of data can flow with the payment – almost unlimited exchange of data and payment ‘attachments’ can be made. This might not mean much to a consumer (after all, you probably know what the money that ended up in your account was for), but it means a lot to businesses. They rely on this data to reconcile who paid them, and what it was for. Casualty Number 3 – BPAY. Previously you never had a comprehensive way to identify your payment inside a payment. BPAY in Australia solved that to some degree by going ‘outside’ the normal payments system and introducing Biller Reference Numbers that were based on a check digit routine so you couldn’t stuff the payment up. If the payment reference didn’t validate up front then you couldn’t make the payment.

With NPP though you can send a heap of data with your payment. You could even send your picture to them. I wouldn’t expect BPAY to lose much ground though – it’s still very efficient and well understood. However those utility type companies (such as telcos, councils etc) who are innovative and develop nifty online ‘overlay’ services to go with a NPP payment could perhaps offer ‘immediate’ reconciliation that accompanies the payment. They wouldn’t need BPAY anymore. That’s just one example.

Summary

As we move forward into NPP then I think that there will naturally be payments stream casualties. Some more affected that others. It’s not all bad news for clearing streams though because a big opportunity opens up via the Data and the overlay services that go along with NPP Payments. We never had a system before that had the potential to wrap so much data inside the payment mechanism. NPP does this well. For consumers the data may be irrelevant and the payment is most important, but for businesses the data is most important and the payment may become secondary.

Don’t get me wrong, it’s all based on the payment – we all need the money – and we want it ‘now’ – but data and online ‘overlay’ services have massive potential. The banks are having their ‘cheese’ moved, and they’ll need to work on fresh business models to keep relevance in an increasingly customer centric world and make up for their lost fees in other ways.