Significant change is under way in the payments sector, both in technological terms and business models. Consumers are increasingly looking for faster and easier ways to make payments, and regulators have begun to encourage domestic market infrastructures to adapt their systems in response to this demand.
In Australia, a change in the payments landscape began in 2010 when the nation’s central bank began a two-year consultation with its payments industry to understand whether there were gaps in the payment infrastructure.
“Services available to Australian households and businesses were falling behind those in some other countries,” says Tony Richards, head of payments policy at the Reserve Bank of Australia (RBA). “There was no real drive in the industry to move to real-time payments.”
The result of the discussion with the industry was the Strategic review of innovation in the payments system, which concluded there were a number of issues that, if left unchecked, could become increasingly problematic in years to come.
The RBA felt it needed to be more proactive, and moved to set out strategic objectives for the payment system. “The RBA consulted with the payments industry, and in 2012 we asked the industry to develop a proposal to build a real-time system which would be available 24/7, have easy addressing and be compatible with ISO 20022,” adds Richards.
In 2013, the RBA took the initiative, jointly with 13 founding member banks, to develop a new national infrastructure for real-time, flexible and data-rich domestic payments. Industry discussions resulted in a single proposal being put forward to the central bank.
“We told the industry that we were willing to build a real-time settlements hub, but expected that the payments or clearing hub should be developed by the industry,” explains Richards. “That type of infrastructure is probably best built and operated by industry, rather than by the central bank.”
Alongside its initial criteria, the central bank had a few other requirements for the system: it had to be mutually owned; have liberal access rules; and be accessed on a not-for-profit basis. The industry’s proposal ticked all the boxes.
The final result bore fruit in February 2017 with the creation of the New Payments Platform – a ‘new set of payment rails’ to allow real-time payments. The NPP consists of two sets of payment infrastructure – the NPP ‘basic infrastructure’, run and designed by Swift, and the RBA’s Fast Settlement Service.
If bank A can no longer say it cannot get funds from bank B, therefore not crediting its customer, they no longer have an excuse. The industry has now been opened up to a whole new set of business models
Tony Richards, Reserve Bank of Australia
The FSS is a separate service of the Reserve Bank Information and Transfer System, the central bank’s real-time gross settlement (RTGS) system. It allows the real-time settlement of each NPP payment in exchange settlement accounts – the equivalent of US federal funds accounts – of the relevant NPP participants. This means there is no netting or batching. Payments are settled line by line in real time. “Looking internationally across the new real-time systems, the NPP is one of the few, or perhaps the only one, to have settlement happening line-by-line in real time,” says Richards.
Throughout the day, banks connected to both the FSS and the RTGS have two pots of liquidity, the larger held in the high-value payment system. Over the weekend, the banks transfer all their liquidity over to the FSS to continue transfers. On Monday, the liquidity is separated again. This means participants can make funds immediately available to the recipient customer, without settlement or credit risk.
“If bank A can no longer say it cannot get funds from bank B, therefore not crediting its customer, they no longer have an excuse. The industry has now been opened up to a whole new set of business models,” Richards tells Central Banking.
The other half of the NPP, what the RBA calls the basic infrastructure, is operated by Swift. The payment messaging service provider won the contract to provide the software following a selection process run by NPP Australia.
“When it came to the selection of the vendor to provide the NPP infrastructure, the industry received a number of proposals,” says Richards. In 2017, Swift was chosen to design, develop and run the system. “A lot of the organisations around the NPP steering committee table had experience working with Swift, and felt it would be a good partner to have on board,” adds Richards.
The NPP’s framework includes a new domestic Swift network connecting participants to each other and to the FSS via a payment gateway for each participant. Recognising ISO 20022 was the future, the system was then designed to route ISO 20022-format messages, with up to 280 characters of data, across the network. “The NPP is not hub-based, but is a distributed network,” explains Richards.
Importantly, the basic infrastructure also includes the addressing service, where participants can register a customer’s transaction account to an identifier or ‘alias’ called a PayID, which may be a phone number or email address. This means if a customer decides they want to make a transaction using a person’s phone number, she or he is able to see the name associated with the corresponding bank account prior to making the transaction.
‘Overlay services’ represent another element of the NPP ecosystem. While the basic infrastructure can be thoughts of as a set of rails, Richards says the overlay services can be thought of as the trains that will use the NPP rails and will allow all kinds of payment services to be offered to end-users.
This may include simple rule books that set standards for participants, or they may be more complex payment solutions that include new message types and interactions with external entities or databases.
The first overlay service, Osko by BPay, is a basic fast payment with enhanced data. However, BPay has plans for additional overlays, including request-to-pay and payment-with-document services.
The RBA-inspired system has so far proven to be resilient during operations. The central bank also appears to have had foresight when building its system, introducing infrastructure that some of its peers are only just beginning to think about.
For example, some pioneers of instant payments are only just transforming its system to run on ISO 20022 formats. Similarly, central banks around the world are only just starting to open up their networks to non-bank payment service providers – the RBA has allowed third-party service providers access to its RTGS since 1999, while central counterparties were given access in July 2012.
“We have had a lot of interest in the NPP from our central bank peers, which is natural,” says the head of payment policy. As Richards says: “Real-time settlements of all payments is one aspect that they are particularly interested in. It is feasible – so why not do it?”
The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, Joel Clark, William Towning and Tristan Carlyle