[Insert Title]

Presented by [Insert Speaker]

[Insert date as: Day, # Month Year]

Developments in the payments industry 23rd Annual Credit Law Conference

Presented by Andrew Galvin, James Moore and Michael Anastas

3 October 2013

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Regulation of the Australian payments sector

Overview of regulation

Purchased Payment Facilities

Payment system policy and real time payments

Merchant pricing and surcharging

New Payments Platform - Real time payments

Emerging products and regulation

The main players

Innovation in the market

Where to from here?

Outline

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Regulation of the Australian payments sector

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A payment system board supporting the RBA

Payment Systems (Regulation Act) / Payment Systems and Netting Act

Consumer protection provisions of the ASIC Act

Non deposit-taking institutions eligible for ESAs and membership of card schemes

Functional definition of “banking business” in the Banking Act expandable by regulation

Regulation of interchange and the imposition of access regimes

Prudential regulation of open loop stored value cards and electronic cash

Payment reforms under Wallis

4

Banking Act modifications

Payment Systems (Regulation) Act

Chapter 7 of the Corporations Act

EFT/ePayments Code

AML Act

Scheme Membership Requirements

The Regulatory Framework

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“banking business” is now defined – but has the meaning changed?

Regulations have been made to include credit card issuing and acquiring and the issuing of purchased payment facilities

APRA has issued prudential standards and authorisation guidelines for SCCIs and PPPFs

Banking Business includes the provision of a PPF if APRA determines the facility:

is of a type allowing payment to be demanded in Australian currency of all or part of the balance held by the HSV [ie akin to a deposit]; and

is available on a wide basis as a means of payment having regard to restrictions limiting purchasers or payees [ie open loop].

Banking Act modifications

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Part 4 – regulates non-ADI holders of stored value (HSVs) for PPFs

PPF: facility purchased by a person from another person

able to be used as a means of making payments

payments are to be made by the provider of the facility or by a person acting under an arrangement with the provider (rather than by the user of the facility).

UNLESS excluded by declaration (being Gift card facilities, loyalty schemes, road toll devices, prepaid mobile phones, limited value ($10M) facilities and limited participant (50) facilities) and Westfield Insurance Cards.

HSV: person who is to make the payments [even if they don’t hold the value and have no contractual obligation to make payments]

Unless one of the exclusions applies, an authority or exemption from the RBA is required. A general exemption has been issued for corporations guaranteed by an ADI or a Commonwealth, State or local government.

Payment Systems (Regulation) Act – Purchased Payment Facilities (PPFs)

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Financial product – includes non-cash payment facilities

single payee facilities are excluded

licensing relief applies if payees are all related companies

licensing relief applies for suppliers arranging or advising on direct debits

wire transfers and money remittance are exempt depending upon settlement time (reg 7.1.07G) – useful for non-prepaid payment services

For prepaid facilities, usually without an exemption, an AFSL alone will not be sufficient because of the Banking Act and PSRA.

Class order exemptions apply for:

gift facilities

low value non-cash payment facilities ($1000/person + $10M float cap)

Prepaid mobile facilities and toll road facilities

Corporations Act: Chapter 7

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Facilities which are not pre-funded are relatively unregulated (eg money transfer business. AFSL may be required depending upon settlement timeframe)

Closed loop facilities are relatively unregulated

Significant entry barriers remain for open loop (except where exemptions apply – eg gift cards) – ADI status and scheme membership may be required

Visa / MasterCard credit card business is heavily regulated – this might be eased – RBA Review of Card System Access Regimes: A Consultation Document

The impact of licensing requirements

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White labelling

Tripartite alliances

Even the card schemes need a sponsor

Specialist platform operators manage most prepaid card programs even for the big banks (eg FIS, eMerchants)

Pure BIN sponsorship (BIN sponsor has a passive role limited to settlement)

BIN sponsor acting as issuer (BIN sponsor assumes full regulatory responsibility but the distributor might need an AFSL)

The impact of licensing requirements – indirect approaches

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Account based stored value has emerged instead of electronic tokens of value

The legal characterisation is important to determine:

Whether banking business is conducted under the Banking Act

Whether it is a designated service under the AML Act, and if so, which type

Whether it is a financial product, debenture or managed investment scheme under the Corporations Act

Whether unclaimed money laws apply, and if so, which ones

Whether it benefits from the Financial Claims Scheme (depositor protection)

Whether the ePayments Code applies

Whether it is subject to unsolicited credit/debit card prohibitions

The legal nature of stored value

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The legal nature of Stored Value - Virtual currencies

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Payment system policy and real time payments

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March 2013 change - Merchant pricing standard – an indirect signal to merchants

Scheme rules must not provide that acquirer terms cannot forbid merchants from recovering reasonable costs of acceptance or pricing different cards differently

Before January 2003, scheme rules had a "no surcharging" provision. Consistently enforced?

Consumer campaign and other regulatory action (ie Victorian Cabcharge ruling) may have more direct effect.

6 April 2013: UK took direct action under Consumer Protection (Payment Surcharges) Regulation, which directly prevents a merchant from charging fees in excess of "costs borne by the trader" for a particular payment method

Merchant pricing standard and surcharging

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Payment system changes around the world

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Overview

Payments System Review

Initial Strategic Objectives

Progress so far

Timeline and next steps

New Payments Platform - real time payment reforms

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Payments System Governance

Existing impediments to innovation: market forces may not be sufficient

PSB sets high-level strategic objectives

Enhanced Industry Governance through co-ordination body to assist in achieving objectives

Payment system review - conclusions

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Payment system review: initial objectives

PSB objective APCA response

Ability to make real-time retail

payments by end 2016

Supportive: see later slides

Same-day settlement of all DE

payments by end 2013

Supportive: Plan for 5 settlements

each business day

Ability to make and receive low-value

payments outside normal banking

hours by end 2016

Mostly supportive: Develop through

real-time payment system, not change

existing systems

Ability to send more complete

remittance information with payments

by end 2016

Supportive: To be considered as part

of the New Payments Platform (real-

time payment system) development

Ability to address payments in a

relatively simple way by end 2017 if not

earlier

Supportive: Industry approach to be

discussed and developed

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Real time payments: businesses and consumers making payments in real time between ADI accounts, near-immediate funds availability to payee

RBA proposal: payments messaging hub + RBA-provided settlements hub

System to be assessed against RBA's "Core criteria", released November 2012, consisting of:

10 program governance criteria (G1-10);

15 criteria for the real time payments solution (S1-15); and

7 criteria for the ongoing operation of the solution (O1-7)

Solution to be delivered in accordance with the timetable proposed by the RBA

In February 2013, RTPC submitted a proposal for the project and basic structure for the solution, which was endorsed by the PSB

Payment system review: Real time payments

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RTPC proposed solution

Source: Source: Strategic Review of Innovation in

the Payments System – RTPC Proposal to PSB 20

RTPC proposed solution

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RTPC was to become RTP Programme Steering Committee (+ RBA reps), has now become New Payments Platform Steering Committee

Proposal included project management overview, including:

Project management roles (KPMG appointed following tender);

Stakeholder and expert groups;

Project streams

Clearing switch and network and simpler addressing will be put to tender, with the vendor providing progress reports to the programme director.

Expressions of interest will be invited for entities wishing to provide the Initial convenience service, with timing and resources to be included in the project management.

Settlement hub project to be implemented by RBA, with progress reports to the programme director

RTPC solution: governance

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RTPC program - timeline

PSB timeline RTPC proposal

PSB consult/report key findings: by Q1 2013 N/A

Tender process to construct payments hub:

mid - end 2013

RFT process early 2013 - early 2014 …

Industry connectivity requirements: mid 2014 Requirements development: early 2013 …

RITS capability for high speed / high volume

settlements: end 2014

Broad timeline: industry testing early 2015 …

Real time retail payments hub - external

testing: end 2014

Broad timeline: industry testing early 2015 …

All ADIs can receive RTP: end 2015

Out-of-hours service, better remittance data:

mid 2016

Basic RTP: ADIs can send and receive fast

message and value, near 24/7, ISO 20022 message

format: end 2016.

Convenience service or other overlay service"

launch simultaneously: end 2016

…

Simpler addressing: end 2017 Sending ADI can identify payee a/c no. (eg

by mobile number): end 2017 … 23

Project definition and planning underway

Solution to be selected and build to commence in H1 2014 (testing Q2 2015)

Implement in Q4 2015

New Payments Platform program: next steps

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Emerging Products and Regulation

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1) Are we seeing changes in the payments

framework or simply new devices with the

same framework?

2) What impact does regulation have on the

new players?

Two important questions

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The main players

Merchants

Financial Institutions

Telecommunications Network Providers

IT/Software/Application Providers

28

A number of different

options or is it a

combination of all?

Financial Institutions

Technology Companies

TelCo Providers

Merchants

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Innovation in the market

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Innovation in the market

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• Consumer facing opportunities

• Merchant facing opportunities

• Integrated smartphone and payment technology

• Purchases of goods and services

• Third party payments

Where to from here?

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A number of different

options or is it a

combination of all?

Financial Institutions

Technology Companies

TelCo Providers

Merchants

Andrew Galvin James Moore Michael Anastas

T +61 2 9334 8502 T +61 2 9334 8686 T +61 7 3020 2833

agalvin@hwle.com.au jmoore@hwle.com.au manastas@hwle.com.au

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