.svg)
In what some are calling the "biggest overhaul" of Australia’s payment system in 35 years, fintechs are looking forward to "fair and equitable" access rights based on new licensing rules.
Last week, the Treasury unveiled its latest Strategic Plan for the country’s payment system, alongside a new consultation on licensing based on payment functions.
As covered by VIXIO, much of the Strategic Plan is aimed at “phasing out” Australia’s legacy payments infrastructure, such as the Bulk Electronic Clearing System (BECS), and phasing out legacy payment methods, such as cheques.
However, the Treasury has also proposed changes to Australia’s licensing framework that regulates payment service providers (PSPs), which is now more than 20 years old.
Under the 2001 Corporations Act, some PSPs fall within the scope of a “financial services business”, and those who do are “typically” required to obtain an Australian Financial Services Licence (AFSL).
The 2001 Act defines a “financial product” as a facility through which a person makes a financial investment, manages a financial risk or makes a non-cash payment.
As per the act, a person makes a non-cash payment “if they make payments, or cause payments to be made, otherwise than by the physical delivery of Australian or foreign currency in the form of notes and/or coins”.
However, as argued by the Treasury, this definition only captures certain functions and services involved in a payments chain.
Due to “lack of clarity” around the scope of the existing regulatory perimeter, only some PSPs have an AFSL, and sometimes two businesses providing “functionally equivalent” payment services may not be regulated in the same way.
For example, certain electronic funds transfers that do not involve a standing arrangement are exempt from being a financial product — some remittance service providers rely on this exemption, while others must hold an AFSL.
Licensing based on function
As such, the Treasury is consulting on a list of “payment functions” that are intended to ensure “consistent” and “appropriate” risk‑based regulation of PSPs.
The aim is to improve regulatory clarity for firms and create a more level playing field between them, both lowering barriers to entry and increasing competition.
For Australia’s fintechs, the most promising development is the opening up of direct access to the payment system for non-authorised deposit-taking institution (non-ADI) PSPs.
Rehan D'Almeida, general manager of FinTech Australia, told VIXIO that fintechs have been “waiting years” for these reforms to payments licensing rules, after they were first proposed in 2021.
“Historically these regulations were not fit-for purpose, as they rigidly restrict access to payment systems, meaning competition is slowed and innovation is frozen out,” he said.
“While the focus may be on the removal of colloquial, but outdated, forms of payments, this framework also paves the way for further innovation in fintech, which will be passed on in the form of further benefits to consumers.”
In 2021, as noted by D'Almeida, the Treasury recommended in a Payments System Review that the Reserve Bank of Australia (RBA) should develop “common access requirements” for non-ADI PSPs.
“The requirements need to appropriately manage the financial, operational and reputational risks PSPs pose as direct payment system participants, but not go beyond this,” the Treasury said.
Last week, the Treasury said the common access requirements will be considered again in a separate consultation, but are likely to include governance, risk management, security, financial and operational capacity obligations.
“It is expected that operators of Australian payment systems would grant access in the same way as they currently do for ADIs to PSPs that meet the common access requirements,” the Treasury said.
This comes as a welcome development for D'Almeida, who pointed out that, in 2022, PSPs made up the largest proportion of Australia’s fintechs, according to the EY FinTech Australia Census.
“We hope the crucial role of fintech companies in shaping the future payments system will be recognised as these important reforms progress,” he said.
“For Australia to take its place as a global leader in payments systems, and to achieve the economic outcomes set out of this reform, it is crucial that the future regulation of the payments system continues to allow for competition.”
The threat of greater oversight
Among other praise for the “clear direction” of the Treasury's proposals, D'Almeida also welcomed the streamlining of licensing roles between the RBA, the Australian Securities and Exchange Commission (ASIC), the Australian Prudential Regulation Authority (APRA) and the Australian Competition and Consumer Commission (ACCC).
To simplify the process of obtaining different authorisations, the Payments System Review recommended that PSPs should be able to apply for various authorisations through ASIC as the single point of contact, without the need to approach multiple regulators in the first instance.
But other observers, such as Brad Kelly, managing director of Payment Services consultancy, questioned whether fintechs are underestimating the risk of greater oversight.
“Fintechs are getting all excited, but they may not be the beneficiaries they think they are,” he said.
Although fintechs claim to want “unfettered access” to the payment system, he said, they are likely to struggle with the higher compliance requirements outlined by the Treasury.
“Currently they have to go through Cuscal or a big bank, and they won't touch fintechs because they are dodgy and underfunded,” he said.
“There is also AML, KYC and CTF which fintechs don’t like. Fintechs are convinced that the Treasury will open things up for them, and this may happen, but APRA, ASIC and the ACCC being the guard dogs should terrify fintechs.”
Kelly said fintechs have complained that they are treated unfairly by banks in Australia, but he disagrees, referring to this as “victim mentality” and noting that banks will take business if it is “profitable and compliant”.
“So they get a seat at the table and complain, but the reality is that they are so small and insignificant that it doesn't matter,” he said. “The word ‘innovation’ is thrown around, but they aren't really doing that either.”
Using Revolut as an example, Kelly said its responses to parliamentary and Senate enquiries have fit this pattern.
Revolut argued that it is delivering “very important” innovation, said Kelly, but in reality “they have a few thousand prepaid cards in the Australian market, make no money, employ a handful of people in Brisbane and have about $35m in the bank.”
