Payments Modernisation at a Crossroad: What Lies Ahead for PSPs in Australia?

July 17, 2023
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June 7, 2023 marked one of the most active days of regulatory activity in Australia to date this year, as the government published its strategic plan for the Australian payments system. The government also launched two consultations: the first consultation aims at tackling proposed amendments to the Payments Systems (Regulation) Act 1998 (PSRA 1998); and the second consultation focuses on a list of payment functions designed to potentially form a foundation for a new licensing framework for payment service providers. This regulatory analysis will explore the background and key drivers motivating the initiatives.

June 7, 2023 marked one of the most active days of regulatory activity in Australia to date this year. On June 7, the Australian government published its strategic plan for the Australian payments system. The government also launched two consultations: the first consultation aims at tackling proposed amendments to the Payments Systems (Regulation) Act 1998 (PSRA 1998); and the second consultation focuses on a list of payment functions designed to potentially form a foundation for a new licensing framework for payment service providers (PSPs).

These regulatory events may drastically change the Australian payments landscape. This regulatory analysis will explore the background and key drivers motivating the initiatives. It will also take a deeper dive into these developments by:

  1. Discussing what the government hopes to achieve.
  2. Examining the regulatory essence and content of each initiative.
  3. Shedding light on the next steps of which PSPs should be aware.

Amendments Long in the Making

For more than a decade, the Australian payments sector has been experiencing significant changes. Over the years, the Reserve Bank of Australia (RBA) has recognised issues in the industry regarding:

  • End users’ demand for timely, real-time settlement of retail payments, which was addressed as a potential gap in the RBA’s Strategic Review of Innovation in the Payments System: Conclusions, published in June 2012.
  • The increasing need for regulator intervention concerning the levels of interchange fees and competition in the cards market, as addressed in the RBA’s Review of Card Payments Regulation: Conclusions Paper, published in May 2016.
  • The increased use of electronic payments at the expense of fewer cash transactions, as discussed by Michele Bullock, the RBA’s deputy governor, in a speech at the Central Bank Payments Conference in June 2019.

As discussed in VIXIO PaymentsCompliance’s regulatory analysis on the Australian open banking regime, the fast-paced changes in the payments industry are also driven by technology and innovation, which underpin the need for adapting the country’s regulatory landscape. The Australian government’s particular plans for modernising the payments-related regulatory framework were laid out in the Transforming Australia’s Payments System report, published in December 2021. The report highlighted the government’s intentions to ensure payments regulations are fit-for-purpose by taking the following key actions, among others:

  • By mid-2022, developing a payments system strategic plan with the goal of addressing innovation in the payments sector.
  • By early 2022, conducting a consultation on amendments to the Payment Systems (Regulation) Act 1998 (PSRA) that will respond to issues arising in the industry.
  • By early 2022, launching a consultation aiming to ensure that the licensing framework applicable to PSPs is appropriate, certain and function-focused.

Despite the minimal discrepancy in timing, these key actions correspond to the regulatory developments published on June 7, 2023. They are examined below in the same order in which they are mentioned above.

Strategic Plan for Australia’s Payments System

Goal

The primary goal of the Strategic Plan for Australia’s Payments System is to provide an outline on the Australian government’s key objectives and areas of policy focus in the payments industry.

The plan is a result of a collaborative process involving regulators, as well as industry and consumer group representatives. A consultation was carried out by the Australian Treasury between December 14, 2022 and February 6, 2023. The Treasury received 60 responses to the consultation; all non-confidential submissions can also be accessed on the consultation’s webpage.

Content

In taking particular actions and decisions with respect to the Australian payments system, the government has committed to the following four core principles: trustworthiness; accessibility; innovation; and efficiency. These principles are not mutually exclusive and may be applicable concurrently with each other.

The strategic plan lays down the government’s five top priorities for the next 18 months:

  • Ensuring the safety and resilience of the Australian payments system by, for example, tackling issues pertaining to fraud prevention and cybersecurity.
  • Bringing the payments regulatory framework up-to-date by implementing changes to the PSRA 1998 and the current payments licensing framework, as well by focusing on least-cost routing (LCR) actions reducing payments costs for small businesses.
  • Developing modern Australian payments infrastructure by phasing out cheques, upgrading payments systems and protecting consumers’ access to cash.
  • Strengthening competition, productivity and innovation across the economy by addressing issues such as the extension of the Consumer Data Right (CDR) to action initiation, including payment initiation.
  • Preserving Australia’s leading position in the global payments landscape by nurturing innovation, focusing on cross-border payments and exploring an Australian central bank digital currency (CBDC).

The list above demonstrates the relationship between the strategic plan and the other two consultation papers published on June 7, 2023. Whereas the strategic plan lays down the general foundation for taking actions falling within the five areas identified above, the two consultations, discussed below, form only one (yet substantial) part of the second area of policy focus – updating the payments regulatory framework.

The strategic plan document can be used to identify particular timelines for initiatives falling under the remaining four areas of focus; a table clearly outlining the government’s roadmap for the payments system can be found on page 33 of the strategic plan.

Timeline and next steps

Aiming to ensure that the strategic plan is fit-for-purpose and appropriate in light of technological innovation, consumer demands and changes in the payments industry, the Australian government has confirmed that the document will be subject to review every 18 months.

Given that the strategic plan was published in June 2023, the next, updated version of the strategic plan will be published in 2025. In the interim lifecycle of the current strategic plan, the government plans to engage in roundtable discussions with payments system industry representatives in mid-2024.

Consultation on Reforms to the PSRA 1998

Goal

The primary goal of the PSRA 1998 consultation is to enable the Australian government and regulators to address new challenges that emerge as the payments sector evolves.

The consultation aims to introduce amendments to the PSRA 1998, which governs the regulation of payment systems and purchased payment facilities (PPFs).

Content

The proposals brought forward in the PSRA 1998 consultation paper come in the aftermath of the Review of the Australian Payments System in 2021. They reflect the recommendations contained in the review’s final report; in particular, they incorporate the changes suggested in Recommendations 6 and 7. As a result, the consultation focuses on two key reforms regarding the government’s regulatory powers and the PSRA 1998’s scope.

1. Expanding the act’s scope

The PSRA 1998 consultation paper proposes an expansion of the regulatory scope of the PSRA 1998 to ensure that the act captures new payments market entrants, including digital wallet service providers.

The specific provision subject to revision is Section 7 of the PSRA 1998, which contains the existing definitions of “payment system” and “participant in a payment system”. In the event that the proposed changes are adopted, the table below demonstrates how these definitions will be amended. The government has opted to describe the approach to the revised definitions in general terms, as the precise wording will be disclosed later during the drafting process of the new legislation.

TermCurrent definition Proposed approach to definition“Payment system”

Defined as “a funds transfer system that facilitates the circulation of money, and includes any instruments and procedures that relate to the system”. (N.B.: Italicised emphasis was originally added by government)

The government proposes to abolish the limitation of the definition to funds transfer systems that facilitate the circulation of money.

Instead, it proposes an approach that places emphasis on “an arrangement or series of arrangements for enabling or facilitating payment or transfer of value, or a class of payments or transfer of value, and includes any instruments and procedures that relate to the arrangement or series of arrangements”.

“Participant in a payment system”

Defined to include either of the following:

  • “[A] constitutional corporation that is a participant in the system in accordance with the rules governing the operation of the system”.
  • “[A] constitutional corporation that is an administrator of the system.”

The government proposes the following approach:

A revised definition of participant could apply to a constitutional corporation that operates, participates in or administers a payment system. It could also include a constitutional corporation that provides services to a payment system, or provides services for the purposes of enabling or facilitating a transfer of value using a payment system.

This technology-neutral approach would ensure that the PSRA 1998 captures both entities with a direct relationship to a payments system and entities that are indirectly connected, such as payment gateways and digital wallets.

The proposal excludes merchants from the PSRA 1998’s scope, with the exception of merchants that have a relationship to a payments system due to their payments system membership or provision of payment services.

2. Introducing new ministerial powers

The second key reform brought forward in the PSRA 1998 consultation paper is the introduction of new ministerial powers, which will allow the government to tackle issues that fall outside the current mandate of Australian regulators.

As the consultation paper recognises, the RBA is the primary regulator of payments systems in Australia. The RBA can take action to address issues contrary to the “public interest”, as defined under Section 8 of the PSRA 1998, particularly when these issues relate to matters such as financial safety of payments system participants and competition.

However, issues to be addressed on the basis of “national interest” fall outside the RBA’s mandate and regulatory role. To address this gap, Recommendation 7 of the 2021 Review of the Australian Payments System proposed the following:

“The Treasurer should have the power to designate payment systems and participants of designated payment systems where it is in the national interest to do so. The designation power includes the power to direct regulators to develop regulatory rules and the power for the Treasurer to give binding directions to operators of, or participants in, payment systems.”

The consultation paper follows the proposal under Recommendation 7, stating that the new designation powers would allow the Treasury to:

  • Facilitate a more open engagement with the payments industry.
  • Address urgent issues in a timely manner.
  • Get more regulators involved when a certain issue goes beyond the scope of powers of a particular regulator.

In practical terms, the new designation powers would allow the Treasury to meet its goals by taking the following measures on the grounds of “national interest”:

  • Designating payments systems.
  • Identifying the “best-placed regulator” to resolve a particular policy issue concerning certain designated systems.
  • Releasing particular directions to regulators.

The Treasury’s designation powers in the “national interest” would essentially resemble the RBA’s powers to designate payment systems in the “public interest” in accordance with Section 11 of the PSRA 1998.

Before undertaking any action, under the proposal, the Treasury must determine that a certain designation action would be in the “national interest”. However, at present, the PSRA 1998 does not contain a definition of “national interest”. As the consultation paper states, it is not common practice for Australian legislation to include a precise definition of the term. Instead, the government proposes that the Treasury’s actions in the “national interest” would be adopted with reference to a wide-ranging, but non-exhaustive, list of factors, including:

  • National security.
  • Consumer protection.
  • Anti-money laundering and counter-terrorist financing (AML/CTF).
  • Cybersecurity.

Depending on the outcome of the consultation, such a list of factors would be included either in the text of PSRA 1998 or in accompanying documents.

Timeline and next steps

The consultation took place between June 7, 2023 and July 7, 2023. As part of the consultation, interested parties were instructed to address the list of questions in Annexure 3 of the consultation paper.

As a next step identified in the roadmap for Australia’s payments system, the government will use the consultation’s feedback to develop draft legislation, launch a consultation on the exposure draft legislation and introduce the new measures amending the PSRA 1998. The government’s intention is to do so by the end of 2023.

Consultation on Licensing of PSPs and Payment Functions

Goal

The payment functions consultation aims to contribute to the government’s work on a new licensing regime for PSPs. It focuses on the definitions of payment functions that will serve as a foundation of the new tiered regime. The planned framework will take these functions into account to ensure that each PSP is supervised in a consistent manner and based on the particular risks associated with its business activities.

The consultation paper presents a list of additional objectives that the government hopes to meet through introducing a new licensing regime:

  • Achieving increased certainty for PSPs that may need a licence with respect to the type of licence and related regulatory obligations.
  • Ensuring there is a more level playing field for PSPs looking to gain access to payment systems, particularly with respect to competition, diversity and innovation.
  • Adjusting the nature of regulatory obligations by taking into account the level of risk for end users associated with particular PSPs.
  • Streamlining the authorisation and licensing processes for entities, particularly where multiple licences may be required.
  • Aligning the Australian regulatory framework with other jurisdictions, especially for PSPs that seek entry into the local market.

Content

The payments functions consultation is a result of Recommendations 8 and 9 of the 2001 Review of the Australian Payments System, which, respectively, require the introduction of a list of payment functions that will be subject to regulation and specify that the payments licensing framework should be tiered and aligned with the functions list.

Drawing on insights and examples from other jurisdictions (in particular, the European Union, the United Kingdom, Singapore and Canada), the consultation paper proposes seven defined payments functions set out under Table 1. These payments functions are grouped into two main categories and then subdivided into additional sub-categories:

  1. Stored-value facilities (SVFs):
  • Issuance of traditional payment accounts or facilities.
  • Issuance of payment stablecoins.
  1. Payment facilitation services (PFSs):
  • Issuance of payment instruments.
  • Payment initiation services.
  • Payment facilitation, authentication, authorisation and processing services.
  • Payments clearing and settlement services.
  • Money transfer services.

For proposed definitions and examples of entities falling within the categories above, please refer to Table 1 of the consultation paper.

The proposed definitions cover a wider range of payments products than the non-cash payment facilities currently covered under the Australian financial services licence (AFSL) regime. The government proposes one of the following three primary options to incorporate the payments functions list into the existing regulatory framework:

  • The list could act as a replacement to the existing concept of non-cash payment facilities.
  • Adding the list as a non-exhaustive list of examples of a new “payment services” definition, which will replace the existing concept of non-cash payment facilities.
  • Regulating SVFs as a type of financial product that replaces non-cash payment facilities, while also regulating PFSs as another type of financial service.

The list of regulated payment functions may be expanding, but licensing exemptions will still apply. It is proposed that the following existing exemptions would remain in place due to the limited levels of risks posed:

  • Low-value payment facilities.
  • Limited-purpose facilities, such as gift cards, loyalty schemes and prepaid mobile phone accounts.
  • Cash payments.

The government has also included a list of existing exemptions that may be amended to ensure consistency with the new licensing regime, including:

  • Exchange and settlement between non-cash payment providers.
  • Certain electronic funds transfers.
  • Payments debited to a credit facility.
  • Unlicensed product issuers that use licensed intermediaries.
  • Relief provided to specified entities and non-cash payment facilities.

Timeline and next steps

The payments functions consultation closes on July 19, 2023. Interested parties are requested to address the list of questions in Appendix 1 of the consultation paper.

As a next step in late 2023, as specified in the roadmap for Australia’s payments system, the government will launch a consultation on the obligations to be imposed on PSPs under the new licensing framework. The submissions received during both consultations will be used to draft the new PSPs licensing framework; the government has confirmed that its plan is to introduce the new legislation in 2024.

Wrapping Things up – But Only for Now

All three regulatory actions detailed above will result in far-reaching changes to the Australian payments system, which the Australian Banking Association (ABA) has described as the system’s “biggest overhaul in 35 years”.

The Strategic Plan for Australia’s Payments System contains no surprises, as the proposals and recommendations have been long in the making; this also applies to the PSRA 1998 and payments functions consultations. As a key advantage associated with all proposals, the Australian payments system will be better equipped to address the benefits and risks associated with more technologically advanced payments products and activities.

To the extent that the new reforms will align the Australian regulatory framework with standards and rules applicable in other key jurisdictions, the proposals also have the potential to enhance the country’s connectivity within the international payments landscape. As clarified in the payment functions consultation discussion, the government expects that the new rules would result in additional clarity for foreign and multinational PSPs that wish to enter the Australian payments market. However, the modernised payments legislation, to be introduced in 2024, will introduce new regulatory requirements for PSPs that may thus far have been subject to licensing exemptions or lack of directly applicable regulation. Therefore, these PSPs should begin to familiarise themselves with the seven draft payments functions described above.

The government’s roadmap for the payments system contains multiple other initiatives that have yet to be introduced in 2023. The terms of some of these initiatives, including the consultation papers above, are still being presented in wider, general terms with further details still to be determined. Interested parties may, therefore, wish to influence the course of legislative and regulatory decision-making by participating or, alternatively, keeping up to date with all regulatory developments and responses from the industry and other stakeholders.

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