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Payments

Regulatory background

Australia’s central bank is the Reserve Bank of Australia (RBA), which oversees payment systems in Australia, through the Payment Systems Board. The Payment Systems Act 1998 allows the RBA to regulate any payment system and create binding rules for security and performance in the system.

Over the past two decades the Reserve Bank of Australia has implemented several reforms in the sector, which include controlling risk, promoting the efficiency of payments and promoting competition for payment services.

Despite the RBA’s continued oversight, payment systems in Australia largely operate without regulatory intervention. Credit card use remains high, despite average interest rates not falling in line with Australia’s record low cash rate.

The “Four Pillars”

Australia’s banking industry is dominated by four major players, the “Big Four”: Commonwealth Bank (CBA), ANZ, National Australia Bank (NAB) and Westpac. The government policy to maintain their separation and prevent mergers between them is known as the “Four Pillars policy”. Between them the banks hold 84% of the credit card market of all banks (APRA, 2014).

Australian consumers overview

Australians are early adopters of new technology, including online and mobile retail as well as Consumer-2-Consumer and social commerce.

Smartphones

Australia has one of the highest smartphone penetrations in the world, at 76% higher than the UK, US and most of western Europe. The Australian smartphone market is split between Samsung (32%) and Apple (38%), with the iPhone clearly the preferred device among under-45s. A third of survey recipients had made an online purchase using their smartphone. (Deloitte Global Mobile Consumer Survey, 2014).

Tablets

Tablet penetration among Australians is 49%. While Australians are most likely to buy music and fast food via a smartphone, for all other categories of online retail a tablet is preferred. (Nielsen; The Telstra Smartphone & Tablet Index 2014, September 2014)

Online retail spend

National Australia Bank (NAB) publishes a monthly index of Australian Online Retails Sales. Annual spend is currently estimated at $16.8 billion, up 8% on a year ago (12 months to March 2015), equivalent to equivalent to 6.9% of spending at traditional bricks and mortar retailers. Online retail spend is growing at over double the rate of traditional retail spend.

Trust

When it comes to mobile transactions, Australians trust their banks above all (73%) followed by financial institutions such as Visa and MasterCard (26%) and money transfer services such as PayPal and Western Union.

Preferred online payment methods

Figure 3: Graph showing Australian consumers preferred payment methods for cross border transactions (Source: Nielsen survey commissioned by PayPal, 2013)

Primary online payment methods in Australia

There are six online payment methods in Australia:

Credit cards

These have different transaction costs associated with them, but are a popular option due to the widespread use of credit cards in Australia. New services have also increased security, such as MasterCard SecureCode and Verified by Visa, which requires a customer to have their mobile phone with them to receive a security code when they make a transaction. Retailers will likely need a Merchant account and payment gateway to accept credit card payments.

Merchants that don’t wish to use a payment gateway will need to purchase and register an SSL certificate, obtain a unique IP, and will usually be required to undergo PCI (Payment Card Industry) compliance, which audits your network security systems and methods of collection and storage of credit card information.

Debit cards

These use the same payment processing technology as credit cards, but access funds directly from the card holder’s transaction account. Merchants able to accept Australian credit cards can generally accept debit cards without making any changes.

Direct deposit and direct debit

Australians are one of the world’s biggest users of online banking, including mobile banking. Over 80% of Australians use online banking to pay bills, buy goods and services with their phones (ACMA, 2013). Direct deposit, ie transferring money directly into a merchant’s account, is another widely used payment method for goods and services online, however on a much smaller scale than credit cards and PayPal.

Online payment services

Online retailers have two main options when it comes to online payment service providers in Australia. These providers allow customers to pay by credit card or electronic transfer without the merchant having access to their credit card or bank account details.

Payment gateways: these link an online store with a merchant account, allowing the immediate transfer of funds. Merchants have more control with this method, as they own both the gateway and the merchant account.

Third party processors: these don’t require sellers to have a merchant account. They are often cheaper and easier to set up in the short term, but they don’t settle funds daily and their fees may be higher.

Some of the main third party processors include:

Some of the main payment gateways, which are accepted by most Australian merchant accounts, include:

Merchant Warrior

IP Payments

SecurePay

SCNet

Fat Zebra

Australian banks also offer their own payment gateway services. One of the main ones of these is MIGS (MasterCard Internet Gateway Service) which also powers the gateways of around seventy banks in the Asia-Pacific region as a white label service. These bank owned gateways do not always offer the same level of support as third party gateways.

Electronic bill payment services

These allow large organisations to offer bill payments over the internet. The major players are BPay and Australia Post Bill Pay.

Cheques and money orders

These have become increasingly rare, but are offered by some merchants.

Service Selection

As always, the payment methods chosen should reflect the channel and customer proposition. More importantly, the method should also work from the customer’s perspective. For example, does the mobile enabled payment method offered reflect the types of devices a customer would use and if bank-to-bank payments, or an overlay payments service is used, can the merchant refund the customer using the same mechanism? If not, what would the customer proposition look like?

Credit and debit cards in Australia

Both credit cards and debit cards are widely and accepted in Australia. There are 7,793,000 credit card holders in Australia (Roy Morgan, 2013)

There are nearly 16 million credit and charge card accounts in Australia, according to RBA statistics. Monthly credit card spend reached $25.6 billion in March 2015 with over 192 million transactions made. Overall, the value of card transactions in Australia has grown at an annual rate of 8.8 per cent since 2002, well above the average growth of 6 per cent in household consumption.

Recent years have also seen a shift from credit cards to debit cards. In August 2004, 49% of card purchases were via debit card and 51% were via credit card. By August 2014, 66% were via debit card and 34% via credit card.

Visa and MasterCard are the cards accepted most widely, with AMEX usually accepted with some exceptions.

The total value of all card transactions passed $510 billion in 2014.

Figure 4: Graph showing payment methods used for domestic online transactions source: Asendia Pocket Guide to cross border e-commerce 2015

Figure 3 highlights the differences in trust that Australian consumers have between buying from a domestic online merchant and a cross border transaction. PayPal is the preferred method in that situation with its buyer protection and global reach going a long way to comforting the customer.

Innovations in the payments sector

New Payments Platform (NPP)

The New Payments Platform (NPP) is new infrastructure for low-value payments in Australia. The aim is provide Australian businesses and consumers with a fast, versatile, data-rich payments system for making everyday payments, using the global ISO20022 messaging standard.

Currently in the “Design, Build, Test” phase (as of December 2014) the project involves Australia’s four major banks as well as small banks and card providers, ACPA (Australian Payments Clearing Association) and the RBA.

EFTPOS

EFTPOS (electronic funds transfer at point of sale) is the primary system in Australia and New Zealand for electronic funds transfer though payment cards. Australia’s system is country specific and does not interconnect. The EFT network is owned by fifteen members who have interchange agreements. Merchants wanting to accept EFTPOS payments must enter an agreement with one of the members, who rent the terminal to the merchant.

Because EFTPOS payments require a PIN it has not previously been used online. But EFTPOS is currently developing new payment products including contactless, online and mobile. It anticipates beginning to offer some online and mobile EFTPOS solutions in late 2015.

Cryptocurrencies

Bitcoin is the primary virtual currency getting attention in Australia. Merchants and service providers have started experimenting with allowing Bitcoin payments.

The Commonwealth Bank plans to start using the Ripple digital currency network to settle payments between its subsidiaries, and says this could eventually enable adding cryptocurrencies.

Mobile commerce

Australians are relatively early adopters of mobile banking compared with the US and UK, though behind many Asian and Scandinavian countries.

Mobile payment apps are at a considerably earlier stage in Australia than mobile banking apps, but Deloitte predicts mobile payments will increase in 2015 due to a “clear appetite for use”, and new entrants into the payment space such as Square, which established Australian operations in early 2015.

Issues affecting the payments sector

GST (Goods & Service Tax): Australia’s GST is a 10% tax on goods and services, equivalent to the UK’s VAT (Value Added Tax). For international purchases, goods worth less than AUD $1,000 are currently exempt. However many local Australian retailers have been lobbying the government to lower this threshold to bring international prices in line with local prices.

Interchange fees: Interchange fees have been capped by the RBA since 2003, but the Bank is reviewing them. Currently, there can be a difference of up to 180 basis points in the cost of the same card presented at different merchants, and merchants often have no way of determining which are the high-cost cards. The RBA wants to make it easier for merchants to respond to differing card costs.

Merchant service fees: Large merchants with more market power are often able to secure lower interchange fees and merchant service fees than smaller merchants, reducing smaller retailers’ ability to compete. The Australian Retailers Association says that by capping fees, it could ensure retailers pay similar merchant service fees, no matter their strategic importance to scheme providers.

Payment card surcharges: In 2002 the RBA allowed surcharging on card payments, but it remains unpopular with consumers. The Bank indicated in 2015 that it may step in to limit “excessive” surcharges and to prevent certain surcharges, for example on low value debit card transactions.

Conclusion

Australia is a highly developed market for online and mobile retail, with high penetration and usage across all demographics

By accepting both credit cards and PayPal, international retailers will be accessible to the vast majority of Australia’s online consumers

The payments sector in Australia is currently undergoing rapid innovation, and while Bitcoin and other virtual currencies currently remain a niche interest, there may be significant demand in future.

Regulatory review and reform in certain areas is imminent, with Australia’s Reserve Bank keen to improve payment issues for both consumers and smaller merchants

 

 

Political and socio-economic environment

Online and mobile usage

Marketing

Custom clearance policy

Legal framework and regulation

Logistics and fulfilment

References