Cash is dead, long live cash: The problems with Australia’s digital ecosystem
Tuesday, November 27, 2018/
Reserve Bank governor Phillip Lowe has warned banks and telco giants there may be a need for tighter regulation to ensure the reliability of Australia’s digital payments ecosystem if key players can’t do a better job preventing outages.
In a speech delivered to the Australian Payment Summit yesterday, the central bank chief said everyone across the digital payments supply chain needed to do a better job of preventing “serious operational incidents” as Australians continue to move away from cash payments.
“Continued effort needs to be made by all participants in the payments system to reduce operational problems,” Lowe said.
“If this does not happen, then it is possible that the Payments System Board could consider setting some standards.”
Lowe’s comments come less than a month after a Telstra outage left businesses across the country unable to process card payments, prompting angry owners to take their complaints against the telco public.
Some business owners claimed they lost thousands of dollars in business due to the outage, prompting the telecommunications ombudsman to advise merchants they may be entitled to compensation.
Earlier this year National Australia Bank (NAB) also compensated businesses after its own outage, which left merchants unable to use eftpos machines on a Saturday.
The cases have underscored the increasing seriousness of outages as consumers move away from cash payments, amid broader discussion about the state of play in the digital ecosystem and whether it adequately protects merchants.
Is cash dying?
In his speech yesterday, Lowe said it appears Australia has reached a turning point where cash will soon become a “niche” payment method.
The revelation, which has been foreshadowed for some time, is backed up by key metrics.
The data on cash payments is striking — ATM withdrawals per capita have decreased from 40 times a year in 2010 to about 25 times a year, according to ABS and RBA data.
At the same time, since 2000, electronic payments have skyrocketed from about 100 each year, on average, to almost 500 a year.
“It is now easier than it has been to conceive of a world in which banknotes are used for relatively few payments,” Lowe said.
Legacy systems unreliable
However, there is concern that businesses, often at the coal face of operational outages, will cop the brunt of consumer anger over technical issues as carrying cash becomes less common.
Steve Worthington, an adjunct professor at Swinburne University of Technology, who has been following Australia’s transition away from cash, says reliability was a key reason dollar bills aren’t going extinct.
“We know that systems will fail so we carry cash with us,” he tells SmartCompany.
Worthington says banks and telecommunications companies are burdened by legacy systems that can’t assure an adequate degree of reliability — an issue the RBA may have to contend with.
“They [the RBA] can put a lot of pressure on,” Worthington explains.
We need a plan B
Tony Greco, general manager of technical policy and public affairs for the Institute of Public Accountants, agrees the reliability of the digital payments ecosystem needs to improve.
“People have a right to expect those systems to work,” he tells SmartCompany.
“There’s a monopoly service and there’s no option B … cards are good, but are you going to give a 24/7 iron proof guarantee that it will be up and running every day of the year?
“We need that option B,” Greco says.
Building redundancies into the system are likely to be a focus for payment providers and telcos moving forward, although the rise of digital payments creates other possible failures on the merchant side, such as poor internet infrastructure.
The cost of electronic payments: Who pays?
These days, offering digital payment options is a competitive imperative for many businesses, which has driven demand for digital point-of-sale systems in recent years.
But there are costs associated with processing digital payments, namely interchange fees, which merchants pay when customers make card payments, making up about 60% of an average payment cost.
On average, Australian merchants pay 0.8% of a transaction value for Mastercard and Visa transactions, according to the RBA.
Card payment costs have traditionally been passed on by merchants through surcharges, but businesses doing this are coming under the pump from consumers who want free card payments.
A recent campaign by finder.com.au has taken things a step further, encouraging businesses to eliminate surcharges on digital transactions.
Over a thousand businesses have signed up, with one cafe SmartCompany spoke to several months ago saying absorbing card costs was a new reality for merchants.
Do interchange fees have a future?
Australia’s interchange fees are lower than many other countries, Lowe said, but there have been recent recommendations, including by the Productivity Commission, to consider regulation to lower (or potentially ban) interchange fees.
The RBA moved to reduce interchange fees with regulation in 2003, and Worthington says their potential abolishment has been hanging over the industry “like an axe” ever since.
“It’s becoming more obvious to merchants what their rates are,” he says.
Worthington says new competitors like Tyro, which allows some contactless debit payments to be processed through eftpos, where moving the needle for merchants.
Lowe said interchange fees will be part of an upcoming review of the payments system to be conducted by the Payments System Board, but that the availability of low-cost debit payments is important.
“The longstanding view of the Payments System Board has been merchants should at least have the choice of sending the debit payments through the lower cost system, whether that be eftpos or the international scheme,” he said.
“Merchants are saying ‘we’ll save some money here, if we can’t do it with our existing acquirer then we’ll start looking’,” he explains.
Greco says interchange fees are ultimately a question for the banks, but says fees could ultimately be a sticking point for merchants as cash becomes less common.
“The banks are being asked to come to the party,” he says.
Banks may not have much of a choice, however, as payment competitors come into the market giving merchants more choice than ever before.