THE INNOVATION JOURNEY:

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1 THE INNOVATION JOURNEY: The last four years and into the future Presentation to the Australian Payments Forum Monday 15 April 2013

2 Where were we? DCITA Report 2006 APCA Innovation Report 2008/9 What s happened since? Where to from here? 1

3 2006 DCITA Future Electronic Payments Markets : 5 actions for $2 billion in cost savings to the economy 1. Moving cash to debit cards $100 billion of cash transactions with a value of over $20 Beyond $20 level, least costly real-time method is debit card Potential savings $900m 2. Lowering the electronic payment threshold Introducing electronic payment products that are less costly than cash for smaller or micro-payments Proliferation of contactless, stored-value cards in transit functions in other countries > what about Australia? 3. Electronic bill payments A significant proportion of bill payments still made using overthe-counter methods and paper-based payment products Need for data / information with payment 2

4 2006 DCITA Future Electronic Payments Markets : 5 actions for $2 billion in cost savings to the economy 4. Electronic bill presentment Research has shown that if a bill is presented electronically, it is significantly more likely that the bill will be paid electronically In addition, electronic bill presentment provides other significant benefits to the economy and to billers eg. direct cost reductions to a biller s operations 5. Migrating cheques to direct entry Still areas where direct entry has yet to replace cheques, even though it would be advantageous to do so B2B payments, government payments, superannuation payments, employee expense reimbursements and bill payments are all key areas that still rely significantly on cheques 3

5 Cost of Payment Systems ($ millions) >>> The DCITA savings equated to additional economic growth of roughly 25 basis points of GDP Economy-wide cost savings from increasing electronic payments $ $ $ Economy-wide cost savings from increasing electronic payments $8 000 $6 000 Total Costs Reductions from Reductions from Cheque migration Electronic bill Biller channel Target micro-payment cash migration presentment mix reductions product over $20 reductions 4

6 2008/9 APCA review concluded that Australian consumers are not demanding innovation in payments... A high percentage of consumers are banked Consumers have lots of choice in payment methods Similar numbers of options by payment channel as seen in most other developed markets There is no overt demand Except in mass transit They perceive no major gaps But take care: Consumers don t know what s possible As Henry Ford said If I d asked people what they wanted, they d have said a faster horse 5

7 ... and that there are different types of innovation Systemic vs Product innovation Systemic changes require collaborative efforts Continuous improvement vs Step change Incremental changes are more easily understood & adopted Repackaging vs Value Proposition innovation B of A s Keep the change debit card program changed the VP Imitators vs Innovators Copying ideas from elsewhere can still be original in your market and categorisation can be a matter of perception 6

8 Six main drivers of innovation were discussed 1. Consumer / Merchant demand Historically large merchants have been drivers of change Increased speed, convenience, consumer loyalty, hence lower costs & higher revenue Consumers have had little direct influence But their choice of payment method is driven by the 6 C s: Capability, Coverage, Cost, Confidence, Confidentiality, Convenience 2. Technological advancements New technological capability facilitates innovation Technology adoption tends to be part of broader strategies 3. Level of security Confidence is one of the 6 C s Innovative payment systems face a challenge to convince consumers they are secure & trustworthy 7

9 Six main drivers of innovation were discussed 4. Industry framework Government has a role to play in ensuring innovation & efficiency are driven into the payment network Industry coordination is required for innovation shared across all players 5. Competition / Market share In mature markets, maintaining a competitive advantage is key to acquiring & retaining customers Many players seek a first mover advantage using innovations 6. Profit Clear financial incentives spur innovation The business case is King 8

10 Developing a business case for step change innovation is problematic - even more so today Profit margins on payment transactions have been decreasing Increasing competition in the marketplace User belief that cost of payments should be constantly reducing Investment in payments has to compete with other investment opportunities, which tend to provide better returns Current appetite in FI s for investment is very low Step change innovations bring more risk Tend to be larger investments Estimating the adoption curve embodies more guess work Longer pay back period, due to low adoption in early years (consumer payment habits take time to break ) May be eclipsed by new technology before reaching critical mass Despite potential for higher returns, FIs are reluctant to invest 9

11 Hence focus is on innovation providing continuous incremental improvement Consumers more easily understand, accept and adopt innovations that require little change in behaviour Investment in incremental improvement is lower, and can more easily be unwound Easier to test market Easier to build business case with more certainty Leverages existing systems Can be substantiated on the adoption by smaller market segments/niches 10

12 Where were we? What s happened since? Where to from here? 11

13 Electronic forms of payment have continued to displace paper Particularly strong growth in debit card transactions Cheque volume has continued to decline High growth in shopping over the internet Removal of toll booths and growth in etags Steps toward mass transit eticketing Open-loop contactless has taken off, and cash withdrawals have declined High growth in prepaid travel cards 12

14 Transactions Per Year (Millions) Debit cards have lead the recent growth in electronic payment transaction volume... Annual Transaction Volume By Type of Retail Payment ,500 3,000 2,500 2,000 1,500 1,000 Customer Cheque Direct Debit Direct Credit ATM Cash Withdrawal Credit & Charge Cards Debit Cards Source: RBA Payment Statistics 13

15 Transaction Value Per Year ($ Millions)... but Direct Entry dominates transaction value 8,000,000 Annual Transaction Value By Type of Retail Payment ,000,000 6,000,000 5,000,000 4,000,000 3,000,000 Customer Cheque Direct Debit Direct Credit ATM Cash Withdrawal Credit & Charge Cards Debit Cards 2,000,000 1,000, Source: RBA Payment Statistics 14

16 Transaction Value Per Year ($ Millions) At retail level, the value of cash withdrawals has begun to fall as card activity increases 300,000 Annual Transaction Value By Type of Retail Payment , , ,000 ATM Cash Withdrawal Credit & Charge Cards Debit Cards 100,000 50, Source: RBA Payment Statistics 15

17 The second half of 2012 saw exponential growth in contactless payments Initially contactless issuance was way ahead of acceptance Acceptance caught up in 2012, spurred by Coles & Woolworths Public announcements include 10+m MasterCard PayPass cards on issue Over 120k contactless terminals deployed 40% of all MasterCard & Visa transactions in Coles are contactless Over 10% of MasterCard transactions below $100 are contactless Highest open-loop contactless txn per capita of any country In addition, anecdotally Many merchants adopting contactless have removed $ minimums (e.g., Subway) Massive growth in contactless transactions under $20 16

18 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Contactless will help continue cash displacement, with cash withdrawals trending down since 2008 $1,800 $1,600 Cash vs Card Value per person per month (adjusted for inflation) 6 Monthly Rolling Average, Indexed to June 2012 CPI $1,400 $1,200 $1,000 $800 $600 $400 $200 $- $ Cash Withdrawal per Capita per Month $ Card Purchases per Capita per Month 17

19 Online shopping is estimated to have doubled in the last 2-3 years, prompting more electronic payment growth The online shopping market, subject to many definitions, was estimated at $60 billion in 2009/10 Dominated by the travel sector Today estimated at around $100 billion, with the growth mainly in non-travel The strong Australian dollar Greater consumer comfort Growing choice amongst online merchants Lower prices NAB estimates online is about 5-6% of Australia's traditional retail sector Online Payments by Payment Method 2011/12 Number Growth, per cent Value Direct entry BPAY Credit cards, and MasterCard and Visa debit cards 25.0 (a) 16.7 Specialised payments providers (b) (a) Includes double-counting of some PayPal transactions (b) Estimates included for one provider for the March and June quarters 2012 Sources: BPAY; RBA; specialised payments providers 18

20 There have been limited market-wide innovations, but lots of localised activity Significant dabbling with new technologies/channels, especially mobile But no coordinated industry approach, with each bank launching its own flavour Further work arounds on information with payment have appeared AMP CustomSuper: direct credit with reference number Payment Adviser linking payroll processing firms and superannuation funds Large number of online initiatives Payment buttons: V.me, MasterPass, PNIPay 19

21 Where were we? What s happened since? Where to from here? 20

22 The Payments System Board has outlined strategic objectives for the future of the payments system All Direct Entry payments should be settled on the day payment instructions are exchanged by the end of 2013 The capacity for businesses and consumers to make payments in real time, with close to immediate funds availability to the recipient, by the end of 2016 There should be the ability to make and receive low-value payments outside normal banking hours by the end of 2016 Ideally it would also involve the capacity for the settlement of card payment receipts during weekends and public holidays Businesses and consumers should have the capacity to send more complete remittance information with payments by the end of 2016 A system for more easily addressing retail payments to any recipient should be available. If provided by a new real-time system, it should be available by the end of

23 The Real Time Payments initiative should provide a platform on which new payment approaches can be based The RTP s proposed information / data with payment should tackle a need identified for many years in the B2B market Further removing cheques (and cash) from this sector The initial convenience service aims to leverage the mobile channel Hopefully dealing with the interbank issues of current proprietary bank mobile payment systems The addressing of payments without account information should: Provide convenience / ease Meet the security concerns of some payees Speed per se may be less of a differentiator as DE moves to intra day settlement 22

24 Mobile NFC is likely to take off once mass transit eticketing is in place, particularly when it goes open-loop Although contactless is becoming more widespread, the move to mobile for these transactions should not be taken for granted Experience in other markets indicates mobile NFC payments can be driven by mass transit epayments Yet to see whether the Australian transit authorities will permit their proprietary applications on mobiles Sydney transit, for one, has indicated an eventual move to openloop card formats, leading the way for mobile NFC 23

25 The continued displacement of paper should continue and be encouraged Cheque usage will continue to decline Generational change Further inroads of existing electronic payment methods RTP initiative The issue of how to deal with the last few cheques remains Cash usage is likely to be further attacked by cards, both contactless and contact, as well as eticketing Surcharging controls and removal of card minimums will help The growth of online shopping also removes paper 24

26 Will innovation in payments help us capture the $2+ billion DCITA report cost savings & drive the digital economy? 1. Moving cash to (debit) cards This seems to be happening, major thrust of contactless 2. Lowering the electronic payment threshold etags, eticketing and contactless cards are attacking this 3. Electronic bill payments RTP initiative should help address the need for data / information with payment 4. B2B payment opportunities Electronic bill presentment & e-invoicing, e-conveyancing, superstream reforms 5. Migrating cheques to direct entry Cheques are in significant decline, and RTP initiative should help accelerate 25

27 DISCUSSION 26

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