Australia’s payments ecosystem is of fundamental importance to Australia’s economy and society, supporting around 55 million payments worth up to $650 billion each day. The system is highly complex and is evolving rapidly. New platforms and technologies are changing the ways in which consumers and businesses transact. The growth of mobile payments has been particularly rapid against the backdrop of the COVID-19 pandemic, and is predicted to become the most popular contactless way for Australians to pay by the end of 2021.
These changes are disrupting the position enjoyed by many of Australia’s major banks and financial institutions that have traditionally been at the centre of the payments system. A growing number of powerful multinational technology firms (like Apple, Google, and others) are playing increasingly central roles within Australia’s payments architecture–often with little regulatory oversight. The global reach and market dominance of these so-called ‘fintechs’ has at times left domestic partners looking to use their platforms and services with little influence and few opportunities to negotiate favourable agreements.
Recent changes to the payments ecosystem have uncovered gaps and inconsistencies in the current regulatory framework. Much of the existing legislation governing the payments space is predicated on outdated structures and systems. Moreover, the effectiveness of the multitude of regulators covering the payments ecosystem has been undermined by outdated concepts of what constitutes a payment platform or service. These gaps have allowed some of the most important players in the system to operate beyond the reach of our regulators.
The fundamental importance of the payments ecosystem, the speed and scale of recent changes, and the regulatory gaps that have emerged, mean Australia does not have the luxury of watching and waiting as developments unfold. Instead, this report recommends government urgently develop proactive policy and implement legislative and regulatory change. In particular, the committee recommends the Treasury report to Parliament on gaps in the current self-regulatory model and provide policy advice on the merits of regulating payment platform providers as participants in the payments ecosystem. The committee also calls for the definition of a payments system within key regulations to be expanded to encompass new and emerging payments technologies and platforms.
Transformations in the payments ecosystem have also exposed consumers to new issues and new threats. Evidence before this committee suggests that
anti-competitive practices may be jeopardising consumer choice, stifling innovation, and driving up payment costs. The breadth of access to sensitive consumer information is also an area of concern for the committee, related primarily to the potential misuse of transaction data (such as for marketing) or the hijacking of this data for nefarious purposes.
Perhaps the most contentious and prominent issue relates to Apple’s control of the near-field communication antenna in its mobile devices. Unlike its competitors, Apple limits third-party access to these chips, in effect requiring payments to be processed with its Apple Pay digital wallet by default, which yields the multinational technology firm a small cut of each of these transactions.
Ultimately, while the committee is concerned that Apple’s business practices in this respect may have restricted competition and limited some innovation in this space, the committee is not convinced of the need for regulatory intervention at this time. The committee nevertheless welcomes the recently launched inquiry by the Australian Competition and Consumer Commission into this issue and the committee recommends key issues for the Commission to consider in this investigation.
In contrast to the fees charged by Apple for the use of its payment technology, Google does not charge a fee for the use of its Google Pay payments platform. Many of the witnesses and submitters to this inquiry promoted Google’s approach as promoting competition and innovation in the payments space. The committee, however, is concerned that the business model underpinning Google Pay may lead to significant issues related to the privacy and the use of customer data.
Another key area of debate related to least-cost routing (LCR), a process through which merchants route transactions through the card scheme that attracts the lowest costs. While this capability exists on most physical cards in Australia, it is not currently supported for mobile payments, often driving up the costs of acceptance for merchants and ultimately consumers. The committee welcomes further attention from regulatory agencies on this issue. At this time, however, the committee remains unconvinced that legislation is required to mandate LCR for mobile payments.
Throughout this inquiry, evidence before the committee suggested the rapid evolution of Australia’s payments ecosystem is likely to continue. It is therefore critical that our legislation, regulators, and regulatory approaches are nimble and flexible enough to adapt to the future of the sector–whatever it looks like. Ensuring this flexibility will require first, that legislation and regulations are updated to become as technology-neutral as possible, rather than wedded to particular ideas of how and what constitute payment platforms and systems. Second, new powers should be vested in the government to allow it to designate firms as participants in the payments system to ensure they fall under existing legislation and that regulations keep pace with practice.