Mr Christopher Kent

Head of Payments Policy Department

Reserve Bank of Australia

GPO Box 3947

Sydney NSW 2001

31 August 2011

Dear Mr Christopher Kent,

I am attaching my submission to the Strategic Review of Innovation in the Payments System.

Yours sincerely,

Supriya Singh

Professor Supriya Singh

Deputy Head, Research

Graduate School of Business and Law,

RMIT University

GPO Box 2476

Melbourne, Vic 3001


Submission: Strategic Review of Innovation in the Payments System

Overview

This submission will identify four areas where the Australian payments system is not currently meeting the needs of end-users and is at risk of lagging behind other countries in the next five to ten years. These areas relate to international remittances, mobile money, appropriate privacy and security of online payments, and ensuring the availability of a mix of payment instruments and channels for end-users.

1.  International remittances are one of the largest international flows of money. Though central banks and commercial banks are involved in initiatives to lower the cost of money that migrants send home, Australia has some of the highest costs of remittances in the region.

2.  Mobile money transfers with or without a bank account are revolutionising money transfers and payments in the developing world. In Australia, banks have not gone beyond mobile banking to seek partnerships with telecommunications companies to enable the transfer of mobile money between persons or between a person and a business without going through a bank account. Mobile money can potentially increase access to payments and money transfers in rural and remote areas and may replace some cash and cheque payments.

3.  Comfort with online payments and transfers would increase if there was appropriate privacy and security that matched social practice.

4.  People use a mix of payments instruments and channels to suit different activities and recipients. Cheques and cash remain an important part of the mix of payments. The emphasis needs to be on responding to user needs while reducing unit costs.

High Costs of International Remittances

Remittances to developing countries in 2010 are estimated at US$ 325 billion (The World Bank 2011). For individual countries, remittances can be greater than foreign direct investment (Mohapatra, Ratha, and Silwal 2010). The total value of remittances is even greater as informal remittances are estimated to be at least 50 per cent of recorded remittances (Development Prospects Group 2007). The International Organization for Migration (IOM) (Swing 2010) estimates that in 2009, recorded remittances ‘were nearly three times the amount of official aid and almost as large as direct foreign investment flows to developing countries’(p.2).

Table 1: Remittance costs for sending US$ 200

Sending country▲ / Receiving country / First quarter 2011
Sending US$ 200
Fee / Exchange rate margin (%) / Percent (%) / Total Cost
Australia / Pakistan / 17.91 / 1.99 / 10.94 / 21.89
Vietnam / 22.04 / 0.47 / 11.49 / 22.97
Tuvalu / 26.22 / 0.00 / 13.11 / 26.22
Kiribati / 26.35 / 0.00 / 13.18 / 26.35
Vanuatu / 26.22 / 1.09 / 14.20 / 28.41
Tonga / 23.05 / 3.34 / 14.86 / 29.73
Solomon Islands / 26.59 / 2.01 / 15.31 / 30.61
Fiji / 24.50 / 3.38 / 15.63 / 31.26
Samoa / 23.43 / 4.92 / 16.63 / 33.26
Papua New Guinea / 26.22 / 7.31 / 20.42 / 40.84

Source: (International Finance Corporation (IFC))
The World Bank estimates outward remittances from Australia in 2009 at US$ 3 billion (Ratha, Mohapatra, and Silwal 2011). More up to date data is not available. Though 27 per cent of Australia’s population was born overseas (Australian Bureau of Statistics 2011) and thus most likely belong to transnational families, we do not have data for remittances from Australia to different countries. It is however known from the available data that sending money from Australia to Papua New Guinea is the fourth-highest in the world (International Finance Corporation (IFC)). These high costs of remittances go against worldwide trends where central banks together with commercial banks cooperate to bring down the cost of remittances, thus reducing the level of informal remittances.

It is important that data for remittances from and to Australia are more comprehensive and detailed, so that this important money transfer can become transparent, cheaper and more efficient.

Mobile Money

Mobile money transfers are increasing access and reducing costs of money transfers and payments in many parts of the developing world, where a large percentage of the population is unbanked. Mobile money refers to the transfer of money to persons or businesses via mobile phones, by people with or without a bank account (Singh and Shelly 2010). Gartner's latest research report says there will be more than 141.1 million mobile payment users worldwide in 2011, representing a 38.2 per cent rise from last year. Globally, mobile payments are forecast to total US$86.1 billion, up 75.9 per cent from last year (Mochiko 2011).

Australia, like many other developed countries is lagging behind, though it has its pockets of people, particularly in remote Australia with little access to physical banking services or access to cash. The emphasis in Australia has been on mobile banking, which adds another channel of payments, rather than introduces a new form of payment. In Australia, one can see an obvious application of mobile banking in remote and rural Australia and particularly in remote indigenous communities with little access to cash (See (Singh et al. 2007)).

Mobile money can also be transferred face-to-face and instantly, thus mimicking some of the properties of cash and improving on the speed of cheques. With appropriate regulation of business correspondents and/or cash-in and cash-out agents, mobile money can be withdrawn as cash, or transferred to a bank account. With safeguards for privacy and security, mobile money can reduce the exploitation of the corner store, increase access and convenience to money transfers and payments, and possibly increase savings.

Appropriate Privacy and Security

The Reserve Bank of Australia has noted in its paper (Reserve Bank of Australia 2011) that Australian consumers ‘appear to be reasonably comfortable with current online payment methods’ (p. 7). One of the reasons for this comfort is that consumers have learnt to trust the consumer protection built into the use of credit cards. The limiting of consumer liability in case of fraud with credit cards has now been also extended to internet payments.

Taking the user-centered approach to privacy and security means that the user should be in control with the sharing of information and being comfortable that the money in the account and payments are safe. At present, with most banks, there is a blanket prohibition from sharing your access codes and passwords. However, research at RMIT University and the Smart Internet Technology Cooperative Research Centre showed that it was common practice for consumers to share this information with their partners or families. This was part of money management practices, or at times a response to the lack of access to banking and payments services. Hence providers’ security provisions collide with social practice (Singh et al. 2007, 2007).

Roy Morgan Research for the Smart Internet Technology Cooperative Research Centre and RMIT University in September 2007 found (Singh 2008)

…that nearly half (43%) of a random representative sample of 669 Australians over 18 and with a bank account had shared their banking passwords and PINs. One third (33%) had shared their banking passwords or PINs with their partners. 7 percent had shared them with their children, 6 percent with other family members, and 5 percent with their parents (p. 110).

The user-centered approach to privacy also means that consumers would like additional information to increase comfort with online transactions. At present with some online transfers, it is the end-user who carries the risk of sending money to the wrong account. Comfort with online payments and transfers would increase if the match between the account number and the name of the account holder is confirmed at the time of payment or transfer.

A Mix of Payments

The Reserve Bank of Australia’s 2010 Consumer Payments Use Study has revealed the importance of different payments instruments and channels for consumers. It showed that cash remained the dominant instrument for low-value payments under $40. Cards were used mainly for mid-sized transactions. BPAY, internet/telephone banking and cheques are important ways of paying for transactions above $500. The choice of these payments instruments was influenced by what consumers carried with them; the speed of the transaction and the ability to use their own funds (Reserve Bank of Australia 2011). Other research has shown that there also needs to be a match between the information provided by the payment instrument that fits the requirements of the activity for both sides of the transaction. The cheque butt was an important reason for the use of cheques because it recorded money sent that could be tracked against money taken from the account (Singh 1999).

At present the discussion is around the high cost of cash and cheques, while both are declining in number an value as part of the total payments landscape. However, the Reserve Bank of Australia’s 2010 Consumer Payments Use Study also shows that cash and cheques remain an important part of the mix of payments for different sets of consumers and activities. Taking a user-centered approach, the questions are how we can respond to the needs of consumers who at present use cash and cheques. This will mean being able to replicate the immediacy, speed, and information provided by these payments instruments. Until this is done, providers’ concerns about unit costs can be more usefully addressed by providers making their systems more efficient, rather than removing choice in the mix of payments. The earlier demise of the passbook has been much mourned by people with little functional literacy and other disabilities, for the passbook enabled them to get help from friends and family before they reached the bank. It may be that the cheque will in time become a relic, but at present there are few other ways of paying your plumber, handyman or garden supplier.

References

Australian Bureau of Statistics. Migration, Australia, 2009-10 (Cat No. 34120) 2011. Available from http://www.abs.gov.au/ausstats/abs@.nsf/Products/A6B6AC80B29DE8F3CA2578B000119758?opendocument accessed 9 August 2011.

Development Prospects Group. 2007. Migration and Development Brief 2. Migration and Remittances Team World Bank 2007 [cited 21 August 2007]. Available from http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21124587~pagePK:64257043~piPK:437376~theSitePK:4607,00.html.

International Finance Corporation (IFC). 2011. Remittance Prices Worldwide: Making markets more transparent [cited 24 August 2011]. Available from http://remittanceprices.worldbank.org/.

Mochiko, Thabiso. 2011. Mobile banking 'slow in Africa'. Business Day July 22.

Mohapatra, Sanket, Dilip Ratha, and Ani Silwal. 2011. Migration and Development Brief 13. Migration and Remittances Unit, World Bank 2010 [cited 5 March 2011].

Ratha, Dilip, Sanket Mohapatra, and Ani Silwal. 2011. The Migration and Remittances Factbook 2011. The World Bank 2011 [cited 30 August 2011]. Available from http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21352016~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html.

Reserve Bank of Australia. 2011. Strategic Review of Innovation in the Payments System: Issues for Consultation. Canberra: Reserve Bank of Australia.

Singh, S. 2008. Secure shared passwords: The social and cultural centered design of banking The Journal of Financial Transformation 23:110-114.

Singh, Supriya. 1999. Electronic money: Understanding its use to increase the effectiveness of policy. Telecommunications Policy 23 (10&11): 753-773.

Singh, Supriya, Anuja Cabraal, Catherine Demosthenous, Gunela Astbrink, and Michele Furlong. 2007. Password Sharing: Implications for Security Design Based on Social Practice. Paper read at SIGCHI conference on Human factors in computing systems CHI '07, at San Jose.

Singh, Supriya, Anuja Cabraal, Catherine Demosthenous, Gunela Astbrink, and Michele Furlong. 2007. Security Design Based on Social and Cultural Practice: Sharing of Passwords In Usability and Internationalization. Global and Local User Interfaces, edited by N. Aykin: Springer Berlin / Heidelberg.

Singh, Supriya, and Marita Shelly. New Financial Services: Review of Mobile Money Transfers in the Asia-Pacific. Smart Services Cooperative Research Centre 2010. Available from http://www.smartservicescrc.com.au/PDF/New_Financial_Services_Review_of_Mobile_Money_Transfers_in_the_Asia_Pacific_February2010.pdf.

Swing, William Lacy. 2010. THE DIRECTOR GENERAL’S REPORT TO THE COUNCIL. Geneva: International Organization for Migration

The World Bank. 2011. Migration and Remittances. The World Bank 2011 [cited 27 August 2011]. Available from http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21121930~menuPK:3145470~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html.

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