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Australian banks face ‘legacy hangover’ in real-time payments shift

Australia’s established big four banks and their competitors risk being stuck supporting billions of dollars in legacy infrastructure under a looming fork in the road between the existing direct debit system and new real-time payments under the New Payments Platform.

The NPP, launched in February 2018, provides open access infrastructure for fast payments in Australia. The platform is supported by the central Reserve Bank of Australia (RBA).

A paper issued this month by the NPP cautions that as Australia’s consumers and businesses increasingly move towards real-time payments, institutions sticking with the direct debit system will likely have to support two sets of rails as consumers transition.

The impending division largely reflects the shift from data skinny “pull” payments requests under the direct debit system and data-rich “push” requests-for-payment (RfP) under NPP enabled services.

Customer control

“Many real-time payments markets are starting to move away from traditional debit style ‘pull’ payments, towards a ‘push’ payment type, or credit transfer,” the NPP paper notes.

“This allows the customer greater control over the timing, the amount and the regularity of payment. Direct debit is still being used in countries where it is a common payment method, e.g. the UK, however the trend is for real-time payment rails to support RfP as a viable alternative.

“This presents challenges in the context of decommissioning legacy infrastructure and how to handle direct debit payments. As yet it is unclear how infrastructures that support direct debit will move forward.”

The RBA has been gradually increasing pressure on Australia’s banks to retire or renew legacy payments infrastructure. Last month it expressed concerns over a big spike in payments outages that it previously attributed to underinvestment in replacing legacy systems.

While the new real time payment services give businesses faster access to cash from recurring bills and invoices, they will also allow consumers to authorise the release of funds for the payments before they go through, a factor certain to increase bill scrutiny.

A little extra

Recurring receivables in Australia are big business, with volumes estimated well in excess of A$100 billion (US$69 billion) per month and utilities, telecom companies, insurers and public transport among the beneficiaries

Australian merchants have for decades have enjoyed a small extra margin through the questionable practice of ‘inertial billing’ that keeps bills and pull requests coming after an account or service has been stopped.

The practice persists as under the direct debit system the bank account holder essentially gives permission to a merchant or biller to take out what they need, when they need it because the charge against the account is pre-authorised and left open.

Gyms and subscription service providers are seen as the worst offenders, as most consumers do not bother pursuing relatively small refunds. This is set to change under a shift to real-time because of notification via apps that allow such transactions to be declined.

The NPP paper notes consumers might actually like the set-and-forget certainty of payments going through under direct debit and raises the option of what it calls an ‘e-mandate’, “where consumers can set up a direct debit and future payments no longer need to be managed.”

“If RfP is to take over direct debit as a payment method for regular payments, it will need to be considered how a mandate might be developed to allow a bank to ‘push’ payments to a supplier at regular intervals,” the NPP paper said. “An electronic mandate (e-mandate) solution could be beneficial here”

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