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Study findings
Payments innovation
There are already a large number of electronic payment products in use in Australia, including debit cards and direct banking transfers. Electronic banking and the use of EFTPOS terminals are now a part of ordinary life for many Australians. There are also products such as credit cards and signature-based debit cards that allow purchases over the telephone or the Internet.
There is evidence of innovation and change in the payment industry occurring over many years. These changes have probably lagged behind the development of technological capability. It is also important to note the following.
- Some initial electronic payments innovations (particularly overseas) placed a heavy emphasis on technological capabilities and did not succeed on a commercial basis.
- Most of the focus today is on using technology to improve current products (for example, the use of smart cards or microchips to reduce fraud) as opposed to developing new electronic payments products and channels. The major exception to this is Internet-based payments.
- The arrival of the Internet has enabled some new payment products to enter the market. BPAY and PayPal are two examples of new payment products that have now reached a critical mass after 10 years or so.
- Some new electronic payment technologies derived from international developments, such as contactless cards, are expected to arrive in Australia soon. Steady progress is being made in areas such as Internet security and biometrics.
- The use of the mobile phone as a payment product or channel has also captured the attention of businesses and futurologists. While the potential for this approach seems to be large, there are still many issues and challenges to be addressed. Products in development are still at a research stage with a wait of five years or more before they are introduced into the mainstream market.
Business payments map
The business payments map, obtained from the sample of Australian businesses surveyed for this study, confirms the findings of earlier studies that cash and cheques are the most widely accepted payment methods for shop front (or in-person) sales.
The survey results also indicate that electronic direct credit is the most widely accepted payment method for Internet sales to consumers. This may suggest that businesses in general are advanced in their preparations to permit the use of electronic payments, even though most customers dealing over the Internet make more use of the other payment methods to actually pay. Businesses themselves prefer to pay other businesses using other (non-electronic) means.
Data in the map also suggests that there are differences in the use businesses make of payment methods.
- Larger businesses tend to make larger transactions, receive more frequent payments and receive more payments from overseas, than smaller businesses.
- There were differences in preferences for payment methods in the sample of businesses surveyed. The payment method most preferred by businesses for shop front sales to consumers is cash, while the most preferred method of being paid for sales to other businesses and for making payments to suppliers is direct bank transfer.
- Cheques are cited as the payment method that causes the most issues and challenges for all types of payments. Large and high-growth businesses have less preference for cash when receiving payments from consumers, and exhibit a stronger aversion to cheques.
The study gained some insight into the perception of the cost of payments methods.
- Cheques are viewed as being the most expensive method of receiving payments from other businesses, while charge cards and credit cards are the most expensive method of receiving payments from consumers.
- Cash is perceived as the least expensive method of receiving payments from consumers, while direct bank transfers are viewed as the least expensive method of receiving payments from other businesses.
The implications, if any, of the payment method use on business profitability was also examined. Businesses surveyed do not believe that increasing their proportion of electronic transactions will increase their sales or selling price. The attraction of greater use of electronic payment methods, with the exception of B2C businesses, is a reduction in costs. B2C businesses had mixed views about the impact of electronic payments on costs. B2C businesses were equally divided amongst the three perceptions that costs would decrease, stay the same or increase.
The survey also provides some other insights:
- While most businesses are satisfied with existing payments arrangements, a significant proportion wants to increase their use of electronic payments, especially among larger companies.
- The greatest impediment to improving payment arrangements is perceived as customers and suppliers not being willing to change what they currently do. The implication is that business would make more use of electronic payments if others moved towards them first.
Looking at the practices of a large number of businesses in the survey confirms many previous assumptions about business behaviour. It also offers a few new insights that may differ from preconceptions and anecdotal experience.
Consumer payments map
The study has identified six characteristics of payment systems that are expected to influence the choice of one payment type over another. These are: capability, cost, convenience, coverage, confidence and confidentiality.
The map derived from the national survey of consumers conducted for the study provides evidence to suggest the following key points.
- The most widely used methods when making payments for purchases away from home are cash, EFTPOS and credit cards. A relatively larger proportion of older people use cheques, while a relatively larger proportion of young people use EFTPOS.
- Cash is the most common method for low-value transactions (for example, purchases worth $10 to $30). Credit cards and then EFTPOS are the most common methods for medium to large purchases (for example, worth around $100).
- The most widely used methods for making payments from home are credit cards and direct debits from bank accounts.
- The most widely used channel for paying bills received at home is BPAY, followed by over-the-counter at Australia Post outlets and card payments over the telephone to a computer response system.
- Consumers reported that credit cards are the most commonly used payment method for Internet purchases.
The map also provides the following insight into what drives consumers' payment product choices.
- Most consumers surveyed indicated that they see cash as surpassing other payment products in terms of coverage, cost, convenience, confidence and confidentiality. Personal cheques lack coverage, while credit cards excel in coverage and convenience.
- Consumers expect to use EFTPOS more frequently in the next three years, although a significant number of them do not anticipate any changes in their payment choices over this period.
- Current electronic payment methods are perceived to offer convenience, confidence of payments being completed, and widespread acceptance or coverage. However, they are perceived to be lacking in confidentiality. Credit cards are perceived as the safest payment method for Internet transactions because of the security (and to a lesser extent, convenience) offered by these cards.
- Consumers continue to use cheques because they are perceived to be the choice of payment method preferred by businesses (despite the fact that the survey of businesses indicate they do not prefer cheques).
- Younger people are much more willing to pay for real-time money transfers than older people.
- The results of the consumer survey indicate that improvements in confidentiality and reduction in costs are the drivers that are expected to generate the largest response in terms of increasing the proportion of payments made electronically.
Gaps
There is significant and growing use of electronic payments in the Australian system. However, the stakeholder consultations and surveys conducted as part of this study revealed that there are still significant gaps and considerable room for increased use of electronic payments.
These gaps are in the supply of—and demand for—electronic payments and their regulation.
- Gaps in supply include the following areas where there seems to be potential for businesses to offer greater use of electronic payments, including:
- large scale P2P transactions;
- real-time purchases;
- micro-payments;
- remittance of information;
- non-credit worthy individuals;
- electronic devices that allow rapid interbank transfers; and
- contactless products and stored-value cards.
- Gaps in demand highlighted by the consumer and business surveys are:
- small firms are disinclined to accept payments from other businesses electronically, and from many consumers;
- businesses are currently less inclined to use electronic payments for paying employees' wages and superannuation contributions; and
- there is potential for older Australians to increase their use of direct debit facilities and of card payments over the Internet.
- Electronic payments are subject to regulation in much the same way as traditional payment products and services. This maintains the safety and integrity of the financial system and protects consumers and investors, so it is not accurate to suggest a gap in regulation. However, some workshop participants pointed to gaps that arise because of the lack of a one-stop-shop regulator. They mentioned uncertainty about regulatory arrangements for the approval or clearance of new electronic payment products and services, and a lingering shortfall in consumer information about their rights and responsibilities regarding newer products.
These gaps may be temporary because they are driven by a lack of cost-efficient technology. Other gaps are more permanent due to the lack of a workable business case or current institutional arrangements in the payment system.
Barriers
Discussions with stakeholders in workshops and a review of other sources point to barriers to the adoption of electronic payments on the supply and demand sides. In addition, current regulation can also act as a barrier to entry for some electronic payment products. Key points about barriers in these categories are outlined below.
- On the supply side, the impediments that restrict the supply of new electronic payment products arise from factors such as:
- the economics of networks requiring high levels of critical mass
- the large investments required in infrastructure with long payback periods
- the difficulty of creating interoperability with existing electronic payment systems
- the difficulty of achieving scale efficiencies
- a lack of key standards and coordination
- the risk to banking systems caused by payment products and the regulatory responses to that risk
- the realities of the commercial marketplace for existing players (for example, the cannibalisation of current products)
- the limited capability of businesses and consumers to coordinate their electronic payment preferences.
- On the demand side, barriers to adoption of electronic payments are identified as:
- the relatively weak business case for adopting an innovation in some instances
- concerns over privacy and security
- limited financial and technological literacy of consumers and merchants
- information problems between providers and consumers
- inadequate dispute resolution processes
- loss of control over payments
- limited access to electronic payments systems
- the inability to cost-effectively couple supplementary payment information with the value transfer.
- Regulation in general is not viewed as a barrier to the use and adoption of electronic payment in future. Experience in Australia suggests that regulatory change has accommodated new approaches and has been supportive of the entry of electronic payments methods. This appears likely to continue. However, stakeholders in the workshops did point to factors such as regulatory complexity; that is, the large number of regulators making decisions about innovation in electronic payments that raise risk and costs. They noted that regulation can influence the pace of change and the rate at which electronic payment products enter the market, and the basis on which they compete.
Many of these barriers and gaps appear to be interconnected. Electronic payments market participants are sometimes caught in a ‘Prisoners' Dilemma'. For example, business is reluctant to offer electronic payments options unless customers demand it, while their customers are reluctant to invest in electronic payments options until nearly all businesses offer them. In addition, adoption curves and innovation cycles show that it is difficult for businesses and consumers to adopt a new technology and obtain the economies of scale necessary to make the service competitive, unless adoption of a change is widespread. Some innovations are adopted on a widespread basis very quickly. Others take some time and falter. It is rarely a straightforward matter to identify the single factor at play, or learn which of many factors was critical to the outcome. This has implications when considering what approach to take to encourage greater use of electronic payments.
Potential gains from change
While there has been a progressive move towards electronic payments in Australia, an acceleration of this trend is likely to bring substantial gains to the Australian economy.
The study reviews existing evidence and reports on new analysis that shows that electronic payments have a significant cost advantage over many traditional payment products and channels.
Drawing on the limited information available, an estimate has been made of the economic benefits of the greater use of electronic payments. A potential annual resource saving of $2 billion could be achieved by shifting payments above $20 from cash to lower-cost electronic payments options (such as the use of debit cards), lowering the threshold where electronic payments methods are more efficient than cash, increasing electronic presentment and payment of bills, and migrating cheques to direct entry. This benefit is equivalent to an increase of 25 basis points in gross domestic product (GDP).
The clear message is that there is a compelling economic case for encouraging greater use of electronic payments in Australia.
The analysis also suggests that the removal of individual barriers will provide different levels of net benefits to the economy. Furthermore, the order in which the barriers are removed may also impact on the total net benefit as payment system incumbents and potential players will react differently to various barrier removal scenarios. This means that it is not only which barriers are removed, but the combination and timing of the removal, that will determine the net benefit to the community.
Development pathways
Seven broad areas have been identified where appropriate action will help the realisation of the potential gains from greater use of electronic payments. These include:
- closing information gaps;
- accelerating adoption of electronic payment methods and channels by consumers and businesses;
- increasing transparency in the pricing of payment products;
- increasing competition and access to new entrants in the payment market;
- promoting appropriate and judicious regulation;
- increasing the capacity for innovation; and
- government continuing to lead by example.
The specific steps can be prioritised into immediate steps, medium-term activities, and longer-term actions that relate to structural changes. Table 1 outlines these suggested steps.
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Actions |
Phase 1: |
Phase 2: |
Phase 3: |
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1. Close information gaps |
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2. Accelerate adoption |
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3. Increase transparency in prices |
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4. Increase access/ competition |
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5. Promote electronic-payment-friendly arrangements |
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6. Governments continue to lead by example |
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7. Increase and maintain the capacity to innovate |
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