Exploration of Future Electronic Payments Markets

Exploration of future electronic payments markets
EXPLORATION OF FUTURE ELECTRONIC PAYMENTS MARKETS
JUNE 2006
ISBN 0 642 75353 9 Commonwealth of Australia 2006 This work is copyright. Apart from any use as permitted under the Copyright Act 1968 no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: Commonwealth Copyright Administration Attorney-Generals Department Robert Garran Offices National Circuit BARTON ACT 2600 Or visit www.ag.gov.au/cca
Report prepared by the Centre for International Economics and Edgar, Dunn & Company for the Australian government department of communications, information technology and the arts (DCITA) and industry sponsors

GLOSSARY SUMMARY Study findings 1 This study Objective and focus Approach Report structure 2 Payments landscape Products and channels Payments products Payments channels Emerging international technologies Technologies likely to emerge next Key points 3 Drivers of change A global perspective Recent experience in the United States Australian experience Factors that shape future payments choices Regulation, public policy and electronic payments Key points 4 Business payments Structure of business survey A map of payments made by businesses Preferred payments methods Views about the cost of payments methods Business impact of electronic payments Improving payments arrangements Other insights Key points 5 Consumer payments Structure of the consumer payments survey Payments away from home Bill payments and Internet purchases Payments method choice Changes Other issues Key points vii 1 2 10 10 11 11 13 13 14 18 20 25 26 28 28 30 34 37 53 56 58 58 59 64 68 69 70 74 77 79 79 79 84 90 92 95 98
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6 Gaps in the payments system Gaps in supply Gaps in demand Gaps in regulation Key points 7 Barriers to innovation and adoption Adoption of innovation and new payments technologies Supply-side barriers Demand-side barriers Regulation Other barriers from the payments maps Key points 8 Implications of change Technology, commerce, payments and growth Economic impact of migration towards electronic payments Key points 9 Development pathways Desired future of the electronic payments market Action possibilities Development pathways Key points Appendix A Comparing the costs of different payments products Appendix B Stakeholder consultations Appendix C Business survey methodology Appendix D Business survey questionnaire Appendix E Consumer survey questionnaire Appendix F Extract from De La Rue cost of cash study References 100 100 101 105 107 108 108 110 113 119 121 124 126 126 126 131 132 132 133 138 140 141 149 154 157 180 196 206
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Boxes, charts and tables 1 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 Development pathways: action possibilities across multiple phases Payments product and channel summary Major payments products used in Australia New payments products in Australia Channels being used in Australia Global payments landscape Emerging products and technology Contactless stored-value cards Mobile phones as a payments device or product Benefits of a biometrics payments system 8 13 14 18 18 20 21 22 23 24 26 26
2.10 Stage of implementation for electronic payments technologies 2.11 Key themes of the future plans of financial institutions 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 Non-cash retail payments in selected countries: proportion of total transactions per person (2001)
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Growth in non-cash retail payments in selected countries: average growth per person over 19972001 29 Change in US non-cash payments (200003) Key insights from a US study of electronic payments systems Share of payments value Combined value and volume for products other than cash Australian Government electronic payments initiatives The six Cs that shape payments choice Functionality of various payments products 30 32 34 36 37 38 40 41 42 43 44 45 46 48 49 49 53 56
3.10 Estimated resource costs of payments (per $58 transaction) 3.11 Total resource cost to merchants for different payments instruments (US$) 3.12 Total resource cost to consumers for different payments instruments (US$) 3.13 Economy-wide costs for different payments types 3.14 Economy-wide cost of payments: ranking of payments methods by transaction size 3.15 Measuring the benefits of payments products 3.16 Proportion of home Internet use (computer and Internet access) 3.17 Proportion of Internet users paying bills online 3.18 Adults purchasing/ordering via Internet for private use 3.19 Consumer views regarding security in e-commerce 3.20 The changing financial landscape
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4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Structure of business payments survey Typical value of payment received from a customer by size of business Typical number of payments from customers per week by company size Most widely accepted payments methods for sales to consumers Most widely accepted method for payments by business customers Most widely used method for making payments to suppliers Most preferred payments product for different transaction types Reasons behind preferred payments method Payments method that causes most issues and challenges 59 60 60 62 63 63 64 65 66 67 68 69 70 70 72 73 76 80
4.10 Main issues caused by payments methods for different transaction types 4.11 Most expensive payments product 4.12 Least expensive payments product 4.13 Impact of receiving increased electronic B2C payments 4.14 Impact of receiving increased electronic B2B payments 4.15 Satisfaction with existing payments arrangements 4.16 Barriers to improving payments arrangements 4.17 Methods used by businesses for internal payments 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 Most widely used methods for payments away from home
Most frequently used methods for payments away from home by number of transactions 81 Most frequently used methods for payments away from home by value of transactions81 Payment methods by transaction value Reasons behind payment product choices by transaction size Most widely used method for payments from home Most widely used channel for bill payments Most widely used channel for payments of bills for 50+ year olds Reasons for not purchasing over the Internet 82 83 84 85 86 87 87 88 89 90 90 92 93 94 94 95 96 97 98
5.10 Frequency of Internet purchases by age group 5.11 Commonly used payment methods for Internet purchases 5.12 Perception of safety of payment method over the Internet by age group 5.13 Preferred methods for Internet payments 5.14 Reasons behind preferred method for payments over the Internet 5.15 Consumer perception of various characteristics of payment methods 5.16 Payment types expected to be used more frequently in the next three years 5.17 Attractiveness of current electronic payment methods 5.18 Feature that would most encourage use of electronic payments 5.19 Impact of changes in payment characteristics 5.20 Willingness to pay for immediate money transfers by age group 5.21 Cheque use by age group 5.22 Reasons for cheque use
6.1 6.2 6.3 6.4 6.5 6.6 7.1 7.2 7.3 7.4 7.5 7.6 8.1 9.1
Dispute resolution arrangements Gaps in demand between business size Method of payment across internal business payments Payment of employee business expenses Gaps in demand between age groups Arrangements for disclosure on rights and responsibilities regarding fraud The process of technology driven adoption Barriers to electronic payment adoption National Privacy Principles Structural barriers to payment innovation in Australia Barriers to increasing electronic payments for businesses Barriers to increasing electronic payments for consumers Economy-wide cost savings from increasing electronic payments Development pathways: action possibilities across multiple phases
101 102 103 104 104 106 109 110 115 119 122 124 127 138
Appendices A.1 A.2 A.3 A.4 A.5 A.6 B.1 D.1 E.1 E.2 Cost data reliability and accuracy by payment method and cost chain activity Indicative social costs for different payment types The cost of handling cash in Asia Economy-wide cost of payments: ranking of payment methods by transaction size Measuring the benefits of payment products Cost of payments by product by transaction size Stakeholder workshops attendee list Business survey quotas by size and activity of firms Quotas by age group Respondents by state and region 144 144 145 146 148 148 150 157 180 180
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Exploration of future electronic payments markets GLOSSARY Australian Payments APCA sets, manages and develops regulations, procedures, and Clearing Association standards governing payments clearing and settlements in Limited (APCA) Australia. Automated clearing An electronic clearing system in which payment orders are house (ACH) exchanged among financial institutions, primarily by magnetic media or telecommunications networks, and handled by a data processing centre. B2B B2C Bill Express Business-to-business. Business-to-consumer. An Australian intermediary payments network that allows customers to pay bills at any participating newsagency or other retail outlet. Technology that allows recognition of individuals through analysing bodily characteristics. The most common types of biometrics are fingerprints, voiceprints, hand geometry and retina scans. An Australian intermediary payments network that allows customers to pay bills and billers to present bills through Internet banking or phone banking services. A term used in this report to describe the functional ability to actually undertake a payment. A card where holders are provided with credit for the value of the transaction. Unlike credit cards, charge card users are unable to carry the balance over into the next payment period but must pay the balance in full at the end of each payment period. The system of transmitting, reconciling and in some cases confirming payment instructions before settlement. A financial intermediary that performs the clearing system role. A term used in this report to describe a customers belief that a payment will be successfully executed and completed, and that the value of a payments method will be respected. A term used in this report to describe the integrity of the payments system in maintaining the privacy of customer information. A payments device (for example, a card) that allows an electronic payment to take place by holding or waving it near a reader without needing to give the card or device to the merchant. A term used in this report to describe how easy a payments method is to use, for example, the need for registration or the speed of payment. A term used in this report to describe the cost of the payments vii
Biometrics
BPAY
Capability Charge card
Clearing system Clearing house Confidence
Confidentiality
Contactless card
Convenience
Cost
Exploration of future electronic payments markets system to customers such as fixed or proportional transaction charges. Coverage A term used in this report to describe how widely a payments system is accepted by merchants and other recipients of payments. A card where holders are provided with credit for the value of the transaction up to a pre-arranged limit. Credit card users may carry the balance over into future payment periods, whilst generally incurring an interest charge. A payment order or a sequence of payment orders made for the purpose of placing funds at the disposal of the beneficiary. Both the payment instructions and the money move from the bank of the payer/originator to the bank of the beneficiary, possibly through several other banks and/or more than one credit transfer system. A card which allows access to a transactional banking account. The dominant style of debit cards in Australia are bank proprietary debit cards, typically called EFTPOS cards, which require a PIN to be entered to authorise the transaction. Visa debit is a four-party payment association product in Australia that requires a signature to authorise the transaction. Electronic equivalent of a hand-written signature. Digital signatures use PKI technology to authenticate both parties in a transaction. The payer initiates a direct entry to a recipient directly from their bank account. A pre-authorised debit on the payers bank account initiated by the recipient. Direct entry transactions include both direct credit and direct debit transactions. Direct entry transactions are not settled in real time. A payments method in the United States (US) that allows customers to email a recipient payment, providing an electronic version of the traditional cheque. An electronic system operating in the US that allows a recipient to authorise transfer of their government benefits from a government account to a retailer account to pay for products received.
Credit card
Credit transfer
Debit card
Digital signature
Direct credit Direct debit Direct entry
eCheques
Electronic benefit transfer (EBT)
A process that enables bills to be created, delivered and paid Electronic bill electronically (typically over the Internet). payment and presentment (EBPP) Electronic data capture (EDC) terminals Electronic funds Also known as EFTPOS terminals, EDCs are the main channel for accepting card-based payments in Australia. A process where a customer pays a retailer using a payments viii
Exploration of future electronic payments markets transfer at point-ofsale (EFTPOS) card (such as a debit, credit or charge card) at a physical pointof-sale by transferring the value of the transaction from their account to that of the retailer. In Australia, EFTPOS is typically used to describe the system of proprietary debit cards issued by the banks, building societies and credit unions.
Electronic payments These are payments where the value of the payments product and payments instructions reside in the information transmitted over an electronic channel. This is in contrast to physical payments methods, such as coins, banknotes or cheques. Enterprise resource planning (ERP) systems EMV Chip These are software systems that are used for operational planning and administration as well as for optimising internal business processes. A set of specifications that define the requirements of chipenabled cards and chip-enabled EDC terminals to operate over the Europay, MasterCard and Visa networks. EMV stands for Europay MasterCard Visa, which were the three initial parties involved in the development of the specifications. The transfer or use, without lawful authority, of a means of identification of another person with the intent to commit, or to aid or abet, any unlawful activity that constitutes a violation of federal law, or that constitutes a felony under any applicable state or local law. A telephone system where the payer responds to an automated set of instructions (delivered by a recorded voice) by speaking and/or entering details directly into the telephone keypad. A type of security token, usually a small hardware device, that allows access to network services or information. A remote, secure location where payments are sent instead of directly to a business. The service then processes the payments (typically cheques) and credits the business. Located on payments cards, the magnetic strip stores the customers details and their credit/debit information. Small value transactions (typically under $5). Most micropayment products allow an aggregation of many small payments with the accumulated amount of money paid as one larger payment. A system that uses the mobile telephone handset to make payments over the mobile network, for example, to top-up a prepaid phone account. A new radio frequency technology that connects a range of devices, such as contactless cards and devices. Person-to-person, also known as consumer-to-consumer. Allows a customer to enrol in a program and choose an icon/picture as a unique, secure identifier. ix
Identity theft
Interactive voice response (IVR) Key fob Lockbox location
Magnetic strip Micro-payments
Mobile payments system Near Field Communications (NFC) P2P Passmark authentification
Exploration of future electronic payments markets Paymate An Internet company that provides an intermediary service that allows customers to use their credit card or direct debit facility to make a payment to a seller who receives the payment in his or her nominated bank account. A mechanism that facilitates the use of a payments product by establishing contact between the payer and the payee. This refers to the product used for making a payment, for example, cash, credit card and EFTPOS. An Internet company that provides an intermediary service that allows customers to use their credit card or direct debit facility to make a payment to a seller who receives the payment in his or her nominated bank account. Enables a network to identify the unique characteristics of an Internet access device to make sure that particular device was used to make the transaction. A numeric code used to authenticate users and allow access to accounts. Usually used in EFTPOS and ATM systems as means of identifying debit card users. The use of fraudulent emails and Internet sites to elicit personal and/or financial information.
Payments channel Payments method PayPal
PC fingerprinting
Personal Identification Number (PIN) Phishing
Public Key PKI technology enables Internet users, who do not normally Infrastructure (PKI) know each other, to perform mutual authentication. It allows technology confidential communication and provides electronic documents with a legally binding digital signature. PostBillPay A method of making bill payments through Australia Post. Radio frequency Technology used in contactless or proximity payments identification (RFID) technologies. It comprises an embedded microprocessor chip that stores all the customer and credit/debit information, and a magnetic loop antenna to transfer the information to the reader. Real-time gross settlement systems Skimming Stored-value card The immediate (real-time) settlement of funds or securities transferred individually, order by order, (without netting). Malicious duplication of electronic data from an electronic payments card. A card where customers prepay to add value to a card. The payments are deducted from the card as the customer makes transactions. A payments mechanism that allows money to be downloaded to a debit card which can then be used for online banking. Mobile phone handsets with embedded chips that allow electronic payments. Technology protocol used to provide a more secure environment when paying by credit card on the Internet. It requires the x
Technocash Wallet phones
3-D secure
Exploration of future electronic payments markets cardholder to enrol in the program to obtain a password. It also requires the merchant to enrol in the program and to make system changes and accommodate the technology. Three-party card Card-based payment associations where the issuer of the card is payment associations the acquirer of the transaction at the merchant. In Australia, the dominant three-party card payment associations are American Express and Diners Club. Four-party card Card-based payment associations where the issuer of the card is payment associations not necessarily the acquirer of the transaction (i.e. they may be different institutions). The dominant four-party payment associations operating in Australia are Bankcard, MasterCard and Visa.
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Exploration of future electronic payments markets SUMMARY A well-functioning economy depends on effective and efficient methods for businesses to pay employees, suppliers and investors, for households to purchase goods and services, and for governments to collect taxes and make payments. The increasing adoption of information technology by businesses and households is broadening the choice of payments methods by creating the opportunity to make payments electronically. Greater use of electronic payments has raised many issues. These include issues related to assessing and increasing the ability of consumers, businesses, governments, financial institutions, non-profit organisations and other economic agents to make payments with complete confidence. Security, privacy, identity and fraud-minimisation are often viewed as critical to preserve and even enhance the level of trust customers and businesses have in current and future electronic payment mechanisms. There are many factors underpinning the interest in electronic payments. On one level, there is a fascination with new technology, and innovation. However, it is notable that products based on this factor alone do not appear to have been successful in the longer term. More attention is being paid to the opportunities to increase value for consumers and businesses and ultimately for the economy at large. Electronic payments can provide benefits, such as convenience in making payments quickly or with minimal effort, or by adding value with extra functions. It is often thought that by reducing the costs of a transaction electronic payment mechanisms would generate productivity and efficiency gains, leading to economic growth and increased levels of national prosperity. There are also potential links to the development of the information economy at large. The effective functioning of the electronic transaction marketplace and the development of e-commerce depends critically on the development of a secure, trusted and lower-cost means of making payments. The broad objective of this study is to investigate the future for electronic payments in Australia. In doing so it:

reviews the changing nature of payments and the emerging role of electronic payments; assesses patterns of use of electronic payments by consumers as well as by businesses; identifies gaps in electronic payments; seeks to identify, what if anything, is acting as a barrier to the adoption of electronic payments; assesses the key economic implications of greater use of electronic payments; and identifies development pathways for actions that may be taken by business the community and government to encourage greater use of electronic payments in Australia.
Exploration of future electronic payments markets 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.
Exploration of future electronic payments markets 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. 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 study gained some insight into the perception of the cost of payments methods.
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.
Exploration of future electronic payments markets 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
Exploration of future electronic payments markets revealed that there are still significant gaps and considerable room for increased use of electronic payments. These gaps are in the supply ofand demand forelectronic 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
Exploration of future electronic payments markets 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.
Exploration of future electronic payments markets 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.

1 Development pathways: action possibilities across multiple phases Phase 1: Immediate steps
Raise awareness. Educate consumers (particularly regarding cash and cheque substitution). Enhance information about the economy wide or resource cost of electronic payment methods in comparison with other payment methods and make this available to the public. Focus on buyer behaviour governing the selection of electronic payment products.
Actions
Phase 2: Medium-term steps

Educate small businesses. Raise awareness about the business case for change.
Phase 3: Longer-term / structural steps
1. Close information gaps
2. Accelerate adoption
Increase security and confidentiality of payment systems by issuing guidelines and best practice models. Increase portability of financial information.
Introduce realtime guarantee of funds for direct entry transactions. Develop universal paymentmessage format.
3. Increase transparency in prices
4. Increase access/ competition
Identify and remove significant crosssubsidies. Promote and communicate cost transparency. Continue to use competition laws to identify and check anticompetitive activities. Define standards for dispute resolution and ownership of fraud.
Move from current bilateral model to multilateral model. Reduce barriers to entry through development of access arrangements. Build appropriate common infrastructure. Encourage interoperability. Provide incentives for collaboration amongst the private sector or in conjunction with selected government agencies.
(Continued on next page)

5. Promote electronicpaymentfriendly arrangements Document scope and coverage of existing legislation. Promote and endorse self-regulation initiatives by relevant industries such as EFT Code of Conduct. Improve coordination between levels of government.
6. Governments continue to lead by example
Governments role as major purchaser and payee to drive alternative electronic payment arrangements. State transit fare payment. Increase electronic payment readiness. Electronic payments CRC.
7. Increase and maintain the capacity to innovate Enhance access to venture capital for new electronic payment providers and businesses based on electronic payments.
CHAPTER 1THIS STUDY The Centre for International Economics (CIE) and Edgar, Dunn and Company are pleased to report on this study to explore the future of electronic payments. The consultants were engaged by the Department of Communications, Information Technology and the Arts (DCITA) and a group of industry sponsors. The industry sponsors were the Australian Payments Clearing Association (APCA), BPAY, Credit Union Services Corporation (Australia) Ltd (CUSCAL), Dialect Solutions Group and Optus. OBJECTIVE AND FOCUS While often taken for granted in everyday life, there is no precise legal definition of a payment (Tyree et al, 2000). A useful approach adopted in this study is to view a payment as the transfer or exchange of value between parties. The parties may be individuals, businesses or government. Traditionally, the value of a payment product has resided in the physical manifestation of that product (for example, gold, coins, currency1 and a paper cheque). With electronic payment products, there is no tangible payment productthe value of the payment product resides purely in the information transmitted when making a payment and not in the value of the medium of exchange. In some cases, a physical payment product exists (for example, debit and credit cards) while in other instances there is no physical product (as when making a direct credit using Internet banking). The broad objective of this study is to investigate the future for electronic payments in Australia. This is because electronic payments appear to provide the best cost and benefit combination when making payments in a variety of situations (for example, consumer purchases from online merchants and large ticket business-to-business [B2B] purchases). Electronic payments also appear to be important in enabling many changes associated with the transition towards an information economy. The terms of reference for the study include the following major elements:

a brief overview of the current payments marketplace, including a comparison of the cost of various payment products and channels to the economy; an examination of market developments, including new payment products and new channels for existing payment products, in both domestic and international markets, with a focus on B2B e-commerce, peer-to-peer/device-to-device transactions, mobile commerce and micro-payments, and an analysis of the key drivers of change; identification of current and emerging gaps in the Australian payments system marketplace, including structural barriers to innovation that prevent the filling of those gaps; and a discussion of possible approaches and developmental or transitional pathways to plausible future electronic transaction marketplace, including the governments role and the viability of alternative policies.
1 The value inherent in currency is, in most instances, the guarantee of the central bank.
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Exploration of future electronic payments markets APPROACH The choice of which payment products consumers, businesses and governments use and accept is complex and involves factors such as costs, benefits, risks, convenience and many others. It is necessary to examine a wide range of factors to attempt to foreshadow the future of electronic payments. Therefore, the study draws on a range of analytical tools, outlined below. Literature review The consulting team used its existing resources as well as undertook a review of domestic and international literature about payments systems and emerging electronic payments opportunities. Stakeholder consultations The consultants engaged a wide range of stakeholders in discussions about the future of electronic payments. This involved meetings with key players and a number of workshops for stakeholders with common interests. Stakeholders include regulatory and other government agencies, banks and other financial institutions, relevant peak bodies, emerging payment systems service providers, payment hardware manufacturers, and various consumer affairs bodies and consumer groups. A summary of the discussions in the three stakeholder workshops is provided in Appendix B. These processes were very helpful in identifying emerging developments in payment methods and channels in the Australian and international markets. The workshops were particularly useful in identifying drivers of change and stakeholder concerns about barriers to change. Surveys of businesses and consumers While there have been various overseas surveys of consumer and business behaviour in the payments marketplace, information about such behaviour in Australia was lacking. This study therefore undertook surveys of Australian businesses and consumers. The results of the surveys enabled the construction of a payments map for businesses and another for consumers. The survey insights, together with information gleaned from the stakeholder consultations, facilitated the identification of gaps, opportunities, barriers and change drivers in the Australian payments marketplace. REPORT STRUCTURE Chapter 2 provides an overview of the payments marketplace. It identifies payment products and channels, including electronic payments. The chapter also identifies major emerging payment systems that generally involve electronic aspects. Chapter 3 presents key issues such as technological change and the factors determining choice of payment systems by individuals and businesses. Chapters 4 and 5 present payment maps by payment size, frequency and type for businesses and consumers respectively. Gaps in the payment system identified through 11
Exploration of future electronic payments markets stakeholder consultations and through the business and consumer surveys are considered in Chapter 6. Chapter 7 discusses the demand-side and supply-side barriers to innovation and adoption of new technologies in the payments market, and the relationship between regulation and the existence or removal of these barriers. The potential gains from greater use of electronic payments are explored in Chapter 8. Chapter 9 explores development pathways, including possible government roles and policy options, that will lead to a stronger and better electronic payments marketplace in Australia.
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CHAPTER 2PAYMENTS LANDSCAPE This chapter provides an overview of the domestic and international payment markets. It identifies all payment products and channels, including electronic payments. This chapter also identifies major emerging payment systems that generally involve electronic aspects, and investigates the trends in the Australian electronic payments system. PRODUCTS AND CHANNELS Payments can be made using cash or non-cash products. They can either be a physical item, such as a cheque, or electronic information. Although a cash transaction involves only two parties, non-cash payments usually involve at least three parties, and sometimes can involve up to five. These additional parties are known as payment intermediaries, and their role is to undertake payment authorisation and payment clearing, and to provide settlement. These steps are often preceded by the verification of the identities of the parties involved and validation of the payment product. Every payment requires a product to hold value and a channel through which to conduct the transfer, either cash or the information required to exchange balances. Chart 2.1 provides a high-level summary of the key products and channel types used in Australia.
2.1 Payment product and channel summary
Financial transaction market
Payment products
Payment channels
Cash
Electronic
Payment cards
Over the counter
Paper instruments
Emerging
Electronic products
Sources: CIE and EDC.
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PAYMENT PRODUCTS Payment products can be divided into four groupscash, payment cards, paper methods and electronic products. Within these groups there are various types of products that are currently used in Australia (see Table 2.2).
2.2 Major payment products used in Australia Cash
Notes Coins
Payment cards
Credit cards Charge cards Debit cards Store cards Prepaid cards
Paper products
Personal cheques Bank cheques Money orders
Electronic products
Direct debit Direct credit Bill Express POSTbillpay
Travellers cheques BPAY
Cash On the surface, cash is a simple payment product. While the paper (or plastic) it is printed on has little or no intrinsic value, the value denominated on the note is widely accepted. Possession is normally a strong indicator of ownership and there are very few issues regarding privacy or confidentiality. Looking deeper, it is clear that maintaining and managing cash involves effort and resources. Notes and coins have to be made and circulated, and systems have to be put in place to secure cash. Protecting against counterfeit currency and other security issues also involves resources. Currently, there are about $36 billion of notes on issue and $2 billion of coins in circulation throughout the economy (RBA 2005). Notes move through many hands before being withdrawn. The rate at which notes move from party to party is known as the velocity of money, which can and does change. The cost to the economy of using cash is therefore a function of the cost of producing notes and coins, the amount of cash in circulation, and how often it is used (that is, its velocity). Payment cards Payment cards include credit cards, charge cards, debit cards, stored-value cards, and store cards. These are described below. Credit cards Credit cards have a buy now, pay later feature, where the consumer does not have the funds debited from his or her bank account2 at the time of purchase but is provided with credit for the value of the transaction. Credit cards also allow the cardholder to revolve their balance (carry the balance on to the next month), while incurring an interest charge. Typically this happens at the end of an interest-free period, but there
2 The persons everyday bank, current and/or transaction account.
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Exploration of future electronic payments markets are a number of cards in the Australian market where the balance incurs interest from the time of the transaction. The majority of credit cards in Australia are combo cards, which incorporate the combined functionality of both a credit card and a debit card, where the type of transaction is designated by the cardholder at the time of purchase. Credit cards in Australia are dominated by the BankCard, MasterCard and Visa associations. There are around 11 million credit card accounts in Australia, which on average have 101 transactions per account per year and an average value of approximately $141 per transaction (RBA 2005). Credit cards are typically used for higher-value retail transactions, for example, fashion, electrical, travel and entertainment purposes, as well as for the payment of utility bills. Charge cards Charge cards have the same characteristic of buy now, pay later, but the cardholder cannot choose to revolve their outstanding balance. Instead, they must pay off the full balance at the end of each statement period. There are approximately 1.5 million charge card accounts in Australia, with American Express and Diners Club dominating the market (RBA 2005). They are usually used for travel and entertainment purchases. Both American Express and Diners Club run closed systems, where the same institution that issues the card is also responsible for processing the transaction (often called a three-party payment scheme). This is fundamentally different to the credit card associations that operate in Australia, where the institution that processes the transaction does not have to be the card issuer. Debit cards Debit cards in Australia are mainly in the form of proprietary bank cards. These can be used at Automatic Teller Machines (ATMs) or EFTPOS terminals. Debit cards are a buy now, pay now product, where the funds are debited from the cardholders account at the time of the transaction. EFTPOS is typically used for smaller-value transactions compared with credit cards and charge cards. EFTPOS needs a PIN to be entered into a secured keypad to authorise the transaction. They also have a cash out capability, where the cardholder can withdraw funds from their bank account. Australians hold approximately 25 million accounts that offer EFTPOS access. Each account has an average of 45 purchase transactions per year, with an average value of $60 each, and 30 cash withdrawal transactions per year at an average withdrawal amount of around $160 (RBA 2005). Visa Debit is another form of debit card that is readily available in the Australian market. Visa Debit is also a buy now, pay now product, but rather than requiring PIN verification it can also use a signature verification to authorise the transaction. As such, it is possible to use Visa Debit for purchases by telephone or over the Internet, whereas EFTPOS debit cards do not have this capability today. There are around 1.4 million Visa Debit cards in Australia. St George bank, Suncorp, credit unions, and building societies issue the majority of these cards.
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Exploration of future electronic payments markets Store cards Store cards in Australia include the David Jones Card and financing cards, such as GEs Creditline card. These products typically have features similar to credit cards, but are only accepted within a closed network of selected retailers. Interest rates are typically higher than on a credit card. Prepaid cards Prepaid cards require the holder to purchase value, and do not normally require an account or personal information. These types of cards have typically been issued as single-purpose, closed-system cards (for example, Telstra phone cards and transit cards), so they cannot be used for other types of transactions. In some international markets, prepaid cards have become an open-system multi-purpose payment product. Examples include the Octopus Card in Hong Kong, Moneo in France and the Suico Card in Japan. These have experienced high growth for low-value payments where cash is typically used. In almost all cases, these opensystem prepaid cards were originally established as closed-system cards for use on public transport. Once their use was cemented in the initial purpose, they were opened up for small-value transactions at selected merchants, such as newsagents and food courts that are located in areas close to the transport systems. In Australia, the Australian Prudential Regulation Authority (APRA) has introduced new prudential standard and authorisation guidelines for providers of purchased payment facilities (PPFs), a new class of authorised deposit-taking institution (ADI). PPFs are new forms of payment methods such as stored-value cards and Internet-based payment systems or electronic purses. The new standard applies a simplified framework for capital adequacy, liquidity and operational risk to PPF providers that have stored-value at risk. PPF providers must also meet ADI prudential standards on governance, fitness and propriety, outsourcing, business continuity management and auditing requirements. ADIs authorised to conduct general banking business are not required to seek further authorisation to operate a PPF (APS 610, Prudential Requirements for Providers of Purchased Payment Facilities). Prepaid payment cards that allow payments to be made to more than one payee, are also subject to regulation as non-cash payment facilities under Chapter 7 of the Corporations Act 2001 (Cwlth), which is administered by the Australian Securities and Investments Commission (ASIC). Chapter 7 sets out a market integrity and consumer protection regulatory framework for financial services. In November 2005, ASIC issued a policy statement defining its approach to the regulation of non-cash payment facilities, including prepaid cards (Policy Statement 185, Non-cash payment facilities, see also ASIC media release IR 05/60). Under this policy, substantial relief from legal requirements is provided to issuers of stand alone prepaid cards, subject to certain monetary limits. Paper products Paper methods include the following.
Cheques, which can be drawn directly by individuals and businesses against their own accounts (personal cheques) or can be drawn against the financial institution (bank cheques). They are typically used for high-value transactions. 16
Travellers cheques, which can be purchased by anyone (normally as a means of acquiring foreign exchange before travelling abroad). They offer a degree of security to the customer and involve a charge by the provider and the bank that converts them to cash. Money orders, which are a cheque-like product that can be drawn against Australia Post. They provide a means of transferring currency through the mail system without the need for the payer or receiver to have a bank account.
Electronic products Electronic payment methods currently used in Australia include direct credit and direct debit, and bill payment methods such as BPAY, Bill Express and POSTbillpay. Direct entry transactions include direct credit, where the payer initiates the transaction directly from their bank account. The other method is direct debit, where the receiver initiates the transaction from the payers bank account with the pre-arranged authority of the payer. Direct entry transactions are not settled in real time, nor is the receiver notified of the transactions success or failure in real time. Therefore, the receiver of funds does not know until the next business day that the payer has initiated the transaction, and the payer does not know until the next day that the transaction was successful. This limits direct entry use to transactions where real-time settlement is not required. BPAY, Bill Express and POSTbillpay are relatively new to the Australian payments market. In general, they use the existing direct credit system as the channel for transferring funds. They also transfer additional information to the receiver of funds for reconciliation purposes (such as a customer number or bill number). BPAY has seen rapid growth in use in recent years driven by the increased use of Internet banking in Australia.3 In addition, there are some relatively new electronic products that have entered the Australian market (see Box 2.3). These methods still require the use of traditional products such as credit and debit cards, so they do not have autonomy from the current payments system.
3 BPAY use grew by around 20 per cent throughout the 2004/05 financial year (BPAY 2005).
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2.3 New payment products in Australia
PayPal Founded in 1998, PayPal has shown dramatic growth in recent years both in Australia and overseas (with a CAGR of 350 per cent between 1999 and 2005). PayPal enables any individual or business with an email address to send and receive payments online. PayPal's service builds on the existing financial infrastructure of bank accounts and credit cards to create a global, real-time payment service. PayPal now has 78 million account members worldwide, and is available in 56 countries and regions. The cost to receive payment using PayPal in Australia is $0.30 per transaction plus 1.1 per cent of the value of the transaction. Paymate Paymate provides a mechanism for credit card and bank-to-bank transactions to be conducted online. It provides an intermediary service permitting customers to use their credit card or direct debit facility to make a payment to a seller who receives the payment into their nominated bank account. Transaction fees apply for both seller and buyer. Buyers are charged about $1 for debit transactions and at least a three per cent charge for credit card transactions. Sellers incur a variable monthly charge for their accounts as well as additional charges from 1.72.4 per cent for excess payments above their limit. Technocash Technocash is a mechanism that allows money to be downloaded onto a debit card which can then be used for online banking. Technocash can be purchased from Australia Post outlets. The system is arguably more secure than credit cards because identifying numbers are not provided to merchants, charge back mechanisms do not apply, and only cleared funds are used in this payment system. A $2 charge applies to load money into the account and there is a small monthly charge for operating the account. There are no per-transaction charges.
Source: DCITA (2005).
Payment channels Payment channels facilitate the use of a payment product by providing a mechanism to establish contact between the payer and payee. There are various types of channels, from the simplest, such as over-the-counter, to the more complicated electronic channels with high levels of encryption for security. In general, payment channels can be classified into three groups: electronic, over-the-counter, and emerging. The various types of channels that are being used in Australia are listed in Table 2.4.
2.4 Channels being used in Australia Electronic channels
Electronic data capture (EDC) ATMs Internet Telephone
Over-the-counter
Bank branches Australia Post Woolworths and Coles Mail
Emerging channels
Near field communications Radio frequency identification (RFID) Digital television
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Exploration of future electronic payments markets Electronic channels Electronic channels facilitate the use of a number of payment products, such as credit cards, debit cards, and direct entry products. There are four primary electronic payments channels currently being used in Australia.
Electronic data capture (EDC) terminals: Often called EFTPOS terminals, or merchant acquiring terminals, EDC terminals are the main channel for accepting card-based payments in Australia. There are currently over 500 000 EDC terminals in Australia, with the big four banks accounting for a significant proportion of the merchant acquiring market. ATMs: There are over 23 000 ATMs in Australia, which performed over 760 million transactions in 2004 for a value of $128 billion (RBA 2005). There are a number of significant players in the ATM market, and it is one of the few payments related industries where there are significant sized competitors to the big four banks. Internet: The two main products used through the Internet for online purchases from merchants4 are credit card-based payments and direct credit transactions, known as pay anyone transactions. Credit card Internet payments require the merchant to provide an Internet payment gateway service to the customer, whereas direct credit transactions do not. Telephone: Payments can be conducted through two methods over the telephone. The first way is to employ a telephone operator to take the details required to conduct the payment and then manually perform the transaction. The second is to use Interactive Voice Response (IVR) systems, where the payer responds to an automated set of instructions (delivered by a recorded voice) by speaking and/or entering details directly into the telephone keypad.
Over-the-counter The primary channel used to conduct payments for consumers is over-the-counter. This channel is highly flexible for the consumer as it takes nearly all types of payments products. However, it is not appropriate for businesses that do not have a shop front. Branch and agency channels require physical contact between the payer and the recipient. In bank branches, customers can initiate cash withdrawals, perform balance enquiries, change details of their bank accounts, open and close accounts as well as a host of other transactions. In addition, banks have established agency channels to allow access to banking services where branches are not available. Australia Post provides many points of presence for banking services in Australia, as do Woolworths supermarkets (through its joint venture with the Commonwealth Bank of Australia). Mail also remains a significant channel for cheque-based payments. Credit card and signature debit cards (Visa Debit) can also be used this way.
4 BPAY is also an Internet payment method, but is primarily focused on bills submitted to consumers
for services already consumed (for example, utilities) rather than instant online purchases.
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Exploration of future electronic payments markets Emerging channels A number of channels are emerging in the Australian payments market. Among these are digital television and data-casting, Radio Frequency Identification (RFID) and mobile phone networks. At this stage, it is unclear how significant these channels will be in the market. There have been remote banking pilots in Australia using data-casting. In addition, many contactless products are using RFID technology (including stored-value cards and tolling systems). Korea and Japan have been the leaders in developing mobile phones as payment channels. RFID and mobile phones are discussed in more detail later in this chapter. Emerging international technologies There are a large number of electronic payment technologies emerging in international markets. The payments landscape is becoming more complex as new payment alternatives, end-user interfaces, authentication methods, acceptance interfaces and alternative networks are introduced (see Table 2.5). The current focus of most innovation in this area is on the front end systems, that is those that interface with the payers and payees. Security is also a key area of development.
2.5 Global payments landscape Currently being used
Payments alternatives End-user interface Authentication Cash, debit (signature/PIN), cheque, credit card, charge card Magnetic strip, card, cheque None, signature, PIN, password
In development or recently introduced

Stored-value/prepaid, ECheque EMV chip, RFID, NFC, PDA/Mobile, key fob, PC, online game system Chip, biometrics, Internet payment security (token, digital signatures, PC fingerprinting, multifactor) Wireless, PDA/mobile, PC
Acceptance interface Networks
In-person, point-of-sale (wired), ATM, mail order, telephone
Card associations, EFT networks, Mobile carriers, P2P other non-BankCard payment brands, clearing systems
Table 2.6 shows the new payment products and technologies that are emerging in international markets. Some of these are discussed in detail below.
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2.6 Emerging products and technology Products and devices
Contactless cards Mobile payments Biometrics Wireless POS ATM (Windows vs OS) eCheques PC/PDA Stored-value cards
Security
EMV chip 3-D Secure Digital signatures Passmark authentication PC fingerprinting Two factor authentications
Contactless cards Contactless payments enable an electronic payment to take place by waving or passing a payment device (a card, a key fob, or similar) near a reader without contact or hand-over of the card or device to the merchant. Contactless payment devices have an embedded microprocessor chip that stores all the customer and credit/debit card information, and a magnetic loop antenna to transfer the information to the reader. Two technologies used for contactless or proximity payments are:
Radio Frequency Identification (RFID) used in most contactless payment system products. The MasterCard PayPass ISO/IEC 14443 Standard has been adopted by Visa andwith a few customisationsby American Express; and Near Field Communications (NFC), a radio frequency technology developed by Phillips and Sony in 2002. It is used to connect a wide range of devices.
Several primary contactless products have recently entered the international payments market:
Exxon Speedpass, which was launched nationally in the US in 1997 by Exxon. It is linked to an established Exxon Mobil account or other payment account chosen by the consumer. To date, there are over 6 million accounts activated in the US. American Express Expresspay, which was first trialled in 2002. It is linked to an existing American Express account or a stored-value account associated with a credit account. It is currently accepted by over 400 merchants in the US. American Express has announced plans to offer Expresspay to all US cardholders (40 million), in addition to conducting trials in Asia (for example, Singapore). MasterCard PayPass, which was first trialled in the US in 2002, and Visa VisaWave, which was launched in early 2005. Chase, CitiBank and MBNA have all announced roll-out programs in the US. These products are designed to minimise payment system impact; magnetic strip data is transmitted to a reader and is then processed like a normal debit or credit transaction.
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Exploration of future electronic payments markets Box 2.7 outlines some of the primary contactless, stored-value cards that have been widely accepted and are experiencing significant growth in use.
2.7 Contactless stored-value cards
Since 1997 there have been a number of significant and successful introductions of contactless stored-value cards. Typically initiated within the mass transit ticketing systems, due to their quick transaction speeds, they have successfully enabled an electronic product to replace many small value cash transactions Octopus Card (Hong Kong) Octopus, launched in 1997 has now issued more cards than there are residents in Hong Kong. With 12 million cards in use, the Octopus card system processes 8.7 million transactions per day, at an average value of HK$7. On average, an Octopus card has a stored balance of HK$65. Octopus was initially established for ticketing purposes on Hong Kongs mass transit systems. It has since expanded to include parking meters, photocopiers and items at many retail outlets, particularly those situated around the mass transit infrastructure. In 2004, 78 per cent of Octopus revenue was derived from transport, with 20 per cent of revenue derived from retail purchases, a figure that is expected to rise to closer to 40 per cent by 2013. EZ-Link card (Singapore) Initiated in 2002, EZ-Link now has over 7 million cards on issue in Singapore and processes over 4 million transactions per day. Initially launched to provide ticketing to the Singapore mass transit systems, EZ-Link cards are now expanding into the retail space for small value transactions. Parking meters and retailers, including 7/11, cinemas, McDonalds and local libraries are amongst the locations that now accept EZ-Link. Other examples of stored-value, contactless cards include the Oyster card in London, the Suico card in Tokyo, and the Moneo in France.
Mobile phone payments Most people in developed countries now have a mobile phone and businesses are seeking new ways to take advantage of their ubiquity. Many mobile phone payment technologies take advantage of the fact that as well as providing a communication device, mobile phones also provide a trusted billing system. Many systems also work with the flexibility already factored into telephone payment systems, including the capacity to identify small charges. Mobile phone payments can be divided into two categories:
payments for phone-related services and data provided through a mobile phone or device connected through a cellular network (for example, web content and games); and payments for purchases in the physical world using a mobile phone as a payment device.
The use of the mobile phone as a payment channel is growing quickly, especially as new forms of services become available over mobile phones. It is predicted that data will account for approximately 26 per cent of US mobile carrier revenues by 2007, up from around nine per cent in 2002. In addition, services that will be delivered through this channel are expected to expand as cellular/mobile technology expands. A
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Exploration of future electronic payments markets significant driver will be the emergence of what has been referred to as Gen-M kids (adolescents currently in middle/high school) who already make considerable use of mobile phones. In 2002, Telstra introduced a mobile phone payment facility to pay for parking in some areas of Sydney and Melbourne. This system was extended to buying soft drinks from vending machines, although access to these specially equipped machines is not widespread. Otherwise there has been very little progress in the use of mobile phones as a payment product in Australia. However, it is being used predominantly in emerging applications in North Asia. For example, NTT DoCoMo in Japan has launched a full mobile payments system that will include a proprietary credit card (Box 2.8).
2.8 Mobile phones as a payment device or product
The use of mobile phones as a payment device is being tested in the marketplace, particularly in Japan and South Korea. These approaches bundle features of mobile phones with other payment systems. Some short extracts from recent business journal articles about these changes are presented below. Phones that double as credit cards ... After introducing handsets last year that double as debit cardsallowing users to pay for small purchases such as soda or coffee from vending machines and convenience storesthe company this year plans to make those phones full-fledged credit cards. To boost its efforts to make mobiles the new way to pay, DoCoMo is taking a 34 per cent stake in Sumitomo Mitsui Financial Group Inc.s credit card business. In late April, DoCoMo said it would pay US$935 million for the stake in Japans second largest credit card issuer. DoCoMo has also held talks with Japans No.1 issuer, JCB International Co., about some sort of tie-up, though no details have been released... The logistics of the enterprise, though, are daunting. For starters, it will require new phone-friendly scanners to be rolled out at the thousands of outlets that accept Sumitomo Mitsui cards. Will that be cash, credit, or cell? Finally, the technology is at hand to turn phones into virtual wallets... Now, so called mobile commerce seems poised to make a lasting comeback. Services are already up and running in Japan, South Korea, Germany and elsewhere. Analysts and wireless execs believe the time is ripe for mobile commerce. Cell phones have become one of the few items that many people nearly 2 billion worldwiderarely leave home without. Consumers will use their phones to beam data to electronic checkout systems, which will authorise the purchase of everything from groceries to a new refrigerator.
Sources: BusinessWeek (6 June and 27 June 2005).
Biometrics Automated identification of individuals by analysing bodily characteristics is known as biometrics. Due to its strong security features, biometrics is well suited for relatively high-risk transaction environments. Common types of biometric technologies under development or in use today include: fingerprints, voiceprints (voice recognition), hand geometry, signature verification and retina eye scan (iris recognition). Biometrics have been used for several years in highrisk, closed-loop environments (for example, building security and high-security network access).
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Exploration of future electronic payments markets Payment applications using biometrics are emerging. The majority are using fingerprints for identification to make a payment in lieu of a signature or PIN that can be copied or stolen. The Pay-by-Touch application used in selected supermarkets in the US is an example of this technology. There are many factors that make the use of biometric payment systems attractive. These primarily relate to the high level of security and the speed at which transactions can take place (Table 2.9).
2.9 Benefits of a biometrics payment system Merchants perspective
Consumers perspective
Enhanced securitybased on unique physical identifiers. Conveniencequicker to get through the checkout line without having to pull out a wallet to make a payment. Low costcurrent systems have been free to enrol in and use.
Differentiationcan present consumers with a new and innovative technology that is not currently used in many places. Securityprovides additional security in authenticating the consumer, minimising fraudulent or dishonoured payments. Faster transactions timespermits faster checkout throughput of customers. Conveniencereduces problems in handling and taking cash.
Biometric payment systems are generally seen to be five or more years away from potential widespread use in open payment networks. This is because they still face significant barriers, including:

relatively high false-acceptance and false-rejection rates at the point of interaction (for example, misreading a fingerprint); the high cost of storing the digitised representation of the biometric on a secure token such as an EMV chip; perceived invasion of privacy by consumers to have personal data stored for use; and no standard for a single biometric that would enable broad roll-out in an open payment network.
Security Authentication methods for Internet payments are still emerging, and customers remain concerned that their payment or personal information are not secure. There are several authentication technologies that have recently entered the international payments market.
EMV (Europay MasterCard Visa) chip cards, which are credit or debit cards that include an embedded microprocessor chip. Rather than swiping the magnetic strip of a traditional payment card, the EMV cards are dipped into a slot that reads data from the chip. The move to chip and PIN is primarily a fraud mitigation strategy that is largely driven by MasterCard and Visa liability shifts.
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3-D Secure technology protocols, which are technologies (targeted at Internet transactions) that require the cardholder to enrol in a program to obtain a password. They also require the merchant to enrol in the program and make system changes to accommodate the technology. Digital signatures incorporating PKI technology that use private and public key methods to authenticate both parties to the transaction. Due to the need for enrolment and key management processes, this technology is primarily used in higher risk environments such as B2B transactions. Provision of alternative personal identity information that gives assurance to the authenticating party that the transaction initiator is properly identified. These include the Passmark authentication technology, which allows a user to enrol in the program and select an icon/picture that is unique to the user, such as a photo of their favourite animal. PC fingerprinting that enables the network to identify the unique characteristics of the Internet access device to prove that this device was used to make the transaction. Two factor authentication that uses the traditional username, password, and/or PIN along with a small electronic device (for example, a mobile phone) that creates a random login number that is required to complete access. Although this security measure is popular in Europe, only Bendigo Bank and the National Australia Bank (NAB) are using it in Australia.5
Technologies likely to emerge next There are a significant number of emerging payment technologies at various stages of development. Consequently, it is difficult to determine which technologies will be accepted next by businesses and consumers and which will fail to obtain the necessary network. Recent research conducted by Edgar, Dunn & Company and the European Financial Managers Association (EFMA) sheds some light on this topic. They conducted a survey on the topic of innovation in payments with 40 senior payments executives, in charge of payments in financial institutions, across 14 countries. The typical plans of these institutions included the implementation of EMV and 3-D Secure, and the evaluation of mobile payments and contactless cards. They were asked to determine what stage of implementation they were at for a number of emerging payments technologies. The results are presented in Table 2.10.
5 The NAB two-factor authentication system sends a random number to the customers mobile phone,
which is then entered into the website by the customer to complete the payment log in process.
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2.10 Stage of implementation for electronic payments technologiesa
Not in consideration per cent 16 33 33 49 28 35 63 In consideration per cent 9 16 35 28 56 51 28 Under implementation per cent 35 14 2 9 2 9 9 Implemented per cent 40 37 30 14 14 5 0
Technology
EMV 3-D Secure Micro-payments P2P payments Mobile payments Contactless cards Biometrics
Source: EDC.
a Among surveyed financial institutions.
Only 40 per cent of the surveyed financial institutions have already implemented EMV and 3-D secure technologies. The technologies that are likely to be implemented in the medium term seem to be mobile payments and contactless cards, with 56 per cent and 51 per cent of surveyed financial institutions considering their implementation respectively. Box 2.11 outlines the key themes from the study.
2.11 Future plans of financial institutions: key themes
The EDCEFMA survey highlighted six key themes from the financial institutions perspective. 1. There is not a single payments-related technology focus for the future.Various technologies are competing for retail bank attention, global adoption, and investment funding. 2. Typically, technology adoption has become a by-product of broader strategies, such as:

product differentiation to obtain competitive advantage; Customer Value Management and Development (CVM) to build customer profitability and retention; operating cost reduction; fraud/risk management; and channel and distribution strategies.
3. Technology adoption in payments is an evolutionary, rather than revolutionary process. 4. The appetite for investment in new payments-related technologies is not great for many banks. This is because:

no one institution can usually drive or guarantee new standards; real consumer demand and actual adoption of new technologies are often very uncertain; the business cases for technology-based payment systems are at best uncertain, especially in terms of revenues generated; and most financial institutions prefer to be technology fast followers than pioneers.
5. New technology applications have yet to fundamentally change the retail payments model. 6. While the banking sector moves forward with caution, others are driving change. Major non-traditional providers are investing to learn, adapt, create and find their best competitive niche for the future.
Sources: EDC and EFMA.
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Exploration of future electronic payments markets Key points Getting paid and paying are not simple matters as businesses and consumers have considerable choice about the products and channels that they can use or offer. The breadth of choice meets the varying needs of different consumers and businesses but it has also created a very complex mesh of interconnected products and channels. There are already a large number of electronic payment products in use. Electronic banking and the use of EFTPOS terminals are now a part of ordinary life for many Australians. There are also products such as direct credit and Visa Debit that permit payments and purchases over the telephone or Internet. There is also a significant range of electronic methods that can be used for payments in Australia. Direct entry products, including BPAY, Bill Express and POSTbillpay, have been available in the payments market for a number of years, but they are new compared with the traditional payments products. Although there is innovation in the industry, it is mostly focused on improving existing infrastructure and interfaces and not creating new payment features. Nevertheless, some expect that new electronic payments technologies derived from international developments will 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. 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 or more years expected before they are introduced into the mainstream market.
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Exploration of future electronic payments markets CHAPTER 3DRIVERS OF CHANGE What is driving change in payments markets? What is different about electronic payments products and channels that can be expected to shape outcomes in the future? This chapter seeks to identify the broad factors at play. It draws on international experience and looks at circumstances in Australia. This chapter introduces the key issues, which are then examined in greater depth in subsequent chapters. A global perspective In a detailed international comparison of payments markets, the Bank for International Settlements (BIS) made several key observations (BIS 1999). There were two major similarities in the countries studied. Firstly, there is a considerable diversity of payment methods available in every country studied. Secondly, cash remains the dominant payment method everywhere. While all countries use non-cash payments to some extent, countries fall into one of two broad groups that rely on a particular class of non-cash payment. The first group is made up of the US, Canada, Australia and a few European countries that depend heavily on cheque payments. The second comprises mainly European countries (for example, Germany and the Netherlands) and Japan that rely heavily on credit transfers (or direct debit in Australia). Table 3.1 sets out the proportion of various retail payments as a share of the total payments made per individual in a recent BIS report (BIS 2003).
3.1 Non-cash retail payments in selected countries: proportion of total transactions per person (2001) a Cheque
United States France Singapore Canada United Kingdom Australia New Zealand Germany Switzerland Netherlands Sweden 53.7 35.3 28.6 25.5 23.1 22.0 19.1 2.4 1.6 -
Debit cards
16.3 29.9 59.7 36.0 24.7 20.9 37.1 8.8 48.4 31.8 27.6
Credit cards
22.2 21.0 15.6 24.9 15.0 2.9 17.2 1.6 6.0
Direct credits
4.8 17.9 5.2 9.5 17.2 23.1 23.2 49.4 21.9 38.0 58.2
Direct debits
3.0 16.9 6.5 8.0 19.4 9.2 5.6 36.5 10.9 28.6 8.2
a Debit card transactions also include stored-value cards for some countries; credit transfers exclude transfers made using real-time gross settlement systems. New Zealand data are for 2000. Note: an entry of - denotes a value of zero or close to zero. Sources: Bank for International Settlements, Statistics on Payment and Settlement Systems in Selected Countries (April 2003); EMEAP Working Group and Payment and Settlement Systems, Payment Systems in EMEAP Economies (July 2002), RBA.
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Exploration of future electronic payments markets Cheque use is especially low in Sweden and the Netherlands. In the Netherlands, cheque use declined from 46.6 million transactions in 1998 to 0.1 million transactions in 2002. Low cheque use in Sweden is often attributed to high bank charges and the fact that cheque guarantees only apply to amounts below SEK 2000 (approximately A$300) which effectively limits cheque use to relatively low-value retail transactions. Patterns of payment use are changing. The BIS identified several trends in payment methods that are common to most of the countries studied. These include the following;

continued use of currency (cash) as a primary retail payment method for point-ofsale transactions in terms of volume; movement away from cash towards electronic non-cash payments; growth in card payments; a shift towards greater use of direct debit transfer; and changes in market arrangements for retail payment methods and services, particularly with respect to service providers and pricing.
Many of these trends are apparent in the data provided in Table 3.2 below. Since it excludes cash, the emphasis is on a reduction in cheque use (which is particularly pronounced in the Netherlands and Sweden) and an increase in other payments.
3.2 Growth in non-cash retail payments in selected countries: average growth per person over 19972001 (per cent) a Cheque
New Zealand United States France Canada Netherlands United Kingdom Australia Germany Sweden Switzerland Singapore -10 -4 -3 -3 -48 -5 -8 -16 -44 -6 -1
Debit cards
16 32 12 20 19 15 8 51 28 22 36
Credit cards
26 6 7 5 8 24 5 11 7 -
Direct credits
2 10 4 10 2 3 12 7 1 -3 0
Direct debits
17 14 9 10 7 8 27 1 11 17 -7
Total
6 2 3 8 7 5 7 5 7 4 13
a Debit card transactions also include stored-value cards for some countries; credit transfers exclude transfers made using real-time gross settlement systems. New Zealand data are for 2000. Sources: Bank for International Settlements, Statistics on Payment and Settlement Systems in Selected Countries, April 2003; EMEAP Working Group and Payment and Settlement Systems, Payment Systems in EMEAP Economies, July 2002, RBA.
The BIS identified that change reflected supply and demand factors. The most significant supply factors are:
information technology developments, assessed by the BIS as being the most fundamental supply factor;
29

competition and cooperation between providers of some retail payment services; and globalisation of payment services offered by individual institutions in international retail payment networks. risk preferences of both payers and payees for specific methods and services; relative customer cost and convenience of various methods; general acceptance and availability of alternative payment methods; and long-term economic growth, in particular the rise in the level of private consumption.
The demand factors deemed most relevant by the BIS were:

Recent experience in the United States If the availability and application of information technology (IT) is a key driver of change, it seems worthwhile to look closely at developments in the US, generally held to be a leader in IT. Customers in the US are making increased use of electronic payment approaches. A recent study into non-cash payments by the US Federal Reserve found that between 2000 and 2003, online debit use rose by 21 per cent per year, offline debit use grew by 24.9 per cent per year, and electronic benefits transfer (EBT) by 15.4 per cent per year (Federal Reserve 2004). Offsetting these increases, cheque use in the US fell by 4.3 per cent per year. Notably, other payments increased, with credit card use increasing by 6.7 per cent per year. Table 3.3 summarises US Federal Reserve data, about changes in non-cash payments in recent years.
3.3 Change in US non-cash payments (200003) Cheque Credit card Automated clearing house
9.0 11.0 6.2 9.1 -
Offline Online debit debit

7.0 13.0 5.3 10.3 40.0 42.0 4.0 7.0 3.0 5.3 46.0 38.0
EBT
2000 share (%) 2003 share (%) 2000 (billion) 2003 (billion) 2000 average value (US$) 2003 average value (US$)
57.0 45.0 41.9 36.7 -
22.0 23.0 15.6 19.0 82.0 89.0
1.0 1.0 0.5 0.8 -
Source: US Federal Reserve System.
The Fedral Reserve commissioned three studies (the Depository Financial Institutions Check Study, the Check Sample Study, and the Electronic Payments Instrument Study) to determine the size and dynamics of the retail payment system and to identify
30
Exploration of future electronic payments markets opportunities for changing cheque payments to electronic payments. The studies found the following:
Electronic payments, as a percentage of non-cash payments, increased from a 15 per cent share in 1979 to approximately 40 per cent in 200001, but cheques have not gone away: in 2000, 29.5 billion electronic payments were originated in the US, compared with 56 billion in 1979 in 2001, 42.5 billion cheques were written in the US compared with 32 billion in 1979 the share of cheques as a percentage of retail non-cash payments fell from 85.7 per cent in 1979 to 77.1 per cent in 1995 and 59.5 per cent in 2000.
Consumers were the predominant cheque writers, and businesses received the majority of cheques. But consumer-written cheques only accounted for about 19 per cent of the total value of cheque payments. B2B cheques alone accounted for more than 42 per cent of total cheque payment value. Remittance and point-of-sale cheque payments together represented greater than half of all cheque payments by volume, while bill payment was the largest single category of consumer payment. Most cheques were written for relatively low dollar amounts (32 per cent were for US$50 or less, 76 per cent were for US$500 or less).
The Electronic Payment Instrument Study and the 2001 Consumer Payment Preferences Study, both undertaken by Dove Consulting, found that in 2000, US consumer payments took the following forms.
Credit cards: By volume, credit and charge cards were the most common electronic consumer payment method (15 billion transactions worth $1235 billion). Eightytwo per cent of volume and 87 per cent of value came from general-purpose credit cards. Online and offline debit: This was the second most popular form of consumer payment method in 2000 (8.3 billion transactions worth US$348 billion), representing 64 per cent of volume and 60 per cent of value. Automated clearing house (ACH): this accounted for 78 per cent of all electronic payments value (with the average value 11 times greater than general-purpose credit cards). Emerging payments: Volumes were small in this category, which included electronic bill payment and presentment (EBPP), P2P payments, stored-value cards, Internet currencies, online debit over the Internet, transponders, cheque electronification and Internet-initiated ACH debit.
What was driving the choices made by consumers regarding payments? The studies found that with:

consumer perceptions of debit, cardholders expressed a high degree of comfort with the product and perceived it to be fast; and recurring bill payments, ACH continued to gain popularity as a bill-payment option (direct debit accounts for 43 per cent of electronic volume) and it had the highest penetration rate among electronic bill-payment options.
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Exploration of future electronic payments markets How would US consumers pay in the future? The Dove Consulting studies projected changes in payment choices: in-store use of cash, cheque and credit card payments were expected to decrease and use of prepaid and debit cards would increase. When paying bills, consumers would increase use of debit, direct payment and online bill payment. Box 3.4 summarises the key insights of a December 2002 report on payment system development.
3.4 Key insights from a US study of electronic payment systems

In their December 2002 report, The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis, the Federal Reserve sought the views of private-sector organisations and other interested parties, including government agencies, about longerterm payments system developments in general, and the key issues that will shape future clearing and settlement systems in particular. Organisations included corporate end users of payment services, technology firms, banks, private-sector payments system operators, and non-bank suppliers of payment services. The study involved a total of 49 organisations and more than 100 individuals. In interviews, views were sought on key questions such as:

What are providers of financial services and IT doing that will change and improve the nations payment systems? What are corporate users of payment services doing that will change and improve the ways in which they make and receive payments? What barriers to innovation have been encountered? What issues should be brought to the attention of the Federal Reserve or other appropriate organisations?
Following are the key issues identified by interviewees.
Having a business case for adopting an innovation in electronic payments systems and, particularly, identifying the demand for innovation are much more important than simply having access to the new technology that would permit the innovation. Providers of payment services cannot assume that an innovative service will generate significant demand just because the service provides new technical capabilities in a creative way. Providing a net benefit to the key participants in a transaction, such as banks, service providers, and end users, appears frequently to be the most important aspect of successful innovation. Innovations that require little change from known and established practices may be more readily accepted than those that are substantially new and unfamiliar. Using new technology to leverage existing payment systems enable firms to take advantage of established practices familiar to users and reduce their start-up costs.
Innovative payment technologies frequently compete with older technologies for financial resources and management attention in a firm or industry. Long-term projects or changes that threaten current business lines, especially profitable credit and debit card operations, may not receive organisational support because of departmental conflicts and short planning horizons. Critical mass and network effects may delay adoption of an otherwise useful or costeffective innovation, resulting in lock-in of older products.
There is a desire for further development of low-cost methods for initiating rapid interbank transfers to and from deposit accounts using the Internet.
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3.4 Key insights from a US study of electronic payment systems
(continued)
Currently, few methods allow end users to make real-time, online purchases using funds from a demand deposit account.
There is a desire to improve cheque collection, if only a temporary measure until electronically initiated payments are even more widely adopted than at present. Truncating cheques earlier in the payment or collection process could combine benefits of cheques to users with the processing efficiencies of electronic payments systems. It is becoming increasingly popular for merchants and billers to scan paper cheques at point-of-sale and at lockbox locations (estimated to reduce check processing costs by 80 per cent) but there are problems with standardising image-exchange systems and telecommunications capacity.
There are different views on how quickly a payment transaction should settle: in real time, near real time, or next day. There is a preference for real-time settlement but, in light of cost considerations, alternatives that achieve similar results such as payment guarantees with a next day settlement may be acceptable (for example, real-time verification that the counterparty has good funds, followed by later settlement). If recipients of payments are interested in receiving funds on a near real-time basis (for example, same day) financial industry efforts could focus on improving same-day interbank clearing and settlement procedures rather than deploying a new, general real-time funds transfer system.
Exchange of information with business partners about an underlying payment transaction is more important to a business than the potential savings from making or receiving payments electronically. People perceive considerable value in receiving an electronic payment and associated information formatted in such a way that the payment and information can be processed straight through to their internal systems. Incomplete technology integration limits banks, corporations and consumers ability to send, receive, and use electronically transmitted business information at low cost. There are different views on whether payment-related information should flow with an electronic payment or be matched up at the end of the process.
There is a lack of agreed standards for payment messages, such as message formats and the way in which payments information is included. A consequent lack of systems interoperability affects transactions among businesses and, in some cases, between businesses and their banks. There was discussion of the concept of a universal payment-message format that uses a common format for several types of electronic payments but might maintain separate clearing channels or business rules for each type. There is a lack of compatible standards for sending electronic payments to different countries (cross-border electronic payments), contributing to the cost and difficulty. Laws and regulations related to payments are viewed as complex, confusing and adding some uncertainty to their operations. Regulation is taken as a given, something to be worked with or around but not necessarily changed.
The Federal Reserve should continue to adopt innovation or extend its services so as to foster innovation in the private sector.
Source: Federal Reserve (2002).
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Exploration of future electronic payments markets Australian experience Cash is the most widely used payment product in Australia. The Australian Retailers Association found in a 2001 study that 40 per cent of the value of all payments at surveyed retailers were paid in cash (ARA 2001). The project team estimates that in 2004 there were approximately 1.1 billion cash withdrawal transactions in Australia, for an average amount of $160 while the average purchase amount of a cash transaction ranges between $13 and $20. Taking the higher end of these results, there are on average eight payment transactions per cash withdrawal6, leading to an estimated 8.8 billion cash transactions in Australia in 2004. When compared with a total of 4.1 billion transactions using other payment products, cash payment transactions constitute approximately 70 per cent of all payment transactions. While cash transactions form a significant proportion of the number of transactions, they constitute only approximately two per cent of the value of all payments made in Australia.7 Significant shifts have occurred in the Australian payments landscape in the last decade. Paper methods such as cheques have been replaced to a large extent by more efficient electronic alternatives. Data from the RBA indicates that the use of cheques declined from more than 80 per cent of the dollar value of non-cash retail payments to less than 30 per cent by 2002 (RBA 2003a, see Chart 3.5). At the same time, the electronic direct entry system, especially the direct crediting of salaries and direct debits to pay recurring bills, expanded rapidly. Before the 1990s and the widespread use of the Internet, most transactions were undertaken through either cheque or cash. However, as electronic payment products become more popular (see Chart 3.5), the total value for cheques has steadily decreased.
3.5
100% 80% 60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Share of payments valuea b

Cheque ATM Cash Out EFTPOS Credit Cards Direct Credit Direct Debit
a Excluding cash other than ATM transactions. b Real-time Gross Settlement (RTGS) system was introduced in 1998/1999, which facilitated settlements between financial instituions and marketdly reduced the value processed by cheques. Source: RBA.
6 It is important to note that cash payment transactions can often be between two individuals, which are
often not captured in official or business statistics.

7 Given the average transaction size is $20 for cash.
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Exploration of future electronic payments markets In 1990, the first prepaid stored-value cards were introduced by Telecom Australia (now Telstra). These cards included a magnetic strip and were used in public phones around Australia. This was followed by the introduction of the Telstra smart public phone card in 1997, which contained an electronic chip that allowed the cards balance to be updated when used and could store a wide range of additional information. Today, most prepaid, stored-value cards are used in urban transport systems and in libraries for photocopying. Although there have been extensive trials of alternative stored-value cards in Australia by MONDEX, VisaCash, and ERG over the last decade, there has not been widespread acceptance of these products. Direct debits and direct credits have been operating for over 20 years. In Australia, these are payments that are bilaterally exchanged through direct computer links between banks via a decentralised national system. However, the channel they use has changed, moving from over-the-counter at a bank branch to the Internet. This has seen a dramatic growth in these types of payments. Recently, Australia has seen the introduction of alternative types of electronic payments, including PayPal, BPAY, BillExpress and PostBillPay. Although they have gained wide acceptance, especially in bill payment, they have not made a large impact on traditional payment methods and represent less than 10 per cent of the total value of transactions. In addition, St George Bank introduced AUD-denominated electronic cash in 1997, although it has not gained wide acceptance as consumers and merchants must hold an account with the institution. Chart 3.6 on the next page, shows the volume of transactions and the change in the average transaction value for each type of major payment product in Australia (excluding non-ATM cash). Electronic payments have grown significantly over the last 10 years at the expense of cheques, which have decreased both in volume and average value. Credit cards and EFTPOS have experienced the biggest growth in the number of transactions. They have also experienced growth in average transaction value (ATV), although ATV growth is relatively small compared with direct debit and credit. This suggests EFTPOS and credit cards are increasingly being used for every day transactions. The Australian experience mirrors the worldwide trend of declining use of paper-based payment methods. Like other countries with traditionally high use of cheques (the US, UK, Canada, New Zealand and France) Australia has shown consistent declines in per capita cheque use at around six per cent per year since 1997. Like many other industrialised countries, use of debit and credit cards as a proportion of all non-cash retail payments has increased significantly. However, unlike most countries, credit card growth in Australia has outstripped debit card growth over this period. For larger payments, the decrease in the average value of cheques and the increase in the average value of direct credit and direct debit suggests that cheque payments are being replaced by these types of electronic payment products. This is especially the case for direct credits where individuals and businesses have more control over the payment schedule, thus emulating the advantages cheques provide in controlling cash flow. In addition, the Australian Government encourages the use of electronic payments through leading by example (see Box 3.7).
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3.6 Combined value and volume for products other than cash a
1,200 Number of transactions (000s) 2123123 Cheque Number of transactions (000s) .. 1,000 800 600 400 200 -0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1,200 Credit Cards 1,000 800 600 400 200 -0

1995 1998 2001 2004
High value cheque transactions moved into real time gross settlement
1,200 ATM Cash Out Number of transactions (000s) .. Number of transactions (000s) .. 1,000 800 600 400 200 -0
1995 1998 2001 2004
1,200 Direct Credit 1,000 800 600 400 200 -0

1995 1998 2001 2004
EFTPOS
Direct Debit
250 ATV growth 200 150 per cent ... 100 50 0 -50 -100
a ATV (Average Transaction Value). Growth rates are for the period 1995 to 2004. Source: Reserve Bank of Australia.
Cheque Cheque
ATM Cash Out
EFTPOS
Credit Cards
Direct Credit
Direct Debit
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Exploration of future electronic payments markets The overall picture is that cash continues to be an important means of payment, both here and abroad. Cash is still a convenient payment method for small-value transactions where speed is critical and payment records less important. General purpose electronic alternatives to cash, such as stored-value cards, have not experienced great success in Australia or in many other countries. Despite publicity about new payment mechanisms, the uptake of innovative payment methods has been slow. On the other hand, payment system users have been quick to adopt new electronic channels such as the Internet, which provide increased access to existing payment methods, such as credit and debit card.
3.7 Australian Government electronic payment initiatives

The move towards electronic payment in Australia has been driven in part by the Australian Governments own initiatives to undertake electronic payments. The Australian Government has reviewed its progress on this matter several times over the last decade. For example:
In his December 1997 statement, Investing for Growth, the Prime Minister committed the Australian Government to adopting electronic payment as a normal means of payment. He encouraged suppliers to use the Internet as the preferred mechanism for transmittal of invoices to the Australian Government. His statement set specific actions for implementation in this area. The Commonwealth Electronic Procurement Implementation Strategy, released in April 2000, recognised the need for government to take a lead role in driving the transition to ecommerce, and for agencies to operate flexibly to take advantage of the efficiency gains that are likely to result from the evolution of new business models. In 2004, the Australian Government Information Management Office (AGIMO) reviewed the status of e-procurement in the Australian Government. The resulting report, the Government E-procurement Snapshot 2004, indicated that Australian Government agencies had made considerable progress in implementing e-payments. It further stated that this progress was driven not only by Australian Government policy, but also by improved electronic services from the banking sector.
Factors that shape future payment choices To examine trends in payment systems and to predict future payment use, it is helpful to review what shapes the choice of payment methods. The decision of a merchant to accept a payment system, or that of a consumer to choose a payment system for a particular type of transaction, reflects how the attributes of each approach meet the needs of individuals and businesses. Drawing together the extensive literature about payment systems, six attributes of payment products are relevant to the choices made:

capability; cost; convenience; coverage; confidence; and confidentiality.
These attributes are outlined in Box 3.8.
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Exploration of future electronic payments markets Some insight about future trends in the payments market and electronic payments in particular can be obtained by reviewing the issues from the perspective of the six Cs.
3.8 The six Cs that shape payment choice

The six Cs are proposed as a simple framework to reflect what consumers and businesses think and feel about very complex topics money and payments. It is to be expected that there will be deficiencies and duplications in any simplifying framework. The borders between each of the factors are sometimes blurred, especially in subjective areas such as confidence and convenience. While recognising limitations, the six broad factors that may shape choice of payment are outlined below. Capability Capability refers to the functional ability to actually undertake a payment. Capability in cash transactions relates to being in a position to hand over and receive the payment. This becomes a threshold issue in non-cash payments, which often involve technical issues such as the establishment of a means of communicating over distance, ability to verify the parties, and many other factors. Cost All payment systems involve some costs. Consumers and merchants are likely to seek to use lower cost paymentsif they know what the use of each payment will cost them. The cost of a payment is not always spread evenly between the parties. Vendors of payment products will often seek to make some approaches appear to be no-cost or low-cost to the customer. The cost structures of payment methods also differ; some have a fixed transaction charge while others are proportional to the size of the transaction. Convenience This refers to the ease of use of a payment method. A need for registration before using the payment method, or the speed of payment (for example, the time taken to approve a payment) can be factors affecting convenience. Coverage Coverage refers to how widely a payment method or system is accepted by merchants and other recipients of payments, such as businesses receiving payments from suppliers. There is little benefit in investing time and other resources in a payment method if it is not accepted by many merchants. Confidence This refers to a customers belief that a payment will be successfully executed and completed, and that the value of a payment method will be respected. Confidence rises where arrangements are secure and value does not leak. Confidentiality Non-cash payments often involve the collection of information that becomes valuable. Users of payment systems are often concerned about the collection and use of personal information, and its potential release to other parties, if not properly secured. Other studies have proposed a slightly different set of characteristics for payment systems. For example, the OECD (2005) has chosen applicability, ease to obtain, reliability/ease of use, cost, security, liability and anonymity as the salient characteristics. Liability refers to legislative protection and provisions, and coverage of potential losses.
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Exploration of future electronic payments markets Capability Technological change is at the heart of the process of introducing new opportunities for electronic payment. Key emerging electronic payment technologies were discussed in the previous chapter. Examples of new products worth noting here include wallet phones (handsets with embedded chips allowing electronic payments) which have been introduced with much fanfare in Korea and Japan recently. Technological advances in the hardware and software underpinning payment systems also affect their efficiency, reliability and performance. The changes in capability go beyond new products. Changes in payment channels are also significant. Some new capabilities add value by changing or shortening channels or payment supply chains. For example, the adoption of wireless networking and Internet Protocol by some ATM operators is allowing the bypass or disintermediation of telecommunications carriers from the value chain, and is delivering significant cost savings to the ATM operators. This type of innovation can provide a way of entry for new participants, especially for those outside the financial services industry, thereby challenging the role of traditional suppliers and intermediaries. Consequently, product and institutional boundaries are blurring and substitutes for traditional payment methods are being created. While banking institutions are likely to remain as the core providers to end users for most retail payment methods and services, IT and payment applications that had once been their exclusive preserve are now available from a wider range of service providers. Declining costs of information technology hardware and software, and the greater expertise needed to develop related payment applications, are the primary drivers for non-traditional financial institutions and even non-financial institutions to become providers in some countries. In end-user markets for products and services, these providers range from credit transfer agents to ATM providers operating in off-hours locations such as convenience stores. Others, such as those supplying communications software and equipment or data processing services, provide specialty input services to payment service providers. In some cases, these input service providers have even begun to enter downstream enduser markets as providers of retail payment methods and services (BIS 1999). Information technology is also providing a new lease of life to informal markets. In addition to B2B and B2C transactions, e-commerce has reinvigorated consumer-toconsumer transactions. This has also been supported by innovations in payment products and channels. Mediating services such as PayPal facilitate person-to-person transfers without the seller having to register as a merchant, as is required for accepting credit card payments. They are also being increasingly used in other areas, such as payment of taxes in some countries, to provide gift vouchers, and for online music sales. Finally, the capability of a payment product also refers to its ability to increase the functionality of the payment. All payment products are not exact substitutes for each other. For example, a debit card transaction provides the merchant with real-time notification of the success of the transaction, and the consumer the security of having to enter a PIN to access their funds. Table 3.9 provides an indicative summary of the different functions of key products in Australia. The cost of providing these services (see below) necessarily changes depending on the functionality provided by the product. 39

3.9 Functionality of various payment products a
Cash Cheque Direct credit Direct PINdebit based debit cards Signature Credit - based cards debit cards Charge cards
Functionality
Transfer of value Real-time notification of payment success Guaranteed funds to the receiver Ability to transact remotely Rapid settlement of value Option to access credit Rewards points (excluding FlyBuys)
a Depends on the bank account used. For example, some accounts provide an overdraft facility that allows access to credit.
Cost Cost would normally be viewed as a strong driver of change. The impact of cost on payment choice, however, is a complex matter. This is because of the differences in capability outlined above, particularly where cost and price signals have been blunted in the market. Previous Australian analysis While the notion that electronic payments are cheaper to provide to the community is generally accepted, the notion is rarely tested. Nothwithstanding the considerable volume of official statistics about the amount and nature of various payment types, there is very little data that is readily available about the cost of payments in Australia in general, or the relative cost of different payment systems. The Financial System Inquiry (the Wallis Inquiry) noted in 1997 that unlike in some other countries, comprehensive data on the costs and efficiency of the payments system are not publically available in Australia (p. 223). The researchers of this report found that while much has changed in the use of different payments (possibly reflecting corresponding changes in costs) little additional official information has become available since 1997. The main official or government source of information about the total cost of the payments system remains an estimate provided in the Wallis Inquiry report. This included an estimate that the total annual costs incurred by Deposit Taking Institutions was between $5 billion and $7.5 billion each year. This does not include the wider economic or social costs of payments or the costs of making, managing and using cash. The Wallis Inquiry report also sought to illustrate the cost of different payment delivery channels. Drawing on information recieved from five insitutions, it shows that cheques were generally the most expensive channel, followed by cash, ATMs, and
40
Exploration of future electronic payments markets EFTPOS. Direct credit arrangements were consistently viewed as being the cheapest delivery channel where it was applicable or available. The RBA has released some estimates that compare the cost of one electronic payment channel with more traditional approaches. This information was released in the RBAs submission to the Australian Competition Tribunals consideration of regulatory matters (Submission of the Reserve Bank of Australia to the Australian Competition Tribunal re: Application for Review of the Determination of the Australian Competition and Consumer Commission Authorisation A30224 and A30225 in relation to the Collective Setting of EFTPOS Interchange Feesthe ACT Submission, p. 28). It identifies the estimated resource cost for three payment types: cash, EFTPOS and credit card. The costs are reported in Table 3.10 below.
3.10 Estimated resource costs of payments (per $58 transaction) Cash
Issuer Acquirer Customer Merchant Total
Source: The ACT Submission (p. 28).
EFTPOS
0.15 0.26 0 <=0.17 <=0.58
Credit card
<=1.47 0.43 0 <=0.17 <=2.07
0.170.40 0.350.60 0 0.12 0.641.12
While there are likely to be many issues and problems with using such findings out of context, the RBA data seems to support the proposition that electronic payment products may be delivered at a lower resource cost than other payments. Key limitations of the RBA analysis are that it:

has not been extended to other payment types (which was not necessary for the purpose of the RBA analysis); does not show if the relative costs change according to the size of the transaction; and factors in zero for the costs that customers face under all three payment types, despite everyday experience where real costs and differences in costs are apparent and they may be substantial.
Overall, when reviewing the existing literature in Australia it is apparent that there is an absence of a transparent framework against which to identify costs, benchmark performance and efficiency. This appears to be a fundamental constraint to making informed decisions about the future of electronic payments systems or in assessing the effectiveness of current approaches in Australia. Insight from the United States Studies about payment systems in the US may provide some insight. Frequently cited analysis suggests that the cost of a countrys payment system may be equivalent to
41
Exploration of future electronic payments markets three per cent of its GDP. In addition, the costs of using electronic payments systems is thought to be about a third of the cost of paper-based transactions.8 A detailed analysis of the comparative cost of retail payment systems was published by Swartz et al in 2004.9 This applied standard cost-benefit analysis techniques to the assessment of the economic or social costs of using different payment methods. As well as looking at the costs to merchants, costs to consumers were also examined. Costs were also examined using different sized transactions. Cost estimates to merchants for purchases at a grocery store are reflected in the figures below. The average cash purchase is US$11.52 and the average for a cheque is US$54.25.
3.11 Total resource cost to merchants for different payment instruments (US$)
0.61 1.22
0.57 0.42 0.3
0.57 0.43
0.64
Cash
Cheques
PIN Cards Credit cards
Cash
Cheques
Transaction size - $11.52
Source: Swartz et al (2004).
The total cost to consumers for the different payment methods, including indirect costs such as the time it takes to withdraw money from an ATM, are shown in the following chart.
8 Daniel E. Nolle et al. (1998), Technological Innovation in Banking and Payments: Industry trends and
Implications for Banks, Quarterly Journal, vol. 17, no. 3, September.

9 Daniel D. Garcia Swartz et al. (2004), The move towards a cashless society: a closer look at payment
instrument economics, AEI-Brookings Joint Centre for Regulatory Studies, Working Paper 04-20, October.
42

3.12 Total resource cost to consumers for different payment instruments (US$)
0.65 0.7 1.92 0.55 0.46
0.55
0.7 0.46
Cash
Cheques
Cash
Cheques
Source: Swartz et al. (2004).
This analysis highlights the significance of the cost to consumers of transactions. They broadly match, or are in some cases, double, the costs faced by merchants. Adding both categories of costs together it is noticeable that the picture changes according to the size of transaction. Cash transactions appear to be the lowest cost method for smaller transactions (accounting for a total of 8.2 per cent of the value of the transaction for transactions of US$11.52), while electronic transactions such as PIN cards involve the lowest cost for larger scale transactions (accounting for 2.1 per cent of the value of a US$54.24 transaction). The relatively high consumer costs of using cash for larger transactions are particularly significant. New estimates of the cost of electronic and other payments in Australia New estimates of the economy-wide or social cost of different payment types are reported in Table 3.13. These estimates are merely illustrative of the likely magnitude of the resource cost to the economy of the major payment categories. The estimates should be read with caution. As noted above, it is not practical to report on definitive data or official estimates about the cost of different payment types with the information that is available to the public. Estimates in this area often involve the use of interpolation to fill in missing values and, in some cases, the application of figures derived from overseas. It is important to emphasise that it would not be prudent to interpret the use of quantitative values as suggestive of a degree of precision that is not attainable at this time. The figures presented in Table 3.13 are broadly indicative of the costs and differences in costs between payment systems. More detail about the basis for forming these estimates is provided in Appendix A of this report. In the table, total cost per year relates to the estimate of the resources used to provide and support each payment method. Cost per transaction is the estimate of the total cost divided by the estimated number of transactions using that payment method. Cost per dollar-value transferred is the estimated cost allowing for the value of transactions
43
Exploration of future electronic payments markets (that is, taking into account that while there may be many cash transactions, these are often for small amounts). The table only reports the costs of payment instruments. They should not be compared without also taking into consideration the different capabilities and functions offered by each product and the benefits that these differences provide to users of that product. The indicative estimates provided in the table suggest that:
the cost of the payments system in Australia is not trivial, with estimated economywide resource costs of around $13 billion per yearequivalent to about 1.7 per cent of GDP; direct entry appears to involve the lowest cost to the economylowest in cost per transactions and cost per value transferred (noting that it is not appropriate for all transactions, such as consumer payments where real-time notification of guaranteed funds is required); cheque payments involve approximately five times the resource cost of direct entry; and cash probably has a low resource cost per transaction (relying on very rough estimates of likely transaction numbers and size), but appears to be the most expensive to provide when measured as a per cent of the transaction value.
3.13 Economy-wide costs for different payment types Settlement type

Delayed notification of guaranteed funds Real-time notification of guaranteed funds
Payment method
Direct credits Direct debits Cheques Debit cards Charge cards Credit cards Cash payment Total
Estimated total cost per year ($millions)

350 400 150 200 850 900 650 700 900 950 31003200 73007500 13 30013 850
Approximate cost per transaction ($)

0.450.50 0.400.55 1.601.75 0.600.65 5.656.00 2.652.75 0.700.80
Indicative cost per $ value transferred (%)

0.010.02 0.010.02 0.050.08 1.001.10 3.003.20 2.002.10 3.604.00
While the figures reported in the table above are proposed as rough estimates, it is notable that they are broadly consistent with (limited) earlier research on the cost of different payment systems (or delivery channels). For example, the estimated total cost per year minus cash, amounts to $6.3 billion. This is in the $57.5 billion range for the cost of payment systems to suppliers of cross-institutional payments reported in the Wallis Inquiry report (FSI 1997, p. 226). Looking at the cost of cash payments alone (which appear to be the highest-cost payment method) it is notable that the value in the table is in line with an independent estimate of the cost of cash payments developed and published by the Asian Banker Journal in 1999, on behalf of De La Rue Pty Ltd. That study estimated that the social or resource cost of cash payments was high in Australia with an estimated cost of
44
Exploration of future electronic payments markets about $7.9 billion per year (ABJ 1999). Different costs by transaction size The economy-wide cost of payments is likely to vary according to the size of that payment. Chart 3.12 ranks different payment types by cost taking into account different transaction sizes. The payment types are ranked by cost, with the lowest-cost payment type having the highest ranking. This analysis hinges on identification of the fixed and variable costs. Fixed costs apply where there are overheads in operating and maintaining systems. Many payment methods involve the use of systems to collect information, reconcile entries and collect payments through processes such as regular paper bills. Variable costs arise where each transaction increases the resources required to process it. Particular attention was given to identify cost items that are variable based on the size of the transaction (for example, float costs).
3.14 Economy-wide cost of payments: ranking of payment methods by transaction size Size of transaction $5
1. Lowest transaction cost 2. 3. 4. 5. Highest transaction cost
$20
Direct entry Debit card Cash Cheque Credit card
$60
Direct entry Debit card Cheque Credit card Cash
$100
Direct entry Debit card Cheque Credit card Cash
Cash Direct entry Debit card10 Credit card11 Cheque
The analysis supporting the table suggests that:

direct entry is the lowest-cost payment approach for all transactions greater than $20 and is the second lowest-cost type for small transactions of around $5; debit cards are the lowest-cost, real-time notification product for payments greater than $20. In fact, what is not shown in the table, but is apparent in the underlying analysis, is that debit cards appear to be lower-cost than cash from around $10 and appear to involve lower costs than cheques up to transactions of around $300; cash is the lowest-cost payment method for small payments of around $5 (and while not reported in the table up to approximately $10, particularly if real-time notification is required in the transaction); and credit card transactions become cheaper to provide than cash at around $60 or more.
Broadly, analysis indicates that electronic payments are significantly cheaper than the non-electronic alternatives. In particular, electronic payments require less economic
10 Refers to proprietary bank EFTPOS debit card, not scheme based debit card. 11 Subject to specific merchant arrangements and acceptance at this low transaction amount.
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Exploration of future electronic payments markets resources to provide. This holds true when looking at both the average costs and allowing for differences in transaction value. If cost is a key driver of behaviour, the analysis suggests that significantly more use can be expected to be made of electronic payments in the future. Indeed, the differences in cost are sufficiently large that it is reasonable to expect that electronic payment types should be significantly more attractive than most other payment types, except for small transactions where cash remains lower-cost (at this time). A fuller comparison and selection of payment methods would take into account the costs and benefits derived from each. Benefits can vary significantly in terms of the other factors discussed in this section (for example, capability, convenience and coverage) as well as in terms of advantages to users (see Table 3.15). Indeed, perceived benefits can vary between individual users. The analysis also suggests that considerable economic efficiencies would be obtained if greater use was made of the electronic payments technologies that are already in use. Given Australias reliance on cheque payments, it is notable that for payments where real-time settlement or notification is not required, direct entry is significantly cheaper than cheques. Decreasing the value at which cash is the most cost-effective payment method would also provide significant benefits given the high cost of cash. This is examined in more detail in Chapter 8 of this report.
3.15 Measuring the benefits of payment products
As noted earlier, the above analysis is merely an analysis of costs and does not include any measurement or comparison of the relative benefits that each of the products provide. Research about the benefits of different payment products has only recently been conducted, and at this stage, only significantly in the US (Swartz et al, 2004). The research modelled the effects of these benefits (such as a reduction in time and effort, increased float periods, increased privacy, the option to use credit) on the American payment system. In general, their findings were that it was beneficial to society to conduct more electronic transactions. And that once both the benefits of the payment products and the value of the transaction were factored in, card-based payments become more beneficial to use for most transactions compared with cash and cheques (the US direct entry system was not included in the study). The net social, marginal cost of each product was determined at two price points in three separate scenariosaverage transactions in a grocery store, a discount store and an electronics store. Assuming that the cost curve is linear between the two price points studied in the US and extrapolating these responses (although not too far from the measured points) reveals that cash is the most beneficial payment method to use at very low-value transactions (under US$10). Signature debit then becomes the next most beneficial between US$10 and US$40. Credit cards become the most beneficial product to use above this point. It is notable that many of the benefits of alternative payment products should be captured in considering the other Cs, including convenience, coverage, confidence, and confidentiality.
Divergent costs and user prices The prices paid by users of the payment system do not always reflect the social cost of providing a payment. In some cases, payment services have been provided for free or appear to be free from the point of view of major users. Cash is a good example of where there is no specific charge on the user for the costs in handling it. In fact, there
46
Exploration of future electronic payments markets is often a perception that there should be a discount for cash. Other payment system services have been provided for free despite additional costs, and charges for others may have been set arbitrarily. Banks, credit and charge card companies and other payment service providers have adopted a wide range of approaches to setting prices reflecting experience, marketing and many other considerations. In recent years, regulators have drawn attention to some payment areas where prices do not reflect resource costs. This has resulted in more expensive payment methods driving out the cheaper methods and, in the process, increasing the average cost of the Australian retail payment system. This is made possible by the asymmetry between the price signals (and the capacity to act on them) faced by the two classes of payment system usersconsumers and merchants (Macfarlane 2005). The problem was particularly acute for credit cards. For many consumers, the effective price of using a credit card to make a payment is negative (once they have decided to hold the card). They are effectively paid by their financial institutions to use the card through the combination of interest-free credit and reward points. In contrast, the cost of cheques has been increasingly borne by users and this is also largely the case for the direct entry system. (In a speech at the AIBF industry forum in March 2005, RBA governor Ian Macfarlane stated that the user pays principle works well in the case of cheques.) In general, divergence between price paid and the actual resource cost of providing payment services appears to impede greater use of electronic payments. Some more expensive payment methods appear to be lower-cost to users than electronic payments. If the perception that electronic payments are not lower-cost is sustained, this would be a barrier to further growth in the use of electronic payments, or place a limiting factor on that growth. Notably, there are implications if there is a failure in the system that allows a gap between the price and cost of different payments to be large. If this is sustained over time, given the magnitude of resources involved in providing payment systems discussed earlier in this chapter, it is likely that the cost to the economy would be great. Coverage An important objective for all payment systems is to be widely accessible to merchants, traders, consumers and other users without high-entry or ongoing costs. Similarly, consumers should encounter as few barriers as possible in undertaking transactions using the system. Cash payments are almost universally accepted (in most countries, legislation requires currency to be accepted as payment for all types of transactions, subject often to minimum denomination limits). This helps ensure that cash is attractive to use and will be used for some time. Cheques are not accepted everywhere. Many merchants are reluctant to accept a personal cheque. The coverage of cards can be mixed. Certain retailers do not accept some charge cards (such as American Express and Diners card). The credit card system involves a wellestablished network of users and merchants that ensures wide coverage and a large user base for many types of transactions. 47
Exploration of future electronic payments markets The only form of Australian debit card payment accepted on Internet merchant websites today is Visa Debitdebit card use on the Internet is far less common than credit card payments. EFTPOS debit cards, which require users to have a deposit account with a financial institution that issues cards or acquires payments, are also mostly limited to domestic payments and do not address the needs of international payments. Historically, it is likely that the lack of coverage probably was a major limitation to the growth of electronic payments for some time. Electronic payments were simply not as accessible as cash or cheque payments. Operating an electronic payment system required a major investment in IT assets and business systems. This limited their use to banks and other large financial institutions. Telephone banking services offered by banks have expanded their coverage, because almost every home and business has had telephone access for some decades in Australia (although other factors seem to be at play limiting the uptake and use of telephone banking products). The arrival of the Internet and its widespread use has substantially improved the potential coverage of electronic payment systems and reduced the barriers to entry of new electronic payments. The majority of Australian households now have access to a computer and the Internet at home. The proportion with a computer has increased steadily from 44 per cent in 1998 to 68 per cent in 2004, and the percentage of households with access to the Internet at home has increased from 16 per cent in 1998 to 62 per cent in 2004 (see Chart 3.16).
3.16 Proportion of home Internet use (computer and Internet access)
80 70 60 % households .. 50 40 30 20 10 0 1998 1999 2000 Q2 2001 Q4 2001 Q2 2002 Q4 2002 Q2 2003 Q4 2003 Q2 2004 Q4 2004 households with Internet access Households with PC
Sources: Household Use of Information Technology, Australia, 200104 (ABS 8146.0).
48

3.17 Proportion of Internet users paying bills online
Internet users paying bills online 45 % Internet users aged 14 years + 40 35 30 25 20 15 10 5 0 Sep 01
Source: Nielsen/NetRatings.
Sep 03
Dec 04
Apr 05
As access to the Internet has increased, so has the popularity of online payment of bills. Chart 3.17 shows that the percentage of Internet users paying bills online has increased from 25 per cent in 2001 to nearly 40 per cent in 2005. The increase in access to the Internet is also associated with an increase in the use of electronic commerce. During 2002, 2.2 million or 15 per cent of all adults purchased or ordered goods and services via the Internet for private use, representing an increase of 34 per cent over the 2001 figure (see Chart 3.18). Of total Internet users, just over a quarter (26 per cent) ordered goods and services via the Internet. The largest increase occurred in the age group 2534 years.
3.18 Adults purchasing/ordering via Internet for private use
20 18 16 14 % 12 10 8 6 4 2 0 1999 2000 2001 2002
Source: Household Use of Information Technology, Australia, 200102 (ABS 8146.0).
As in the case of businesses embrace of e-commerce, the potential for further increases in consumer/household use of e-commerce portends a latent demand for new forms of electronic payment that are specifically developed and tailored for consumer e-commerce. Where e-commerce has essentially provided a supermarket wherever 49
Exploration of future electronic payments markets there is a computer with Internet access, it is likely that electronic payments will evolve to support those transactions. Making electronic payment options available (that is, expanding coverage) often involves a major investment in systems. One example is the development of online property conveyancing. This will soon be available in Victoria. Electronic conveyancing (EC) will eliminate the paper shuffle that occurs before settlement day, the manual drawing and depositing of bank cheques into accounts, and the need for people to meet in the same room to exchange documents and cheques. It will also eliminate the space required for certificate and document storage.12 All jurisdictions in Australia are committed to developing a National Electronic Conveyancing Strategy (NECS) so that there is a uniform approach to EC across Australia. New South Wales and Victoria are now currently working with the other jurisdictions on finalising a detailed strategy for the development of NECS. The current focus is on determining the process for achieving a national solutiona national governance arrangement, national business model and national implementation strategy. Now that large electronic payment systems are established, some analysts and commentators are turning to the opposite end of the payment size spectrum. They place emphasis on the potential for electronic payments to support small-value transactions or micro-payments. Micro-payments for digital products that are delivered and paid for together, and almost immediately, seem particularly suitable for electronic payments. An example is Apples i-Tunes store that allows customers to download songs for US$0.99 each. This service became available in Australia in late 2005. Broad coverage and access may also involve providing for the entry of new payment service providers to existing payment service infrastructure. Cash can be viewed as an open access system, but access to other arrangements may not be guaranteed, including, for example, mobile telecommunications devices. Convenience Consumers generally view cash as convenient to carry for small purchases at the pointof-sale. Indeed, cash is so convenient that it needs additional safeguards when dealing with large amounts or when not conducting a point-of-sale purchase on a face-to-face basis to avoid theft. This means that to be competitive with cash, electronic payments systems have to offer a high level of convenience. Service providers appear to be cognisant of this; a key value-proposition of micro-payments through mobile phone systems is that they would be as easy to undertake, if not easier, than making a telephone call. The suppliers of more established electronic payment products and channels emphasise to their customers the advantages of paying bills and making purchases from the comfort of home, or from an office, or anywhere, without having to make a special trip, or queue for service. Businesses have a different perspective on convenience to that of consumers. They are likely to seek payment products and services that fit in to their broader processes. For example, they may welcome opportunities to streamline business processes such as
12 Details available from www.landexchange.vic.gov.au/ec/
50
Exploration of future electronic payments markets GST accounting, invoicing and statement production. Greater interoperability could help connect electronic payments systems with business accounting systems, streamlining operations for purposes such as Business activity statement provision to the Australian Taxation Office. Businesses will not see much value in implementing a new electronic payment system in one area of their business if their fundamental business systems still require the production and processing of alternative payments, particularly cheques. This may be a particularly pronounced issue for smaller businesses where the gains from using an electronic payment system may be small relative to the cost of new business/accounting systems or processes. Businesses tend to manage a lot of information associated with a transaction as well as the funds. Streamlining the funds management with an electronic payment system while depending on a manual or paper system for the other information needs, can cause problems and raise risks for a business. Essentially, businesses require seamless solutions. The issue of how electronic systems fit within existing business systems is apparent in Australian business attitudes towards information technology, whether it is a computer, the Internet, a website, or use of e-commerce. According to the Australian Bureau of Statistics (ABS) the most commonly reported barrier to using these sorts of technologies was the perception by the business that it was not suited to the nature of the business. Other businesses identified lack of skills or appropriate training as a barrier to computer use (ABS Year Book Australia 2003). Confidence For some time it has been known that trust and confidence are closely linked to a consumers use of banking services. Similarly, it is likely that confidence is also a factor in the choice of a payment method. This is probably of particular importance in regard to large payments. Settlement arrangements when purchasing a house, for example, often involve the employment of legal advisers acting for each party to physically supervise the transfer of deeds and funds. It would also be important when looking at regular payments that add up to a large amount over time. Providers of new payment systems face a challenge to convince customers that their products or channels are trustworthy and users can rely on obtaining their purchase or not losing their money. This includes convincing users that the system is secure and that value will not leak through theft or fraud. It is notable that convincing the general public that paper money was as valuable as gold was once a similarly difficult task. Convincing the public many years later that paper currency no longer needed to be backed by a quantity of gold reserves was also challenging. Some electronic payments products try to leverage off an institutions reputation for trustworthiness. Many electronic payments systems are specifically linked to wellknown and trusted organisations and are seen as offering secure systems and business practices. The confidence consumers have in a payment method also depends on the associated payment channel. For example, online payments with credit cards differ from offline payments, in that the card is not physically provided by the customer and the merchant does not obtain a signed confirmation from the customer. Some card schemes provide
51
Exploration of future electronic payments markets a system of cardholder authentication, usually through provision of name, credit card number and expiration date. To prevent illegitimate interception, this information is encrypted via secure socket layer service (SSL). SSL allows verification of merchant identity via the SSL server certificate. For business, getting paid is often the central issue. For merchants, while cash may be viewed as being best in ensuring payment, credit card payments (which are largely backed by the card provider) may be better than cheques, which were once highly susceptible to being dishonoured. Merchants are also concerned about cash flow. Traditional payment channels and products that take time may be less attractive than electronic systems that are quicker or use a more reliable cycle enabling better cash-flow planning. For regulators, maintaining confidence in the payment system is of paramount importance. Systems that could suffer from a large-scale compromise in security could lead to financial management problems in key institutions in the payment system, which could in turn spread instability through the financial system at large. Confidentiality The anonymity of cash is often held to be one of its major attractions. It is likely that many users view that a cheque is more anonymous than many electronic payments. In practice, the data that enters accounting systems through the use of cheques is similar to that of electronic payments (including details such as the identities of the payer and receiver, bank, branch and account number). In general, credit card payments are made via an identifiable account, resulting in the loss of anonymity. In the US, there are credit card payment schemes where the client receives transaction-specific virtual credit card numbers so that the identity of the buyer is concealed from the seller and only the buyers bank retains a record of his or her identity. In Australia, the National Privacy Principles (NPPs) in the Privacy Act 1988 help to safeguard the privacy of those engaging in electronic transactions. Under the provision of NPP 1.1, an organisation must collect personal information only if it is necessary for one or more of its functions or activities and not merely if it is useful or desirable. NPP 1.3 and 1.5 require organisations that collect personal information to take reasonable steps to ensure that individuals are aware of certain matters. From complaints and enquiries from consumers, the Office of the Federal Privacy Commissioner in Australia has identified the following privacy issues with regard to electronic transactions:
the printing of full credit card details (including name, expiry date and full credit card number) on credit card transaction receipts produced by merchant EFTPOS facilities; the cardholders name appearing on the ATM screen at the commencement of the EFTPOS transaction, allowing other customers to identify the individual; the collection of card details by merchants subsequent to an EFTPOS transaction for their internal purposes; and the inability of consumers to retrieve funds (or obtain redress) when they have inadvertently deposited funds by electronic means into another customers account. 52
Exploration of future electronic payments markets It is thus expected that confidentiality is a major factor influencing consumer views about electronic payments. Surveys about attitudes towards the use of e-commerce consistently find this to be a significant factor. Results of a recent review from the US are provided in Box 3.19. Recent fraudulent cases of phishing scams, involving emails and bogus websites that trick people into divulging personal information, have highlighted the issue of security in electronic financial systems. As with many new technological systems, a degree of technological, and in this case financial, literacy is required for consumers to safeguard access to their accounts.
3.19 Consumer views regarding security in e-commerce
A consumer research study by Howard DeBow for VISA in 2001, found that: the top three concerns of regular online shoppers are shipping costs (55 per cent), security of payment information (35 per cent), and privacy or personal information (33 per cent); the top three concerns of browsers (not buyers) are security of payment information (94 per cent), privacy of personal information (79 per cent), and unfamiliarity/lack of trust with unknown merchants (44 per cent); and online shoppers with low concerns about security spend more than twice as much online as online shoppers with high security concerns.
According to DeBow, the following factors would help consumers get over the security hurdle:

eighty-one per cent agreed that entering a PIN or password before completing an online transaction is secure; eighteen per cent found swiping credit cards through readers attractive; fifteen per cent would download special software; fourteen per cent would provide their mothers maiden name; and fourteen per cent felt no need for increased credit card protection.
Source: DeBow (2001).
Business is also concerned about risks to confidentiality through the use of electronic systems. Supporting previous findings, a recent Sensis study reported that the most serious concern businesses have about e-commerce is the security issue of people hacking into their computer systems (Sensis 2004). Finally, merchants or content providers want the payment process to be transparent to the user, as this encourages greater use and/or a propensity to complete a purchase. They also want any payment scheme to facilitate swift and easy completion to ensure that they get paid in time. The divergence of needs and priorities between these different parties means that it is difficult for a payment product or system to satisfy them simultaneously, and may in part explain why so few payment innovations have thrived and succeeded. Regulation, public policy and electronic payments Regulation of financial systems, and payment systems in particular, can be expected to influence the future of electronic payments.
53
Exploration of future electronic payments markets There are four primary Australian Government agencies that regulate the payments system.
Reserve Bank of Australia (RBA), which is responsible for regulating the payments system to optimally control the risk to the financial system, promote efficiency, and promote competition in the market for payment services. Australian Prudential Regulation Authority (APRA), which is responsible for the supervision of banks, general and life insurance companies, building and friendly societies, and superannuation funds. Australian Competition and Consumer Commission (ACCC), which is responsible for ensuring that the payments system arrangements comply with the competition and access provisions of the Trade Practices Act 1974. It may exempt organisations from the competition provisions and accept undertakings in respect of third-party access to essential facilities. Australian Securities and Investments Commission (ASIC), which is responsible for market integrity and consumer protection across the financial system, including the payments system.
In addition, there are several other agencies that are involved in the payments system that impact on (although in less direct ways) the operation and use of payment products and channels within Australia. The main intent of regulatory supervision of the payments system and its various parts is to:

control risk in the financial system; promote efficiency in the payment system; and promote competition in the market for payment services. ensuring that the operation of payment systems complies with normal laws (for example, the provisions of the Trade Practices Act 1974); setting standards; maintaining the integrity of the financial system (including protection of investors in payment systems); and providing consumer protection in the financial system.
Broader objectives include:
While regulators in Australia indicate they seek to apply a light handed approach, regulation can also shape who supplies payment services, how they enter and compete and what services they provide. By shaping factors such as the information about products, and disclosure of prices and other factors, regulation can influence the demand for different payment products and channels. Prudent regulation can indeed act as an enabler in the payment market. The thrust of most regulation has been to support greater entry ofand competition betweenproviders of electronic payments. Significant themes of policy change include the following.
54
Functional equivalence: The Australian Government has legislated and developed a series of regulations that provide legal certainty over online transactions, giving them similar effect to paper-based transactions. Entry of new technologies: New technologies that bring about improvements in the technical efficiency of the payments system have been negotiated, agreed and admitted into the payments system. As noted in the Wallis Report (FSI, 1997, p. 386), however, there has been a reliance on cooperative arrangements that may have impeded the overall economic efficiency of the payment system. There is some evidence that this is still the case. Entry of new players in the payments market: The RBA has been working with members of the Australian Payments Clearing Association (APCA) on the development of an access code that would provide greater certainty and transparency regarding the process for joining the EFTPOS system. APCAs members have now agreed to a code that: places a reasonable cap on the price of establishing a connection to existing participants establishes a clear timetable for the testing of connections removes a previously proposed requirement that entrants must meet a minimum volume before the new arrangements would be applicable.
Competition in credit cards: Oversight of rules and membership rights of card associations. Appropriate pricing: The recent RBA/ACCC payment system reforms are resulting in significant changes in wholesale (that is, interchange) pricing, competitor access and cardholder surcharging. This is prompting a rethink of the roles of participants in the current transaction services infrastructure value-chain. Transparency: The RBA/ACCC payment system reforms followed long-standing concerns about the degree of transparency (and competition) in these systems. The RBA came to the view that the efficiency of the overall system would be improved if cardholders paid prices for various payment methods that more closely reflected relative costs than was then the case. As is the case with the interchange fees in the BPAY system, the RBA is also of the view that it is in the public interest for charge and credit card data to be publicly available. Not only would publication of market-share data be likely to foster competition, it would also promote more informed analysis regarding competition and efficiency in the payments system.
Consumer literacy: The Australian Government has established the Financial Literacy Foundation to give Australians the opportunity to better manage their money. The foundation will deliver a national strategy within which new and existing financial literacy initiatives can function more effectively and more consistently, to raise community financial literacy levels. An information campaign, to be launched in 2006, aims to raise awareness of the immediate and long-term benefits of improved financial literacy, and to encourage consumers to engage with financial literacy information and resources. Codes of conduct: For example, the Electronic Funds Transfer (EFT) Code of Conduct was revised in 2002 to recognise advances in technology, such as telephone and computer banking, smart cards and electronic cash but continues to 55
Exploration of future electronic payments markets cover electronic funds transfers undertaken via ATMs or EFTPOS. The changes to the code include: improved complaint and dispute resolution processes greater clarity about who is liable for any unauthorised transactions that are debited to an account requirements for account holders to take reasonable steps to secure their card and code (their PIN) providing account holders with a minimum of 20 days notice of any increases or changes to fees and charges relating to use of an access method, or increasing an account holders liability for loss and or introducing, removing or altering any transaction limits that apply to using an access method, for example, a card, a PIN, an access code, or a password.
Standards: Organisations, including APCA in Australia and MasterCard/Visa internationally, have established new standards (in particular 3DES, but also EMV), which will require significant investment in the basic transaction services infrastructure.
3.20 The changing financial landscape

A payments system reform process covering credit cards, Visa debit cards, EFTPOS debit cards and ATMs was undertaken by the RBA and the ACCC in 2000. It is expected to be fully implemented no earlier than late 2006. The RBAs objective is to have relative end-user prices more closely reflect the resource costs of providing payment services, greater transparency of wholesale prices, and greater competition. Although the reform process is still under way, the reforms have already led to a number of changes to the payments market in Australia, particularly where credit cards are concerned. The changes can be seen to have possibly increased competition in the market. There are a number of (new entrant) international institutions now actively investigating the potential to issue credit cards in the Australian market, as well as an increase in fees charged to consumers related to the use of credit cards. Traditional payment providers are being forced to eliminate their cross-subsidisation of transaction services in order to charge a price representative of the costs imposed in providing that service. As discussed above, this can already be seen in the area of credit cards where the interchange rate has fallen substantially, loyalty programs have been repriced or reduced, and consumer fees and charges have risen since the reforms. Clearly, the changes to the payment system landscape will lead to shifting market power between value chain participants (for example, banks, processors, and merchants). A clear understanding of these changes to the market as well as the impact on all participants is an important component of this study, especially where projections on the future direction of the market are concerned.
Key points International comparisons of payments show both similarities and significant differences in payment use. Cash is still very important everywhere. Australia is one of a group of countries that depend to a significant degree on cheques. Other countries have gone further in using direct debit payments, which are essentially electronic payments.
56
Exploration of future electronic payments markets Six characteristics of payment systems have been identified in this study that are expected to influence the choice of one payment type over another. These are: capability, cost, convenience, coverage, confidence and confidentiality. The future of electronic payments includes many opportunities and some challenges when examined against these six characteristics.

New electronic payment methods are being made available through changes in capability introduced by rapid technological change. It is likely that electronic payments have a significant cost advantage over many traditional payment products and channels. When looked at from a whole-ofeconomy or community perspective, electronic payments need fewer resources to support them than other payment approaches. Electronic payments approaches are the lowest-cost for all but small payments (around $20 per transaction and more). This cost advantage would normally be expected to be a factor in encouraging greater use of electronic payments. The impact of the cost advantage that electronic payments have will be neutralised if users of various payment systems do not pay prices that reflect the resource costs of using alternative payments. Widespread use of the Internet is expected to open up access, increasing potential coverage and convenience of electronic payments in the future. Survey results regarding e-commerce suggest that business convenience is likely to involve a wider range of factors, including applicability to a business and the ability to incorporate electronic payments systems within overall business systems. It is necessary to assess how significant these factors are in practice, specifically for payments in Australia. The confidence that users have that the transaction will be made and that it will be paid is a background issue with all payment systems. Confidentiality is widely viewed as posing key challenges to e-commerce, and could be expected to raise issues regarding electronic payments. The actual impact of this factor in shaping the acceptance and use of payments in Australia needs to be assessed.
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. Experience in Australia suggests that regulatory change has accommodated new approaches. The broad thrust of recent approaches has been supportive of the entry of electronic payment methods, and this is likely to continue. The next few chapters test many of the suggestions and expectations about factors that influence current and future electronic payment choice. These chapters will examine whether they are in fact significant in practice for businesses and consumers in Australia today.
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Exploration of future electronic payments markets CHAPTER 4BUSINESS PAYMENTS Knowing about the use made of payments today is valuable to form a view about the future of electronic payments. Until this time there has been very little public information about the use that businesses make of payment systems. This chapter reports on a key output of this study, a map of payments made by Australian businesses. The survey also allows examination of other fundamental dimensions, such as the perceived cost differences between payment methods and the impact that change in payment methods may have. Structure of business survey The survey was conducted on behalf of the consultants by I-View, using a computerassisted telephone interface (CATI) system. The study has a sample of 596 businesses. The businesses were selected at random and stratified by size according to the number of people employed. Small businesses are defined as those employing fewer than 20 persons. Medium-sized businesses are defined as those employing between 20 and 200 persons, while large businesses are defined as those employing more than 200 persons. Companies were also stratified by the nature of their operations (retail, manufacturing or service). The overall sample is geographically representative of the total population of businesses in Australia. Businesses were asked about the frequency of payments made and received, as well as the size of those payments. The survey questionnaire was designed to elicit information about three types of payments that every business has to handle on a day-to-day basis:

payments received from consumers and/or business customers in person (for example, at the shop front) or remotely; payments made to suppliers; and payments made to employees.
Businesses that sell primarily to consumers (that is, B2C businesses) were asked about payments received from these customers, whilst businesses that sell primarily to other businesses (B2B businesses) were asked about payments received from their business customers. All respondents were asked about payments they made to suppliers and employees. For the relevant types of payment, businesses were asked to nominate the payment method that:

has the best coverage (that is, how widespread acceptance of a payment method is); is the most preferred; is the payment method that causes the most issues and challenges; is the most expensive; and is the least expensive.
Businesses were also asked to choose the most compelling reasons behind their answers. In addition, businesses were questioned about their satisfaction with existing payments arrangements, as well as what they saw as the most serious impediments to improving payments arrangements. 58
Exploration of future electronic payments markets Finally, the survey looked at the internal payment arrangements of businesses with regards to wage payments, business payments and business expenses, as well as reasons for (and barriers to) implementing electronic bill presentment. The structure of the business payments survey is illustrated in Chart 4.1. More details about the survey are provided in Appendix C. The survey questions are reproduced in Appendix D. The information in the remainder of this chapter refers to the sample of Australian businesses interviewed for this study.
4.1 Structure of business payments survey
Payments received Customers Consumers in-store and in-person Consumers remote sales on-line Consumers remote sales off-line Businesses
Payments made External Suppliers
Internal Surveyed businesses Employee Expenses
Superannuation
Salaries and wages
A map of payments made by businesses Size of payments made Larger companies receive larger-value payments. The majority of businesses typically receive individual payments in excess of $500, and for large businesses typical payments received are over $5000 (see Chart 4.2). Such payments (over $5000) form 54 per cent of all payments received by large companies, while 59 per cent of payments received by small businesses are less than $500 in value. For very large companies (those with revenues in excess of $100 million), 71 per cent of payments received are of amounts greater than $5000.
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4.2 Typical value of payment received from a customer by size of business
Typical customer payment >$5000 $500-5000 $100-500 $50-100 $500-5000 <$10 3% 25% 28% 11% 16% 5% Small (1-19 employees) 31% 18% 21% 8% 9% All (N=596) 22% 6% 5% Medium 2% 15% 7% 6% Large 1% 16% 35% 34% 54%
Respondent segment
(N=199) (N=199) Company size

(20-119 employees) (200+ employees) (N=198)
Frequency of payments received There is a wide range of payment frequencies for different companies: 31 per cent of all surveyed companies received 20 or fewer customer payments per week, 26 per cent received between 21 and 100 customer payments per week, 29 per cent received between 101 and 1000 payments per week, while 15 per cent received more than 1000 payments per week (Chart 4.3).
4.3 Typical number of payments from customers per week by company size
Typical no. of customer payments per week >5000 1001-5000 101-1000 21-100 Jun-20 5 or less Respondent segment 26% 19% 12% All (N=596) 26% 25% 24% 6% Small (1-19 employees) Medium 20% 8% 4% Large 29% 24% 34% 38% 1% 7% 8% 22% 3% 7% 27% 3% 16% 14%
(N=199) (N=199) Company size

(20-119 employees) (200+ employees) (N=198)
Larger businesses tend to receive more frequent payments: 16 per cent of large companies received more than 5000 payments from customers per week, while only one per cent of small companies did so. Similarly, large businesses tend to make more frequent payments to suppliers than small businesses. 60
Exploration of future electronic payments markets International payments Larger businesses tend to receive proportionally more payments from overseas business customers: 15 per cent of small businesses report that between one and 25 per cent of their business customer payments are received from overseas, while the corresponding figure for large businesses is 46 per cent. Similarly, larger businesses are also significantly more likely to make payments to overseas suppliers than smaller businesses, as are rapidly growing companies. Acceptance of payment method Payments received from consumers The most widely accepted payment methods for shop front and in-person13 sales to consumers are cash and cheques (89 per cent each), credit cards (71 per cent), direct bank transfer (68 per cent) and debit cards (63 per cent). That is, 89 per cent of the businesses surveyed accepted cash and cheques for payments made by their customers, while 63 per cent of businesses surveyed accepted debit cards for such payments. For online Internet sales to consumers, the most widely accepted payment methods are direct bank transfer (71 per cent)14, credit cards (39 per cent), charge cards (25 per cent) and the Visa debit card (17 per cent). The most widely accepted offline (mail or phone) payment methods for Internet sales are cheques (74 per cent), credit cards (64 per cent), charge cards (31 per cent), the Visa debit card (29 per cent) and direct bank transfer (26 per cent). (See Chart 4.4.)
13 An in-person receipt of payment by a business would include, for example, a tradesperson or a
mobile service at a consumers household.

14 Given the emphasis on the use of credit cards in the literature reviewed, and in personal experience
when shopping on the Internet, it may seem improbable that direct entry is the most frequently used payment method for purchases made on the Internet. However, it is possible to make a purchase over the Internet and pay using direct credit, so long as the merchant is willing to split the purchase order away from the payment of that purchase order. The popularity of direct entry as an Internet payment method is consistent across the entire sample. It is true for large and small businesses and most of the other data splits used in the survey, and these results are statistically significant. This example shows that looking at the practices of a large range of businesses may produce insights that differ from preconceptions and anecdotal experience. This may be an area that only further empirical research can resolve definitively.
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4.4 Most widely accepted payment methods for sales to consumers
% respondents using payment method to receive consumer payments for shop front sales
Cash Cheque Visa, Mastercard & Bankcard Direct bank transfer/funds Debit cards/EFTPOS t f American Express Cards On account Other payment cards BPAY Bill Express/Post Bill/Agents PayPal 0% 1% 10% 20% 30% 40% 50% 60% 70% 35% 31% 11% 7% 71% 68% 63% 43%
89% 89%
% respondents (N=281) 80% 90% 100%
% respondents accepting payment method for internet sales to consumers (on-line)
Direct bank transfer Visa, Mastercard & Bankcard American Express cards Visa debit cards Other payment cards BPAY 0% 10% 10% 20% 30% 40% 50% 17% 16% 25% 39%
71%
% respondents (N=115) 60% 70% 80%
% respondents accepting payment method for internet sales to consumers by mail or telephone
Direct bank transfer Visa debit cards American Express cards Visa, Mastercard & Bankcard Cheque 0%
26% 29% 31%
% respondents (N=111)
64% 74% 10% 20% 30% 40% 50% 60% 70% 80%
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Exploration of future electronic payments markets Payments received from business customers The most widely accepted method for payments received from business customers (Chart 4.5) are direct bank transfer (98 per cent), cheques (96 per cent), cash (55 per cent), credit cards (49 per cent), debit cards (28 per cent) and charge cards (22 per cent). The most widely used payment channel for payments received from business customers are direct into our bank account (97 per cent), mail (96 per cent), in person at our location (52 per cent), and via the Internet (23 per cent).
4.5 Most widely accepted method for payments by business customers
98% 96% 55% 49% 28% 22% 9% 4% 2% 1% 0%
Direct bank transfer/funds transfer Cheque Cash Visa, Mastercard & Bankcard Debit cards/EFTPOS American Express cards BPAY PostBill Pay/Australia Post Bill express PayPal
% respondents (N=311) 20% 40% 60% 80% 100%
Payments made to suppliers The most widely used methods by businesses for making payments to suppliers are cheques (95 per cent), direct bank transfer (80 per cent), and credit cards (31 per cent). (See Chart 4.6.) Sixty-five per cent of direct bank transfers are made via a direct
4.6 Most widely used method for making payments to suppliers
Cheque Direct bank transfer/funds transfer Visa, Mastercard & Bankcard BPAY American Express cards Cash Other payment cards Debit cards/EFTPOS 0%
95% 80% 31% 12% 9% 7% 4% 3% 20% 40% 60% 80% 100% % respondents (N=596)
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Exploration of future electronic payments markets electronic linkage with our bank (65 per cent), using our Internet bank site to transfer from our account (44 per cent), and using BPAY at our Internet bank site (13 per cent). B2B and B2C payment patterns The majority of small businesses sell primarily to consumers (63 per cent) rather than businesses or government (37 per cent). Conversely, the majority of large businesses sell primarily to businesses and government (64 per cent) rather than consumers (36 per cent). Other issues Smaller businesses are more likely to make most of their sales to consumers in person; 45 per cent of small businesses derive 100 per cent of their revenues from store and in-person sales, compared with only 20 per cent of large businesses. Service businesses are most likely to receive payments from consumers via Internet and other remote sales. Fifteen per cent of companies in services derive more than 25 per cent of revenue from such sales, compared with seven per cent for retail companies and three per cent for manufacturing businesses. PREFERRED PAYMENT METHODS The survey results suggest that businesses have significantly different preferences for receiving B2B payments compared with B2C payments. They prefer to accept cash for B2C payments, compared with a strong preference to make and receive B2B payments using direct bank transfers (see Chart 4.7). In particular, 45 per cent of businesses receiving payments from B2C transactions expressed preferences for non-electronic payments methods (cash and cheques). The key driver for payment product preference is ease for the business (Chart 4.7).
4.7 Most preferred payment product for different transaction types
Non-electronic: 45% BPAY Cash Direct bank transfer Debit Card/EFTPOS Cheque Visa, Mastercard & Bankcard Other 34% 81% 67% 4% 5% 8% 23% 3%
22% 13% 11% 11% 9% B2C In-Store
47% 19% 25%
8% 11% B2B 4%
23% 3% B2B-Paying
B2C Remote Receiving
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Exploration of future electronic payments markets Cheques create the most problems for companies in all transaction types, although many companies reported having no issues. The key reason for issues differs based on the transaction type. In particular, cheques create issues based on a greater chance of incurring fraud and/or the cheque bouncing. Most preferred payment method Payments received from consumers The payment methods most preferred by businesses for receiving payments from consumers for shop front/in-person sales (see Chart 4.7) are cash (34 per cent averaged across all businesses), and direct bank transfer (22 per cent averaged across all businesses). (See Chart 4.7.) However, direct bank transfer is most preferred by large companies. The main reason cited by businesses for their preferences is that its the easiest way for me and my business (46 per cent). Direct bank transfer is the most preferred payment method for Internet sales (47 per cent), for the following reasons: easiest way for me and my business (39 per cent) and get funds very quickly (30 per cent), as shown in Chart 4.8.
4.8 Reasons behind preferred payment method
Main reasons for preferring payment method for on-line consumers (top 5) Easiest way for me and my business I get the funds very quickly I will receive guaranteed funds Costs me less than other forms of payment There is less paperwork 0% 18% 13% 11% 10% 20% 30% 40% 50% 30% 39%
% respondents stating reason for preferred consumer payment method (top 5) (shop front sales) Easiest way for me and my business Costs me less than other forms of payment I get the funds very quickly I will receive guaranteed funds There is less paperwork 0% 12% 10% 20% 30% 40% 50% 26% 24% 21% 46%
Main reasons for preferred payment method for business customers Easiest way for me and my business I get the funds very quickly I will receive guaranteed funds There is less paperwork Costs me less than other forms of payment 18% 18% 0% 10% 20% 30% 40% 50% 60%
Main reasons for preferred payment method to suppliers
51% 40% 29%
Easiest way for me and my business Costs me less than other forms of payment There is less paperwork Gives me a good record of the payment Ensures that supplier gets funds 0% 27% 22% 16% 13% 20% 40% 60%
64%
80%
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Payments received from business customers The most preferred method for receiving payments from business customers is direct bank transfer (81 per cent), because it is the easiest way for me and my business (51 per cent), it enables businesses to get funds quickly (40 per cent), and because they will receive guaranteed funds (29 per cent). Payments made to suppliers The method most preferred by businesses for making payments to suppliers is, again, direct bank transfer (67 per cent) as it is the easiest way for me and my business (64 per cent) and costs companies less than other forms of payment (27 per cent). The main reason/s given as to why a payment method causes the most issues and challenges are greater chance of fraud/rip-off in consumer payments (32 per cent) and a lack of information to reconcile the account in business customer payments. It generates lots of paperwork (24 per cent) and costs more to me than other forms of payment (23 per cent) are the reasons for payments to suppliers (see Chart 4.10.) Least preferred payment method Cheques are cited as the payment method that causes (the) most issues and challenges for receiving payments from consumers (28 per cent), receiving payments from business customers (28 per cent, and most acute for retailers), and for making supplier payments (37 per cent). It is interesting to note, however, that 35 per cent of companies reported having no issues when receiving payments from consumers, 38 per cent of companies felt similarly when receiving payments from business customers, and 48 per cent felt likewise when making payments to suppliers. (See Chart 4.9.)
4.9 Payment method that causes most issues and challenges
None/no issue 35% Cash Direct bank transfer Debit card/EFTPOS Cheque 28% Visa, Mastercard & Bankcard Other 13% B2B Receiving
38% 7% 14%
48%
8% 11% 28% 8% 10% B2C
5% 37%
10% B2B-Paying
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4.10 Main issues caused by payment methods for different transaction types
Main issues caused by payment methods (for sales to consumers)
Greater chance of rip-off/fraud I have to go to the bank Costs me more than other forms of payment I get funds too slowly Generates lots of paperwork 0% 5% 9% 10% 15% 20% 25% 30% 14% 12% 11%
32%
35%
Main problems with payment methods for payments from business customers
Lack of information to reconcile accounts I have to go to the bank I get the funds too slowly Generates lots of paperwork Costs me more than other forms of payment 0% 5% 10% 11% 11% 15% 20% 25% 16% 19%
30%
30%
35%
Main Problems with Payment Methods for Payments to Suppliers
Generates lots of paperwork Costs me more than other forms of payment I have to go to bank to do it It doesn't give me a good record of payment It doesn't integrate with my accounting/payables system 0%
24% 23% 7% 6% 5% 5% 10% 15% 20% 25% 30% 35%
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Exploration of future electronic payments markets Views about the cost of payment methods B2B companies consistently view cheques as the most expensive payment product (for both receiving and paying), while B2C companies perceive credit cards as a higher cost product to receive a payment than cheques. B2C companies view cash as the cheapest form of receiving payments, while B2B companies view direct bank transfers as the cheapest product. Most expensive payment method The most expensive methods for businesses to receive consumer payments are perceived as credit cards (27 per cent), cheques (23 per cent), and charge cards (19 per cent). The most expensive methods for receiving business customer payments are cheques (43 per cent), especially in the case of large businesses. Cheques are also perceived as the most expensive method for making payments to suppliers (Chart 4.11).
4.11 Most expensive payments product
6% 19% 7% 23% 4% 11% 19% 19%
Diners Club American Express None more so than others Cash Debit card/EFTPOS Cheque Visa, Mastercard & Bankcard Other
43%
67%
27% 15% 14% B2C Receiving 12% B2B 14% B2B-Paying
Least expensive payment method The least expensive method for receiving payments from consumers is perceived to be cash (52 per cent), followed by direct bank transfer (25 per cent). Direct bank transfers are perceived by businesses to be the least expensive method of receiving business customer payments (73 per cent) and for paying suppliers (63 per cent), (see Chart 4.12).
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4.12 Least expensive payment product
14% 6% 52% Direct bank transfer Debit card/EFTPOS 73% Cheque Visa, Mastercard & Bankcard Other 25% 8% 4% 4% 7% B2C Receiving
None more so than others Cash
16% 5%
63%
4% 3% B2B
8% 4% 4% B2B-Paying
IMPACT ON BUSINESS OF ELECTRONIC PAYMENTS Businesses were asked to predict the impact of increased use of electronic payments on their business, in terms of cost, sales volume and selling prices. The survey results suggest that businesses do not believe that increasing their proportion of electronic transactions will increase their sales or selling price. The attraction, with the exception of B2C businesses, is a reduction in costs. Impact of electronic payments on costs Businesses surveyed were equally divided in predicting that more electronic payments made by consumers will reduce, increase or leave their costs unchanged. On the other hand, 52 per cent of all companies surveyed believe that greater use of electronic payments by business customers will lower their costs, while 33 per cent believe that their costs will be left unchanged. Forty-seven per cent of all companies believe that greater use of electronic payments when paying their suppliers will result in a reduction of their business costs (see Charts 4.13 and 4.14). Impact of electronic payments on sales volume Approximately 90 per cent of companies believe that further migration to electronic payments by themselves and their customers will have no impact on their sales volumes. Impact of electronic payments on selling price Likewise, a similarly large percentage of companies believe that greater use of electronic payments by their customers or themselves (when making payments to suppliers) will have no impact on their selling prices.
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4.13 Impact of receiving increased electronic B2C payments
Reduce 3% 28% 1%
Stay the same 34% Increase 88% 86%
Don't know
31% 6% Impact on costs 1% 6% 4% Impact on sales volume 9% 3% Impact on selling prices
None
4.14 Impact of receiving increased electronic B2B payments

Reduce 52% 90% Increase 33% Don't Know 9% 4% Impact on Costs
1%
2%
Stay the same
93%
None
2%
5% 4% Impact on Sales Volume
3%
2%
Impact on Selling Prices
In terms of consumer payments, companies gave the following reasons as to why they believe electronic payments would not help their business: it costs me more than other forms of payment (24 per cent) and not suitable for small value purchases (17 per cent). The following reasons were given for business customer payments: lack of information to reconcile the account (15 per cent) and my staff find it complicated. Improving payments arrangements Businesses surveyed appear mainly satisfied with the current payment systems. Receiving payments from business customers is the area where businesses show the greatest desire for change because electronic transactions, speed and reconciliation capabilities are important. The other side of the transaction is consistently seen as the barrier to changing payments behaviour.
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Exploration of future electronic payments markets There appears to be some desire to increase the number of electronic payments that are conducted, particularly in the B2B environment. Nearly half of the B2B companies want to change the way they receive funds. Interestingly, lowering payment costs was not identified as a primary concern for businesses. Satisfaction with existing payments arrangements For B2C payments, 70 per cent of businesses receiving such payments are happy with existing payments arrangements; eight per cent want to handle more payments electronically. For B2B payments, 56 per cent receiving these payments are happy; 21 per cent want to handle more payments electronically, especially large companies (29 per cent). Seventy per cent of businesses are happy with current supplier payments arrangements, while 20 per cent want to handle more payments electronically. (See Chart 4.15.)
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4.15 Satisfaction with existing payments arrangements
Main things that businesses would like to change about receiving payments from consumers
Nothing, I'm happy with everything the way it is Want to speed up the payment process Want to handle things electronically Want to lower my costs of handling payments Want to stop customer payment defaults 0% 5% 4% 10% 20% 30% 40% 50% 9% 8%
70%
60% 70%
80%
Main things that respondents would like to change in receiving payments from business customers
Nothing, I'm happy with everything the way it is Want to handle things electronically Want a way of reconciling payments to the right transactions Want to speed up the payment process Want to lower my costs of handling payments 0% 5% 10% 20% 30% 40% 50% 10% 10% 21%
56%
60%
Main things that respondents would like to change about the way they make payments to suppliers
Nothing, I'm happy with everything the way it is Want to handle things electronically Want to lower any costs of handling payments Want to speed up the payment process Want to be able to provide more information with the payment 0%
70% 20% 4% 4% 4% 10% 20% 30% 40% 50% 60% 70% 80%
Greatest impediment to improving payments arrangements The reason most commonly cited as preventing more migration to electronic payments is that customers/suppliers wont change what they do (63 per cent for B2C
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Exploration of future electronic payments markets payments, 80 per cent for incoming B2B payments, and 51 per cent for outgoing B2B that is, supplier payments). (Chart 4.16)
4.16 Barriers to improving payments arrangements
Barriers to improving payments from business customers
Customers won't change what they do My bank/financial institution Software/hardware/internet access limitations High cost of making changes 0% 9%
80%
7%
4%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Barriers to improving payments from consumers
Customers won't change what they do My bank/financial institution Government rules & regulations High cost of making changes 0% 12%
63%
5%
3%
10%
20%
30%
40%
50%
60%
70%
Main barriers to improving the way businesses make payments to suppliers
Suppliers won't change what they do No suitable software available My bank No suitable payment method available High cost of making changes 0%
51% 12% 10% 6% 5% 10% 20% 30% 40% 50% 60%
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Exploration of future electronic payments markets Other insights Impact of company size and revenue growth Large and high-growth businesses have lower preferences for cash in B2C payments Among companies that experienced high revenue growth (in excess of 10 per cent over the previous year), a smaller proportion (23 per cent) listed cash as the most preferred method for receiving payments from consumers for shop front/in-person sales, compared with about 38 per cent for all other companies. When stratified by business size, the results were 25 per cent for large business and 43 per cent for small business. Large and high-growth businesses exhibit stronger dislike for cheques For payments to suppliers, 53 per cent of large businesses viewed cheques as the payments method causing the most issues and challenges, compared with 20 per cent of small businesses. Sixty-two per cent of large companies believe that greater use of electronic payments will reduce their costs, compared with 31 per cent of small companies. The proportions for high-growth companies and other companies are 61 per cent and 50 per cent respectively. More large businesses view cheques as the most expensive payment method for B2B payments than small businesses (52 per cent versus 43 per cent). In addition, large businesses are also more inclined to list direct bank transfer as the least expensive method for making supplier payments than small businesses (81 per cent versus 41 per cent). Similarly, companies experiencing a revenue growth of more than 10 per cent are also more inclined to express the same views as large businesses (74 per cent against 57 per cent for companies with zero or negative revenue growth). Large businesses are less happy with existing payments arrangements and desire more electronic payments Large businesses are less likely to express satisfaction with existing payments arrangements. For B2B payments received from customers, only 41 per cent of large businesses are happy with existing payments arrangements compared with 70 per cent of small businesses. The proportions for supplier payments reflect the same dichotomy (81 per cent of small businesses expressing satisfaction with current arrangements versus 54 per cent for large businesses). For receiving B2B customer payments, 29 per cent of large businesses desire more electronic payments compared with 12 per cent for small businesses. For supplier payments, the proportions are 10 per cent for small businesses and 35 per cent for large businesses. Other insights into consumer payments The most common payment channels used by customers who buy on account with the businesses surveyed are mail (90 per cent), over-the-counter (65 per cent), by Internet (46 per cent), and by telephone (43 per cent). Payments methods that customers use to settle accounts with businesses include cheques (96 per cent), direct bank transfers (68 per cent), cash (58 per cent), credit
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Exploration of future electronic payments markets cards (57 per cent), debit cards (42 per cent), and charge card (24 per cent). Other insights into supplier payments Payments to overseas suppliers The primary ways of making payments to overseas suppliers are bank telegraphic transfers (55 per cent) and direct bank/funds transfers (52 per cent). Direct bank transfers are made via direct electronic linkage with our bank (68 per cent) and Internet banking (44 per cent). Barriers to increasing direct bank transfers in supplier payments Primary reasons given for not increasing the amount of direct bank transfers to suppliers are some suppliers dont like bank transfers (49 per cent) and we dont have the banking details of all suppliers (45 per cent). Impact of accounting systems on payment choices Seventy-three per cent of companies say that their accounting system influences the way they pay suppliers because the system generates cheques (60 per cent) and the system is linked to making direct bank transfers (50 per cent). Internal payments Wage payments Among the businesses surveyed, 88 per cent of hourly-paid employees and 91 per cent of salaried employees are paid by direct bank transfers (see Chart 4.17). Not all employees are paid this way because our employees dont want to be paid that way (37 per cent) and it doesnt suit our accounting payment system (23 per cent). Superannuation payments Superannuation payments are primarily paid by cheque (55 per cent) and direct bank transfer (56 per cent). (Again, see Chart 4.17.) This represents a significant opportunity for increasing the proportion of superannuation payments that are paid electronically. The reasons cited for not currently doing so are that (it) doesnt suit our accounting/payroll system or we dont have the details of the funds bank accounts (19 per cent), superannuation fund doesnt allow (13 per cent) and the need to provide more information/data than is allowed in an electronic payment (11 per cent).
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4.17 Methods used by businesses for internal payments
% respondents using payment method to pay 'salaried and hourly paid employees'
Direct bank transfer 7% 6% 6% 3% 2% 2% 0% 10% 20% 30% 40% 50% 60% 70% 80%
88% 91% Hourly Salaried
Cheque
Cash
Other
90%
100%
% respondents using payment method to make employee superannuation payments
Direct bank transfer
56%
Cheque
55%
Other
5%
BPAY
2%
0%
10%
20%
30%
40%
50%
60%
Business expenses The business expenses of employees are primarily handled by employees paying any expenses themselves and claiming them back subsequently (46 per cent for all companies, 73 per cent for large companies) and by providing them with company credit/charge cards (31 per cent). Electronic bill presentment Forty-one per cent of businesses surveyed saw the presenting of bills/invoices to customers electronically over the Internet as part of their business/payments strategy in the next 24 months. The reasons given for wanting to present bills electronically include cost saving in not sending paper bill (76 per cent), provides an additional service for my customer (54 per cent), provides cost saving through customers serving themselves online (44 per cent), and enables migration of payments into lower-cost electronic channels (41 per cent).
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Exploration of future electronic payments markets The biggest barriers to implementing electronic bill presentment are perceived as it is not suitable for my business (24 per cent), process of implementation (15 per cent), cost of implementation (14 per cent), no consumer demand for this (14 per cent), and integration with my existing systems (13 per cent). Key points The business payments map obtained from the sample of Australian businesses surveyed, confirms earlier work that cash and cheques are the most widely accepted payment methods for shop front/in-person sales. Electronic direct credit is the most widely accepted payment method for Internet sales in the sample. Given the emphasis on the use of credit cards in the literature reviewed, and in personal experience when shopping on the Internet, it may seem improbable that direct entry is the most frequently used payment method for purchases made on the Internet. However, it is possible to make a purchase over the Internet and pay using direct credit, so long as the merchant is willing to split the purchase order away from the payment of that purchase order. The popularity of direct entry as an Internet payment method is consistent across the entire sample. It is true for large and small businesses and most of the other data splits used in the survey, and these results are statistically significant. This example shows that looking at the practices of a large range of businesses may produce insights that differ from preconceptions and anecdotal experience. This may be an area that only further empirical research can resolve definitively. 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/in-person 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 weaker preferences for cash when receiving payments from consumers, and exhibit a stronger aversion to cheques. Some clear messages emerged regarding the cost of payment methods. The businesses surveyed view:
cheques as being the most expensive method for receiving payments from other businesses, and credit cards as the most expensive method for receiving payments from consumers; and cash as the cheapest method for receiving payments from consumers and direct bank transfers as the cheapest method for receiving payments from other businesses.
The impact on business of payment method was also examined. Businesses surveyed appear not to 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.
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Exploration of future electronic payments markets 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. A large proportion of superannuation payments continues to be made with cheques instead of via direct bank transfer. The reason most commonly cited by businesses as preventing more migration to electronic payments is that customers and suppliers wont change what they do. There are many other examples where businesses indicate that they cannot or will not change unless others do.
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Exploration of future electronic payments markets CHAPTER 5CONSUMER PAYMENTS What use of payment systems do consumers make? Do they prefer some payment types over others? If so, why? This chapter seeks to provide answers to these and other key questions regarding the views and attitudes of Australian consumers towards payment products and the payments system. It reflects insights obtained through a survey of Australian consumers. Structure of the consumer payments survey The survey of 300 Australian consumers was conducted on behalf of the consultants by I-View using a computer-assisted telephone interface (CATI) system. The sample was drawn from the electronic White Pages listings across Australia, and stratified by geographic area with quotas controlled by gender and age. The consumer survey questionnaire was divided into a number of key sections. The information that was sought in these sections included:

how consumers paid for purchases outside of the home, and why; how consumers paid for transactions from home (for example, bills and Internet purchases), and why; how consumers perceived five different characteristics of each product: cost of using the payment method confidence that the payment will be completed coverage or how widely accepted the payment method is confidentiality or anonymity afforded by the payment method convenience of the payment method;
how consumers expect their behaviour to change and what will be the driver of this change; and specific questions on cheque use and money transfers.
The survey sought to distinguish between how widely used a payment method is, and how frequently it is used. A payment method is widely used if a large proportion of respondents report having used it to make a particular type of payment (say, payment of bills from home). A method is frequently used if it is used to pay most of the bills by respondents who report having used this method. (See Appendix E for the survey questions.) Payments away from home Respondents were asked which payment methods they used when making physical purchases outside the home. Breadth and frequency of use The breadth of use of a payment method is measured by the percentage of consumers who indicate they have used this payment method at least once in the last six months. The usage frequency of a payment method is measured by the proportion of all payments made using this method, among consumers who indicated they used this payment method at least once in the last six months.
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Exploration of future electronic payments markets Most widely used payment method For payments at retail locations, consumers have predominantly used cash, EFTPOS and credit cards in the last six months. The two products that show significant differences by age are EFTPOS and cheques (Chart 5.1).
5.1 Most widely used methods for payments away from home
97% 70% 64% 18% 14% 12% 7% 6% 5% 4% 0% 20% 40% 60% 80% 100% 31-50 50+ 0% 20% 16-30 1% 16-30 31-50 50+ 0% 20% 40% 52% 60% Debit/EFTPOS 83% 78% Average 70% 80% 100%
Cash Debit/EFTPOS Credit card Personal Cheque Store cards Money Order Fuel cards Bank Cheque Cabcharge Charge card
Personal cheque Average 18% 19% 31% 40% 60% 80% 100% 120%
Ninety-seven per cent of respondents have used cash in the last six months, 70 per cent have used debit cards/EFTPOS, 64 per cent have used credit cards and 18 per cent personal cheques. Eighty-three per cent of 1630 year olds have used EFTPOS, compared with 52 per cent of those aged 50 and above. Conversely, one per cent of 1630 year olds have used cheques for payment at retail locations in the last six months, compared with 31 per cent for those aged 50 years and over. Most frequently used payment method Although nearly everyone has used cash as a payment method in the last six months (as above), credit cards are quoted as the most frequently used payment method for payments away from home, followed by cash and debit cards/EFTPOS. Respondents who have used credit cards for payments outside the home in the last six months reported using them for 44 per cent of all such transactions. The figure for cash was 40 per cent and for debit cards/EFTPOS, 37 per cent (see Chart 5.2). Credit cards also dominated in terms of payment value, with 49 per cent of total transaction value being paid by credit cards for those who reported using these cards (see Chart 5.3).
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5.2 Most frequently used methods for payments away from home by number of transactions
Number of Respondents Credit card Cash Debit/EFTPOS Charge card Fuel Cards Personal cheque Store cards Bank cheque Money order Cabcharge 0% 14% 13% 12% 9% 8% 8% 6% 10% 20% 30% 40% 50% 40% 37% 44% 193 290 210 13 22 55 41 18 36 16
5.3
Most frequently used methods for payments away from home by value of transactions
Number of Respondents Credit card 49% 38% 35% 16% 15% 15% 13% 10% 8% 7% 0% 20% 40% 193 210 290 22 18 55 13 41 36 16 60%
Debit/EFTPOS Cash Fuel cards Bank cheque Personal cheque Charge card Store cards Money order Cabcharge
It is interesting to note that credit cards are the dominant payment choice for those consumers that use them. In particular, consumers who use credit cards estimate that they transact almost half of their payment value away from home on credit cards. 81
Exploration of future electronic payments markets While cash represents the second most frequently used product for purchases outside of the home by transaction type, debit cards are the second most frequently used by transaction value, indicating that cash transactions are of smaller value than debit card transactions. Payment method by transaction size Cash is the predominant payment method used for low-value transactions. Credit and debit cards are used more frequently for higher-value transactions (see Chart 5.4). Simplicity appears to be the key driver for the choice of payment method for low-value transactions. Interestingly, consumers say they use credit cards for higher-value transactions because they do not have sufficient cash on them (see Chart 5.5).
5.4 Payment methods by transaction value
Payment product used for purchases < $10 Cash Debit/EFTPOS Credit card 0% 3% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 7% 90%
Payment product used for purchases of $30 Cash Debit/EFTPOS Credit card Personal cheque Charge card 0% 1% 1% 10% 20% 30% 40% 50% 24% 29% 46%
Payment product used for purchases of $100 Credit card Debit/EFTPOS Cash Personal cheque 0%
40% 38% 16% 2% 10% 20% 30% 40% 50%
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5.5 Reasons behind payment product choices by transaction size
Reasons for using product for purchases of $30 52% 16% 16% 12% 8% 0% 20% 40% 60% Simple to use Dont have enough cash with me Quickest method Dont get surcharged It allows me to control my spending 0% 9% 9% 20% 40% 60% 13% 35% 34%
Reasons for using product for purchases of < $10 Simple to use Most accepted by shops for this value Quickest method Don't get surcharged Easy to limit and control spending
Payment product used for purchases of $100 Dont have enough cash with me Simple to use It allows me to control my spending Other Receive loyalty points Easy limit and control spending 0%
51% 21% 10% 8% 8% 8% 20% 40% 60%
Payment for $10 transactions Cash is the most common method of payment for $10 purchases (90 per cent), followed by debit cards/EFTPOS (7 per cent) and credit cards (3 per cent). The main reasons cited were simple to use (52 per cent), dont get surcharged (16 per cent), and quickest method (16 per cent). Payment for $30 transactions Cash is still the dominant method for $30 payments, but debit cards/EFTPOS and credit cards are also likely to be used (29 per cent and 24 per cent respectively). In particular, 1630 year olds are very likely to use debit cards/EFTPOS for $30 payments (40 per cent). The main reasons respondents cited for their payment choices were simple to use (35 per cent) and dont have enough cash with me (34 per cent). Payment for $100 transactions For purchases around $100, credit cards and debit cards/EFTPOS are the primary payment methods (40 per cent and 38 per cent respectively). Fifty-five per cent of 1630 year olds would pay for such purchases with debit cards/EFTPOS, compared with 26 per cent of those aged 50 years and above. The main reasons cited by respondents for their preferences were dont have enough cash with me (51 per cent) and simple to use (21 per cent).
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Exploration of future electronic payments markets Bill payments and Internet purchases Respondents were asked about the payment methods they had used in the last six months for paying bills received at home and making Internet purchases. Breadth and frequency of use Most widely used payment method Credit card and direct debit transactions from bank accounts are stated as the most widely used methods for bill payments. These at home transactions include payment for phone and electricity bills and trade invoices. Credit cards were used by 37 per cent of respondents, while 35 per cent reported using direct debit from their bank account (Chart 5.6).
5.6 Most widely used method for payments from home
Credit Card Direct Debit transaction from bank account Cash Direct bank transfer through Internet banking Personal cheque Debit card Direct Debit transaction from Credit card Other Bank cheque Money order Charge card 0% 4% 3% 1% 10% 20% 30% 40% 0% 10% 20% 30% 8% 7% 12% 16% Age group 16-30 31-50 50+ 1% 15% 30% 24% 23% Personal Cheque 37% 35%
Personal cheques are widely used by older age groups: 30 per cent of those aged 50 and above who were surveyed reported using cheques for payments from home, versus 15 per cent for 3159 year olds and one per cent for the 1630 year olds. Most frequently used payment method Cash, debit cards15 and credit cards are the mostly frequently used methods of making bill payments. For those who reported using cash and debit cards for making bill payments, 70 per cent of their transactions are made using these payment methods. The corresponding proportion for credit cards is 64 per cent.
15 Although a bill may have been received at home, it is possible to pay it using a debit/EFTPOS card
by taking the bill and making the payment at an over-the-counter location
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Exploration of future electronic payments markets Most widely used payment channel BPAY (38 per cent), Australia Post outlet/shop (33 per cent) and card payment over the telephone to a computer response system, are the most widely used channels for paying bills received at home (see Chart 5.7). However, those aged above 50 years have a bias towards paying cash in-person, over-the-counter at a shop (31 per cent compared with 20 per cent for all respondentssee Chart 5.8).
5.7 Most widely used channel for bill payments
BPay Australia Post outlet/shop Card over the telephone to a computer response system Card on the Internet Cash over the counter at a shop Australia Post outlet/shop EFTPOS Card over the telephone to a person Mail Other PostBillPay PayPal on the Internet BillExpress at a shop 0% Western Union 0% 10% 20% 30% 40% 2% 1% 7% 6% 14% 14% 16% 16% 20% 20% 29% 38% 33%
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5.8 Most widely used channel for payment of bills for 50+ year olds
BPay Australia Post outlet/shop Card over the telephone to a computer response system Card on the internet Cash over the counter at a shop Direct debit EFTPOS Card over the telephone to a person Mail Other PostBillPay PayPal on the internet BillExpress at a shop WesternUnion 1% 0% 0% 0% 10% 20% 30% 4% 8% 17% 15% 23% 19% 12% 23%
32% 40%
31%
% respondents (N = 108)
40%
50%
Internet purchases and payments Reasons for not purchasing over the Internet Despite 71 per cent of respondents having Internet access, 70 per cent still do not make purchases over the Internet (see Chart 5.9). Lack of confidence in Internet payments is a significant barrier. The most commonly cited reasons for having never purchased anything over the Internet are I dont have access to/dont know how to use the Internet (46 per cent) and Im nervous/concerned about paying for things over the Internet (28 per cent). I prefer to see/feel what I am buying in person was cited by only 11 per cent of respondents (see Chart 5.10).
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5.9 Frequency of Internet purchases by age group
Internet purchases per month 3% 1% 1% 6% 2% 5% 3% 2% 2% 1%
5 or more 4 3 2
22%
3%
16%
23%
1%
29%
70% 1 or less Never

Respondent Segmen t
79% 68% 63%
Total
N = 300
16-30yrs
N = 88
31-50yrs
N = 104
50+yrs
N = 108
5.10 Reasons for not purchasing over the Internet

I dont have access to/dont know how to use the Internet Im nervous/concerned about paying for things over the Internet I prefer to see/feel what I am buying in person I havent had the need to buy anything that way Refuse to say/Don't really know I dont have a credit card to pay over the Internet Im concerned that the supplier wont deliver the goods 0% 3% 3% 2% 10% 20% 30% 40% 50% 11% 10% 28% 46%
Most commonly used payment method for Internet purchases Credit card is the most commonly used payment method for Internet purchases (81 per cent), with direct funds transfer from my bank account on the Internet coming in a distant second (15 per cent). PayPal is used by only eight per cent of respondents (see Chart 5.11).
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5.11 Commonly used payment methods for Internet purchases
Credit card on the Internet Direct Funds Transfer from my bank account on the Internet PayPal on the Internet BPay Australia Post PostBillPay on the Internet Send a money order in the mail Debit Card on the Internet 0% 4% 3% 3% 3% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 8% 15% 81%
Safest payment method over the Internet Credit card is seen as the safest payment method over the Internet although there is considerable fear and uncertainty about it. Twenty-six per cent of respondents perceive credit cards as being the safest method; an equal proportion felt that all methods are unsafe, while 28 per cent chose dont know as their response. There were significant differences across age groups: 34 per cent of 1630 year olds perceive credit cards as the safest payment method compared with 15 per cent of those aged over 50 years (see Chart 5.12).
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5.12 Perception of safety of payment method over the Internet by age group
Dont Know Other None, they are all unsafe Australia Posts PostBillPay BPay PayPal Direct Funds Transfer from my bank account Credit Card Debit Card Respondent Segment
16% 28% 2% 27% 26% 5% 5% 6% 26% 4% Total N = 300 6% 2% 34% 3% 5%
26% 2% 17% 10% 6% 1% 1% 1% 13% 2% 32% 6% 15% 1% 41%
5% 16-30yrs N = 88 Age Group
6% 31-50yrs N = 104 50+yrs N = 108
1%
Preferred payment method over the Internet Similarly, 63 per cent of those aged over 50 years said they didnt use nor want to use the Internet to make payments, compared with 28 per cent for 1630 year olds and 33 per cent for 3150 year olds. Among all available payment methods, credit cards were preferred by 81 per cent of all respondents, followed by direct funds transfer from my bank account (15 per cent). (See Chart 5.13.) Security and convenience are the main drivers of choice of payment method over the Internet (see Chart 5.14). The reasons most commonly cited were I feel its more secure (42 per cent) and its more convenient (24 per cent).
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5.13 Preferred methods for Internet payments
Credit card on the Internet Direct Funds Transfer from my bank account on the Internet PayPal on the Internet BPay Australia Post PostBillPay on the Internet Send a money order in the mail Debit Card on the Internet 0% 4% 3% 3% 3% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 8% 15% 81%
5.14 Reasons behind preferred method for payments over the Internet
I feel its more secure Its more convenient Its easier to use It avoids going into credit I get loyalty points It saves me money/is cheaper I dont have a credit card It allows me to schedule the date of the payment It delays when I have to pay from my bank account 0% 4% 3% 2% 2% 2% 10% 20% 30% 40% 50% 6% 19% 24% 42%
Payment method choice Survey respondents were asked to rate the importance of five characteristics of payment methods (convenience, cost, confidence, confidentiality and coverage) on a scale (low, medium and high). The sixth characteristic, capability, was omitted from the consumer survey on the grounds that decisions and the issues regarding the supply of payment technologies were not generally in consumers hands. 90
Exploration of future electronic payments markets To compute a payment methods score for each of these attributes, a low rating was assigned 0 points, a medium rating 5 points, and a high rating 10 points. The total number of points was then averaged over all respondents for each attribute of every payment method. Plotting the five Cs in radar form The results of the above exercise are plotted in radar form in Chart 5.15. Note that:

the shaded (or inner) pentagon is the same in each figure and represents the average of the results; the axes show the scores for each of the five Cs: convenience, cost, confidence, confidentiality and coverage; the vertices of the shaded pentagon show the average scores for each attribute/characteristic across all payment methods; and the vertices of the outer pentagon show the scores achieved by the payment method in question.
For example, the figure on the upper left corner of Chart 5.15 shows that cash scores above average on each attribute and is perceived favourably with regard to each of the five attributes, especially for coverage, confidentiality and confidence. On the other hand, as shown in the upper right figure, credit cards score above average for coverage and convenience, about average for confidence, slightly below average for cost, and significantly below average for confidentiality. Cash, then, is clearly perceived by consumers to be the best payment method, excelling in all five characteristics. Credit cards are perceived to be convenient and widely accepted, but lack confidentiality. The primary drawback of personal cheques is viewed as its lack of coverage or widespread acceptance. Direct debit from a bank account is perceived as being average in terms of confidence and confidentiality, and slightly above average for coverage, cost and convenience. Least important characteristics when choosing a payment method When respondents were asked to name the two least important characteristics of a payment method, the results were as follows: convenience (59 per cent), coverage (54 per cent), privacy of personal information/confidentiality (50 per cent), cost (49 per cent) and confidence in payment being made (41 per cent).
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5.15 Consumer perception of various characteristics of payment methods
Cash
Conv enience 10 8 6 4 2 0
Credit card Convenience

10 8 6 4 2 0
Cov erage
Cost
Coverage
Cost
Confidentiality
Confidence
Confidentiality
Confidence
Cash
Average
Credit card
Average
Personal cheque
Conv enience 10 8 6 4 2 0
Direct debit from bank account Convenience

10 8 6 4 2 0
Cov erage
Cost
Coverage
Cost
Confidentiality
Confidence
Confidentiality
Confidence
Personal cheque
Average
Direct debit from bank a/c
Average
Changes Payment types expected to be used more frequently in the near future When asked which payment types they expected to use more frequently in the next three years, respondents named EFTPOS (27 per cent), cash over-the-counter at the shop (23 per cent), card on the Internet (17 per cent) and BPAY (15 per cent) as the more significant types. A large proportion (34 per cent) did not expect any changes in their use of payment types (see Chart 5.16).
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5.16 Payment types expected to be used more frequently in the next three years
EFTPOS Cash over the counter Card on the Internet BPAY Telephone to a computer response system Australia Post outlet/shop Telephone to a person None, don't anticipate any changes 0% 5% 10% 15% 20% 25% 30% 2% 1% 34% 35% 40% 5% 17% 15% 23% 27%
Least attractive characteristics of current electronic payment methods The characteristics that respondents find least attractive about current electronic payment methods are: privacy of personal information (39 per cent), cost (26 per cent), coverage and acceptance (16 per cent), confidence in payment being made (10 per cent) and convenience (6 per cent). By inverting the figures for each payment method (that is, subtracting them from 100 per cent), it is possible to plot an indicator of the current attractiveness of electronic payment characteristics (see Chart 5.17). The 70 per cent threshold appears to be the hygiene level, in that a characteristic that achieves a score lower than this threshold is a potential driver for greater adoption of electronic payments if it can be substantially improved.
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5.17 Attractiveness of current electronic payment methods
100 90 80 70 60 50 40 30 20 10 0 Convenience
Confidence
Coverage
Cost
Confidentiality
Encouraging greater use of electronic payments When asked to name which factor, if it was improved, would most encourage greater use of electronic payments, 44 per cent chose privacy of personal information (that is, confidentiality), 21 per cent cost, 13 per cent confidence in payment being made, 12 per cent wide coverage of acceptance, and 10 per cent convenience (Chart 5.18).
5.18 Feature that would most encourage use of electronic payments
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Convenience
Confidence
Coverage
Cost
Confidentiality
Respondents were also asked for their response (strongly agree, agree, neither agree nor disagree, disagree or strongly disagree) to each of the following statements:

I would make more use of electronic payments if they were more convenient for me; I would make less use of electronic payments if the costs of use went up;
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Improvements in the protection of my private information would encourage me to make greater use of electronic payments; Reductions in confidence of payment execution would not impact my use of electronic payments; and Improvements in coverage and acceptance would encourage me to make greater use of electronic payments.
A strongly agree response was awarded 10 points, a strongly disagree response was awarded -10 points, with the other responses awarded 5, 0, and -5 points. An average of 0 points for a given statement across all respondents, would indicate that respondents were neutral about that statement. The average number of points respondents awarded to each statement is shown in Chart 5.19. Note that because of the phrasing of their associated statements, the positive or negative signs in front of the scores for confidence and cost have been switched. The results indicate that reductions in cost and improvements in confidentiality are expected to generate the largest response in terms of increasing the proportion of payments made electronically.
5.19 Impact of changes in payment characteristics
Convenience
Confidence
Coverage
Cost
Cost
Confidentiality
-6
-4
-2
0 Score
n = 300
Other issues Money transfers A third of respondents (32 per cent) reported having transferred money to another persons account via the Internet or a telephone. Of these, only 30 per cent believe that Internet or phone transfers to another bank occurred within 24 hours. Sixty-eight per cent say they would not pay a fee, however small, for the money to be transferred immediately (see Chart 5.20). There are, however, substantial variations 95
Exploration of future electronic payments markets across age groups. Twenty-one per cent of 1630 year olds are willing to pay $5 or more for immediate money transfers and 18 per cent are willing to pay between $2 and $4.99. In the group aged 50 years and above, 80 per cent are unwilling to pay a single cent, four per cent are willing to pay between $2 and $4.99, and four per cent are willing to pay $5 or more.
5.20 Willingness to pay for immediate money transfers by age group
$5.00 or more $2.00$4.99 $0-$1.99
11% 9% 11%
21%
8% 5% 11%
4% 4% 12%
18% 12% 77% 48% 80%
68% Nothing, wouldnt pay a fee Respondent Segment
Total N = 97
16-30yrs N = 33 Age Group
31-50yrs N = 39
50+yrs N = 25
Cheques Personal cheques are more likely to be written by an older person. Only nine per cent of 1630 year olds surveyed use cheques for making payments, while 65 per cent of those aged 50 years and over do so (see Chart 5.21).
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5.21 Cheque use by age group
Personal cheques written per month 11 or more 6-Oct 3-May 91% 1-Feb Less than 1 None Respondent Segment 57% 52% 35% 10%
4% 6% 9% 14% 10%
1%
5%
3%
7% 9% 15% 15%
8% 9% 16%
21%
Total N = 300
16-30yrs N = 88
Age Group
31-50yrs N = 104
50+yrs N = 108
The main driver for writing personal cheques is supplier preference. The most commonly cited reasons for using cheques were choice of payment preferred by the supplier (34 per cent), most convenient method (20 per cent), and its easier to keep track of my money (16 per cent). (See Chart 5.22).
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5.22 Reasons for cheque use
Choice of payment preferred by the supplier Most convenient method Its easier to keep track of my money Only option available to me Keeps my personal information private Gives me confidence in payment being made Wide coverage of acceptance Ive always paid by cheque, dont know any other way I dont have internet access/banking Takes longer for the money to come out of my account Refuse to say/Dont really know Least costly method Allows me to choose exactly when I pay 0% 6% 5% 4% 3% 3% 2% 1% 1% 1% 10% 20% 30% 40% 10% 16% 20% 34%
Electronic bill presentment Currently, 83 per cent of respondents receive at least one bill electronically. Electronic versions of bills are received via e-mail sent to me (76 per cent) and at the biller companys website (14 per cent). Websites where respondents expressed a wish to view and pay their bills online include my bank or credit union website (38 per cent), biller company website (21 per cent) and Australia Post website (15 per cent). However, 52 per cent of respondents do not want to view and pay bills online. KEY POINTS The map derived from a national survey of consumers illustrates the following key points about the use that people said they make of different payment methods.
The most widely used method when making payments for purchases away from the home are cash, EFTPOS and credit cards. A relatively larger proportion of older people in the sample use cheques, while a relatively larger proportion of young people said that they use EFTPOS. Cash is the most common method of payment for $10 purchases and $30 purchases. Credit cards, followed by EFTPOS, are the most common methods for $100 purchases. The most widely used methods for making payments from home are credit cards and direct debits from bank accounts. 98

The most widely used channel is BPAY, followed by Australia Post outlets and card payments over the telephone to a computer response system. Credit cards are the most commonly used payment method for Internet purchases.
The map also provides insight into what is driving the choices made about payment methods.
Most consumers surveyed indicated that cash excels in 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 used for Internet payments because they are perceived as the safest payment method for such 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 method of payment preferred by businesses. Younger people are much more willing to pay for real-time money transfers than older people. Changes in cost and confidentiality are expected to have the largest impact on consumer use of electronic payments.
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Exploration of future electronic payments markets CHAPTER 6GAPS IN THE PAYMENT SYSTEM Where are the gaps in the electronic payments system? This chapter identifies areas where an increased use of electronic payment products and channels may be feasible. It investigates gaps in supply, demand and regulation and highlights gaps from the consumer and business surveys. Gaps in supply A gap is apparent where there is capability and demand for an electronic payment, but it is not being supplied. A number of supply-side gaps have been identified from the literature and stakeholder workshops. These are listed below.
Large-scale P2P payments are inefficient because slow transaction times are becoming increasingly inadequate (for example, most people in Australia still use bank cheques for large transactions when purchasing a house or motor vehicle). This is imposing costs on consumers and businesses that could be reduced through the use of electronic payments. Consumers and businesses cannot make real-time, online purchases or transfers using funds from a demand deposit account. Although bank accounts update when the transaction has been undertaken, the payment is not transferred to the sellers account until the end of the settlement period, normally at the end of each weekday. Currently, most non-cash payment products are costly when used for small payments or micro-payments. For example, the use of credit cards for transactions below $10 imposes a significant cost on the merchant, as there is often a minimum flag fall that is charged by financial institutions. This is in contrast to the significant demand in the online environment for these types of transactions. A product that allows efficient movement of detailed remittance information with the payment (for example, B2B transactions and payments within the health care market) is not available to consumers and businesses. There is limited scope to use electronic payments for those who are not credit worthy and there is a significant proportion of the population who do not have a credit card. While much smaller, the proportion of people who do not have a bank account (the un-banked) have limited opportunity to use more convenient and lower-cost electronic payments. Although prepaid products are available they do not have widespread acceptance and are limited to a relatively small number of transaction types. Electronic devices that allow for a truly mobile payment product through initiating relatively secure, rapid interbank transfers, to and from deposit accounts are not available (for example, using a mobile phone as a payment device). Although there are obligations in licensing arrangements to have a dispute resolution system (see Box 6.1), workshop participants felt that there is not an electronic product on the market that has an efficient and low-cost dispute resolution mechanism. Products that do not require interaction between consumer and business at the point-of-sale are not available (for example, contactless cards). Vending machines that use cash do provide a degree of contactless-ness that lowers transaction costs and shortens service time for consumers, but there is scope to extend this 100
Exploration of future electronic payments markets convenience to a broader range of normal goods and services through electronic products.
The consumer survey revealed that they do not believe there is an electronic payment product that is as convenient as cash but preserves confidentiality for low-value transactions. This gap could potentially be filled by stored-value cards that can be used across a wide range of transaction types. However, these are not widely available or used in Australia today. The few that are available are very limited in their scope and can only be used to purchase a narrow range of services.
6.1 Dispute resolution arrangements

Under the financial services laws, deposit institutions must be licensed by ASIC. One of the general obligations of licensees under the Corporations Acts 2001 is to have a dispute resolution system. This requires the deposit institution to have internal dispute resolution procedures consistent with the Australian Standard (or other standard that may be determined by ASIC), as well as membership of one or more ASIC approved external dispute resolution schemes. Consequently, all deposit institutions belong to one of three schemes covering payments disputesthe Banking and Financial Services Ombudsman, the Credit Union Dispute Resolution Centre, and the Financial Co-operatives Dispute Resolution Scheme. These services, which are free of charge to consumers, regularly deal with unauthorised transaction and other payment disputes. The Banking and Financial Services Ombudsman, in particular, has also developed detailed guidance for industry on how it approaches electronic and other payment disputes.
Source: ASIC personal communication, 31 October 2005.
Some of these gaps appear to be temporary. Temporary gaps are often driven by technology, where it has not kept pace with changing consumer needs, or where there is a lag in the process of adopting technology developed overseas. Discussion in earlier chapters of this report noted that contactless cards and mobile phone payment technologies are being developed or under trial overseas. These technologies may emerge in the Australian payment market. Structural or permanent gaps are likely to be associated with institutional arrangements (commercial and/or regulatory) that block the profitable operation of a new product within the existing market. Often these are associated with barriers to entry. Barriers to entry and other impediments are explored in the next chapter. GAPS IN DEMAND Some problems in the market for electronic payments in Australia may amount to a gap in demand. That is, there is a capacity to provide an electronic payments product or channel but this capacity is not being fully utilised. Key areas where use does not seem to be made of existing capacity are discussed below. Transition failures Although the use of cheques has been in decline, Australia still makes more use of this payment method than many other comparable countries. Meanwhile, there is also evidence that Australian businesses are under-utilising existing electronic payment methods such as direct entry payments. This is supported by the business survey. Although cheque and direct transfer appear to be the most popular method of settling consumer and business accounts, 30 per cent of businesses surveyed see an 101
Exploration of future electronic payments markets opportunity for improvement in receiving payments from consumers and would like payments to be quicker, suggesting a need for more electronic payments. There appears to be considerable scope to make additional use of the Internet as a payment channel, particularly in view of the very high level of over-the-counter bill payments transactions. Compared with other channels, the Internet represents a relatively low-cost option. However, there are security issues that raise concerns about confidence and confidentiality regarding use of the Internet as a payments channel. Electronic payment laggards The consumer and business surveys highlight areas where a large portion of the community lags in the adoption and use of electronic payments. These areas form potential gaps in demand. Small firms appear to make less use of electronic payments than larger firms. Chart 6.2 shows the average volume of payments received by businesses, from businesses and consumers by electronic payments type. The first chart shows large firms use direct entry for nearly 60 per cent of their sales, while small firms use direct entry for around 40 per cent. This suggests a potential gap of 20 per cent of the volume of payments made by small firms that could be closed by greater use of direct entry payments. There is a similar story with payments between businesses and consumers, where direct entry in large firms is used on average for around 28 per cent of transactions, but in small firms it is used for around 12 per cent of sales. In addition, less use is made of electronic payments in B2C transactions than in B2B transactions. This is also illustrated in Chart 6.2. The proportion of direct entry payments appears to be much higher for all firm sizes for B2B than B2C transactions, although the need for real-time value transfer may be driving this in B2C shop front / in-person situations. There are also potential gaps in the use of electronic payments across transaction type. These include payment to employees, superannuation contributions, and business expenses for employees.
6.2 Gaps in demand between business size a
Average use of electronic products for B2B 70 EFTPOS 60 50 per cent 40 30 20 10 0 Small firm Medium firm Large firm Credit cards Direct entry
Average use of electronic products for B2C 70 EFTPOS 60 50 per cent 40 30 20 10 0 Small firm Medium firm Large firm Credit cards Direct entry
a Refers to average payment volume for businesses receiving payments. Sources: CIE and EDC.
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Exploration of future electronic payments markets Chart 6.3 shows the use of electronic payments for payments to salaried employees and superannuation contributions. The first chart presents the responses from businesses when asked what methods of payment were used to pay salaried employees.16 It shows that nearly 100 per cent of salaries in medium and large businesses are paid through direct bank transfer, whereas only 68 per cent of small businesses use direct debit. This suggests there is potential for small businesses to increase their use of electronic payments for these types of transactions.17 The second graph in Chart 6.3 represents the response from businesses when asked which methods of payment were used to make employees superannuation contributions. It shows larger businesses were less likely to use cheques and more likely to use direct bank transfer. This suggests there may be a gap in demand for electronic payments by smaller businesses for superannuation payments. However, this also shows that there may be a gap in the use of electronic payments for superannuation in medium and large companies. This is because the relative use of direct bank transfers is significantly lower for superannuation payments than the methods of payment for salaried employees.
6.3 Method of payment across internal business payments a
Methods of payments for 'salaried' employees 100 90 80 70 per cent
per cent Methods of payments for superannuation contributions 100 90 80 70 60 50 40 30 20 10 0 cheque Bpay direct bank transfer
cash cheque direct bank transfer
60 50 40 30 20 10 0 small medium large
small
medium
large
a Refers to average payment volume. Sources: CIE and EDC
Business expenses of employees also showed gaps in the demand for electronic payments. Chart 6.4 shows the response by businesses when asked how they handle the business expenses of employees. It shows that just under 20 per cent use cash and around six per cent pay a standard allowance through cash. In addition, claim back was used in just under 50 per cent of businesses, however it is not clear whether this would be done through cash or electronic payments.
16 Similar results were found for employees paid by the hour. 17 It is possible that small businesses are more likely to use cash to avoid various state and federal
employee taxes.
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6.4 Payment of employee business expenses
Cash advance
Paid an allowance
Claim back
Credit/charge cards
Other
10
15
20
25 per cent
30
35
40
45
50
Potential gaps in demand were also found amongst consumers. This was especially the case across age groups where older people were found to make less use of electronic payments. Chart 6.5 shows the average use of electronic payments and the average use of electronic channels by customers, split into three age groups. It shows direct debit is used by just over 70 per cent of those between ages 16 and 30, whereas only about 48 per cent of those aged 50 years and above use direct debit. Similarly EFTPOS and the Internet were used much more frequently by the 1630 age group compared with the other two groups. Those aged above 50 tended to use the telephone more to make payments.
6.5 Gaps in demand between age groups a
Average use of electronic payments products (C2B) 100 90 80 70 per cent 50 40 30 20 10 0 16-30 31-50 Age 51+ 60 EFTPOS Direct debit Credit cards Direct credit (through internet)
Average use of electronic payment channel (C2B) 70 60 50 per cent 40 30 20 10 0 16-30 31-50 Age 51+ EFTPOS Card on the Internet Card over telephone
a Refers to average payment volume for consumers making payments Sources: CIE and EDC.
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E-payment services E-payment services can be defined as the process of government (federal, state and territory, and local) using electronic channels and payment products to pay and receive funds from business, consumers, and other government agencies. This definition encompasses all types of electronic transactions from basic over-the-counter transactions and online transactions, to complex multi-agency transactions and data integration. E-payment services are encompassed within the broader e-government strategy currently being implemented by the Australian Government. This strategy was initially developed in 1997 when the Australian Government announced its commitment to putting all appropriate Australian Government services online by 2001. As part of this, a specific commitment was to establish electronic payment as the normal means for Australian Government payments by 2000, and to be able to trade electronically with all simple procurement suppliers who wish to do so by the end of 2001 (AGIMO 2005a). Although the government has moved some way towards achieving its goal, workshop participants noted that there is still much that could be achieved in terms of Australian Government agencies making more use of electronic payment options and consumers/clients utilising services already in place. This includes increasing the number of electronic payments and improving the electronic payment services for those agencies that have aleady adopted electronic payments. These views are supported by evidence presented in the Government E-procurement Snapshot 2004 report, which showed that despite the use of electronic payment, there were still some agencies that did not always send remittance advice in electronic format (AGIMO 2005b). A study by DMR Consulting (2003), estimated that only 20 per cent of Australian Government transactional services were offered online. In addition, a recent survey conducted by the AGIMO showed that although 39 per cent of Australians contacted government (at all levels) by the Internet, only a limited number used it for payment services in the 12 months before the survey. Only 16 per cent of these people used it for income or personal tax, 10 per cent for land rates or tax, eight per cent for registrations and licences, and three per cent for fines (AGIMO 2005c). However, the Australian Government is continuing towards greater use of electronic payments. In October 2005, the Department of Health and Ageing announced that it will examine proposals to improve and modernise Medicare claiming procedures (Office of Joe Hockey, 2005). It is proposed the system will allow patients to swipe their Medicare and bank cards at doctors surgeries to immediately claim the Medicare rebate, rather than having to line up at a Medicare office for reimbursement. Gaps in regulation The possibility that current regulation does not always provide the necessary framework to ensure gaps in demand and supply are filled was raised in some of the workshops conducted for this study. These possibilities have been termed regulatory gaps and are described below.
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Exploration of future electronic payments markets Regulatory arrangements were said to lack transparency in relation to obtaining entry to provide new payment products and services, as it is not clear what will and will not be allowed into the current payment system. There is no one-stop-shop regulator for payments system participants because incumbents and new entrants need a licence or permit from each regulator. Processes for obtaining regulatory approval are often complex. Electronic banking and payment systems are subject to regulation from a number of sources, including Part 7 of the Corporations Act 2001, Payments Systems (Regulation) Act 1998, Payments System and Netting Act 1998, and the Electronic Funds Transfer Code. In addition, electronic banking and payment systems are regulated by APRA under the Banking Act 1959, by ACCC under the Trade Practices Act 1974, and by ASIC under the ASIC Act 2001, along with regulations imposed by the RBA. This makes it costly for new entrants to become aware of the legislation, which can mean several revisions to products and systems before compliance is met under all relevant legislation.18 Some stakeholders noted that there is regulation missing to facilitate new systems and technology entering the market. This increases the risk for new entrants trying to enter the market as they are not able to gauge the acceptance of their product from the government. Although there are statutory and other requirements designed to ensure the rights and responsibilities are disclosed to consumers of financial products (see Box 6.6), consumers do not have a clear understanding of who owns the risk of fraud. This means consumers may not be aware of the relative security attributes of each product and could therefore be limited in making an informed choice on the overall security benefits of each product. This gap is primarily due to the inability of the current disclosures to ensure consumers are informed of their rights and responsibilities.
6.6 Arrangements for disclosure on rights and responsibilities regarding fraud

In most payment situations, consumers do not bear the risk of third party fraud except in limited circumstances. In the case of credit card transactions, including most online, card-not-present transactions, cardholders generally have the benefit of the chargeback arrangements under the card schemes rules. If the cardholder challenges the legitimacy of a transaction there will generally be a chargeback to the merchant, and this will remain in place unless the merchant can positively establish that the consumer authorised the transaction. The Code of Banking Practice, to which nearly all retail banks subscribe, sets out a range of disclosure obligations applicable to banking services (see Part C: disclosures. The Code is available at www.bankers.org.au). Among these is an obligation to include information on chargeback rights for credit card products, including information on timeframes for reporting disputed transactions (Clause 10.5). The EFT Code of Conduct also protects consumers from fraud risk. Nearly all deposit institutions providing services to retail customers subscribe to this code, which covers consumer EFT transactions generally. Clause 5 of the code sets out a liability allocation regime under which, in broad summary, account holder liability is limited to a maximum of $150 unless the account user unreasonably delays in notifying the institution of any loss or theft; or the account institution can establish, on the balance of probabilities, that account-user fraud or negligence with security codes contributed to the loss.
18 It is also worth noting that state and territory governments regulate consumer credit contracts, such as
credit cards, through the Uniform Consumer Credit Code.
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cont. Subscribers to the EFT Code are also required to disclose their obligations under the code to consumers. Both the Code of Banking Practice and the EFT Code of Conduct are binding on subscribers, and industry dispute resolution schemes, such as the Banking and Financial Services Ombudsman, play a pivotal role in ensuring obligations under these codes are adhered to.
Source: ASIC personal communication, 16 March 2006.
Key Points Although there is significant use of electronic payments within the Australian payments system there are still significant gaps. These are in supply of and demand for electronic payments and regulation. Gaps in supply result from either technology not keeping up with demand or barriers to entry for new technologies. Gaps in demand result from barriers to adoption. While there are opportunities for new products to enter the market, there still exist significant opportunities for current electronic payment products to capture more of the traditional payments market (for example, cheques and cash). Gaps in supply of electronic payment products were found in large scale P2P transactions, real-time purchases, micro-payments, remittance of information, non-credit worthy individuals, electronic devices that allow rapid, interbank transfers, low-cost dispute resolution mechanisms, contactless products, and stored-value cards. These gaps may be temporary, driven by unavailable cost-efficient technology, or more permanent due to current institutional arrangements in the payments system. Potential gaps in demand for electronic payments result from community lag in adoption. The consumer and business surveys highlighted several areas where electronic payments could be increased. These were in small firms for payment receipt from other businesses and consumers, and for the payment of employees and superannuation contributions. In addition, there is potential for individuals over 50 to increase their use of direct debit facilities and card payments over the Internet.
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Exploration of future electronic payments markets CHAPTER 7BARRIERS TO INNOVATION AND ADOPTION What is limiting the use of electronic payments? This chapter reviews the main factors at play. It opens with a review of how innovation is normally subject to a diffusion process in the marketplace, and the experience of the Australian electronic paymentss market in adopting new electronic payment products. The chapter then analyses factors that impede demand and supply for electronic payments. This is followed by a review of possible regulatory factors that may be adversely impacting the development of the electronic payments market. Evidence on barriers to innovation and adoption obtained from the surveys of businesses and consumers are also reported. Adoption of innovation and new payment technologies Firms electing to shift to electronic payments or households deciding to adopt electronic payment technologies are likely to follow well-established patterns of adoption (see Box 7.1). The process of adoption or diffusion of a new technology often begins slowly due to costs of information acquisition on the part of adopters, and high production costs and imperfect technology on the part of producers. Time can be a barrier to the adoption of electronic payments. Reaching a take-off point or a stage of critical mass is also important. While technological innovations may create new payment methods and services, it is the demand from users that stimulates competition among providers, reducing prices and encouraging further adoption. While a single business may make the decision to invest in a new payment system based on their own costs and benefits, there are system-wide flow-on implications. Where an innovation or new payment method becomes so widespread that it essentially forms a standard, other merchants (and even customers) have to conform with it for fear of losing their own position in the market. Such network externalities are often cited as critical to the success of a new payment technology. Start-up costs can influence the adoption process. New electronic products may impose start-up costs such as: investments in new or additional equipment for individual computer banking and payments; vendor terminals; and dedicated communications hook-up and installation fees charged by payment and communications providers.
There are also learning costs associated with new technology (highlighted by the observation that it is normally young, affluent, educated individuals that are quickest to take up new payment technology and methods). Furthermore, there may be legal and security concerns affecting the demand for new technology which involve expense to resolve or clarify. Realisation that the adoption path for a technology is not guaranteed also highlights some key risks. The adoption path for a new electronic payment product may not reach a profitable level of adoption before it is replaced by a new technology, leading to a truncated adoption curve. This process is known as creative destruction and imposes risk on businesses introducing new products into the market, and even on users in
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Exploration of future electronic payments markets investing in systems to support new innovations.19
7.1 The process of technology-driven adoption
A successful new technology is generally adopted because it is more economical or technologically superior to the existing way of doing things. Thus the process is usually referred to as one of technology substitution of new for old technology. But what drives this process? Why is time or a process needed at all if the new is clearly superior to the old technology? General observation of many periods of technological change has led to a model of the diffusion process. It is the characteristics of the population that govern the rate of adoption, as well as the pattern by which information about the new technology is disseminated and absorbed. Research completed by Rogers in the 1960s about behaviour in communications marketing, suggested that the willingness of individuals to adopt innovative products is distributed in a bell curve (see below). Extending this observation to social and economic systems, as information about an innovation is diffused through a society, non-adopters have an increasingly large amount of information on which to base a decision to adopt a new technology. Rogers model of the distribution of adopters (innovators, early adopters, early majority, late majority and laggards) is reflected in the figure below on the left.
Distribution 100 84
13 1/2% Early adopters 2 1/2 % Innov ators
Cumulative distribution
Per cent
34% Early
34% Late 16 % Laggards
50 16 2 1/2 Time
majority majority
The figure on the right is the cumulative level of adoption for a successful innovation through a society or economic system. It follows what is often described as an S-curve. The adoption process often begins slowly due to costs of information acquisition on the part of adopters, and high production costs and imperfect technology on the part of producers. A new technology becomes more useful as adoption rises (due to network externalities), as do economies of scale. Adoption takes off and then gradually levels off as the saturation point is reached. Subsequent research suggests that innovation is subject to different distribution curves depending on the circumstances of the technology at hand. The differences involve small changes at the margins of the curve, leaving Rogers overall pattern broadly intact.
Sources: Vanston and Vanston (1996).
The risks involved in the adoption of technology influence behaviour of the community at large. In the same way, late adopters are potential users of a new
19 Purchasers of Betamax format video recording systems, which were eclipsed by VHS systems, will
be familiar with the costs and inconvenience involved with creative destruction.
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Exploration of future electronic payments markets technology who are waiting to see if others adopt. This means the rate of adoption is a function of what others do as well as the choice of individuals or businesses. Experience in Australia Although the volume and value of electronic payments products has grown in the last 10 years, the previous chapter identified that there were gaps in the use of electronic payments. Key barriers that may have reduced the incentive to innovate, or adopt new innovations are shown in Table 7.2. They have been divided into supply-side barriers, demand-side barriers, and barriers from regulation.
7.2 Barriers to electronic payment adoption Supply-side
Demand-side
Regulation
Complex regulations may appear daunting to potential entrants.
Practices of existing stakeholders/network effects and high telecommunications costs. Required investment in infrastructure and the lack of venture capital.
Need to establish business case for adopting innovation under conditions of limited cost transparency. Privacy and security concerns. Lack of consumer and merchant education.
A large number of regulators. Focus on protecting the stability of the core payments system may inhibit innovation in some instances.
Limited interoperability with existing/legacy systems.
Lack of scale efficiencies.
Information problems. Control over payments and information. Access to the electronic payments system. Information exchange with payments.
Lack of key standards and coordination throughout the payments system. The prisoners dilemma.

Supply-side barriers Supply-side barriers are those impediments that restrict the supply of either incumbent electronic payments or the introduction of new and innovative electronic payment products. Practices of existing players/network effects The established financial institutions, such as credit card companies and banks, possess considerable market power due to the advantages derived from their established networks. With the exception of the mediating service PayPal, some entrants have failed because of their inability to establish a viable user base. Telecommunications
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Exploration of future electronic payments markets companies are important new participants, especially for micro-payments via mobile telephone payment solutions, to the extent that regulations allow them to operate as payment intermediaries.20 Innovative payment technologies frequently compete with older technologies for financial resources and management attention in a firm or industry. Consequently, useful or cost-effective, innovative technologies that require the cooperation of incumbent payment providers (such as banks) may be delayed due to their inability to integrate with the current network, resulting in lock-in of older products. In addition, long-term projects or changes that threaten current business lines within existing payment providers, especially profitable card operations, may not receive organisational support because of departmental conflicts and short planning horizons. Required investment in infrastructure There are significant long-term infrastructure investments needed to set up and maintain new payment systems that will reach and retain an important number of users. New services will initially incur losses before being able to experience the benefits of the significant sunk costs. Potential investors in new electronic payment products and channels may perceive these products as relatively unattractive due to the uncertainty about whether they will be widely accepted in the market, whether regulation will allow them to operate, or whether superior technology will be introduced before a critical mass can be established. This is compounded by the long timeframe required to develop a large enough network to justify the continuation of the payment product. Although the Internet has provided a mechanism for accessing a large network at a relatively low cost, not all payment products can function in this environment. Consequently, the risk/return trade-off may not be attractive for some electronic payment products due to the high initial investment cost and the difficulty in changing or maintaining consumer perceptions and tastes. Furthermore, obtaining critical mass may be hard to achieve if access to existing infrastructure or customers is not forthcoming. In addition, a number of workshop participants noted that the venture capital market within the Australian economy is very small, and almost non-existent for companies that do not have an income stream. This represents a large barrier for companies that want to invest in the electronic payments market as it either forces them to pay a large price for the capital or to look offshore for funds. Limited interoperability with existing/legacy systems New technology and its specific applications to payment services have facilitated innovation in retail payment products and services, lowering costs of supplying payment services or increasing revenue opportunities for service providers. In the transition period, as payment volume shifts from established technology and retail payment methods to newer products that may ultimately be more cost-effective,
20 Telecommunications companies are currently legislated under Chapter 7 of the Corporations Act
2001. Although this act does not restrict the ability of telecommunications companies to operate as payment intermediaries, they may be subject to the regulatory regime applying to non-cash payment facilities under the act if they operate prepaid mobile payments facilities.
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Exploration of future electronic payments markets overall operating costs may temporarily rise. The initial savings from economies of scale in new technologies may be insufficient to cover the loss of such economies in the previously established technology. Investments in new technology are thus usually more attractive if they are integrated into, and are synergistic with, the established infrastructure. Indeed, as noted in Chapter 2, the majority of innovation is currently being targeted at the payer and payee interfaces, rather than the core payment products. Lack of scale efficiencies The success of a new electronic payment product is critically dependant on the ability to generate a network that is sufficiently large to provide its members with more benefits than substitute products already available in the market. The more merchants who accept the electronic payment product, the greater the benefits that accrue to the users of the producttheir search time is reduced and the convenience of using the product is increased. Furthermore, the more users there are, the easier it is for merchants to defray fixed costs. Success in establishing a new payments product network thus requires reaching a critical mass so each side of the market can benefit from a minimum level of development. For example, the prospects for merchants investing in the capability to accept a card depends on the number of cardholders. On the other hand, the attractiveness of the card to potential cardholders depends on its convenience, which is partly determined by the number and location of merchants who accept the card. The card networks have solved this chicken and egg problem by making investments on both sides or employing other strategies to get both sides committed to the scheme. This same issue was confronted by BPAY, which required a large base of Internet banking consumers and a significant number of BPAY accepting billers, a situation which failed to materialise until about five years after its original launch. Lack of key standards and coordination Standardisation in the Australian payment system can apply to processes, data, and technology. Standardisation is considered desirable because it can drive network economies of scale and transparency in the market. A number of benefits can arise from the standardisation of an electronic payment product, including:

reduced production costs; certainty for commercial operations which can reduce risk for further electronic payment and technology developments; additional advantages to users through network externalities; and competition in prices rather than technical characteristics (IPTS 1999).
Lack of agreed standards in the Australian payments system for payment messages, such as message formats and the way B2B information is included, and the consequent lack of systems interoperability, affects transactions among business and, in some cases, between businesses and their banks. Workshop participants noted that the information fields that accompany electronic payments are not standardised across the banking industry, thereby limiting the introduction of new infrastructure. One of the main impediments to standardisation is the key issue of who pays the extra cost to generate the interoperability of the payments system. Furthermore, agreement 112
Exploration of future electronic payments markets must be made on which standard should be used; which may be difficult to achieve among the mix of incumbent and potential electronic payment providers. The Prisoners Dilemma In the business survey, respondents felt that the volume of electronic payments is dictated by customer and supplier habits and tastes and not by themselves. They saw changing consumer and supplier habits as representing the biggest barrier to increasing electronic payments. This means that businesses in B2C transactions are not willing to change their payment receipt methods because they do not know if consumers will use the products. Similarly, it could be expected that consumers are not willing to change their payment methods because they do not know if businesses will also change. The consumer survey showed that 34 per cent of consumers pay by cheque because they believe it is the most preferred payment method for the business. However, the business survey showed cheques were one of the least preferred products, especially amongst large companies. This scenario is a type of Prisoners Dilemma21 where both consumers and businesses would be better off if they cooperated. The problem is that there is currently no way for businesses and consumers to coordinate their actions. If each knew how the other was going to respond then they could both be made better off. Therefore, the lack of coordination between businesses and consumers places a barrier on the further adoption of electronic payments and a barrier on the introduction of new technologies. Demand-side barriers Demand-side barriers are those impediments that reduce the demand for electronic payments. Removing these is expected to lead to a further increase in electronic payment transactions and an increase in the acceptance of new and innovative electronic payment products. Business case for adopting innovation As it is costly to learn to use new products and develop trust and confidence, consumers and merchants may be biased towards using the current payments system. This is especially the case if the reduced costs from switching payment products or channels does not represent a significant portion of their income or total cost base. Having a business case for adopting an innovation in electronic payment systems and, particularly, identifying the demand for innovation are much more important than simply having access to the new technology that would permit the innovation. Providers of payment services cannot assume that an innovative service will generate significant demand just because the service provides new technical capabilities in a creative way.
21 The Prisoners Dilemma originally referred to a theoretical game where two partners in crime who
were being questioned separately had to choose either to confess to a crime to bargain for a lighter sentence but thereby implicate the other, or deny the crime and risk a heavier sentence based on a confession from the other. Given the incentives of the game, the best strategy for each prisoner is to confess. However, both would have been better off had they been able to cooperate. By cooperating and denying to committing the crime, both would have been relased for lack of evidence.
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Exploration of future electronic payments markets Providing a net benefit to the key participants in a transaction, such as banks, service providers, and end users (payer and payee) appears to be the most important aspect of successful innovation. In addition, to establish a business case for electronic payments the issue of the crosssubsidisation of payment products and channels that is occurring in the market must be addressed. The incentive to switch to electronic payment products is reduced as the current pricing in the payments system means consumers and businesses do not necessarily pay the full cost of each transaction. This distorts demand towards those products that are relatively cheap for the consumer and business, even though they may not be the lowest-cost option for the economy. Privacy, security and authentication Payment security is an issue that needs to be negotiated along the electronic payment supply chain and includes technical, commercial, legal and socio-psychological issues (ECB 2004). However any payments system cannot be 100 per cent secure due to the cost and difficulty in maintaining that level of security. Therefore, users of payment systems accept some degree of risk when using electronic payment products. The speed at which new methods are adopted depends, in part, on perceptions of the distribution of risks, costs, and benefits. To gain widespread use, payment innovations must successfully address concerns over issues such as privacy, security, and convenience. There are three primary security concerns facing the current electronic payments system in Australia, including:

identify theftthe misuse of personal data; phishingthe use of fraudulent emails and Internet sites to elicit personal and/or financial information; and skimmingmalicious duplication of electronic data from an electronic payment card.
As a consequence, there have been continuing consumer concerns over online payments (especially online credit card payments) as well as more general concerns related to e-commerce and the Internet. Concerns over fraud related to online payment systems persist, as shown in surveys of US consumers (Ipsos 2004) and similar surveys in Australia (OFPC 2004), Canada and the United Kingdom. Another barrier related to privacy is that information on users must be stored for some electronic payments to verify identity and minimise fraud. However, there is a general reluctance amongst some consumers to provide detailed financial information to institutions other than banks, as the risks associated with the loss of control and the possibility of fraud is perceived to be relatively high. This perception exists even though there are strict rules and regulations that have been implemented by the Australian Government in relation to the use of private information (see Box 7.3). Indeed, the consumer survey conducted as part of this study identified confidentiality as the weakest link in current electronic payment products.
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7.3 National Privacy Principles The National Privacy Principles (NPPs) in the Privacy Act 1988, apply to those businesses that collect customer information when processing electronic transactions because they (a) have a turnover of more than $3 million; or (b) have opted in under section 6EA of the Act; or (c) are otherwise covered because they trade in personal information. Some key provisions are as follows.
Collection: under the provisions of NPP 1.1, an organisation must collect personal information only if it is necessary for one or more of its functions or activities and not merely if it is useful or desirable. Notice: NPP 1.3 and NPP 1.5 require organisations which collect personal information to take reasonable steps to ensure that those individuals are made aware of certain matters. These include making the consumer aware of the organisations to which they usually disclose personal information of that kind, and the main consequences for the individual if all or part of that information is not provided. Use or disclosure: when personal information has been collected for the primary purpose of completing the electronic transaction, the organisation may use or disclose the information for that purpose. Where it is proposed that the information be used for a different purpose, NPP 2.1 provides that the information may be used for that new purpose if it is related to the primary purpose and it is in the individual's reasonable expectations. It is in this area of secondary uses or disclosures of personal information that consumers may have a specific interest. Organisations should clearly state to consumers how such uses or disclosures are related to the primary purpose of collection. In this way, they will provide sufficient information for consumers to exercise a level of choice about whether they wish to transact.
Data security: NPP 4.1 obliges an organisation to take reasonable steps to protect personal information it holds from misuse and loss, and from unauthorised access, modification or disclosure. This means that organisations should hold records containing personal information securely, databases should generally be password protected with levels of access provided to staff on a need-to-know basis together with the provision of audit trails. For example, if it is proposed that a biometric payment system is adopted, it will be necessary to consider privacy protection such as ensuring that a biometric database cannot be compromised, that information transfers cannot be intercepted, or biometric information on a data chip cannot be accessed without the holder's consent. Anonymity: while there may be significant economic benefits from the increased adoption of electronic payment systems, consumers should be given a choice to transact anonymously by paying cash. In this regard, NPP 8 requires that wherever it is lawful and practicable, individuals must have the option of not identifying themselves when entering into a transaction with an organisation.
Source: Office of the Federal Privacy Commissioner, personal communication, 26 October 2005.
The distrust of organisations with personal financial information may also be heightened by small businesses being exempted from the Privacy Act 1988. Businesses with an annual turnover of $3 million or less are exempt from the private sector provisions of the act, which means these businesses will not be subject to privacy obligations towards their customers (Office of the Federal Privacy Commissioner, personal communication, 26 October 2005). Consequently, those small businesses that offer, or would like to offer, electronic transaction facilities may legally use personal information in a manner that would be considered inappropriate by the individual. An
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Exploration of future electronic payments markets example is using or disclosing a customers information in a way unrelated to the completion of the transaction. Anecdotal evidence suggests consumers and businesses are willing to put up with slight inconvenience for an increased level of security. An example of this is the daily limit placed on direct entry transactions, where individuals are willing to reduce their payment flexibility for reduced exposure to fraud. Consumer and merchant education: financial and technological literacy Several barriers arising from a lack of knowledge on the part of consumers and businesses are apparent from the results of the business and consumer surveys. Businesses perceive that suppliers do not like direct bank transfers, when in fact direct bank transfers are the businesses clearly preferred method for receiving and making payments. Moreover, 34 per cent of consumers perceive cheques to be the choice of payment preferred by suppliers. Businesses, on the other hand, view cheques as the second most expensive, and by far the most problematic, payment method. Consumer and merchant education can also potentially increase the penetration of electronic payment by boosting enthusiasm about the future of such payments. The consumer survey revealed a distinct lack of excitement about electronic bill presentment and other payment innovations. Complacency about current payment arrangements is likewise apparent from the business survey, where 70 per cent of businesses claimed they are happy about current arrangements. Attitudes towards payment (and other technological) innovations are very different in countries such as Japan and Korea, which may help explain why they are leaders in the use of mobile payments. Educational issues in the Australian payments system stem from a number of reasons, including the following.
Education on the use and benefits of a new product can be costly and the marginal cost for each additional individual is likely to increase because it becomes increasingly difficult to seek out the uneducated. This reduces the incentive to increase education. In addition, electronic payments products and channels, and the issues of security and risk surrounding them can be complicated to understand. Firms may not be able to recoup all of the benefits from education as skills acquired are often transferable. That is, the educated customer or business may then choose to use a product or service offered by another firm. There is a lack of perceived need for government action, as the private sector is assumed to be capable of educating users about products and services.
A significant portion of consumers still do not have access to the Internet or the necessary skill set to undertake some forms of electronic payment. This represents a significant barrier to those products that require the use of this type of technology. Innovations that require little change from known and established practices may be more readily accepted than those that are substantially new and unfamiliar. This is because the cost in terms of re-education, skills development and developing trust in moving from one product to another is minimised if the new product has similar attributes to the incumbent.
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Exploration of future electronic payments markets Furthermore, the complexity of security measures (for example, encryption) means it is difficult for consumers to understand the merits of various types of security. Therefore, they have difficulty differentiating products based on their vulnerability to fraud and identity theft. Information problems There were a number of barriers identified through the workshops that relate to information problems in the current payments system.
Consumers do not have full information on their rights and responsibilities regarding alternative payment systems. This can present a barrier for firms entering the market with a relatively more secure payment product, as they may be limited in generating returns based on this product feature. The ability of individuals to trust a company without seeing and authorising a bill payment (for example, direct debit) is limited, as some consumers believe there is bound to be an occasion where the company may deduct too much money out of the account. Without a bill this cannot be immediately verified. However, providing information on every transaction can be costly, especially if the product has been designed to be used with high-volume transactions. This is especially the case with micro-payment products, where financial statement administration costs may be high due to the volume of transactions that pass through the account.
Dispute resolution and consumer protection Current electronic payment products can have a high cost to the consumer if there is a dispute over payment (for example, a dispute may take a long time to settle which could cause cash flow problems). This means consumers not only experience personal cost, such as the time lost in pursuing the dispute, but also the inconvenience of not having those funds available while the dispute is being resolved. Many consumers indicated in the survey that they are wary of adopting electronic payment because they perceive that there is often no avenue where, or individual from whom, they can seek assistance if there is a problem with the service. Therefore, the lack of personal interaction that can be associated with electronic payments may discourage their use. Control over payments In direct debit systems the consumer or business may potentially lose control over the payments from their account. For example, there is a possibility that accounts could be overdrawn because the consumer or business does not know the balance of their account at any one time, especially if the account incurs a large number of direct debits. Furthermore, a breach of security may mean a loss of control over an account. For example, if the identity of a person or account is obtained illegally it can easily be transferred across the Internet and can render other accounts exposed, as opposed to the theft of cash where the individual loses the money only. Anecdotal evidence suggests small businesses use cheques in B2B and B2C transactions because, among other things, it gives them the ability to delay payments
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Exploration of future electronic payments markets and, as a result, additional control over their finances (for example, the excuse the cheques in the mail). This characteristic is especially valuable for businesses where cash flow gaps can develop. Consequently, some businesses that use cheques would be reluctant to switch to electronic payment if it did not provide them with the same implicit delayed pay when I want to pay function. Access to electronic payment systems Individuals may not have access to electronic payments. This could stem from the inability to:

obtain the hardware and software required for the electronic payment; use the necessary technology even if access is available; and gain sufficient credit worthiness (in the case of credit cards).
A significant barrier exists for businesses in terms of integrating their electronic payments and accounts payable and accounts receivable systems. Businesses can integrate their accounting systems with their electronic payments system in a number of ways, including through:

enterprise resource planning (ERP) systems; proprietary software; software bridged between their work station and accounts payable/receivable system; bank customised integration software; and third party e-payable software (AFP 2004).
Organisations integrate their electronic payment and accounting systems to achieve internal operating efficiencies. However, the introduction of these systems can pose a significant sunk cost on the business in terms of introducing and developing the software and retraining staff. Consequently, those businesses that do not have high transaction volumes may not find it feasible to install these systems, preferring traditional methods such as cheques and cash. This was supported by the business survey, where around a quarter of business respondents believe their accounting system influences the way they pay suppliers, principally through generating cheques or being linked into direct bank transfers. Information exchange with payments There is considerable value to a business in receiving an electronic payment and associated information, which is formatted in such a way that the payment and information can be processed straight through to their internal accounting systems. However, incomplete technology integration limits banks, corporations, and consumers ability to send, receive, and use electronically transmitted business remittance information at low cost. Furthermore, there are different views on whether payment-related information should flow with an electronic payment or go through a separate conduit to be matched up at the end of the process. Approximately 15 per cent of respondents in the business survey believe the number of electronic payments is constrained by the limited amount of information that can be
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Exploration of future electronic payments markets transmitted with the payment. The most desired additional information is the invoice number of the transaction, although a full remittance advice was also highly desirable. Reasons for returned stock or partial payment were viewed as being less important. In the C2B payment space the solutions offered by providers such as BPAY and Australia Posts PostBillPay have provided a means for account reconciliation through the use of reference numbers. However, these transactions tend to be far more straightforward than in B2B transactions. REGULATION Generally, the approach of regulators in Australia to electronic payments has not presented a major or sustained barrier to the adoption of electronic payment products. That said, regulation does affect the development of payment systems, partly through shaping conditions for entry into different payments markets. (Aspects of the nature and impact of the regulation of the payments system in general is referred to in Box 7.4.) Stakeholders in the workshops suggested that laws and regulations related to payments are viewed as complex, confusing, and adding some uncertainty to their operations. Some workshop participants indicated that there were a large number of regulators that play a role in the introduction of electronic payment product innovations. Dealing with the regulators sequentially sometimes meant that changes required to meet the needs of one, required revisiting issues with regulators that had provided an earlier clearance. Workshop participants indicated that dealing with more than one regulatory body at once is not practical. Complexities in navigating the process of regulatory approvals and uncertainties about the time this would take was said by some stakeholders to add an element of risk. Other stakeholders, especially those reporting from the perspective of payment service providers (that is, businesses), indicated that regulation can often be taken as a given, something to be worked with or around but not necessarily changed. This results in products and channels being developed within the current regulatory framework. This may limit the pace of change, thereby reducing the prospect of optimal alignment between changing market needs and innovation and production development. Of course, this needs to be set against the value of the regulatory process in protecting essential public interests.
7.4 Structural barriers to payments innovation in Australia
Historically in Australia, banking systems and payment systems have been closely integrated. The structure of the Australian Payments Clearing Association (APCA) demonstrates this with its Consumer Electronic Clearing System (CECs) management committee comprising banks, credit unions, building societies and the RBA. Coles Myer is a recent addition to this committee, indicating that the loop between banking and payments need not be closed. Looking forward, the rise of credit card providers as players in the payments system as well as emerging payment systems providers as described above, shows that banks and other established financial institutions do not have an exclusive role in the area of electronic payments. Australias EFTPOS network is based on bilateral arrangements between the EFTPOS service providers. Unlike some other countries, there is no central EFTPOS provider. Australian EFTPOS cards can be used at any EFTPOS terminal via an interoperable system administered through the CECS arrangements, and bilateral arrangements between each EFTPOS service provider. Therefore, any new entrant to EFTPOS service provision would need to develop a bilateral arrangement with each of the other service providers, representing a significant barrier to entry. Alternatively, a new entrant could use the services of one of the existing providers as a gateway to links with other financial institutions.
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7.4 Structural barriers to payments innovation in Australia
(continued)
Similar issues have arisen in the development of telecommunications networks with early bilateral arrangements evolving to the current structure. Currently, a regulatory access regime allows providers of value-added services to gain access to the connectivity resources of a few, large infrastructure providers. A similar system architecture may have merit for electronic payment systems. The APCA has established a Working Group drawn from its CECS members, together with representatives from the CECS Advisory Council. Its aim is to assess the practicality of, and develop recommendations on, the development of EFTPOS access conditions in the CECS rules. Gilbert & Tobin has been engaged to assist in designing access rules. Access rules will apply to three key services: physical connection and switching, clearing, and settlement. While this initiative offers some scope to increase the economies of scale and therefore reduce transaction costs, it does not appear to address broader issues of integrated service delivery and physical and technological architecture which would remain based on X.25 communication protocols. Currently, there is little incentive for existing players in the EFTPOS network to provide linkages for new entrants who must attempt to establish technical bilateral links with multiple parties. For example, MoneySwitch is a Sydney-based company and aspirant acquirer that plans to use Internet Protocol (IP) networks to connect merchants with financial institutions. It has raised issues outlining the blockages and delays in gaining access to the EFTPOS network in submissions to the RBA. Access regimes are intended to balance the economic interests of infrastructure providers with those of access seekers. The effectiveness of access regimes is dependent on a number of factors. The underlying infrastructure needs to have the functionality to support third party services over its network. Taking the example of the EFTPOS network, this would require new providers to gain access to the network using other providers infrastructure, although their ability to offer additional services may be restricted by the capabilities of that network. Effective access regimes have price rates that are appropriately set, providing access providers with a satisfactory return on their investment (which may be a sunk cost) yet not so low that they limit the commercial incentive to invest in other infrastructure. For the EFTPOS network, setting an access rate too low could limit investment in alternative smartcard networks or other alternatives such as mobile phone-based payment systems. Any regulation of the access regime would need to settle disputes in a timely manner that promotes effective competition. The ACCC has a long-standing role in the Australian payments system to ensure that the competition and access provisions of the Trade Practices Act 1974 are not contravened. It has authorised many of the APCA arrangements, including BECS and CECS. The RBA can designate a payments system and impose an access regime or set standards on it. An access regime for EFTPOS services would reduce legacy barriers to entry for any new electronic payment services infrastructure, as new service providers could easily use the existing technology to gain access through the EFTPOS network. Therefore, any new payment services seeking access would be limited to the functionality of the existing network and its terminating devices. An alternative proposal could be to widen the access regime to permit different terminal devices using the existing EFTPOS infrastructure as a telecommunication network. Such an access regime has the potential to further reduce transaction costs for electronic payments as well as introduce new payment services innovation. The ACCC has stated that it is in favour of access reform to allow new entrants to markets. However, transaction fees using such a system may still not achieve the low rates of a federated payments model.
Source: DCITA (2005).
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Exploration of future electronic payments markets One potential barrier noted in the workshop was the possibility that the application of the four pillars policy may also impede investment in electronic payment systems. The notion raised by some workshop participants was that the centralisation of systems could provide significant economies of scale. This would increase the returns on investment in new electronic payment systems, but it is blocked in the current regulatory approach. However, it is not clear to what extent the four pillars policy does in fact limit the ability to achieve economies of scale in the context of payment systems. One alternative that is not blocked under the four pillars approach is to build shared systems. For example, with regulatory approval, three of the four major Australian banks have joined together in two separate consortia, one focused on cash handling and the other on cheque processing. It was also suggested by some industry stakeholders that some relevant authorities do not see the need for B2B transaction facilitation, as they believe it exposes the government to risk and does not deliver a real competitive advantage. Consequently, it was noted that regulators may be reluctant to change regulation to fit individual products, instead relying on an all encompassing framework. Other barriers from the payment maps In addition to the knowledge deficiencies discussed earlier, the business and consumer surveys also pointed to other barriers standing in the way of increased use of electronic payments. Business views about barriers Around 63 per cent of businesses noted that the primary barrier to increasing the receipt of more electronic payments was the inability to change customer habits and tastes (see Chart 7.5). This suggests that businesses feel they do not have the ability to impact on the type of payment method the customer uses, and instead should focus on getting money into their accounts rather than determining which way it gets there. They also worry that any action taken to influence customer payment choices may reduce their organisations attractiveness to the customer. Other barriers to increased electronic payments include the business bank or financial institution, software/hardware/Internet access issues, and government rules and regulations. Interestingly, businesses do not rank cost as a significant barrier to increased use of electronic payments. However, businesses also noted that one of the main reasons why they are still using non-electronic payment methods is because it is the easiest way to do business. Cheque payments caused businesses the most issues and challenges for payments received from consumers and other businesses, while cash and credit cards caused the least. The main issue with cheques faced by businesses when selling to consumers is the greater chance of being defrauded, although cost in terms of having to go to the bank or costs relative to other forms of payment were also significant. The most significant issue in receiving payments from businesses was insufficient information to reconcile accounts.
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7.5 Barriers to increasing electronic payments for businesses
B2C Customers won't change what they do My bank/financial institution Software/hardware/internet access limitations High cost of making changes 0 10 20 30 40 % B2B receiving Customers won't change what they do My bank/financial institution Government rules and regulations High cost of making changes 0 10 20 30 % B2B paying 40 50 60 70 50 60 70 80 90
Suppliers won't change what they do No suitable software available My bank/financial institution No suitable payment method available High cost of making changes 0 10 20 30 %
40
50
60
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Exploration of future electronic payments markets Roughly the same proportion of respondents believes that increasing electronic payments from consumers will either increase or decrease their costs, while over 50 per cent believe increasing electronic payments between businesses will reduce their costs (as opposed to nine per cent who believe it will increase their costs). The main reasons for wanting to present electronic bills to business customers was the cost saving in not using paper bills. In addition, a significant proportion of businesses surveyed believed that electronic bill presentment would provide an additional service for their customers. Consumer views about barriers The primary barriers to adopting electronic payment products were identified in the consumer survey as being:

generational/consumer habit and taste; access or ability to use software and hardware; and concerns over security/fraud.
The majority of consumers aged over 50 are more likely to use personal cheques and less likely to use debit cards and EFTPOS. Furthermore, around 63 per cent of respondents aged over 50 noted that they do not want to use the Internet to make payments. Although reasons for this were not provided within the survey, anecdotal evidence suggests this is the result of not wanting to change habits or learn new electronic payment products, and security concerns. This could be due to the significant time and effort required for some of these people to learn new processes and develop new trust. The younger age categories showed distinctly different, proelectronic payment tendencies. Despite 71 per cent of respondents having Internet access, 70 per cent do not make purchases over the Internet. The primary reasons for this were the inability to use the Internet and concern about security and the possibility of fraud or identity theft. (See Chart 7.6.) There also seems to be a significant barrier arising from the perception that security of online electronic payments is poor. Around 54 per cent of respondents believe all payment methods over the Internet are either unsafe or they are uncertain which products are the safest. For those who do make payments over the Internet, concern about the security of the payment was noted as the number one reason why they use their preferred payment product, followed by the products convenience and ease of use (see Chart 7.6).
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7.6 Barriers to increasing electronic payments for consumers
Reason for never purchasing over the internet
I don't have access/don't know how to use internet Concerned about paying over internet Prefer to buy in person Haven't had the need to use internet for purchases Don't really know Don't have a credit card to use over internet Concerned the supplier won't deliver the goods
10
15
20
25 per cent
30
35
40
45
50
Reason for preferred internet payment method

I feel it's more secure It's more convenient It's easier to use It avoids going into credit I get loyalty points It is cheaper I don't have a credit card It allows me to schedule the date of payment It delays when I have to pay from my account
10
15
20
25 per cent
30
35
40
45
Key points The level and rate of adoption of electronic payments is mainly determined by the characteristics of the product, the additional net benefits it provides to users over and above substitute products, and the barriers to adoption. The study points to a number of barriers to the adoption of electronic payments, both on the supply and demand sides. In addition, while regulation has largely been supportive of the entry of innovative electronic payment products and services, the discussion in workshops held for this study also noted ways that it may sometimes slow innovation and the adoption of some electronic products. 124
Exploration of future electronic payments markets Supply-side barriers were identified as those impediments that restrict the supply of electronic payment products. They are derived from the practices of existing players, high investment required in infrastructure, limited interoperability with existing electronic payment systems, limited ability to achieve scale efficiencies, lack of key standards and coordination, and the limited capability for businesses and consumers to coordinate their electronic payment preferences. On the demand side, barriers to adoption of electronic payments were identified as the relatively weak business case for adoption, concern over privacy and security, limited consumer and merchant financial and technological literacy, information problems between providers and consumers, inadequate dispute resolution, loss of control over payments, limited access to the electronic payments system, and the inability to costeffectively exchange information with electronic payments. Supply and demand barriers merge where suppliers do not use electronic payments because they view that customers do not prefer them, and where customers do not use electronic payments because suppliers do not offer them. This has many parallels with the Prisoners Dilemma where cooperative action is needed to get the best outcome. Breaking through these barriers may assist in making progress along the adoption curve for new technology. It is likely that if electronic payments reach the point of critical mass or a take-off point, the rate of adoption and use could accelerate rapidly.
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Exploration of future electronic payments markets CHAPTER 8IMPLICATIONS OF CHANGE Increasing the use of electronic payments would raise economic efficiency and boost economic activity. This chapter briefly reviews the evidence for the general proposition that the wider use of digital technologies, including in e-commerce, has supported a substantial lift in economic performance in Australia. It also reports on an analysis of the possible gains from greater use of key electronic payments products and channels. Technology, commerce, payments and growth Links between new technology, new approaches to commerce and economic growth are now well established. A detailed economic analysis of e-commerce reported in the Beyond 2000 report commissioned by the National Office for the Information Economy, forecast that the shift towards more widespread use of e-commerce was more significant than a change in technology. This change was expected to enable significant business change that would have fundamental implications for economic activity in general. Using a sophisticated model of the Australian economy, the Beyond 2000 study estimated that these changes could raise economic activity by 2.7 per cent over the next decade, or 27 GDP basis points per year (NOIE 2000). In a series of studies measuring actual economic performance, the Productivity Commission found that the use of ICT products in general had already contributed 0.4 percentage points to growth over the late 1990s. This figure and the Beyond 2000 forecasts may sound like a small amount, but they account for a significant share of total economic growth that even in a rapid growth phase rarely exceeds four per cent per year. It is also notable that the ICT contribution observed by the Productivity Commission was greater than the estimated growth impetus achieved from this source in the US. More importantly, Australia achieved its growth increase from the use of ICT rather than production (Parnham et al 2001). Similar to the use of ICT and e-commerce, it is likely that the implications of the greater use of electronic payments would spread beyond those that made the initial change, or the participants in the financial services sector alone. Change in approaches to making a payment would touch on all walks of life where people, businesses, and government buy and sell goods and services. It is likely that this would also play a similar transforming role in the way commerce is undertaken. Economic impact of migration towards electronic payments Implication of lower costs Chapter 3 showed that the provision of electronic payment products and channels generally involves less cost than most other approaches. Drawing on this information and other insights from the body of the study, the potential impact on the cost of conducting and supporting payments across the economy (given a reasonable shift towards use of particular electronic payment products and channels) was calculated. The exercise was divided into a sequence of five key steps:
moving current cash payments over $20 to debit card products; 126

introducing new electronic payment products that lower the threshold where they become cheaper than cash-based payments; moving current bill payment behaviour away from cash paid over-the-counter towards electronic payments; presenting bills electronically; and moving cheque use further towards direct entry.
The results of the exercise are summarised in Chart 8.1.

8.1 Economy-wide cost savings from increasing electronic payments
$14 000 Cost of Payment Systems ($ millions) >>>
$12 000
$10 000
$8 000
$6 000 Total Costs Reductions from Reductions from Cheque migration micro-payment cash migration product over $20 Electronic bill presentment reductions Biller channel mix reductions Target
Moving cash to debit cards As shown in Chapter 3, the point at which cash is no longer the lowest-cost way of making a transaction, is reached at transactions at and above $20. Beyond that point the cost of making transactions would fall if other methods were used. Of the approximate $200 billion in payments made in cash per year in Australia, it is estimated by the consultants that $100 billion of this is for transactions with a value of over $20. What are the economy-wide cost implications of substituting electronic payments for cash once the point where cash is the lowest-cost option has been clearly exceeded? Beyond the $20 level, the least costly real-time method of transfer is debit card. While it is not likely to expect that all transactions over $20 could be made by debit cards (other electronic payment products such as direct banking transfers and credit cards may also be selected, depending on the preference of the consumer) viewing this as a substitute for cash provides a baseline to model potential savings to the economy. Based on the figures reported in Chapter 3 and other factors, replacing cash with an electronic payment method would reduce costs to the economy by approximately $900 million each year.
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Exploration of future electronic payments markets One of the difficulties of encouraging a shift in behaviour away from cash for larger transactions is that the parties that benefit most from a shift away from cash are not necessarily the parties directly involved in the transaction. As seen earlier in the report, there is a divergence between the price for some payments and their cost, and this is particularly true for cash. As the bulk of the cost of cash payments is currently borne by neither the payer nor the receiver, there will be little incentive for the parties to change their behaviour. This analysis indicates that while not straightforward, achieving a shift away from cash toward an electronic payment method for transactions larger than $20 would produce worthwhile savings to the economy. Lowering the electronic payment threshold What are the economy-wide implications of introducing electronic payment products that are less costly than cash for smaller or micro-payments? One of the key barriers to cost-effective electronic micro-payment products is the current requirements for the transaction to return to base for authorisations and clearing at the time of the transaction. Stored-value smart cards overcome this barrier, although they have their own set of issues which seem to limit the use of such products to small value transactions (such as the cash-like nature of the card, where if you lose the card, the value on the card is also lost). The emergence and proliferation of contactless, stored-value cards in transit functions in other countries has shown that cost-efficient mechanisms can be developed. They have been successfully implemented, meaning that they have addressed consumer concerns and have reached a reasonable degree of acceptance and use. They have in effect lowered the threshold by which electronic payments become less expensive than cash. Public transport authorities in Sydney and Melbourne are currently independently implementing products for their mass transit systems. These systems offer the opportunity to move a large number of small cash-based payments to electronic forms. While illustrating the potential to reduce costs these projects also show that so far, progress is largely limited to initiatives with a large scale. What value would there be if the threshold transaction size where electronic payments become cheaper to the economy than cash could be reduced? Based on the cost differential in providing cash, the possible cost of hypothetical smaller-scale electronic payment products that are on the horizon, and a reasonable reduction in cash use by facilitating the ubiquitous proliferation of cash replacement products, the consultants estimate that a saving to the economy of close to $1 billion each year could be generated. While previous analysis suggests that development and application of practical micro-payments and related electronic payments are still some years away, this seems to be the most difficult area of the five examined to achieve efficiency gains reviewed in the chapter. Nevertheless, the estimate suggests that there is a good reason to pursue this outcome. Electronic bill payments A significant proportion of bill payments are currently made using over-the-counter methods (for example, at agents such as Australia Post) and paper-based payment
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Exploration of future electronic payments markets products. This product/channel combination creates significant additional cost with, in most cases, very little additional benefit. Whilst a biller that has their own distribution network will often want customers to come into their locations to pay bills, so that they can create an additional interaction with their customer, this benefit is not present when the bill is paid in person at an agent. The key benefit from over-the-counter agents is the access they provide to bill payers. However, if a bill payer has access to a cheaper channel such as the Internet, then the biller has incurred significant additional cost by using over-the-counter products for no additional benefits (particularly if a cheque or cash is used). Work conducted by Edgar, Dunn & Company in various markets, including Australia, has indicated that a standard utility biller (energy or telecommunications) stands to save $2$5 million just by making marginal changes to the payment product/channel combinations chosen by their customers. The potential savings to the economy through limited changes in behaviour are significant. For the purposes of this study and reflecting expectations about the capacity to substitute over-the-counter methods and necessary investments in new systems, a conservative estimate of the potential benefit is a gain in the region of $50 million annually for Australia. It should be noted that some legislative changes may be required to access these savings. For example, it is understood that the State Concessions Act 2004 in Victoria stipulates that concession card discounts on utility bills in Victoria can only be gained by over-the-counter payments at Australia Post. Electronic bill presentment Whilst electronic bill presentment is not strictly an electronic payment transaction, research in the US 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. Most of these benefits result in direct cost reductions to a billers operations. The key areas for operational efficiencies to be gained are in paper and mailing costs, and a reduction in call centre costs. A key role for call centres is handling queries on a customers current balance and transaction history. Electronic bill presentment allows the customer to view these on a self-help basis. Increasing electronic bill presentment will therefore raise the proportion of bills paid electonically. Since most electronic payments are cheaper than most other payment methods for most sized transactions, there should be a reduction in costs to the economy at large. Based on factors reported in Chapter 3 and other estimates made by the consultants, a conservative figure of the benefit to the economy is a reduction in costs of around $100 million per year.
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Exploration of future electronic payments markets Migrating cheques to direct entry The research conducted as part of this study clearly showed that there are 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. The study estimated that by shifting superannuation payments currently made by cheques to direct entry, a 20 per cent reduction in B2B payments made by cheques combined with a 30 per cent reduction in bills paid by cheques, would result in an overall decrease in cheque use of approximately 30 per cent. This modelling is also consistent with the pattern of electronic transaction use for larger companies, which demonstrates a leadership position in the use of electronic transactions. That is to say, if small businesses were to use electronic payments in the same way large businesses currently do, the resulting impact would be a reduction in cheque use by 30 per cent. This 30 per cent reduction, with direct entry picking up the transactions, would result in an estimated $190 million saving to the economy each year. Overall impact Looking at the five steps proposed above suggests that significant payment efficiencies can be gained from facilitating current initiatives and altering current payment behaviour. The potential direct gain to the economy from these five initiatives would be in the order of $2 billion in cost savings to the economy (or a 17 per cent decrease in payments systems costs) each year. This equates to additional economic growth of roughly 25 basis points of GDP. The impact modelling clearly shows that the largest single area where efficiencies can be gained are reducing payments involving cash. The goal is not the complete disappearance of cash. Cash is, however, a product where clear economic efficiency can be increased. Significant resources are used in maintaining the cash system that add little additional value22, or less value than other payment methods could provide. With less cash circulating in the economy, many of these resources would be freed, allowing them to be re-directed into areas generating a greater return for the economy. It would be useful to assess the full impact on the shift to the greater use of electronic payments as the direct impacts flow through the economy at large. This could be achieved through the use of a general equilibrium model and would show impacts on the finance sector, other sectors of activity, government budgets and wider economic indicators such as output, employment and inflation. While useful, this analysis is outside the scope of this particular study.
22 Per unit of value, coins are a far more expensive form of cash than bank notes, and the collection and
sorting of coins from various devices, such as parking meters, toll machines and vending machines, uses significant labour resources.
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Exploration of future electronic payments markets Key points Similar to other industries making greater use of a transformative technology, greater use of electronic payments would provide considerable economic benefits for both businesses and consumers. Looking at just five key areas of change, it is estimated that greater use of electronic payments could potentially save some $2 billion each year. This is equivalent to an increase of 25 basis points in GDP. While there are factors to overcome to achieve greater use of electronic payments, this chapter points out that the potential gains make even a considerable effort worthwhile.
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Exploration of future electronic payments markets CHAPTER 9DEVELOPMENT PATHWAYS What are the transition pathways that could be pursued to develop the electronic payments market? This chapter indicates how industry and government could address gaps and barriers in the payments system to foster the emergence of innovative, competitive and efficient payment products and channels in Australia. The chapter also suggests approaches and timeframes for consideration. Desired future of the electronic payments market Good strategy depends on knowing where you want to go. Vision is required. Government bodies already have strong goals in regard to payments in Australia. A key objective in the RBAs charter, for example, is to promote efficiency and competition in the operations of the payment system. This is fairly broad and encompasses many different kinds of payment methods. The consulting team proposes the following vision that could be pursued to shape the future of the electronic payments markets in Australia: To encourage the widespread adoption and take-up of electronic payments instruments and channels in Australia, where this improves the overall efficiency of the economy whilst promoting the smooth exchange of goods and services. The beneficial outcomes sought in pursuit of this vision are characterised by a market that provides:

widespread but prudent access to current and new electronic payment methods; a high level of transparency regarding the cost and other attributes of all payment products and channels; minimal divergence between the price paid by users of payment methods in general (not just electronic payments) and the relative resource cost of providing those methods; the scope to exercise informed choice between payment methods for consumers and businesses to suit the nature and size of their transactions; minimal regulatory and commercial barriers to entry for providers of electronic payment products (while not compromising security and still minimising risks to the core payments system); electronic payment products that are appropriately secure and protect confidentiality to engender trust and consequently higher use; a high level of capability amongst businesses and consumers to develop, provide and adopt innovative electronic payment products; an approach to regulation that minimises the regulatory burden; and low risk of failure through a high level of awareness and understanding about strengths, weaknesses, and risks of electronic payment products, effective, low-cost dispute resolution processes, and clear cut codes of conduct for payment system providers.
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Exploration of future electronic payments markets Action possibilities Three different approaches can be taken to the development of consumer online payment markets (Mantel and McHugh 2001). One approach emphasises that there are significant institutional, design, competition and/or customer irrationality challenges that may require public sector involvement and application of policy. A second approach suggests that market forces will allow development of an optimal payment market as long as efficient solutions are identified by consumers, merchants and financial providers, and steps towards their implementation are clearly planned. This approach stresses the importance of efficient coordination among all market participants. A third approach argues that markets are efficient and that optimal results can be achieved without coordination. The evidence reviewed in the earlier parts of this paper suggests that, while market forces have driven considerable use of electronic payments that provides significant gains, there are market factors that can raise some barriers to further use. Economies of scale and network economies can provide barriers to entry. Information asymmetries can also give rise to Prisoners Dilemma-like situations that impede greater use of electronic payment methods. Mismatching of benefits may create strong incentives to use methods that are less efficient than electronic payments from an economy-wide perspective. A lack of transparency in some areas also distorts the decision making process of businesses and consumers. In short, this is an area where public intervention and policy is warranted. A key observation drawn from the earlier analysis is that the impediments to greater use of electronic payments do not hinge on a single factor. The evidence suggests that there is a myriad of interconnected influences at play, so it would be a mistake to suggest a single solution. Drawing together the many insights and observations from earlier chapters into an easily comprehensible plan of action is not straightforward. Rather than suggest a large number of microlevel changes and ideas, a smaller number of action possibilities are proposed that capture the main themes. These include measures to:

close information gaps; accelerate adoption; increase transparency in prices; increase access/competition; promote electronic payment-friendly arrangements; provide direction through the government leading by example; and increase and maintain the capacity to innovate.
A brief discussion about each of the suggested areas follows. Close information gaps Many gaps and barriers arise because businesses and consumers do not have comprehensive information about electronic payment products, or they have misperceptions about what the other party to a transaction needs, wants or prefers. The appropriate response is to improve the information that the parties possess.
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Exploration of future electronic payments markets Specific activities may include:
raising consumer awareness about the broader benefits of using electronic payment products, especially tried and tested electronic payment products that are available today; raising awareness about rights and obligations regarding electronic payment products (including through raising financial literacy and awareness of codes of conduct and dispute resolution processes that apply to electronic payments); raising the awareness of small business and merchants about electronic payment options and how to implement systems; providing benchmark information about the economy-wide or resource cost of electronic and other payment systems that is made available to the public; and providing general information about the business case for small businesses making investments that enable their use of electronic payment products.
Accelerate adoption Currently many viable and useful electronic payment methods are still at an early stage in the adoption process. The experience of many products and services suggests that the diffusion process can take many years or decades before the use of a new product reaches a take-off point. Widespread coverage and use is particularly important in new payment systems to raise acceptance and reduce costs (by spreading high fixed costs). Accelerating adoption involves accelerating the diffusion process. In addition to raising awareness, actions that could accelerate adoption include:

improving security to increase confidence and confidentiality in electronic payment methods, especially in the online environment; ensuring that consumers can control their bank account and other accounts when linked to electronic payment methods; increasing the capability to link payments to related information (such as invoices and remittance information) while managing and ameliorating any associated security risk; increasing capabilities to use electronic bill presentment; encouraging the use of accounting systems with built-in flexibility to select electronic payment options; promoting real-time settlement (or, in light of cost considerations, consider alternatives that achieve similar results such as payment guarantees with a next-day settlement, or real-time verification that the counterparty has good funds, followed by later settlement); and supporting the development of industry standards and practices that increase harmonisation of and interoperability between payment methods, and reduce barriers to adoption (while noting the need to ensure that standardisation is not used as a means of blocking the entry of new competitors into the market).
Most of the other actions also have a role to play in accelerating adoption.
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Exploration of future electronic payments markets Increase transparency of prices Greater efficiency is likely to be obtained when users face prices that reflect the relative resource costs of payment services. The ability of economic agents to make better decisions throughout the community and economy at large hinges on this. Activities include:

identifying if and where significant cross-subsidies exist in the payments market that alter users decisions away from an optimal position; working to remove, where appropriate, these identified cross-subsidies; increasing cost transparency where commercially appropriate; and communicating cost transparency.
Increasing transparency also has strong links to encouraging competition and providing access to entrants with new electronic payment products. Increase access/competition The entry of electronic payment products or service providers is closely linked to competition. It is important to ensure that:
there is scope for competition in the banking system to allow new entrants to compete in the payments industry (with sufficient recognition of the systemic risk caused by payment products to the banking system); and there are safeguards to minimise cross subsidisation in the payments system where this is used to block the entry of providers of new electronic payment products.
Promote electronic payment-friendly arrangements There is a potential for regulation to block or impede change towards increased use of electronic payments. Equally, effective regulation could enhance the development of electronic payment markets. Likely activities to enhance and streamline regulation to increase electronic payment use include:

enhancing standardisation, for example, in message formatting, while minimising the associated risks; developing efficient approaches to pay for interoperability of payment methods and systems; guiding the development of industry standards on the maximum time allowed for dispute processing to shorten the return time for debit payments (this would provide consistency across the payments market and cap the potential cost to consumers of a disputed payment); ensuring there are appropriate rules governing the use of electronic payments, including clarification of the ownership of fraud regarding electronic payment methods, and development of a consistent framework for dispute resolution; issuing guidelines and best practice models that address consumer demands for security and privacy of personal information while providing sufficient details for authentication of transactions and the delivery of goods; 135

promoting and endorsing self-regulation initiatives by the relevant industries such as the EFT Code of Conduct; and building on the existing coordination efforts between regulators and establishing a unified point of contact for participants and new entrants in the payments industry. At a recent conference, an assistant governor of the RBA proposed the establishment of an institution to act in this manner. The driving force of this idea is to make it easier for new competitors to enter the payments system (AFR 2005). Other commentators have suggested a broader role for an entity of this sort. They suggest a role including the promotion of various payment systems, the facilitation of access, and the provision of leadership on some technology issues (Cornell 2005).
Government leading by example Payments to or from the Australian Government and state, territory and local governments constitute an important part of the retail payments landscape and a substantial part of the overall size of the payment system. Trends in government payments can therefore have a strong impact on overall payment use. In many countries, given their huge scale of payment operations, governments have been at the vanguard of the conversion from paper to more efficient electronic payments. Government in Australia has taken significant steps to increase the use of electronic payments. The Australian Government in the early 1980s began moving significant amounts of payments, primarily welfare benefits paid hitherto by cheques, to electronic files of direct credits to beneficiaries accounts at financial institutions. As a result, government cheque volume drawn on the Reserve Bank fell by two-thirds between 1983 and 1986. The introduction of the Government Direct Entry Service (GDES) in 1991 facilitated electronic payments for government organisations using high-speed data links to send transaction information to financial institutions. Reflecting the overall trends in the economy, the number of cheques written by the Reserve Banks government customers has decreased by about five per cent annually since the implementation of GDES. Further government initiatives to undertake electronic payments were discussed in an earlier chapter. Overall, it is likely that considerable savings were generated as a result of these steps. Looking to the future, governments in Australia could build on their strong track record and provide further momentum to achieve the economy-wide savings discussed in the previous chapter, by taking further deliberate steps towards increased use of electronic payments. This could include the following initiatives.
Undertaking a review of current transfers and other payments made to government agency clients that could be made on an electronic basis (for example, in areas such as superannuation). This should identify specific areas where payments are not made using lower-cost electronic payment options and develop approaches that would increase use of electronic payments where this would be beneficial. Drawing on recent snapshot studies of e-procurement in government and other information sources, adopt specific plans to obtain full compliance with the Australian Governments existing requirement for electronic payments, noting that this may involve addressing issues that suppliers have with making electronic payments. In particular, it may be valuable to advise suppliers to government about the benefits of using electronic payments, and the security that is already factored 136
Exploration of future electronic payments markets in to many electronic payment systems that address the concerns that some suppliers seem to hold about privacy and other matters. (This should also be mindful of existing policy objectives and other constraints on government procurement, such as the overriding need to achieve value-for-money and the provisions of the recent Free Trade Agreement between Australia and the US regarding government procurement).
Encouraging government agencies to automate links between procurement, invoice, delivery document and cost centre debit codes, identified in recent reports as an opportunity to enhance efficiencies from electronic payments. Establishing an agreement between Australian governments where they pay and receive transfers and grants between the different layers of government using electronic payments methods. Undertaking or sponsoring a review of wider public sector payment arrangements to assess the benefits of the use of electronic payment methods, and the ability of governments to generate the required critical mass. Ideally, this would take a whole-of-government approach spanning all levels of public sector payments used in Australia, including government-owned businesses and arms length agencies. This should also identify the benefits of adopting electronic payment approaches in areas such as ticketing for public transport, provide guidance about where such approaches are useful (and where they are not), and indicate how to bring about change. Generating an increased awareness of the issues regarding electronic payments and channels, including the potential gains from their widespread use. Engaging in collaborative projects. These could include providing incentives for collaboration of the private sector with selected government agencies.
Increase and maintain the capacity to innovate Developing the next generation of electronic payment products is closely linked to the development and application of advanced ICT know-how. Adoption of emerging electronic payment approaches is also linked to users having relatively sophisticated capabilities, including having a device such as a computer or Internet access. Even using technologies developed abroad relies on having sufficiently advanced systems to utilise their output. Actions necessary to maintain capacity to innovate and use new electronic payment methods may include:
increasing expertise in electronic payments in terms of product research and development at a pre-competitive level (this may involve a cooperative research centre or other arrangements to undertake and disseminate research into these issues); encouraging the development of small scale or start-up businesses seeking to develop new electronic payment products or services; increasing access to venture capital for enterprises that are commercialising innovative electronic payment products or services in Australia. (Concerns about the availability of venture capital have long been voiced by technological
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Exploration of future electronic payments markets entrepreneurs in Australia. The Australian Government has recognised this and is currently undertaking a fundamental review of the venture capital industry); and
encouraging the maintenance of a high level of electronic payments readiness throughout the community (this would be akin to steps Australian governments have already taken to raise the Internet and e-commerce readiness of the community at large).
Development pathways Practical achievement of the identified action possibilities would need to be spread out over time. Three broad phases of activity are proposed:

Phase 1 or immediate stepsimplemented in the first and second years of the strategy; Phase 2 or medium-term stepsimplemented between the third and fifth years of the strategy; and Phase 3 or longer-term and structural changeimplemented after the first five years of the strategy.
The distribution of actions under each of these phases is summarised in Table 9.1. There are a number of areas that could be substantially addressed in Phase 1. This is particularly so of many of the actions to fill information gaps. Some activities are already underway, such as the development of a code of conduct for electronic funds transfer and others. Increasing adoption, increasing access/competition and encouraging more electronicpayment-friendly arrangements are areas that are likely to take more time and are therefore viewed as falling into Phase 2. Changing the process of diffusion to accelerate the adoption of electronic payment methods will take some time. In addition, most of the activities required to increase and maintain the capacity to innovate should be viewed as long-term processes, which take time to establish and have an impact on the economy. Note that some actions are likely to be spread out over a number of phases.
9.1 Development pathways: action possibilities across multiple phases Actions Phase 1: Immediate steps
Raise awareness. Educate consumers (particularly regarding cash and cheque substitution). Enhance benchmark information about the economy-wide or resource cost of electronic payment methods in comparison with other payment methods and make this available to the public.

Educate small businesses. Raise awareness about the business case for change.
Phase 3: Longer-term/structural steps
1. Close information gaps
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9.1 Development pathways: action possibilities across multiple phases

(continued)
Actions
Phase 1: Immediate steps

Focus on buyer behaviour governing the selection of electronic payment methods.

Increase security and confidentiality of payment systems by issuing guidelines and best practice models. Increase portability of financial information.

Introduce real-time guarantee of funds for direct entry transactions. Develop universal payment-message format.
2. Accelerate adoption
3. Increase transparency in prices Identify and remove significant crosssubsidies. Promote and communicate cost transparency. Continue to use competition laws to identify and check anticompetitive activities. Define standards for dispute resolution and ownership of fraud.
4. Increase access/ competition
5. Promote electronic payment friendly arrangements
Document scope and coverage of existing legislation. Promote and endorse self-regulation initiatives by relevant industries such as EFT Code of Conduct.
Move from current bilateral model to multilateral model. Reduce barriers to entry through development of access arrangements. Build appropriate common infrastructure. Encourage interoperability. Provide incentives for collaboration amongst the private sector or in conjunction with selected government agencies. Improve coordination between levels of government.
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9.1 Development pathways: action possibilities across multiple phases
(continued)
Actions
Phase 1: Immediate steps

Governments role as major purchaser and payee to drive alternative electronic payments arrangements. State transit fare payment. Raise electronic payments readiness.
6. Governments continue to lead by example
7. Increase and maintain the capacity to innovate Enhance access to venture capital for new electronic payments providers and businesses based on electronic payments.
Electronic payments CRC.
Key points Seven broad areas were identified where actions could be undertaken to raise the adoption of electronic payment methods to benefit the Australian economy. These are as follows:

closing information gaps; accelerating adoption; increasing transparency in prices; increasing access/competition; promoting electronic payment-friendly arrangements; continuing the current situation of government leading by example; and increasing and maintaining the capacity to innovate. Phase 1immediate steps; Phase 2medium-term steps; and Phase 3longer-term or structural change.
A development pathway involving three phases is proposed. These phases are:
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Exploration of future electronic payments markets APPENDIX A COMPARING THE COSTS OF DIFFERENT PAYMENT PRODUCTS The notion that electronic payment products involve lower costs than other payment products underpins much of the analysis in this report. This appendix explains the method and process by which the economy-wide costs of various payment methods (as reported in Chapter 3) have been measured, estimated and compared. New estimates of payment costs in Australia While having an understanding of the cost of payment systems is important for the purposes of this study, there was little specific official data or findings of previous analysis about this that could be drawn on. It has been necessary to form a basis on which to compare costs specifically for this study. Of course, development of a detailed and accurate cost of the entire payments system is a complex and time consuming process, which is outside the scope of this study. Instead, estimates have been made using the limited industry knowledge that is available, academic papers and the authors own calculations. The limited goal of this analysis is to obtain a broad estimate of the cost of providing different payment systems to facilitate comparison of electronic and non-electronic payment systems. A further aim is to compare how costs per transaction vary according to transaction size. Because of the profound limitations of the data, the estimates obtained are intended to be illustrative of the broad costs and cost differences. The focus of analysis is on the economy-wide cost of payments. The intent is to capture the value of the economic resources absorbed in providing and receiving payments. Firstly, this involves including all of the parties in a transaction. For most payment methods this generally implies the inclusion of the customer, merchant and issuing and acquiring entities such as banks or credit card providers. All significant components of costs should be considered. Most studies take into account the resources used by issuers and acquirers because these costs are often captured or able to be derived from official statistics. Some studies specifically include the costs faced by merchants, including the cost of obtaining access to systems and handling transactions. It is also important to take account of the costs faced by customers in a transaction. One partys costs can be another partys benefit. This makes it important to carefully disentagle real resource costs (which absorb resources) and transfers (which shift resources or costs between parties). Identifying the resource costs of payments requires:

allocating bank fees related to payment products and services to the payment products being studied; allocating the receivers costs that are additional to the bank fees; allocating the payers costs that are additional to bank fees; and including estimates of the social costs that are not borne by parties directly involved in the transaction and allocating these costs to products.
These activities are detailed in the three subsections that follow.
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Exploration of future electronic payments markets Allocating bank fees In a competitive market the fees that banks charge for a service are likely to be broadly reflective of the cost of providing that service. These costs are identified and allocated to the various payment methods studied. The Reserve Bank publishes data on banking fees and on merchant service fees charged by American Express and Diners Club (three-party card schemes) in Australia. (Specifically, they are contained in a table called F6: Domestic Banking Fees Income in the monthly Reserve Bank Bulletin.) Aggregate bank fees relating to transaction accounts and payment products in 2004 totalled $3.9 billion. In addition, three-party card merchant service fees are estimated at $890 million (figures on fees and charges relating to the issuing of these cards is not known, so the three-party fees are understated). The sum of these two groups of fees and charges totalled $4.8 billion in 2004. Account fees were allocated to products that access funds in these accounts (direct entries, cheques, debit cards, ATM and over-the-counter withdrawals) based on transaction numbers. Four-party credit card merchant fees (Bankcard, MasterCard, Visa) and issuing fees (not including interest earned on outstanding balances) were separately identifiable, so did not need any further allocation. Transactional fees are more difficult to allocate to products, as many banks offer feefree bank account products up to a certain number of transactions. For each product, the average fee was multiplied by the number of transactions to obtain a total potential fee income. The actual fee income was then compared with potential fees to understand what proportion of transactions incurred fees (the fee utilisation rate). Finally, for each product, the total transactions were multiplied by the average fee and the fee utilisation rate to allocate the transaction fees to products. The costs of ATM withdrawals and over-the-counter cash withdrawals were allocated against the cost of making cash payments. Receivers incremental costs Receivers costs vary significantly by product. There have been a number of studies that investigate these costs. This study draws on two Australian reports to provide values estimating the costs of receiving a payment that is incremental to bank fees:

the Australian Retailers Association (ARA) submission to the Reserve Bank of Australia; and PriceWaterhouseCoopers report, Cost to Businesses of Accepting Cash as a Means of Payment, undertaken on behalf of MasterCard International.
Both studies estimated the cost of cash for a receiver. The Australian Retailers Association estimated these costs at $0.12 per transaction (or 0.70 per cent of the average transaction value of $17). The PriceWaterhouseCoopers study estimated the cost of cash to merchants at $0.31 per transaction (or 2.3 per cent of the average transaction value of $14). Reflecting the lack of further information, a straight average of the values from the two studies has been used to form an estimate of the receivers cost of accepting cash payments.
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Exploration of future electronic payments markets The Australian Retailers Association also estimates the costs of other payment methods, including the bank fees paid. This study used the average values reported in the ARA study to identify incremental costs for payment products that are not cash. To avoid double-counting, these costs have been netted of bank fees, to identify the incremental cost to receivers, over and above banking fees. Payers incremental costs and social costs There are fewer studies that investigate the payers costs of payment products. Even rarer are studies that attempt to include the social costs of these payment systems, which are not borne by parties directly involved in the transaction. The Boston Consulting Group estimated in 1993 that the social costs created by cash payments, incremental to direct costs borne by the parties of the transaction, equated to 0.75 per cent of the UKs GDP. Similarly, in Belgium, this value was estimated at between 0.35 per cent and 0.56 per cent of GDP (PriceWaterhouseCoopers 2002). These costs include distribution costs, the cost of fraud and counterfeit systems, the opportunity cost of holding cash and so forth. Once again, reflecting the lack of better information, this study has taken a straight average between the values that are available for the UK and Belgium to estimate the incremental cost of cash outside of the banking system in Australia. This results in an cost estimate of $4.8 billion. This value includes the payers costs of using cash incremental to ATM and over-the-counter banking fees, as well as the social cost not borne by the parties directly involved in the transaction. To estimate the cost per transaction of cash payments the authors have drawn on the findings of a detailed research report produced in the US. A comprehensive study of payers costs was conducted by Swartz et al in the US in their paper titled The Move Toward a Cashless Society: A Closer Look at Payment Instrument Economics (Swartz et al, 2004). The observed cost relativities per transaction from the US were used as a basis for forming estimates of costs per transaction for the equivalent products in Australia. To develop a cost for direct entry, which was not included in the US study, the key payers costs such as processing time and queue time were estimated. As there is no queuing time associated with a direct entry transaction, this value was removed to provide an estimate of direct entry costs. Reliability Clearly, the activities described above have involved making estimates to fill data gaps. It is likely that there is a margin of error around these estimates. It is also likely that the scope for error is not uniform. The authors have reviewed the reliability of the key parts of each of the payment methods analysed and report the findings in the table below. It uses a traffic light key: green reflects that the estimate is viewed as being of high reliability, yellow reflects a moderate level of reliability, and red reflects a low level of reliability.
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A.1 Cost data reliability and accuracy by payment method and cost chain activity
Merchant/ payee Direct credits Direct debits Cheques Payment acquiring institution Payment issuing institution Central banking/ systemic Consumer/ payer/ cardholder
Debit cards Charge cards Credit cards Cash payments Table key: Higher level of reliability Moderate level of reliability Lower level of reliability
The table above reflects the authors view that most of the estimates have a high level of reliability. The areas of lowest reliability relate to the estimates for the cost of cash payments. Average cost of payment methods Estimates of the average cost of different payment methods or products derived from the approach described above are shown in Table A.2.
A.2 Indicative social costs for different payment types
Payment method Total cost per Cost per year ($millions) transaction ($) 350400 150200 850900 650700 900950 31003200 73007500 13 30013 850 0.450.50 0.400.55 1.601.75 0.600.65 5.656.00 2.652.75 0.700.80 Cost per $ value transferred (%) 0.010.02 0.010.02 0.050.08 1.001.10 3.003.20 2.002.10 3.604.00
Settlement type Delayed notification of guaranteed funds Real-time notification of guaranteed funds
Direct credits Direct debits Cheques Debit cards Charge cards Credit cards Cash payment Total
Observations suggested from the findings reported in Table A.2 are that:
the cost of the payments system in Australia is not trivial, with estimated economywide resource costs of around $13 billion per yearequivalent to about 1.7 per cent of GDP; 144
direct entry appears to involve the lowest cost to the economy or community at largelowest in cost per transactions and cost per value transferred (noting that it is not appropriate for all transactions, such as consumer payments where immediate settlement and guaranteed funds are required); cheque payments involve approximately five times the resource cost of direct entry; and cash probably has a low resource cost per transaction (relying on the estimates of likely transaction numbers and size that include data analysed in Table A.2), but appears to be the most expensive to provide when measured as a percentage of the transaction value.
Of course, reflecting the tentative nature of the underlying estimates in the analysis, the figures reported in the table above are broadly indicative, rather than being precise values of the cost of payments. It is notable, however, that these rough estimates are broadly consistent with (limited) earlier research on the cost of different payment systems (or delivery channels). For example, the estimated total cost of payments per year minus cash amounts to $6.3 billion. This is in the $5$7.5 billion range for the cost of payment systems to suppliers of cross-institutional payments reported in the Wallis Inquiry report (FSI 1997, p. 226). Looking at the cost of cash payments alone (which appear to be the highest-cost payment method and which involve estimates that were subject to a red light warning about reliability) it is notable that the value in the table is in line with an independent estimate of the cost of cash payments developed and published by the Asian Banker Journal in 1999. That study conducted on behalf of De La Rue Pty Ltd estimated that the social or resource cost of cash payments was high in Australia, with an estimated cost of about $7.9 billion per year. (ABJ 1999). Some notes about the Asian Banker Journal study and the cost of handling cash in Asia are provided in Box A.3. An extract of the DeLaRue study is provided in Appendix F.
A.3 The cost of handling cash in Asia
The Asian Banker Journal completed an Asia-wide research project on the cost of holding cash in Asia in 1999. This was conducted in conjunction with De La Rue, the company that is the worlds largest currency note printer. The Asian Banker Journal states that their study was the first to discuss the cost and processes of handling cash in Asia. The authors of this study have not been able to find any other or more recent studies about this. The study sought to identify visible, invisible and opportunity costs to support local currency in circulation. Factors considered when costing cash extended beyond the manual cost of counting, sorting and treating physical notes and coins, as well as interest lost, storage, salaries, security and transportation. The study found that the cost per transaction of cash was essentially insignificant. However, the cost of supporting local currency when viewed from the system as a whole was significant. In fact, the cost for Australia was estimated to amount to $7.9 billion each year. This led the authors to conclude that cash makes sense to the end user, but saddles the organisations involved in processing the cash through its cycles with tremendous hidden and obvious costs. Source: Asian Banker Journal 1999, Cost of Handling Cash in Asia.
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Exploration of future electronic payments markets Different costs by transaction size The economy-wide cost of payments is likely to vary according to the size of that payment. A ranking of the cost of different payment types by transaction value are reflected in Table A.4.
A.4 Economy-wide cost of payments: ranking of payment methods by transaction size Size of transaction
Ranking of payment methods by transaction cost 1. Lowest transaction cost payment method 2. 3. 4. 5. Highest transaction cost payment method
$5 Cash Direct entry Debit card23 Credit card24 Cheque
$20 Direct entry Debit card Cash Cheque Credit card
$60 Direct entry Debit card Cheque Credit card Cash
$100 Direct entry Debit card Cheque Credit card Cash
This analysis hinges on identification of the fixed and variable costs. Fixed costs apply where there are overheads in operating and maintaining systems. Many payment methods involve the use of systems to collect information, reconcile entries and collect payments through processes such as regular paper bills. Variable costs arise where each transaction increases the resource cost required to process it. Particular attention was given to identify cost items that are variable based on the size of the transaction (for example, float costs). The results of the analysis supporting the above table suggests that:

direct entry is the lowest-cost payment approach for all transactions greater than $20 and is the second lowest-cost type for small transactions of around $5; debit cards are the lowest-cost real-time notification product for payments greater than $20. In fact, what is not shown in the table but is apparent in the underlying analysis is that debit cards appear to be lower cost than cash from around $10 and appear to involve lower cost than cheques for transactions worth up to around $300; cash is the lowest-cost payment method for small payments of around $5 (and while not reported in the table up to approximately $10, particularly if real-time notification is required in the transaction); and credit card transactions become cheaper to provide than cash at values greater than approximately $60.
23 Refers to proprietary bank EFTPOS debit card, not scheme-based debit card. 24 Subject to specific merchant arrangements and acceptance at this low transaction value.
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Exploration of future electronic payments markets Key points Broadly, the analysis indicates that electronic payments are significantly cheaper than the non-electronic alternatives. In particular, electronic payments demand fewer economic resources. This holds true when looking at both the average costs of payment methods and when allowing for differences in transaction value. If cost were a key driver of behaviour, the analysis suggests that significantly more use can be expected to be made of electronic payments in the future. Indeed, the differences in cost are sufficiently large that it is reasonable to expect that electronic payment types should be significantly more attractive than most other payment types, except for small transactions where cash remains lower-cost (at this time). It is important to note that the analysis in the appendix has been restricted to the cost of payment methods. It is to be expected that the benefits obtained from payment systems would also be important in the choice of payment methods offered and used. Key findings and observations derived from the recent US study about benefits are reported in Box A.5.
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A.5 Measuring the benefits of payment products
The above analysis is merely an analysis of costs and does not include any measurement or comparison of the relative benefits that each of the products provide. Research quantifying benefits of different payment products has only recently been conducted, and at this stage only significantly in the US (Swartz et al, 2004). The US research modelled the effects of these benefits (such as a reduction in time and effort, increased float periods, increased privacy, the option to use credit and so forth) on the American payment system. In general, the findings were that it was beneficial to society to conduct more electronic transactions. The analysis also shows that once the benefits of the payment products were factored in and taking into account the value of the transaction, card-based payments become more beneficial to use for most transactions compared with cash and cheques (the US direct entry system was not included in the study). The net social marginal cost of each product was determined at two price points in three separate scenariosaverage-sized transactions in a grocery store, a discount store and an electronics store. Assuming that the cost curve is linear between these two price points and extrapolating these responses (although not too far from the measured points) reveals that cash is the most beneficial payment method to use at very low value transactions (under US$10). Signature debit then becomes the next most beneficial between US$10 and US$40. Credit cards become the most beneficial product to use above this point. The different marginal cost trajectories for different sized transactions derived from the US study are reflected in the figure below. (Note that the values reported are in US dollars.)
A.6
Cost of payments by product by transaction size

3.00 2.50 Marginal cost (US$) 2.00 1.50 1.00 0.50 0 0 10 20 30 40 50 60 70 80 90 100 Transaction size (US$) Cash Non-verified cheque Verified cheque Credit/charge cards Signature debit PIN debit
Source: Swartz et al (2004).
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Exploration of future electronic payments markets APPENDIX B STAKEHOLDER CONSULTATIONS Three workshops were held by CIE and EDC to solicit the views of stakeholders on various issues pertaining to the Australian payments market. The workshops were targeted at: (i) (ii) (iii) regulatory and other government agencies; the banking industry; and entrants and other companies in the payments market respectively.
The workshop attendees, excluding CIE and EDC representatives, are listed in Table B.1. Discussion topics Discussions in the three workshops centred largely on gaps in the current electronic payment market. They also covered various types of barriers deterring the adoption of new payment products and use of more electronic payments. Workshop for regulators Topics discussed included the following.
Barriers to adoption of electronic transactions: B2B barriers such as the lack of information flow with payments, the lack of a standard messaging protocol and information, cultural resistance to change and existing investments discouraging innovation and adoption regulatory barriers such as concerns over settlement occurring outside the banking system P2P barriers such as ceilings on transaction value per day limiting the use of electronic transactions, access to information technology by older people and the under-privileged, concerns about confidentiality and security, the systemic risks posed by delayed settlement of large P2P transactions and the lack of chargeback and re-presentment rights for many P2P products.
Gaps in the current electronic payments market: micro-payment issues regarding statements and transaction confirmation lack of a consistent consumer protection model because the current legacy arrangement of financial services is extended to banking accounts and electronic payments, resulting in over-regulation in some instances and underregulation in others.
Possibilities for improvement: an overarching consumer protection regulatory framework; flexibility of exchange of transaction systems infrastructure; transparent, cost-reflective pricing; common standards; and more real-time transactions.
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B.1
Stakeholder workshops attendee list

Reserve Bank of Australia (RBA) Australian Securities and Investment Commission (ASIC) ASIC ASIC Australian Competition and Consumer Commission (ACCC) Australian Prudential Regulation Authority (APRA) Australian Payments Clearing Association (APCA) American Express American Express American Express Commonwealth Bank of Australia Citibank Citibank Credit Union Services Corporation (Australia) Limited (CUSCAL) HSBC MasterCard National Australia Bank VISA Westpac Westpac Avantec EmPay First Data International First Data International KeyCorp MoneySwitch NineMSN Paymate
Workshop for regulators (20 June 2005)
Stephanie Weston Michael Funston Elisabeth Hristoforidis Steve Martin Gavin Jones Graham Ellis Phil Timms Nick Alexander Mark Rayer Tony Ritchie Brian Stratton Madeline OConnor Michael South Omaya Mansour Ed White John De Bree Norm Benstead John Hall Kerry Munro Brett Watson Bill Hakin Anthony Shephard Peter Blackett Peter Simpson Tem Elliott Paul Wood Mark Britt Dilip Rau
Workshop for banking industry representatives (23 June 2005)
Workshop for entrants and others (24 June 2005)
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Exploration of future electronic payments markets Workshop for banking industry representatives Topics discussed in this workshop included:

gaps in the current electronic payments market; micro-payments with issues regarding type, cost and speed, as well as customer confidence; health care payments; B2B payments issues, such as the preference of small businesses for the cash flow control of non-electronic payments, spending and reconciliation controls of payments cards that companies provide for employees, and the lack of product offerings for non-credit worthy customers; P2P payment issues such as the unavailability of real-time clearing for large value payments (such as property settlements); authentication issues, such as the lack of an agreed standard outside the current bilateral systems; barriers to the adoption of electronic transactions, including: tax issues such as the provision of tax invoice information on a card statement and tax avoidance trust issues such as the lack of online trust the lack of a central governance point with the current industry structure being inadequate for managing investments in new systems lack of priority for system investment due to complacency acceptance issues for new payment products such as the difficulty of achieving a critical mass lack of dispute resolution codes for debit transactions piecemeal government approach with differences between state and federal levels the perception that electronic Internet payments carry greater fraud risk than cheques growth in direct debits being hindered by peoples desire to see a bill before payment return on investment perceived as low because payment systems require very large investments with very long payback periods, which is especially difficult to justify with the investment already sunk into existing systems lack of agreement in the industry on joint development efforts an excess number of regulatory parties and fragmented industry bodies;
possibilities for improvements, including: making the cost of cheques transparent open message standards that leverage broadband common infrastructure that can be plugged into by many parties and which allows individual institutions to add value reduced but more focused regulation, with preferably one regulator with remit across payments
151
Exploration of future electronic payments markets regulatory support for a common industry body the public sector leading by example to induce people to use electronic transactions; and greater promotion of direct debit. Workshop for entrants and others The following topics were discussed in the workshop:
gaps in the current electronic payments market, including: lack of a suitable micro-payment method, with three important criteria being cost, convenience and trustworthiness (although risk mitigation is less important in low-value transactions) lack of real-time online settlement statement problems with micro-payments, which may be addressed by online instead of paper statements the need for consumer education about expecting lower service levels with micro-payments as servicing costs quickly become prohibitive a lack of reconciliation ability in B2B transactions the need to develop a critical mass (remembering the role of Coles and Woolworths in popularising EFTPOS payments) the lack of a compelling business case for developing new payment method s that facilitate B2B transactions, such as B2B payments with concurrent information transfer the difficulty of accessing venture capital in Australia stifling innovation in payments, with almost no capital available for pre-revenue companies disparateness of regulation, with too many standards gaps that are partly due to APCA stifling innovation (although this view was challenged by others in the workshop) mobile payments offering potential, with hospitality a target market the high cost of tamper-proofing mobile payment devices payments via mobile phone being expected to increase in the coming years due to the familiarity of todays youths with mobile phones;
barriers to the adoption of electronic transactions, including: consumer acceptance the low acceptance of online payments due to a lack of trust and the reluctance to make the first transaction, which will likely encourage further transactions trust and security in payments, with little public knowledge of the level of consumer protection (unlike the UK where the government spends large amounts marketing the consumer protection code) the need for a resolution management process control issues, such as consumers disliking the possibility that a direct debit may occur when there are insufficient funds in their account the need for seven settlement days a week (instead of the current five), with multiple settlements per day even if not in real time; and
152
possibilities for improvements, including: better industry cooperation greater competition in the banking and telecommunications markets the government leading consumer education on financial and payment matters lower-cost and open access for payment providers without intermediaries a common network utility that industry players can easily plug into aggregator intermediaries being allowed on the acquiring side cleaner links to Visa and MasterCard on the acquirer site with a ubiquitous IP network and without needing the banks as a gateway standard specification for new payment types a single card that can be used for many types of transactions.
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Exploration of future electronic payments markets APPENDIX C BUSINESS SURVEY METHODOLOGY This section summarises the information provided to the Australian Bureau of Statistics in the application for Statistical Clearing House approval to proceed with the business survey. PURPOSE OF SURVEY The survey was designed to elicit information on the payments systems used by businesses that transact with suppliers, consumers or other businesses, the payment methods they prefer or dislike (for both online and shop front sales), the problems they perceive with these payment methods, the costs associated with each payment method, the average sizes of payments for sales and purchases, their likely response to increasing the proportion of electronic payments, as well as information on the internal cost of payments (such as salary payments to employees). The business survey was conducted in the expectation that it would shed light on the efficacy of current payments products and channels, and help identify the drivers of and barriers to innovation and adoption of new payment methods and systems. PRINCIPAL OUTPUTS The principal data items collected in the survey were: value of payments received and disbursed, payment methods accepted, preferred payment methods, reasons underlying preferences, cost of payment methods. Cross-classification of the sample was by business size (small, medium and large) and type of business (retailer/ wholesaler/importer, manufacturer/producer/miner and service provider/government body). POPULATION/FRAME Target population The target population comprised small, medium and large businesses that interact with suppliers, customers and other businesses and were thus active users of various payment products and channels. The sample was chosen to be representative of the business population across the States of Australia and metropolitan versus rural. Frame source Telephone numbers were drawn from DTMS (DeskTop Marketing System), which is an electronic version of the Yellow Pages. Numbers from the yellow pages were randomly selected. All Australian businesses that have a Yellow Pages entry were viable for selection. Frame unit Businesses across Australia were screened through self-selection into three business types: retailers (includes importers and wholesalers), manufacturers (includes mining 154
Exploration of future electronic payments markets and producers) or service providers (and government) and three sizes. A total of 594 businesses were into divided into nine units on the frame. Information on the frame about these units were: name, address and postcode, telephone number, state and ANZIC code and SIC code, metro/rural, business size by employment and business type via self selection. SAMPLE DESIGN A stratified random sample generated from the Yellow Pages was used. Stratification Stratification was by company size (small, medium, or large) identified by employee numbers, company type (retailer/importer/wholesaler, manufacturer/producer/miner or service provider/government body). No geographic boundaries were set and company size was open-ended. Every business self-selected its company type. The sample was equally allocated to size and type. EXPECTED RESPONSE Response bias A relatively high response rate was expected on this survey, mitigating the impact of non-responses. If any unit in the strata showed significantly high non-response rates, efforts would be initiated to understand the impact of these non-responses on the sample. Follow-up interviews were also scheduled to ensure that respondents completed the survey in the time most convenient for them. ESTIMATION AND ANALYSIS Identification of outliers Outliers were identified through the data analysis stage. It was not expected that there would be significant outlier issues, as most questions in the questionnaire refer to business processes and hence are categorical variables, and not scalar variables. Similarly, most analysis conducted on this survey was a simple cross-tabulated aggregation of responses and did include statistical analyses such as regression analysis or cluster analysis. Respondents who supply responses that are physically impossible (for example, replying that they dont accept credit card payments, but later stating that credit card payments are x per cent of their receipts) were removed from the analysis. Data aggregation Data were aggregated in cross-tabulated forms by company type and company size. When studying the implications of the survey results for the Australian macroeconomy, the weighting strategy used was to weight the frame by current sector data of the economy provided by the Australian Bureau of Statistics
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Exploration of future electronic payments markets Allowances for potential sources of non-sampling error in estimation Non-responses were tracked by unit. If any unit showed particularly high patterns of non-responses, efforts were made to ensure that non-responses were not introducing non-sampling error. Statistical data analysis techniques As mentioned above, the purpose of the survey was to map the current use and needs in the Australian electronic payments system for businesses. As such, most analysis was an aggregation of sample responses. If necessary, variance analysis was conducted on key questions to generate confidence intervals for the overall economic summary.
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Exploration of future electronic payments markets APPENDIX D QUOTAS A random sample of 594 businesses was surveyed over the telephone by I-View in August 2005. Their distribution by size and activity are shown below in table D.1.
D.1 Business survey quotas by size and activity of firms
Retail 66 66 66 198 Manufacturing 66 66 66 198 Service 66 66 66 198 Total 198 198 198 594 Number of employees (including part-time and casual) Small: 119 Medium: 20199 Larrge: 200+ Total
Sources: I-View, CIE and EDC.
BUSINESS SURVEY QUESTIONNAIRE
SURVEY QUESTIONS Screening and categorisation SC.1 Are you be willing to be part of this survey? Is it convenient to conduct the survey with you now? SC.2 SC.3 Is your organization a market research company? How many people are currently employed by your company?
SC.4 Which of the following currently best describes the main business of your organization? Primarily we sell things that we have purchased from other companies, without actually changing them in any significant way, in that sense we think of ourselves as a Retailer (or Importer or Wholesaler) Primarily we make things that we then sell to other companies, in that sense we think of ourselves as a Manufacturer (or Producer or Miner) Rather than making or selling physical products, we primarily provide services to consumers and/or businesses, in that sense we think of ourselves as a Service provider (or Government body) SC.5 What is the typical value of a payment currently received from a customer? Below $10 $10.01 to $50 $100.01 to $500 $500.01 to $5000 Over $5000 SC.6 Currently, how many customer payments would your business typically receive each week? 5 or below 6 to 20 157

20 to 100 100 to 1000 1000 to 5000 Over 5000
SC.7 What is the typical value of a payment that you currently make to a supplier? Below $50 $50.01 to $100 $100.01 to $500 $500.01 to $5000 Over $5000 SC.8 Currently, how many payments to suppliers would your business typically make each week? 5 or below 6 to 20 20 to 100 100 to 500 500 to 1000 Over 1000 SC.9

Currently does your company sell primarily to:
Consumers Other businesses (and/or Government)
Consumer customer payments C.1 What is your estimate of the percentage of your current revenue coming from? Store and in-person sales Internet and other remote sales % %
C.2 Thinking about receiving payments from your customers for shop front sales, what are the different ways you accept payment from customers today?

Cash Cheque Visa, MasterCard & BankCard credit cards American Express cards Debit cards/EFTPOS BPAY BillExpress/PostBillPay/Agents PayPal Direct bank transfer/Funds transfer
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On account Other C.3 How would you divide 100 points across the different payment methods you accept for shop front sales in proportion to the number of payments/transactions? Cash Cheque Visa, MasterCard & BankCard credit cards American Express cards Debit cards/EFTPOS BPAY BillExpress/PostBillPay/Agents PayPal Direct bank transfer/Funds transfer On account Other Total 100 C.4 For those buying on account, what are the different routes by which they pay you?

Over the counter By mail By Internet By telephone By fax/telex By agent
C.5 For those buying on account, what are the different methods by which they pay you to settle the account with you? Cash Cheque Visa, MasterCard and BankCard credit cards American Express cards Other payment cards Debit cards/EFTPOS

BPAY BillExpress PostBillPay PayPal Direct bank transfer Other
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C.6 Thinking about receiving payments from your customers for Internet sales, what are the different ways you accept payment from customers today? Firstly, online Visa, MasterCard and BankCard credit cards Visa debit cards American Express cards Other payment cards BPAY PostBillPay PayPal Direct bank transfer Other C.7

Secondly, by mail or telephone off-line Cheque Visa, MasterCard and BankCard credit cards Visa debit cards American Express cards Other payment cards BPAY BillExpress PostBillPay PayPal Direct bank transfer Other
C.8 How would you divide 100 points across the different payment methods you accept for Internet and phone sales in proportion to the number of payments/transactions? Cheque Visa, MasterCard and BankCard credit cards Visa debit cards American Express cards Other payment cards BPAY BillExpress PostBillPay PayPal Direct bank transfer Other
160
Exploration of future electronic payments markets Total 100
C.9 What method of payment would you most prefer your customers of online Internet sales to use, including methods that you dont use/accept today? Cash Cheque Visa, MasterCard and BankCard credit cards Visa debit cards American Express cards Other payment cards BPAY BillExpress PostBillPay PayPal Direct bank transfer Other C.10 Why would you most prefer <INSERT ANSWER FROM C.9> payments from your online customers? I will receive guaranteed funds

I get the funds very quickly It costs me less than other forms of payment There is less paperwork I dont have to go to the bank Its the easiest way for me and my business My customers like it better My staff like it better There is little chance of the transaction being reversed Less change of fraud/rip-off Other
C.11 What method of payment would you most prefer your customers of shop front sales to use, including methods that you dont use/accept today?

Cash Cheque Visa, MasterCard and BankCard credit cards American Express cards Diners Club cards Debit cards/EFTPOS BPAY BillExpress
161

PostBillPay PayPal Direct bank transfer Other
C.12 Why would you most prefer <INSERT ANSWER FROM C.11> payments from your shop front customers? I will receive guaranteed funds I get the funds very quickly It costs me less than other forms of payment There is less paperwork I dont have to go to the bank Its the easiest way for me and my business My customers like it better My staff like it better There is little chance of the transaction being reversed Less change of fraud/rip-off Other C.13 What method of payment from your customers currently causes the most issues or challenges for your business? Cash Cheque Visa, MasterCard and BankCard credit cards American Express cards Diners Club cards Debit cards/EFTPOS BPAY BillExpress PostBillPay

PayPal Direct bank transfer Other
C.14 Why do payments by <INSERT ANSWER FROM C.13> cause you problems? I get the funds too slowly It costs me more than other forms of payment Generates lots of paperwork I have to go to the bank Not suitable for small value purchases My staff find it complicated
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Problems with the transaction being reversed Greater chance of fraud/rip-off Other
C.15 In terms of the cost of receiving payments from your customers, what do you currently consider to be the most and least expensive method of payment for you to receive? C.15 Most Expensive C.16 Least Expensive Cash Cheque Visa, MasterCard and BankCard credit cards American Express cards Diners Club cards Debit cards/EFTPOS

BPAY BillExpress PostBillPay PayPal Direct bank transfer Other
C.17 What impact would increasing the proportion of electronic payments, such as card payments or bank transfers, you receive from customers have on your business?
None, already receive all payments electronically C.17A My costs would: Reduce Stay the same Increase Dont know C.17B My sales volume would: Reduce Stay the same Increase Dont know C.17C My selling prices would: Reduce Stay the same Increase Dont know
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C.18 What are the reasons that increasing the proportion of electronic payments wouldnt help your business? I get the funds too slowly It costs me more than other forms of payment Generates lots of paperwork Not suitable for small value purchases My staff find it complicated Problems with the transaction being reversed Lack of information to reconcile the account Other C.19 Is there anything that you would like to change in regard to receiving payments from customers? Nothing, Im happy with everything as it is (GO TO C.21) Want to reduce/get rid of handling cash Want to lower my costs of handling payments Want to speed up the payment process

Want to stop customer payment defaults Want to handle things electronically Want payments to interface straight into my accounting systems Want to reduce the paperwork thats involved Want a cost effective way to receive small payments electronically Other
C.20 What is stopping you doing this? Government rules & regulations Card scheme/companies rules & regulations My bank/financial institution The high cost of making the changes No suitable payment method available Customers wont change what they do No suitable software available Other Business customer payments B.0 Thinking about receiving payments from your customers, what percentage of customer payments are currently made to you from overseas? % 164
B.1

What are the different ways you accept payment from customers today? Cash Cheque Visa, MasterCard and BankCard credit cards American Express cards Other payment cards Debit cards/EFTPOS BPAY BillExpress PostBillPay / Australia Post PayPal Direct bank transfer Other
B.2 How would you divide 100 points across the different payment methods you accept in proportion to the number of payments you receive? (READ OUT RESPONSES FROM B.1 & RECORD RESPONSE ON POINT SPLIT)

Cash Cheque Visa, MasterCard and BankCard credit cards American Express cards Other payment cards Debit cards/EFTPOS BPAY BillExpress PostBillPay/Australia Post PayPal Direct bank transfer/Funds transfer Other Total 100 What are the current channels through which you receive payments? By mail Direct into our bank account In person at our location Via the Internet By telephone, with human operator By telephone, using IVR system 165
B.3


Through an agent (eg. Australia Post) Other
B.4 How would you divide 100 points across the different payment channels in proportion to the number of payments you receive? By mail Direct into our bank account In person at our location Via the Internet By telephone, with human operator By telephone, using IVR system Through an agent (eg. Australia Post) Other Total 100 B.5 What method of payment would you most prefer your customers to use, including methods that you dont use/accept today? Cash Cheque Visa, MasterCard and BankCard credit cards

American Express cards Diners Club cards Debit cards/EFTPOS BPAY BillExpress PostBillPay PayPal Direct bank transfer Other
B.6 Why would you most prefer <INSERT ANSWER FROM B.5> payments from your customers? I will receive guaranteed funds I get the funds very quickly

It costs me less than other forms of payment There is less paperwork I dont have to go to the bank Its the easiest way for me and my business My customers like it better My staff like it better There is little chance of the transaction being reversed
166

I get full information to reconcile the account Other
B.7 What method of payment from your customers currently causes the most issues or challenges for your business? Cash Cheque Visa, MasterCard and BankCard credit cards American Express cards Diners Club cards Debit cards/EFTPOS BPAY BillExpress PostBillPay PayPal Direct bank transfer Other B.8

Why do payments by <INSERT ANSWER FROM B.7> cause you problems? I get the funds too slowly It costs me more than other forms of payment Generates lots of paperwork I have to go to the bank Not suitable for small value purchases My staff fund it complicated Problems with the transaction being reversed Lack of information to reconcile the account Other
B.9 In terms of the cost of receiving payments from your customers, what do you currently consider to be the most and least expensive method of payment for you to receive? B.9 Most Expensive B.10 Least Expensive

Cash Cheque Visa, MasterCard and BankCard credit cards American Express cards Diners Club cards Debit cards/EFTPOS BPAY BillExpress
167

B.11 What impact would increasing the proportion of electronic payments, such as card payments or bank transfers, you receive from customers have on your business? (READ OUT & RECORD RESPONSE) None, already receive all payments electronically

B.11A Reduce Stay the same Increase Dont know B.11B Reduce Stay the same Increase Dont know B.11C Reduce Stay the same Increase Dont know
My costs would
My sales volume would:
My selling prices would:
B.12 What are the reasons that increasing the proportion of electronic payments wouldnt help your business? I get the funds too slowly It costs me more than other forms of payment

Generates lots of paperwork I have to go to the bank Not suitable for small value purchases My staff fund it complicated Problems with the transaction being reversed Lack of information to reconcile the account Other
B.13 Is there anything that you would like to change in regard to receiving payments from customers? Nothing, Im happy with everything as it is
168

Want to reduce/get rid of handling cash Want to lower my costs of handling payments Want to speed up the payment process Want to stop customer payment defaults Want to handle things electronically Want payments to interface straight into my accounting systems Want to reduce the payment that is involved Want a cost-effective way to receive small payments electronically Want a way of reconciling payments to the right transactions Other
B.14 What is stopping you doing this? Government rules and regulations Card scheme/companies rules and regulations My bank/financial institution The high cost of making the changes No suitable payment method available Customers wont change what they do No suitable software available
Other
Electronic bill presentment EB.1 Do you see the presentment of bills/invoices to your customers electronically over the Internet as part of your business/payments strategy in the next 24 months? No Yes EB.2 Why do you want to present bills to your customers electronically? Enables migration of payments into lower cost electronic channels Provides an additional service for my customer My competitors have done it/ are likely to do it Provides cost saving through customers serving themselves online (for example, deflects calls to our call centre) Cost saving in not sending paper bills Other EB.3 If you have not already implemented electronic bill presentment, what do you see as your biggest barriers to implementation? I dont know what it is Im not interested in it 169

It is not suitable for my business Dont see the return on investment Integration with my existing systems No consumer demand for this The process of implementation The cost of implementation Other
Supplier payments S.1 Thinking about making payments to the suppliers of goods and services to your business, but not your employees, do you currently have to pay any of your suppliers overseas? Yes No S.2 What are the different ways you make overseas payments to suppliers today? (READ OUT, ROTATE & RECORD RESPONSE; MULTIPLE RESPONSE PERMITTED)

Normal Australian bank account cheque Bank cheque in foreign currency Visa, MasterCard and BankCard credit card American Express card Other payment cards Debit cards/EFTPOS BPAY Western Union/Money orders PayPal Direct bank transfer/funds transfer Bank telegraphic transfer Other
S.3 What are the different ways you make payments to domestic suppliers today? (READ OUT, ROTATE & RECORD RESPONSE; MULTIPLE RESPONSE PERMITTED)

Cash Cheque Visa, MasterCard and BankCard credit card American Express card Other payment cards
170

Debit cards/EFTPOS BPAY BillExpress PayPal Direct bank transfer/funds transfer Other
S.4 How would you divide 100 points across the different payment methods you use to make payments to domestic suppliers today, in terms of the number of payments/transactions? (READ OUT RESPONSES FROM S.3 & RECORD RESPONSE ON POINT SPLIT) Cash Cheque Visa, MasterCard and BankCard credit card

American Express card Other payment cards Debit cards/EFTPOS BPAY BillExpress PayPal Direct bank transfer/funds transfer Other Total 100
S.5 How do you make direct bank transfers to your suppliers? (READ OUT, ROTATE & RECORD RESPONSE; MULTIPLE RESPONSE PERMITTED)

We use our Internet bank site to transfer from our account We use BPAY at our Internet bank site We write a letter/fax/email to the bank with instructions We have a direct electronic linkage with our bank We phone or go to the bank and instruct them Other
S.6 What are the reasons you dont increase the amount of direct bank transfers to your suppliers? (READ OUT, ROTATE & RECORD RESPONSE; MULTIPLE RESPONSE PERMITTED)

We need to provide more remittance information to our suppliers Our accountants/auditors dont like direct bank transfers We dont have the banking details of all suppliers Some suppliers dont like bank transfers 171

We prefer methods where we have a better hardcopy paper trail We are not set up for direct bank transfers Other Does your accounting system influence the way you pay suppliers? Yes No
S.7

S.8 How does it influence your supplier payments? (READ OUT, ROTATE & RECORD RESPONSE; MULTIPLE RESPONSE PERMITTED)

The system generates cheques The system is linked to making direct bank transfers The system is linked to an electronic commerce service Does not permit cash payments American Express/Diners Club links into our expense ledger Other
S.9 Ignoring any constraints and including any methods that you dont use today, what method of payment would you most prefer to use to pay your suppliers? (RECORD RESPONSE)

Cash Cheque Visa, MasterCard and BankCard credit cards American Express cards Diners Club cards Debit cards/EFTPOS BPAY BillExpress PostBillPay PayPal Direct bank transfer Other
S.10 Why would you most prefer <INSERT ANSWER FROM S.9> to pay your suppliers? (RECORD RESPONSE IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED)

It ensures that the supplier gets the funds I choose exactly when the payment will be made It costs me less than other forms of payment There is less paperwork
172

It generates loyalty (frequent flyer) points for me Its the easiest way to pay for me and my business My suppliers like it better My staff/accountant like it better It integrates best with my accounting/payables system It gives me a good record of the payment Other
S.11 What method of payment to suppliers currently causes the most issues or challenges for your business? (RECORD RESPONSE) Cash Cheque Visa, MasterCard and BankCard credit cards American Express cards Diners Club cards Debit cards/EFTPOS BPAY BillExpress

S.12 Why do payments by <INSERT ANSWER FROM S.11> cause you problems? (RECORD RESPONSE IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED)

I cant provide all the necessary information with the payment It costs me more than other forms of payment Generates lots of paperwork I have to go to the bank to do it Not suitable for small value purchases My staff find it complicated It doesnt integrate with my accounting/payables system It doesnt give me a good record of the payment Other
S.13 In terms of the cost of handling payments to suppliers, including your internal costs, what do you currently consider to be the most expensive method of payment for you to use? (RECORD RESPONSE) Cash 173

Cheque Visa, MasterCard and BankCard credit cards American Express cards Diners Club cards Debit cards/EFTPOS BPAY BillExpress PostBillPay PayPal Direct bank transfer Other
S.14 What do you currently consider to be the least expensive method of supplier payment for you to use? (RECORD RESPONSE) Cash Cheque Visa, MasterCard and BankCard credit cards American Express cards

Diners Club cards Debit cards/EFTPOS BPAY BillExpress PostBillPay PayPal Direct bank transfer Other
S.15 What impact would increasing the proportion of electronic payments, such as card payments or bank transfers, you make to suppliers have on the cost of running your business? (READ OUT & RECORD RESPONSE)

None, already make all payments electronically My costs would: Reduce Stay the same Increase Dont know
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Exploration of future electronic payments markets S.16 Currently electronic payments limit the amount of information that you can transmit with your payment, is this limiting the number of electronic payments that you make to suppliers? (RECORD RESPONSE) Yes No S.17 What additional information do you need to transmit to the supplier with your payment? (RECORD RESPONSE IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED)

Delivery docket number/information Remittance advice information Reasons for partial payment Reasons for returned stock Purchase Order number/information Identification of GST/tax amounts Invoice number/information Other
S.18 Is there anything that you would like to change in regard to making payments to suppliers? (RECORD RESPONSE IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED)

Nothing, Im happy with everything as it is Want to reduce/get rid of handling cash Want to lower my costs of handling payments Want to speed up the payment process Want to handle things electronically Want payments to interface straight into my accounting systems Want to reduce the paperwork thats involved Want to be able to provide more information with the payment Want a cost effective way to make small payments electronically Other
S.19 What is stopping you doing this? (RECORD RESPONSE IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED)

Government rules & regulations Card scheme/companies rules & regulations My bank The high cost of making the changes
175

No suitable payment method available Suppliers wont change what they do No suitable software available Other
Internal costs of payments I.1 Thinking about paying your employees, which of the following types of employees does your business currently engage? (READ OUT & RECORD RESPONSE; MULTIPLE RESPONSE PERMITTED) Only hourly paid Only salaried Salaried and hourly paid I.2 What are the different methods of payment you use to pay the Hourly Paid employees today? (READ OUT, ROTATE & RECORD RESPONSE; MULTIPLE RESPONSE PERMITTED)

Cash Cheque Direct bank transfer Other
I.3 What are the reasons that you dont pay all the Hourly Paid employees by direct bank transfer? (RECORD RESPONSE IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED) Not all employees have a bank account We dont have the details of all employees bank accounts Our employees turnover so fast, its not worth setting it up Our employees dont want to be paid that way

The payments vary in size too much Too much paperwork involved Doesnt suit our accounting/payroll system Against our union/workplace agreement Legislation says we have to give a choice Other
176
Exploration of future electronic payments markets I.4 What are the different methods of payment you use to pay the Salaried employees today? (READ OUT, ROTATE & RECORD RESPONSE; MULTIPLE RESPONSE PERMITTED)

Cash Cheque Direct bank transfer Other
I.5 What are the reasons that you dont pay all the Salaried employees by direct bank transfer? (RECORD RESPONSE IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED)

Not all employees have a bank account We dont have the details of all employees bank accounts Our employees turnover so fast, its not worth setting it up Our employees dont want to be paid that way The payments vary in size too much Too much paperwork involved Doesnt suit our accounting/payroll system Against our union/workplace agreement Legislation says we have to give a choice Other
I.6 What are the different methods of payment you use to make employees superannuation contributions today? (READ OUT, ROTATE & RECORD RESPONSE; MULTIPLE RESPONSE PERMITTED)

Check BPAY Direct bank transfer Other
I.7 What are the reasons that you dont pay all the superannuation contributions electronically? (RECORD RESPONSE IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED)

Need to provide more information/data than provided in an electronic payment We dont have the details of the funds bank accounts Too expensive to set up the systems The payments vary in size too much Too much paperwork involved
177

Does not provide enough record of payment Doesnt suit our accounting/payroll system Other
I.8 How do you handle the business expenses of employees today? (RECORD RESPONSE; MULTIPLE RESPONSE PERMITTED) Provide them a cash advance They pay any expenses and claim back later Provide them company credit/charge cards They are paid a standard allowance/per diem Other
General G.1 Which of the following would best describe your organisations total annual sales revenue for your most recent financial year? (READ OUT & RECORD RESPONSE) Less than $1 million $1 million up to $5 million

$5 million up to $10 million $10 million up to $20 million $20 million up to $50 million $50 million up to $100 million Over $100 million Refused/Dont know
G.2 Which of the following would best describe your organisations growth in sales revenue over the last year? (READ OUT & RECORD RESPONSE) Declined by 11% or more

Declined by between 1 and 10% Revenue stayed the same Grew by between 1 and 10% Grew by between 11 and 20% Grew by 21% or more Refused/Dont know
G.3 What type of Internet connection does your business have today? (RECORD RESPONSE) Satellite Wireless broadband 178

Fibre optic cable / T1 connection ISDN Cable modem broadband ADSL broadband Dial-up service None Other Dont know
G.4 Could I please record your name in case we need to get back in touch with you? (RECORD RESPONSE) Respondents Name:
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Exploration of future electronic payments markets APPENDIX E CONSUMER SURVEY QUESTIONNAIRE
QUOTAS A random sample of 300 individuals was surveyed over the telephone in September 2005 by I-View. Their age and geographical distribution are shown below in tables E1 and E2.
E.1 Quotas by age grouping
Age group 1630 year olds 3150 year olds 51 year olds and above Total
Source: I-View, CIE and EDC
Number surveyed 88 104 108 300
E.2 Respondents by state and region

State Brisbane QLD other Sydney NSW other Melbourne VIC other Hobart TAS other Adelaide SA other Perth WA other Canberra ACT other
Source: I-View, CIE and EDC
Surveys 28 24 70 25 54 23 9 6 20 7 13 9 11 1
Percentage Population of total estimate 9.3% 8.0% 23.3% 8.3% 18.0% 7.7% 3.0% 2.0% 6.7% 2.3% 4.3% 3.0% 3.7% 0.3% 7.7% 9.6% 21.5% 12.6% 18.0% 7.6% 1.0% 1.6% 6.1% 2.3% 7.0% 2.5% 1.0% 0.7%
Desired target 23 29 65 38 54 23 3 5 18 7 21 8 3 2
SURVEY QUESTIONS Payments at and in the home H.1 What type of payment methods do you use to make payments at or from your home, for example phone and electricity bills, tradesmen invoices, etc? (READ OUT, ROTATE, RECORD RESPONSE, MULTIPLE RESPONSE PERMITTED)

Cash Personal Cheque Money Order Debit Card
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Credit Card (eg. MasterCard, Visa, Bankcard, American Express Blue) Charge Card (eg. American Express, Diners Club) Direct Debit transaction from Bank Account Direct Debit transaction from Credit Card Direct Bank Transfer through Internet banking Bank Cheque Any other ?______________________(SPECIFY)
H.2 How would you divide 100 points across the different payment methods you use to pay these bills, in proportion to the number of payments you make at or from home? (READ OUT RESPONSES FROM H.1 & RECORD RESPONSE ON POINT SPLIT) Cash Personal Cheque

Money Order Debit Card Credit Card (eg. MasterCard, Visa, Bankcard, American Express Blue) Charge Card (eg. American Express, Diners Club) Direct Debit transaction from Bank Account Direct Debit transaction from Credit Card Direct Bank Transfer through Internet banking Bank Cheque Any other ?______________________(SPECIFY)
H.3 Still thinking about all those payments made at or from home, what are all of the various payment channels you use? (READ OUT, ROTATE & RECORD RESPONSE; MULTIPLE RESPONSE PERMITTED)

EFTPOS Cash over the counter at a shop Mail Card on the Internet Telephone to a person Telephone to a computer response system BPAY PostBillPay PayPal Australia Post outlet/shop BillExpress WesternUnion Any other? ______________________(SPECIFY) 181
Exploration of future electronic payments markets H.4 How would you divide 100 points across the different payment channels you use to pay these bills, in proportion to the number of payments you make on bills at home? (READ OUT RESPONSES FROM H.3 & RECORD RESPONSE ON POINT SPLIT)

EFTPOS Cash over the counter at a shop Mail Card on the Internet Telephone to a person Telephone to a computer response system BPAY PostBillPay PayPal
Australia Post outlet/shop BillExpress WesternUnion Any other? ______________________(SPECIFY) (TAKING EACH OF THE RESPONSES IN H.1 ONE AT A TIME, RUN THROUGH THE FOLLOWING QUESTION AS MANY TIMES AS NEEDED) H.5 You said that you use <INSERT PAYMENT METHOD FROM H.1> to make some payments at home, which types of bills do you pay this way? (RECORD RESPONSES IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED, UNPROMPTED)

Boat registration/licence Car insurance Club & other memberships Council rates Credit card/other card statement Educational fees Electricity Finance/loan statement Gas Home shopping/delivery Home/contents insurance Income tax Internet service Landline telephone Life insurance Medical insurance
182
Mobile telephone Motor vehicle registration/driving licence Pay TV Publication subscriptions Rent Tradesmen Water bill/rates Other ______________________(SPECIFY) (REPEAT H.5 AS MANY TIMES AS NEEDED) I would now like you to think about the Internet, and your use of it for financial transactions. H.6 In a typical month, how often would you make a purchase using the Internet? (RECORD RESPONSE)

Never 1 or less (GO TO H.8) 2 (GO TO H.8) 3 (GO TO H.8) 4 (GO TO H.8) 5 or more (GO TO H.8)
H.7 Why have you never purchased anything over the Internet? (RECORD RESPONSES IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED, UNPROMPTED)

I prefer to see/feel what I am buying in person I havent had the need to buy anything that way Im nervous/concerned about paying for things over the Internet Im concerned that the supplier wont deliver the goods I dont have a credit card to pay over the Internet I dont have access to/dont know how to use the Internet
Refuse to say/Dont really know Other ______________________(SPECIFY) (GO TO H.9) H.8 What different payment methods do you normally use to pay for items purchased over the Internet? (RECORD RESPONSES IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED, UNPROMPTED)

Debit Card on the Internet Credit Card (eg. MasterCard, Visa, Bankcard, American Express Blue) on the Internet Charge Card (eg. American Express, Diners Club) on the Internet 183

Send a personal cheque in the mail Send a money order in the mail Send a Bank cheque in the mail Direct Funds Transfer from my bank account on the Internet PayPal on the Internet BPAY on the Internet Australia Post PostBillPay on the Internet Other ______________________(SPECIFY)
H.9 What payment method do you feel is the safest to use over the Internet? (RECORD RESPONSE) Debit Card Credit Card (eg. MasterCard, Visa, Bankcard, American Express Blue) Charge Card (eg. American Express, Diners Club) Direct Funds Transfer from my bank account PayPal BPAY Australia Post PostBillPay None, they are all unsafe
Other ______________________(SPECIFY)
H.10 Ignoring any constraints and including any methods that arent readily available today, what method of payment would you most prefer to use over the Internet? (RECORD RESPONSE) Debit Card Credit Card (eg. MasterCard, Visa, Bankcard, American Express Blue Charge Card (eg. American Express, Diners Club) Direct Funds Transfer from my bank account PayPal

BPAY Australia Post PostBillPay Other ______________________(SPECIFY) I dont use/want to use the Internet to make payments GO TO H.12)
H.11 Why would you most prefer <INSERT ANSWER FROM H.10> to make payments over the Internet? (RECORD RESPONSES IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED, UNPROMPTED)

I feel its more secure Its more convenient It avoids going into credit 184

It delays when I have to pay from my bank account It allows me to schedule the date of the payment I dont have a credit card It saves me money/is cheaper I get loyalty points Its easier to use Other ______________________(SPECIFY)
H.12 Have you transferred money to another persons bank account using the Internet or a telephone? (RECORD RESPONSE) No (GO TO O.1) Yes H.13 When you do this, how long do you think it is before the funds are available in that other persons bank account? (RECORD RESPONSE IN MOST APPROPRIATE CATEGORY) Instantly/immediately Less than 1 hour 1 to 6 hours

7 to 12 hours 12 to 24 hours The next day 2 days More than 2 days
H.14 If I told you that it took 24 hours, what fee would you be prepared to pay so that the money is transferred immediately? (RECORD RESPONSE IN MOST APPROPRIATE CATEGORY) Nothing, wouldnt pay a fee Less than $1.00 $1.00 to $1.99 $2.00 to $2.99 $3.00 to $3.99

$4.00 to $4.99 $5.00 to $5.99 $6.00 or more
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Payments out and away from home O.1 Which of the following methods have you used in the last 6 months to pay for purchases when you are out and away from your home? (READ OUT, ROTATE & RECORD RESPONSE; MULTIPLE RESPONSE PERMITTED) A. Cash B. Personal Cheque C. Money Order D. Debit Card/EFTPOS E. Credit Card (eg. MasterCard, Visa, Bankcard, American Express Blue F. Charge Card (eg. American Express, Diners Club) G. Bank Cheque

H. Store Card (eg. David Jones) I. Fuel Card (eg. BP, Caltex) J. Cabcharge Other ______________________(SPECIFY)
O.2 How would you divide 100 points across these different payment methods that you have used to make payments when you are out and away from your home, firstly in terms of the number of payments/transactions you make? (READ OUT & RECORD RESPONSE) [ONLY OFFER IF ANSWERED IN O.1] Cash [ONLY OFFER IF ANSWERED IN O.1] Personal Cheque [ONLY OFFER IF ANSWERED IN O.1] Money Order [ONLY OFFER IF ANSWERED IN O.1] Debit Card/EFTPOS [ONLY OFFER IF ANSWERED IN O.1] Credit Card [ONLY OFFER IF ANSWERED IN O.1] Charge Card [ONLY OFFER IF ANSWERED IN O.1] Bank Cheque [ONLY OFFER IF ANSWERED IN O.1] Store Card [ONLY OFFER IF ANSWERED IN O.1] Fuel Card [ONLY OFFER IF ANSWERED IN O.1] Cabcharge [ONLY OFFER IF ANSWERED IN O.1] Other _____________(SPECIFY) TOTAL 100 O.3 How would you divide 100 points across these different payment methods that you have used to make payments when you are out and away from your home, in terms of the value of payments/transactions you make? (READ OUT & RECORD RESPONSE)
[ONLY OFFER IF ANSWERED IN O.1] Cash
186
[ONLY OFFER IF ANSWERED IN O.1] Personal Cheque [ONLY OFFER IF ANSWERED IN O.1] Money Order [ONLY OFFER IF ANSWERED IN O.1] Debit Card/EFTPOS [ONLY OFFER IF ANSWERED IN O.1] Credit Card [ONLY OFFER IF ANSWERED IN O.1] Charge Card [ONLY OFFER IF ANSWERED IN O.1] Bank Cheque [ONLY OFFER IF ANSWERED IN O.1] Store Card [ONLY OFFER IF ANSWERED IN O.1] Fuel Card [ONLY OFFER IF ANSWERED IN O.1] Cabcharge [ONLY OFFER IF ANSWERED IN O.1] Other _____________(SPECIFY) TOTAL 100 The size or value of the payment can affect the method that you use, so I would like to take you through some payment scenarios away from home. O.4 What is your most common method of payment for something in a shop costing $10 or less? (RECORD RESPONSE, UNPROMPTED, ONE ANSWER)

Cash Personal Cheque Money Order Debit Card/EFTPOS Credit Card (eg. MasterCard, Visa, Bankcard, American Express Blue) Charge Card (eg. American Express, Diners Club) Bank Cheque Store Card (eg. David Jones) Fuel Card (eg. BP, Caltex) Other ______________________(SPECIFY)
O.5 Why do you normally use <INSERT ANSWER FROM O.4> for payments of $10 or less? (RECORD RESPONSES IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED, UNPROMPTED)

Simple to use Easy to limit and control spending Dont have enough cash with me Dont have a credit card Safest method Quickest method I dont like using credit It allows me to control my spending Most accepted by shops for this value 187

Dont get surcharged Receive loyalty points Other ______________________(SPECIFY)
O.6 What is your most common method of payment for something costing around $30? (RECORD RESPONSE, UNPROMPTED, ONE ANSWER) Cash Personal Cheque Money Order Debit Card/EFTPOS Credit Card (eg. MasterCard, Visa, Bankcard, American Express Blue Charge Card (eg. American Express, Diners Club) Bank Cheque Store Card (eg. David Jones) Fuel Card (eg. BP, Caltex) Other ______________________(SPECIFY) O.7 Why do you normally use <INSERT ANSWER FROM O.6> for payments of around $30? (RECORD RESPONSES IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED, UNPROMPTED)
Simple to use Easy to limit and control spending Dont have enough cash with me Dont have a credit card Safest method Quickest method I dont like using credit It allows me to control my spending Most accepted by shops for this value Dont get surcharged Receive loyalty points Other ______________________(SPECIFY) O.8 What is your most common method of payment for something costing around $100? (RECORD RESPONSE, UNPROMPTED, ONE ANSWER)

Cash Personal Cheque Money Order Debit Card/EFTPOS 188
Credit Card (eg. MasterCard, Visa, Bankcard, American Express Blue Charge Card (eg. American Express, Diners Club Bank Cheque Store Card (eg. David Jones) Fuel Card (eg. BP, Caltex) Other ______________________(SPECIFY) O.9 Why do you normally use <INSERT ANSWER FROM O.8> for payments of around $100? (RECORD RESPONSES IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED, UNPROMPTED) Simple to use Easy to limit and control spending Dont have enough cash with me

Dont have a credit card Safest method Quickest method I dont like using credit It allows me to control my spending Most accepted by shops for this value Dont get surcharged Receive loyalty points Other ______________________(SPECIFY)
Cheques CH.1 [ONLY RESPONDENTS ANSWERING PERSONAL CHEQUE IN H.1 AND/OR O.1] On average, roughly how many personal cheques would you write per month? (RECORD RESPONSE) None (GO TO CP.1) Less than 1 1-2 3-5
6-10 11 or more CH.2 Why do you use cheques to make payments? (RECORD RESPONSES IN MOST APPROPRIATE CATEGORY, MULTIPLE RESPONSE PERMITTED, UNPROMPTED)

Only option available to me Choice of payment preferred by the supplier
189

Its easier to keep track of my money Takes longer for the money to come out of my account Allows me to choose exactly when I pay I dont have a credit card I dont have Internet access/banking Ive always paid by cheque, dont know any other way Most convenient method Least costly method Gives me confidence in payment being made Keeps my personal information private Wide coverage of acceptance Refuse to say/Dont really know Other ______________________(SPECIFY)
The Cs of payment methods CP.1 [USING THE COMBINED ANSWERS GIVEN TO QUESTIONS H.1 AND O.1, REMOVING DUPLICATIONS, ASK] In terms of its level of convenience to you, how would you rate the following payment methods on a scale of high medium and low, where high means it is highly convenient to you? (READ OUT & RECORD RESPONSE) Low Medium High Payment method 1 Payment method 2 Payment method 3 Payment method 4 Payment method 5 Payment method 6 CP.2 [USING THE COMBINED ANSWERS GIVEN TO QUESTIONS H.1 AND O.1, REMOVING DUPLICATIONS, ASK] In terms of its level of cost to you, how would you rate the following payment methods on a scale of high medium and low, where high means it is high cost to you? (READ OUT, ROTATE FROM CP.1 & RECORD RESPONSE) Low

Medium
High
Payment method 1 Payment method 2 Payment method 3 Payment method 4 Payment method 5 190
Payment method 6 CP.3 [USING THE COMBINED ANSWERS GIVEN TO QUESTIONS H.1 AND O.1, REMOVING DUPLICATIONS, ASK] In terms of its level of confidence to you, how would you rate the following payment methods on a scale of high medium and low, where high means you have a high degree of confidence that the payment will be made without mistake? (READ OUT, ROTATE FROM CP.2 & RECORD RESPONSE) Low Medium High Payment method 1 Payment method 2 Payment method 3 Payment method 4 Payment method 5 Payment method 6 CP.4 [USING THE COMBINED ANSWERS GIVEN TO QUESTIONS H.1 AND O.1, REMOVING DUPLICATIONS, ASK] In terms of its level of privacy for you, how would you rate the following payment methods on a scale of high medium and low, where high means that your personal information will be highly protected? (READ OUT, ROTATE FROM CP.3 & RECORD RESPONSE) Low Medium High
Payment method 1 Payment method 2 Payment method 3 Payment method 4 Payment method 5 Payment method 6 CP.5 [USING THE COMBINED ANSWERS GIVEN TO QUESTIONS H.1 AND O.1, REMOVING DUPLICATIONS, ASK] In terms of its level of coverage for you, how would you rate the following payment methods on a scale of high medium and low, where high means it has very widespread acceptance as a means of payment? (READ OUT, ROTATE FROM CP.4 & RECORD RESPONSE) Low Medium High

Payment method 1 Payment method 2 Payment method 3 Payment method 4 Payment method 5 Payment method 6
191
Exploration of future electronic payments markets CP.6 All of the following characteristics are important when choosing a payment method, but which are the two least important characteristics for you? (READ OUT, ROTATE & RECORD TWO RESPONSES) Convenience Cost to you Confidence in payment being made Privacy of personal information Wide coverage of acceptance Changes C.1 Looking ahead into the next 3 years, which two payment types do you expect to make more use of than in the past? (RECORD TWO RESPONSES IN MOST APPROPRIATE CATEGORIES) EFTPOS Cash over the counter at a shop Mail Card on the Internet Telephone to a person
Telephone to a computer response system BPAY PostBillPay PayPal Australia Post outlet/shop BillExpress WesternUnion Other ____________ (specify) None, dont anticipate any change C.2 Which one of the following characteristics of current electronic payments methods (eg. debit card, BPAY) do you find least attractive? (READ OUT, ROTATE & RECORD ONE RESPONSE) Convenience Cost to you
Confidence in payment being made Privacy of personal information Wide coverage of acceptance C.3 Of the factors just mentioned, improvements in which one would most encourage you to make greater use of electronic forms of payments? (READ OUT, ROTATE & RECORD ONE RESPONSE)
Convenience
192
Cost to you Confidence in payment being made Privacy of personal information Wide coverage of acceptance C.4 I will now read you out a number of statements and for each statement I would like you to tell me if you Strongly Agree, Agree, Neither Agree or Disagree, Disagree or Strongly Disagree (READ OUT, ROTATE & RECORD ONE RESPONSE) Strongly disagree Strongly agree I would make more use of electronic payments if they were more convenient to me 1 2 3 4 5 I would make less use of electronic payments if the costs of usage went up 1 2 3 4 5 Improvements in the protection of my private information would encourage me to make greater use of electronic payments 1 2 3 4 5 Reductions in confidence of payment execution would not impact my use of electronic payments 1 2 3 4 5 Improvements in coverage and acceptance would encourage me to make greater use of electronic payments 1 2 3 4 5 Electronic bill presentment EB.1 Do you currently receive any bills electronically rather than on paper through the post? (RECORD RESPONSE) No(GO TO EB.3) Yes EB.2 Where or how do receive these electronic versions of your bills? (READ OUT, ROTATE & RECORD RESPONSE, MULTIPLE RESPONSE PERMITTED)

At the biller companys website
At my banks website Via an Email sent to me At Australia Posts website Other (Record verbatim) EB.3 At which of the following types of websites would you like to be able to view and pay your bills online?
193
Exploration of future electronic payments markets (READ OUT, ROTATE & RECORD RESPONSE, MULTIPLE RESPONSE PERMITTED) My bank or credit union website Biller company website Australia Posts website My personal finance website My Internet Service Providers website A web portal site, like NineMSN Do not want to view and pay bills online General Finally, the following questions gather demographic information, so that we can ensure that we have a representative sample in our survey. This personal information will not be released. G.1 (INTERVIEWER TO NOTE GENDER OF RESPONDENT) Male Female G.2 What is your marital status? Single (GO TO G.4)
Married/de facto Divorced/widowed/separated Refused (DO NOT READ) G.3 How many dependent children in the household? (RECORD RESPONSE) None 1 2 3 More than 3 Refused G.4 And which of these would best describe your total annual household income before tax? (RECORD RESPONSE)

Less than $20 000 $20 000 to $39 999 $40 000 to $59 999 $60 000 to $79 999 $80 000 to $99 999 $100 000 to $149 999
194
OVER $150 000 Refused G.5 What postcode do you live in? (RECORD RESPONSE) G.6 What is the highest level of educational qualification you achieved? (RECORD RESPONSE) Elementary Junior Senior College University Masters Other ___________________ Refused G.7 What type of Internet connection do you have at home today? (RECORD RESPONSE) Satellite Wireless broadband

Cable modem broadband ADSL broadband Dial up service None Other Dont know
195
Exploration of future electronic payments markets APPENDIX F EXTRACT FROM DE LA RUE COST OF CASH STUDY
THE COST OF HANDLING CASH IN ASIA

Preamble De La Rue and The Asian Banker Journal is pleased to announce the completion of a region-wide research on the Cost of Handling Cash in Asia. The research was carried out by the research arm of the Asian Banker journal and was principally sponsored by De La Rue Cash Systems, a division of De La Rue plc, the cash to cards company that is most famously known as the worlds largest currency note printer. This is one of the most important, if not ambitious, research products ever undertaken in the region on a topic that is core to the everyday operations of financial institutions, retailers and other organisations. While we did not commence this research with a view of establishing a cost to handling cash, it became evident that ascribing a cost was fundamental to assisting the users of this report in their cash cycle re-engineering exercises. The fact that this is possibly the first research product to discuss the cost and processes of handling cash in Asia will undoubtedly attract considerable attention. We expect there to be considerable analysis of our work, and accept that any future work will improve on what we strove to achieve. We welcome feedback in this regard. The detailed key findings have been published in a report entitled The Cost of Handling Cash: Cash Handling Strategies for Asia by the Asian Banker Journal and available to the industry. The Key Findings Based on the research documented in this Report, the findings were as follows: 1. The Cost of Handling Cash in Asia is high Establishing a cost to handling cash is important because it provides a benchmark on which bankers and other cash intensive organisations can re-engineer their processes. The cost of handling cash in the different countries, indexed relative to each other, with Singapore as the base for the Overall Cost Index is as stated below.
196

The Cost of Handling Cash Country Cost of Handling One Unit of Cash in Local Currency Terms Per Transaction A$0.001 per A$1 HK$0.0002 per HK$ 0.000767 Rupiah per 1,000 Rupiah RM$0.000575 per RM1 0.00041 Pesos per 10 Pesos S$0.000177 per S$1 NT$0.000274 per NT$1 0.000329 Baht per 10 Baht Cost of Handling Cash in Local Currency terms per annum Total visible and invisible costs and opportunity costs to support local currency in circulation per annum A$7,937.46 million HK$7,001.60 million 6,125858.76 million Rupiah RM 3,617.59 million 14,621.35 million pesos S$656.62 million NT$51,982 million 39888.86 million Baht
Australia Hong Kong Indonesia
A$0.40 for every A$1 HK$0.09 for every HK$1 280 Rupiah for every 1,000 Rupiah RM0.21 for every RM1 15 Pesos for every 100 Pesos S$0.065 per S$1 NT$0.10 for every NT$1 12 Baht for every 100 Baht
Malaysia Philippines Singapore Taiwan Thailand
Source: Asian Banker Journal
To benchmark the cost of handling cash, we indexed the actual or indicative values of the following cost elements: i. ii. iii. iv. v. vi. vii. Transport. Interest Rate Lost (Cost of Holding)/ Storage. Security/ Cash in Transit Companies. Manpower. Insurance / Fraud. Level of Automation Others.
The Per Transaction Cost appears very insignificant. For this reason, almost all end-users of cash find that it cost them nothing to deal in cash for small value transactions. However, the cost consideration is very significant if viewed from an institutional point of view. For example, at A$0.40 per dollar in Australia, the total cost of supporting all the cash in circulation in this country is A$7937.46 billion per annum. This of course includes all the interest lost for cash in float, the salaries of staff, transportation, opportunity costs and other cost items that are otherwise invisible. The corollary here is that cash makes eminent sense to the end-user, but saddles the organisations involved in processing the cash through its cycles with tremendous hidden and obvious costs.
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Exploration of future electronic payments markets Our study shows that costs in domestic currency terms are highest in Australia. Transportation and salary costs make Australia the most expensive country to process cash in this part of the world. This possibly also relates to why it has been the first country in the region to pioneer the re-engineering of their cash handling processes. The diagram below denotes how we attributed the costs to Singapore. The Costs Associated to the Cash Handling Process in Singapore Per Day
Monetary Authority of Singapore (MAS) (De facto central bank) B C C S
(1)
Cash Center (Notes) Cash Center (Coins)
Banks Cash Centers (S$900m costing S$203,014)
DISTRIBUTION ATMs (S$89.4m costing S$56,566) Retailer Business Transactions (S$45m costing $851,096) Bank Branches (S$216.9m costing S$223,714)
End Users (S$927.4m costing S$190,565)
Notes: (1) BCCS: Board of Commissioners of Currency Issuers of Singapores currency notes. The numbers in the boxes denote the total amount of cash attributable to each section and the cost associated to the handling that cash. Source: Asian Banker Journal
We attributed a cost of S$190,565.33 to the cost of the S$927million of cash in end-user or consumer hands, but this is only based on opportunity cost for money that would otherwise be earning interest in the banks. Many references have been made in the past on the actual cost of handling cash, especially by those who promote alternative payment devices such as credit cards and electronic purses. References have been made to usually support the common and mistaken notion that the alternative payment devices are cheaper and safer than cash.
198
Exploration of future electronic payments markets The findings of the research do not support this assertion. Cash continues to be the cheapest and safest form of transaction device for the everyday transactions. The notion that cash is more prone to fraud is also not supported by empirical evidence. If anything, fraud on alternative payment devices is far more compelling.
2.
The use of Cash in Asia is strong and continues to increase.
The amount of cash in active circulation in most countries accounts for between four and eight percent of their Gross Domestic Produce (GDP). Correlation between Cash in Active Circulation and GDP
3500 3000 2500 2000 8 1500 6 1000 500 0 4 2 0 16 14 Cash Per Person 12 Cash in circulation as a % of GDP 10
Source: Asian Banker Journal.
Except for Malaysia, Thailand and China, the penetration of cash as a percentage of the GDP appears to move proportionally to the cash per capita. The correlation of cash to the GDP appears to level off to about four percent as the cases of the Philippines and Indonesia would suggest. The figure for China suggests that the economy is far more dependent on cash than any other country in the region. Australia appears to be able to hold its cash at an efficient ratio of about four percent of the economy although the cash per capita is very high. Although cash as a percentage of total payments has been stable, the use of cash in absolute terms has continued to increase. Modern electronic payment methods have generally absorbed the rise in new demand without actually displacing cash. 199
In spite of the advent of new payment devices, the use of cash in absolute terms continues to increase steadily over the years. Our data shows that cheques, credit card, debit card, electronic funds transfer (EFT) have served to largely absorb the tremendous growth in M1 money. But these have hardly reduced the volume of cash itself. Also, these payment devices serve well their niche markets to provide convenience and accessibility. But as discussed in the report, they have not displaced cash on the basis of cost of transaction or security, as commonly perceived. The primary data supporting the illustration above is stated in the table below.
Currency in circulation Countries Currency in Circulation (in million) Local Currency Australia Hong Kong Indonesia Malaysia Philippines Singapore Taiwan Thailand
Cash per capita US$ 821.5 1675.18 45.59 331.84 53.65 2278.77 863.5 209.55
US $ 15,033.07 10,051.10 9003.32 6835.97 3696.46 7,064.18 18,651.60 12,824.35
A$19,843.65 HK 77,795.51 RPH 21,878,067 RM17,226.64 PS 97,475.65 S$ 10,101.78 NT$519,820.09 BHT 332,407.15
3.
The use of Cash is dwarfed only by the use of cheques in most countries.
The use of cheques dominates most countries in the region. This is usually for businessto-business transactions, but does not indicate the percentage for consumer-to-consumer and consumer-to-business transactions.
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Non-cash transactions in Asia Countries *Value of Debit transactions In local currency in million (US$ million) A$1,900.00 (US$1,235) HK$3618.68 (US$467.53) RPH 303.70 (US$0.038) Negligible (1) PS 719.901 (US$27.300) S$278.30 (US$172.55) NT$267.55 (US$9.6) BHT1297.51 6 (US$7.4438) Vol. Of credit card transactions Local currency in millions (US$ million) Cheques In local currency (US$ millions)
Australia Hong Kong Indonesia Malaysia Philippines
A$2,300.00 (US$1,495) HK$99102.96 (US$12,804) RPH8,431,000 (US$1044.60) Na. PS26,370.53 (US$1,000.02) S$7915.00 (US$4907.30) NT$97,068 (US$2912.04) BHT$119,904 (US$2997.60)
A$4,797,249.6 (3,634,280) HK$16,137,040 (2,084,889) RPH5,506,380 (2,266) RM668445.12 (265,256) PS1,124,100.30 (US$42,628) S$547658.54 (US$382,978) NT$10,412,566 (US$373,612) BHT4,093,967.3 (US$164,814)
Singapore Taiwan Thailand
Debit transaction here refers to point of sale transfer. (i) This figure reflects the total number of debit cards and customer payment accounts. Based on latest available figures as at December 1997. Source: The Asian Banker Journal
There is still much scope for the development of alternative retail payment systems, particularly card-based ones. 4. Banks that have a strong liabilities business tend to be relatively profitable.
The graph below indexes several banks in the region on their liability ratios against profitability from their 1996 results. The higher the index the stronger the banks liabilities base. It suggests that there is a correlation between the ability of banks to be profitable and the strength of their liabilities base.
201

Liabilities-Profitability Coefficient for selected banks
0.014 0.012 0.01 0.008 0.006
Credit Lyonnais National Australia Bank Bangkok Bank Thai Farmers Bank PCI Bank (Phil)
0.004 0.002 0
Multi Purpose Bk (Mal) Hongkong Bank (HK)
-5
0
Profitability Index
10
Source: Asian Banker Journal.
Cash continues to hold a very strong value proposition to financial institutions and other service providers today. It provides a basic point of interaction between service provider and consumer, from where to market other products and services. The value proposition of cash is even higher during a high inflationary period, as being experienced in Asia today. Efficient mobilization and management of retail deposits, which are usually based strongly on cash, helps strengthen the liabilities base of banks, reduce the cost of funds and help attain profitability. Charging for cash handling services, either to consumers or to retailers, has been achieved as a punitive or cost proposition to discourage customers from transacting in cash. There is scope to charge for cash handling services as a value proposition. In the long-term, moving away from cash can be a mistake for banks, and can result in cash-in-transit companies and major retailers taking over a major relationship building platform with consumers. It is however possible for banks to retain the primary relationship with their customers while out-sourcing the cash handling operations to third parties. This is already evidence in countries such as the United Kingdom. Supermarket chains have created a role for themselves as major providers of retail financial services as a result of their ability to streamline their cash handling and other payment strategies. Not dealing with their cash handling processes can result in banks incurring huge operational costs, which in some places is said to be as high as 80 percent of branch operations cost. While most banks in the region today have identifiable managers responsible for projects such as branch re-engineering and risk management, we found only one bank in Asia that had a manager whose role specifically oversees its cash handling processes. That also only because the bank is a major note issuing agency as well. 202
Exploration of future electronic payments markets 5. The roles of Regulatory Authorities and Note Issuing Agencies are changing Banks are increasingly being forced to deal with their cash handling processes by the central banks. In the past, the central banks absorbed most of the cost of ensuring the steady supply of physical cash in the economy. But central banks and note issuing agencies (NIA) in the region are either working at or planning to divest themselves from most of the cash handling process. Bank Negara Malaysia and the Reserve Bank of Australia are pioneers in this regard, moving the onus of their cash processing services to the commercial banks. Generally, the central banks and NIAs want to retain the role of manufacturing and destroying currency notes, but to out-source all other functions. There are already instances of active outsourcing of certain notes and coin processing activities to third party companies such as Cash-In-Transit and Security companies. The practice of Held-to-Order in the United Kingdom provides central banks and commercial banks with a means to rationalize their cash handling processes efficiently and to minimize operational costs. Held-to-Order enables banks to lodge the cash in their possession with their accounts at the central bank without having to physically transport and store the cash. 6. The role of Cash-In-Transit and Security Companies has to be expanded Cash-in-Transit (CIT) and Security companies have over the years, moved up the service value chain to provide more strategic cash processing services. The biggest obstacle faced by the CITs is the traditional image of being mere transport and security providers. They are however able to provide end-to-end cash processing services which would encompass collecting, depositing, processing (counting, sorting, and bundling), transporting and providing security for cash handling to the bank branches and ATMs. This is already widely practiced in Australia and Taiwan. But some banks have not become receptive to such services. They fear that confidentiality will be compromised. The idea of being associated with cash services requires more radical thinking on the part of financial service organizations. 7. Retailers make natural partners in the Cash Handling Process
Large corporations and retailers have generally been very proactive in rationalizing their cash handling processes. There are opportunities for banks to either service the retailers or establish strategic alliances with them in order to rationalize the cash handling process. The operating principle in rationalizing relationships with retailers is that the processing of cash is best carried out at the source or at primary element in the cycle. The more proactive retailers in the West have invested in their own cash processing capabilities. Retailers in Asia have demonstrated their desire and capability to be more proactive, except that current conditions have not forced them to do so.
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Exploration of future electronic payments markets Jaya Jusco stands out as an Asian retailer that has proactively invested in its own Electronic Data Interchange (EDI) network to reduce the cash based transactions that it makes with its leading suppliers and customers. The practice of Cash Back, which is popular in the United Kingdom and Australia, is a workable practice that could be encouraged in Asia. Cash Back is a procedure by which retailers re-cycle the cash they encounter back to consumers and gain several benefits in the process. Overall, retailers are in a strong position to use their cash handling capabilities to develop strong relationships with their customers. They are also in a very strong position to establish primary financial service relationships with consumers. This is most evident in the evolution of supermarket chains in the United Kingdom, which have become financial service providers in their own right. To a certain extent the increasing role of non-banks in cash handling initiatives have threatened the image of banks as cash providers. 8. ATMs and Fit Notes Automated Teller Machines (ATM) and vending machines provide the most compelling reason for rationalizing the cost and processes of handling cash. ATMs are very large cash hoarders and require machine fit notes. This places a strain on the distribution of cash. It was possible to work out the average cost of cash in ATMs because of the practice of minimum average cash holding in ATMs.
Average Holding Cost of Cash in ATMs
Country
Average Amount of Cash Held (US$)
Storage Cost = Average amount of Cash X Interbank Rates (US$) 4,493 24,700 26,000 8,625 9,225
Total No of ATMs (1996/7)
ATMs Per million population
Growth in ATMs (19931996)
Australia Hong Kong Indonesia Jakarta Malaysia Philippines Metro Manila Singapore Taiwan Thailand Bangkok
91,000 260,000 100,000 75,000 60,000
7,912 2,379 2,840 1,488 2,930 2,439 1,463 1,635 10,232 3,685 2,211
395.63 396.48 14.2 303.8 146.52 32.52 242.2 510.7 487.2 61.42 599.67
NA NA 660.9% NA 76% 83.5% NA 20.6% 52.52% 98% NA
47,200 75,000 60,000
3,540 4,050 15,900
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Exploration of future electronic payments markets Based on interest rates and the minimum hold balances alone, the cost of maintaining cash in ATMs in Indonesia and Hong Kong would appear to be much higher than the rest of the region. The cost in Hong Kong is even higher if rental is taken into account. This has been offset by a reduction in the number of branches in the territory.
Assumptions
The methodology in this exercise involved the following assumptions: Cash was treated as a commodity that had to be dealt with principles derived from the science of distribution and logistics rather than from banking. Cash handling refers not only to the manual tasks of counting, sorting and treating physical notes and coins but also the underlying cost factors such as interest lost, storage, salaries, security and transportation. We focused on bench marking the cost of handling cash between the different countries on a relative rather than on an absolute basis. We used the island of Singapore as the controlled benchmark that contained all the elements of the cash handling processes available in all countries.
Research Methodology
The research methodology involved conducting in-depth, one-on-one interviews with the different players in the cash cycle. These include the manufacturers (note issuing agencies), distributors (central banks and commercial banks, cash-in-transit companies) and end-users (corporations, transport companies and retailers). We also conducted working sessions with parties who have a vested interest in the development of cash to test and verify the facts represented in this report.
About De La Rue Cash Systems
De La Rue Cash Systems is the worlds largest cash handling systems provider and is a Division of UK based De La Rue plc, the cash to cards group, most famous as the worlds largest commercial printer of bank notes. De La Rue Cash Systems provides security and cash handling equipment to the world's banking, retail, leisure and transport industries. Its extensive product portfolio offers cash handling solutions for Teller Automation in bank branches and the processing, counting and sorting of cash. It also provides software, security equipment and a full range of consultancy services in support of each product range. The company's commitment to R&D focuses on new products designed to reduce the cost of handling cash for its customers. The division operates around the world and has offices in some 25 countries employing over 3000 staff. The company also supplies cash handling and physical security equipment to banks and retailers, as well as identity, electronic payment and smart card systems to governments and commerce worldwide.
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