Clearer graduated payments regulation

Recommendation 16

Enhance graduation of retail payments regulation by clarifying thresholds for regulation by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.

Strengthen consumer protection by mandating the ePayments Code. Introduce a separate prudential regime with two tiers for purchased payment facilities.


Australia has a complex framework for regulating payments. Relevant provisions are contained in numerous laws, regulations and instruments administered by ASIC, APRA and the Payments System Board (PSB).

  • The regulators should publish a clear guide to the framework for industry, and in particular for new entrants, that outlines thresholds and regulatory requirements.

Government and ASIC, in consultation with the other regulators, should simplify and improve consumer protection regulation for retail payment service providers.32 In doing so, they should make the following changes:

  • Narrow the AFSL regime for non-cash payment facilities so that only service providers that provide access to large, widely-used payment systems require an AFSL. This would remove the need to exempt services linked to small payment systems from the regime, such as public transport cards and road toll devices.
    • The thresholds of ‘large’ and ‘widely used’ could cover a system providers with annual transaction values over $100 million and more than 50 payee groups or annual transaction values over $500 million and more than five payee groups.
    • The definition of a payee group should be designed from the customer’s perspective. A system that provides access to several merchants would be considered to provide access to a single payee group where the customer associates the merchants with a single merchant brand.33
    • Thresholds should be designed to provide clear guidance for new entrants, rather than to substantially alter the current regulatory perimeter.
  • Government and ASIC should extend basic consumer protection regulation under the currently voluntary ePayments Code to all service providers.34

APRA, in consultation with other regulators, should develop a separate, two-tier prudential payments regime for purchased payment facilities (PPFs)35 to replace the current single-tier regime, which is a modified version of the authorised deposit-taking institution (ADI) regime.36

  • The new regime would offer PPFs a choice between two tiers. The lower tier would maintain the current 100 per cent liquidity ratio requirement but reduce other prudential requirements to lower compliance costs. The higher tier would reduce liquidity requirements but strengthen other prudential requirements. Lower liquidity requirements would ensure competitive neutrality between PPFs and other ADI service providers.
  • APRA should publish clear thresholds for the new regime so that it only captures PPFs of sufficient scale. For example, it could only apply to PPFs that hold more than $50 million of stored value and enable individual customers to hold more than $1,000.37 APRA should remove exemptions for services providers that do not allow deposits to be redeemed for Australian currency.38

The regulators should review the extent to which their current powers enable them to regulate system and service providers using alternative mediums of exchange to national currencies, such as digital currencies.39 For example, the RBA should review the definitions in the Payment Systems (Regulation) Act 1998 to ensure they are sufficiently broad.


Ensure retail payments system regulation:

  • Maintains confidence and trust in the payments system.
  • Is better understood by industry, particularly new entrants, and accommodates rapid market development.
  • Provides adequate consumer protections.
  • Provides competitive neutrality for PPFs.


Given its vital role in the economy, the payments system must be efficient and trusted. Currently, Australia’s payments industry is undergoing rapid innovation, giving consumers access to an increasing array of online and mobile payment options. Over the past five years, the volume of non-cash payments in Australia has grown at an annual rate of 8–9 per cent.40

Payments system regulation needs to be able to accommodate future changes in structure and technology. Figure 10: Overview of the payments system presents an overview of Australia’s payments system. In the past, regulation focused on ADIs (Area A), which were the main service providers. But now, non-traditional business models have emerged (Areas B to E). The Inquiry expects that new PPFs (Area C) will emerge in the future, including PPFs that may be attached to supply chains and other on-line purchasing systems.

Some payment systems also incorporate new mediums of exchange such as digital currencies. International peer-to-peer networks that process digital currency payments on distributed ledgers (Area D) are difficult to regulate because there is no clearly identifiable operator.41 However, commercial services using digital currencies in ‘closed loop’ systems (Area C) could be regulated like other retail payment services.

Figure 10: Overview of the payments system

The figure shows how different areas of the payments system interact.Area A shows the different systems that link directly to ADI accounts, which are at the centre of the payments system and link into all other areas of the payments system. Area A includes debit card and credit cards systems, cheque systems, the direct entry system, bill payment systems such as BPAY, and fast payment systems such as the soon-to-be-implemented New Payments Platform.Area B shows payment systems linked to funds at risk, such as payment cards linked to cash management trusts.Area C shows payment systems linked to stored-value accounts, such as online payment systems like PayPal, and prepaid card systems.Area D shows distributed ledgers that link to peer-to-peer payment systems, like the BitCoin system.Area E shows non-ADI card accounts that link to credit card systems and charge card systems.Area F shows how cash interacts with the other areas.Area G shows how exchange settlement accounts link to the Reserve Bank Information and Transfer System, which is used to settle inter-ADI transactions. Finally, Area H shows how offshore systems link to domestic systems. This includes foreign cash, card systems, specialist remittance arrangements and correspondent banking arrangements. 

View image enlarged

Although payment services linked to funds at risk in investment products (Area B) are rare, these could grow in the future. Eventually, these could be linked to managed investment schemes (MISs), as well as superannuation funds, allowing members to make payments with their superannuation balances during the drawdown phase.42 Regulation should not impede such developments.

Problem the recommendation seeks to address

Some submissions note that current retail payments system regulation is fragmented, complex and lacks clarity.43 It is not always applied on a functional basis and may not accommodate future innovation, such as digital currencies.

Elements of graduated, functional regulation exist. However, regulation generally lacks clear criteria and transparent thresholds. Combined with regulator discretion in administering the law, this generates complexity and uncertainty, particularly for new entrants.

The ePayments Code provides some consumer protections; however, it is not mandatory and as such does not cover all consumers.44 The application of the AFSL regime is complex and costly. ASIC has given multiple class orders and individual exemptions because the breadth of current regulation captures entities that should not need an AFSL.45

Before the Wallis Inquiry, participation in payment systems tended to be restricted to banks. Reforms post-Wallis sought to expand access to payment systems, but recognised that this could involve entities holding funds equivalent to deposits. Government sought to address this issue by introducing a prudential regime for PPFs.

However, the scope of the prudential regime for PPFs is unclear because it involves a number of exemptions and declarations.46 The current PPF regime also involves significant compliance costs and does not provide competitive neutrality with other ADIs. Although PPFs have simpler capital requirements than traditional ADIs, they have significantly stricter liquidity requirements.47 This can place PPFs at a competitive disadvantage and provides a perverse incentive for smaller service providers to limit their growth to avoid entering the PPF regime.

Options considered

The Inquiry considered maintaining the existing approach of using various exemptions to narrow the scope of the AFSL regime to target the entities that should be regulated. Although this would involve relatively small costs over the immediate term, the complexities and impediments to innovation that the current approach creates would grow over time. A more transparent approach to regulation that does not require exemptions would improve industry understanding and provide greater certainty. The Inquiry also considered maintaining the voluntary nature of the ePayments Code as an alternative to extending it to all service providers. However, the Inquiry believes the ubiquity of electronic payments necessitates consistent consumer protections to maintain confidence and trust in the system.

The Inquiry also considered maintaining the current prudential regime for PPFs as well as reducing the liquidity requirements of the current regime. However, both approaches maintain relatively high compliance costs for PPFs with simple business models. The recommended two-tier approach allows PPFs to trade off compliance costs and competitive neutrality to suit their business models, rather than have regulation determine this for them. The Inquiry also considered maintaining the current thresholds and exemptions for applying prudential regulation, but these create uncertainty for industry. Increasing thresholds ensures smaller service providers are not unintentionally captured.

Regulators should review the extent to which their current powers enable them to regulate system and service providers using alternative mediums of exchange to national currencies, such as digital currencies. The Payment Systems (Regulation) Act 1998 empowers the PSB to regulate “funds transfer systems that facilitate the circulation of money”. It is not clear that the PSB can regulate payment systems involving alternative mediums of exchange that are not national currencies. Currently, national currencies are the only instruments widely used to fulfil the economic functions of money — that is, as a store of value, a medium of exchange and a unit of account.48

Digital currencies are not currently widely used as a unit of account in Australia and as such may not be regarded as ‘money’. However, their use in payment systems could expand in the future. It will be important that payments system regulation is able to accommodate them, as well as other potential payment instruments that are not yet conceived. Current legislation should be reviewed to ensure payment services using alternative mediums of exchange can be regulated — from consumer, stability, competition, efficiency and AML perspectives — if a public interest case arises. This review could take place within a broader review of the system’s capacity to accommodate future payment systems.


The recommended approach to clearly graduate regulation provides increased certainty to industry while accommodating innovation. The functional criteria for determining when regulation should apply are broad so thresholds can be adjusted to reflect market developments.

Replacing piecemeal exemptions in the AFSL regime with functional regulation would improve efficiency and ensure current and future business models are appropriately regulated. Extending the ePayments Code to all service providers would help protect all consumers from fraud and unauthorised transactions.

Giving PPFs flexibility could generate lower compliance costs, enhance competitive neutrality and better facilitate participation from non-traditional financial institutions, supporting innovation and competition.

Ensuring current regulation can accommodate services using alternative mediums of exchange would support innovation and confidence in the payments system.

32 For the two payments recommendations, the term ‘service providers’ refers to entities that enable end-users (consumers and businesses) to make and receive payments in payment systems. The most common example of a service provider is a Bank. See Figure 10: Overview of the payments system and Figure 11: Retail payments system fees and charges for more information.

33 An example is a gift card grouping several merchants under a single shopping centre brand, or a frequent flyer program providing access to several merchants.

34 The ePayments Code is enforced by ASIC and provides some consumer protections. The code provides guidance for setting and changing terms and conditions, and rules for determining who pays for unauthorised transactions and recovering mistaken internet payments.

35 PPFs hold stored value relating to payment systems but are not traditional ADIs. An example is PayPal.

36 Some payments systems use ADI accreditation as a means of assurance for providing access their systems. The PSB should work with industry to ensure that entities regulated under the new two-tier regime, as well as entities that will shortly no longer require a specialist credit card institution ADI licence, will still be able to access core payments infrastructure, including the New Payments Platform.

37 The current prudential threshold for stored-value holdings is $10 million.

38 This could result in prudential regulation applying to some service providers, such as providers of prepaid cards that operate on widely-used systems.

39 An example of a digital currency is Bitcoin.

40 Reserve Bank of Australia (RBA) 2014, Payments System Board Annual Report, RBA, Sydney, page 19.

41 A distributed ledger is a public ledger for determining who owns an asset — in this case, a digital currency. Transactions are processed by open-source peer-to-peer systems and then recorded on public ledgers, of which several copies are held by users of the system. No single party operates the system or is responsible to its users.

42 The Inquiry’s recommendation would ensure that basic consumer protections would apply to these service providers, but would not affect how these service providers are prudentially regulated, as the funds used for making payments would not be considered ‘stored value’.

43 For example, refer to Australian Payments and Clearing Association 2014, Second round submission to the Financial System Inquiry, pages 10–11.

44 Examples of non-subscribers to the ePayments Code include a three-party system provider as well as some banks, credit unions, building societies and finance companies.

45 This has included relief for gift cards, prepaid mobile accounts, loyalty schemes and electronic road toll devices. For further details, refer to Australian Securities and Investment Commission (ASIC) 2005, Regulatory Guide 185, Non-cash payment facilities, ASIC, Sydney.

46 For example, whether a PPF is redeemable for Australian currency currently determines whether that facility falls within APRA’s prudential regime or whether it should be subject to RBA authorisation. To date, exemptions and declarations have meant that no PPFs are authorised by the RBA.

47 PPFs must hold high-quality liquid assets that are of equal value to their stored-value liabilities, while standard ADIs have lower liquidity requirements.

48 Robleh, A 2014, ‘The economics of digital currencies’, Bank of England Quarterly Bulletin, Q3, Vol 54, No. 3.