Payments Monitor - Fourth Quarter, 2016

CEO's Corner

China's three major banks experience vertical growth & the SARS epidemic becomes a catalyst for internet banking.

On a recent trip to China, I was struck by the scale and pace of growth of China’s Fintech community.

China’s Fintech market cap valuation of US$69 billion dwarfs the USA’s US$31 billion and the rest of the world at US$11.5 billion. This rapid growth has its roots in the political reform that began in 1978. In parallel, Government-led modernisation programs increased consumption and drove investment, laying the foundations for the rise in online payments. The catalyst for behavioural change, however, was the 2003 SARS epidemic. Preferring to stay indoors to avoid exposure to SARS, people relied on the internet for information, communication - and payments.

The combination of these events led to the emergence of a new type of organisation – the internet banks. These gained traction when underpinned by legislation in 2011. So how do internet banks differ from traditional banks? There’s a key difference from a regulatory perspective in that internet banks can’t take deposits or open branches. There are also size and focus differentiators; internet banks typically have a tenth of the workforce of traditional banks and 50% of this workforce is focussed on technology.

There are more than 250 licensed internet banks in China, with three of the major ones - informally known as the BATs (Baidu, Ant Financial and Tencent) - dominating the scene. In fact, the BATs’ growth has been so rapid that they now process more than 95% of payment volumes, representing 10% of the value. Tencent’s success started with the launch of a WeChat Red Packet service. Tencent digitally transferred the long-held Chinese tradition of gifting red envelopes at New Year by making it possible through a mobile app. This promotion accelerated unprecedented growth in digital payments, increasing the customer base from 5 million to 500 million in two years. 

When I asked what the reasons were for the BATs vertical growth curve, they gave four: focussing on the customer experience; targetting the largely ignored low value, high volume market segment; circumventing the traditional infrastructure and connecting directly to the banks; and better balancing the tradeoff between security and convenience. 

In terms of customer experience, each of the BATs has focussed on keeping the customer on the platform. For Alipay, this has led to the development of a ‘lifestyle super app’. This app includes a wide range of services such as social networking, interactive entertainment, browsing, maps, medical services and online media. The host of services offered increases customer stickiness, while the payments feature is the glue.

I was amazed as I walked through shops and restaurants at how well entrenched the BAT apps were, seamlessly integrating ordering from a menu and payment. What caught my attention was learning about their pioneering credit rating tools which are unlike the traditional static sources we are all familiar with. The internet banks use automated, dynamic and regularly updated scoring that incorporates lifestyle indicators such as the websites visited, payments profiles, geo location information, and social media profiles. Customer scores are disclosed in a rating app which customers use for a range of purposes, from avoiding pre-authorisation deposits at hotels to dating profiles! The internet banks are now expanding into wealth management and lending.

The BATs’ success has been built on access to data, a compulsory national ID card and a supportive regulatory environment. As jurisdictions around the world all consider these core elements, it will be interesting to see how the future unfolds.

Industry News

25 years on and APCA is rebranding.

This year, APCA celebrates 25 years at the heart of the Australian payments industry. It’s an important milestone for us and we’re taking the opportunity to revisit our brand to ensure that it reflects the type of organisation that we are today.

The payments landscape is changing rapidly, and APCA is evolving with it. We are proud of our long history and excited about new opportunities to support the future evolution of Australian payments. 

APCA was established in February 1992 to manage rules for clearing payments instruments – our name, ‘Australian Payments Clearing Association’, is a direct reflection of this role. Back in the early '90s, most non-cash retail payments were made by cheques, followed by direct entry and cards.

The world of payments has changed significantly since then, and the pace of change is accelerating. Rapid innovation in payments technology and services has created a more digital and connected environment. Today, hardly anyone uses cheques, most face-to-face payments are ‘contactless’, online shopping is the norm and mobile payments are gaining traction.

Responding to this change, APCA has become the home for collaboration and cross-industry innovation, actively developing its role in enabling the network effect. As participants continue to grow in number and diversify in nature, we are engaging with a broader range of stakeholders than ever before.

Our rebrand is an important step in positioning for the future and we look forward to providing further details on our new brand identity in the coming months.

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Industry News

Industry continues strong focus on tracking online card fraud.

APCA’s latest fraud data released in December 2016 show that card not present (CNP) fraud remains the most prevalent fraud on Australian cards. In the 12 months to 30 June 2016, CNP fraud – both domestic and overseas – increased from $323 million to $402 million, accounting for 77% of all fraud on Australian cards.

As in many other jurisdictions, Australia’s CNP fraud is increasing due to continuing growth in e-commerce, a global trend in online card fraud, and migration of fraud online as chip technology and industry efforts continue to reduce card present fraud.

While most CNP fraud on Australian cards occurs overseas, these latest statistics show that domestic CNP fraud grew by 32% to $156 million over the 12 month period. Tackling this fraud continues to be a key priority for APCA’s Issuers and Acquirers Forum (IAF).

The IAF, comprising financial institutions and the card schemes, meets regularly to consider non-competitive payment card issues. As part of its work in exploring an industry-wide solution to CNP fraud, over the last year, the IAF:

  • Commissioned research on: the impact of CNP fraud on consumers; the changing landscape of online retail and fraud; and the approaches taken in other jurisdictions to mitigate CNP fraud.
  • Developed a set of guidelines for issuers and acquirers (IAC) to provide a set of best practices for implementing a range of data security, fraud detection and customer authentication solutions for the CNP environment. APCA is currently consulting industry on these guidelines.
  • Engaged merchants to understand their needs and expectations and to help develop an industry communications strategy for combating CNP fraud. This included a merchant forum in early November.

During 2017, the IAF will work to promote awareness and encourage effective mitigation of CNP fraud through continued education and communication, and implementation of the best practice guidelines. These industry initiatives will support the ongoing fraud mitigation efforts of financial institutions, the card schemes and law enforcement.

Fraud Statistics Media Release IAC Guidelines

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Regulatory Round-Up

Productivity Commission’s draft report on Data Availability and Use.

APCA lodged a submission on Monday 12 December 2016 in response to the Productivity Commission’s draft report into Data Availability and Use.

The Commission’s draft report investigated access and use to public and private sector data, making several draft recommendations towards reforming data sharing. In particular, the draft recommendations proposed the creation of a new ‘Comprehensive Right’ giving consumers greater control over data. The draft report also noted that the private sector was best placed to determine the appropriate standards for such data transfer. This report was the second of three stages in the Commission’s 12-month inquiry.

The draft report aligned with many of the points raised in APCA’s submission to the Commission’s issues paper during the first phase of the inquiry. In particular, the need to maintain security and privacy while ensuring consumers continue to benefit from their data.

APCA’s latest submission reconfirms that appropriately strong authentication mechanisms must be in place to support data sharing, and highlights the importance of trust. In particular, for the sharing of payments data as Australian consumers place significant trust in the handling of their personal information by financial institutions.

The final report on the inquiry into Data Availability and Use is expected to be handed to the Australian Government in March 2017.

Submission Draft Report