Innovative Payments

Open Banking & the New Payments Platform for Superannuation Funds

The proliferation in the creation and capture of data over the past decade is projected to continue, prompting The Economist to recently announce on its front cover that data was the new oil. If we compare this with our experience in trying to fit an adequate description in the 18 character field provided by banks to label an electronic transfer, The Economist’s announcement can seem hard to believe.

Payments is an area which is ripe for innovation, and as if right on cue, it’s is happening. The New Payments Platform (NPP), Open Banking, and the mooted Data Sharing and Release Act are all closely related represent the start of a significant shift in way that individual, business and government payments interact.

Like any change, it will create opportunities and challenges. The purpose of this article is to bring changes in payments technology to the attention of superannuation funds.

Payments infrastructure & superannuation

Before focusing on each of the initiatives in a little more detail I thought it’d be useful to consider the role of payments infrastructure in a typical superannuation fund. What I have attempted to visualise here is a simplified model of the payments related transactions a superannuation trustee is involved in.

Naturally, many of these functions are outsourced to service providers such as an administrator or custodian. Evermore this makes in critical that a superannuation fund trustee is aware of the changes to ensure that the commercial arrangements and outsourcing agreements holding the supply chain together anticipate and address these changes.

These aspects of a superannuation fund’s operations are likely to change before too long, as the NPP comes into operation later this year and Open Banking from July next year.

New Payments Platform

The best way of understanding the NPP is the focus on what differs from the existing payment platforms typically used in the operation of a large superannuation fund. This can be done by summarising the key differentiating features in four key areas:

Speed and availability will improve drastically, with settlement of payments taking a matter of seconds irrespective of the day or time.

A Smart Addressing System (PayID) will enable individuals to link a phone number, email address or ABN to their BSB and Account details to enable payments to be made without having to remember the BSB and Account details.

Rich Payment Information means that the 18 character string will be extended to a 280 character string in its simplest form. The reference field is also flexible to include any structured or unstructured data file of link to an online file.

Workflow capability will be improved to allow for the clearing process to be configured to involve sequences of transactions such as invoicing other trigger events for payments.

Importantly, the NPP is brand new infrastructure. It is not built on top of legacy infrastructure, meaning that the transition can be incremental as new applications are developed and the enhanced functionality satisfies the needs and expectations of trustees, managers, and ultimately members.

How the Basic Infrastructure works

The NPP infrastructure is scalable and flexible, with a core infrastructure and the flexibility to configure customised Overlay Services. This means that the Basic Infrastructure can be used without much effort to achieve the benefits such as real time settlement (well, almost real time) and 280 characters rather than 18 for a reference.

Just for fun, I thought it’d be interesting to pursue a grossly inadequate crash course in payments clearing and settlement, and how the Fast Settlement Service works to reduce the timing of payments to reduce from days to seconds.

There are generally two processes in a payments system:

• Clearing, matching account details, ensuring adequate balance; and
• Settlement, transfer of currency between banks.

Currently, most clearing is completed by AusPayNet for cheques, direct entry payments, ATMs and debit cards and high-value payments. Other payments clearing systems independent of AusPayNet include credit cards (MasterCard and Visa), the domestic debit card system managed by eftpos Payments Australia Limited (ePAL) and the BPAY system for payment of bills.

Settlement only happens after clearing has been completed. Each Authorised Deposit-taking Institution (ADI… or let’s just call it a bank) holds an Exchange Settlement Account (ESA) with the Reserve Bank of Australia to settle transfers with other banks.

Most low value retail payments are settled on a net settlement basis, which means that obligations are settled on a deferred basis the following business day around 9.00 am. Higher value transactions between banks are settled using the Real Time Gross Settlement Service, which is used for 70% of all inter-bank transfers, mainly foreign exchange and security market transactions.

The Fast Settlement Service operates similar to the Real Time Gross Settlement Service, but for low value transactions. The Fast Settlement Service enables the NPP to settle transfers almost immediately.

This Basic Infrastructure currently supports one payment message -a basic single credit transfer. There are a handful of standard message types between Payment Gateways as part of the clearing service, consistent with ISO Standard. However, there is the ability to build on top of Basic Infrastructure to develop more bespoke sequences of clearing messages, including instigating a payment or invoicing. This customisation is what’s called an Overlay Services. This is worth looking at in greater detail…

Overlay Services

An Overlay Service is payment message with additional features or functionality built on top of the Basic Infrastructure. Some examples could be the inclusion of an SLA, a new data field or format, or addition of a new message type or sequence.

Overlay Services will leverage the NPP’s basic infrastructure and provide tailored payment services. Overlays might typically be apps which enhance or expand the service delivered by the NPP’s basic infrastructure.

Osko is an example, having been developed by Bpay to facilitate bill issue and payment within a transaction. Subscribers can be individuals, business or government.

To provide an Overlay Service, testing and authorisation by NPPA is required. An Operational Agreement with a NPP Participant of Identified Institution is also required.

Applications of the NPP in the Superannuation Industry

Overlay Services provide the ability to develop solutions to various needs of a market. It’s worth considering how either Basic or Overlay Services might benefit the superannuation industry.

Some hastily considered possibilities:

• Contributions allocation processing times and Straight Through Processing improvement (Basic NPP)
• SuperStream Gateways might integrate messages within NPP (Overlay Service by SuperStream Gateway)
• Smart Address information for retirement income payments (Overlay Service from a Fund or Administrator)
• Rich Payment Information to include Exit Statements etc. (Overlay Service from the Fund)
• Faster payments for financial hardship and compassionate grounds (Basic NPP)
• Insurance Premium Payments to contain data in accordance with standards (Overlay Service by Administrators)
• Standard Business Reporting (SBR) integration for ATO payments to include data with payments (Overlay Service from ATO)
• Distribution and dividend payments to contain statement (Overlay Service from Custodian)
• Lost Member Reporting integration from the ATO (Overlay Service from ATO)
• Service Providers will be able to initiate an invoice, which a fund could pay with remittance and reconcile with orchestrated messaging (Third Party Overlay Service)

So great, there might be a wide range of ways in which the NPP can contribute to a more efficient superannuation system and improved member experience. However there are important competition policy considerations of concentrating the information within the banking system? This potentially places the NPP Participants in a very powerful position, connecting to a broader range of business functions.

This is the perfect Segway into Open Banking…

Open Banking

Open Banking might seem like a relatively new concept, but it forms part of a broader Open Innovation movement. Open Innovation has been described by Henry Chesbrough, adjunct professor and faculty director of the Center for Open Innovation at the Haas School of Business as “a distributed innovation process based on purposively managed knowledge flows across organizational boundaries, using pecuniary and non-pecuniary mechanisms in line with the organization’s business model.”

In competition policy, information asymmetry is an important consideration when analysing bargaining power of participants in a market. Where too much information is concentrated within the control of a participant, it tends to stifle competition, innovation and efficiency in a market.

Open Banking is part of this broader movement towards ensuring that there is adequate competition in the markets which trade on data and information. The data involved in payments infrastructure and banking is planned to be subject to significant changes to open access and promote competition.

The Path to Open Banking

While Open Banking hasn’t happened yet in Australia, a reform pathway has been forged over the past couple of years. A series of reviews, inquiries, and public policy announcements suggest that we’re on the verge of Open Banking from mid 2018.

Productivity Commission Inquiry

The Productivity Commission released its report on the Inquiry into Data Availability & Use to the Commonwealth Government on 31 March 2017 and publicly released on 8 May 2017. The breadth of the proposed change is significant. It will cover everything from financial services, health, education, publicly funded academic research and anything else which we put online!

If you didn’t find the time to wade through the 644 pages of the report, it can crudely be condensed down to a handful of key themes.

The fundamental premise of the recommendations is that data sourced directly or indirectly from individuals, remains accessible (however isn’t necessarily proprietary, therefore something which can be owned) of the individual. Therefore, individuals should have a Comprehensive Right that would enable them to:

• share in perpetuity joint access to and use of their consumer data with the data holder
• receive a copy of their consumer data
• request edits or corrections to it for reasons of accuracy
• be informed of the trade or other disclosure of consumer data to third parties
• direct data holders to transfer data in machine-readable form, either to the individual or to a nominated third party.

The report importantly weighs in on the question of what information should be classified as Consumer Data. At its broadest level, the PC recommends that Consumer Data should include:

• personal information (as defined in the Privacy Act) in digital form
• files posted online by the consumer
• data created from consumers’ online transactions, Internet-connected activity or digital devices
• data purchased or obtained from a third party that is about the identified consumer
• other data associated with transactions or activity that is held in digital form and relevant to the transfer of data to a nominated third party.
• Data that is only imputed by a data holder to be about a consumer

It’s important to note that the recommendations of the Commission may not be adopted into public policy. Yet there are themes at aspects at the very least which will be reflected in different industries.

So then, what are the implications of the PC recommendations for the superannuation industry? It’s likely to be manifest initially in payments as Open Banking!

Open Banking Objectives and API Model

Open Banking is planned to commence in July 2018 if the terms of reference on the recently announced Inquiry into Open Banking are indicative of development. Open Banking will mean that information such as transaction and loan repayment data will be available to customers with their consent, who should then be able to use that data to access better financial products or services in a safe and secure manner.

Open Banking goes further than the Data Availability & Use recommendations. While the PC was agnostic to particular technologies to provide access to customer data, Open Banking is likely to prescribe APIs, Security, and Governance arrangements.

It is technically possibly for third party applications to scape web data from online banking accounts without Open Banking, and this does already occur. One of the benefits of Open Banking is that it should provide enhanced security and governance standards which will promote trust, confidence and awareness of the market for data driven services.

APIs aren’t cheap to develop. Open Banking is well underway in the UK, where banks have spent on average A$1.7million per bank on developing APIs for open banking. The Australian banking sector is likely to face similar expenses in developing the APIs to enable consumers to access their data, but may also be able to charge fees for access to APIs.

One of the key tasks for the Inquiry into Open Banking which King & Wood Mallesons partner Scott Farrell will head is to make recommendations of what data should be accessible to consumers. The challenge will be to balance individual rights to data about ourselves, while protecting sensitive commercial data which doesn’t directly relate to an individual and will often have become proprietary as a result of the bank’s analytical work.

While closely related, the scope of open banking may not align with the determination of data as proprietary or not, and any subsequent creation of any resulting intellectual property rights. The ownership of data is an issue which I have heard debated on numerous occasions. Is it the Trustee, the Administrator, or the individual that owns the data? Is personal information something which can be owned? Where not, how can we ensure that individuals retain rights to access their personal data?

Open Banking is already happening!

Open Banking is just around the corner in Australia, however it is already happening internationally. The UK has the initiative up and running, and there is the second EU Payments Services Directive requiring member states to implement open banking across the EU. So how should superannuation funds prepare for open banking? What are the competitive opportunities and threats?

There might be an initial period of opportunity for any superannuation fund which is able to act quickly to enhance member experience and outcomes by integrating banking data in some of the following ways:

• A single view of banking and retirement savings, improve member experience
• Reconciliation of employer contributions with salary payment transactions
• Behavioural analysis of member savings and spending behaviour can enable
• Smart assessment the lifestyle impact of any retirement income replacement shortfalls

There are also significant competitive risks, which come with open banking. It could become a rather busy and crowded marketplace… it’s not to much of a stretch to see the primary owners of digital real estate such as Apple, Amazon, Facebook and Google make a play to integrate payments via NPP Overlay Services and Open Banking. Competition might get heavy for banks and superannuation funds in the jostle for the digital connection with consumers.

Open Super? Open Pension?

It is glaringly obvious that the question of Open Super or Open Pensions will eventually raise its head. It’s true that the marketplace for retirement income products in the accumulation phase is naturally less competitive, due in part to behavioural traits such as hyperbolic discounting.

However, there is a strong argument that superannuation funds which are well prepared to provide members with the flexibility to access their information via proprietary or third party applications will be able to focus on advising on or providing the best interests of members by managing financial risks.

Where to from here? Superannuation fund should be considering the NPP and Open banking as part of strategic planning, considering how it might impact outsourced services, and getting involved in consultation with government.