There are strong signals that open banking will lead Australia away from its legacy, card-based payments systems towards true digital payments. The latest is Treasury's Payments System Review, which was released at the end of August and made 15 highly-targeted recommendations aimed at levelling the payments playing field, currently controlled by the banks.
The paper recommends simplifying access to the payments infrastructure via a single, tiered licensing framework, creating common regulatory requirements and, perhaps most importantly, aligning the payments ecosystem with Australia’s open banking regime.
Those actions will open up payments to a connected ecosystem, as a range of new players access the same regulatory protections and reputational benefits as the big banks. That in turn will encourage innovation, competition and ultimately choice, as individuals and businesses are enabled to pay the way they want, without unnecessary friction.
"Payments now perform a vital role in providing consumers and businesses with a way to engage with Australia’s digital economy," wrote King & Wood Mallesons senior partner Scott Farrell in the 100+ page document. Mr Farrell was chosen by Treasurer Josh Frydenberg to spearhead the payments system review. He has also led two reviews into open banking.
"The payments ecosystem at large should support Australia’s digital economy and be aligned with broader developments in the data ecosystem, such as the future directions of the Consumer Data Right and digital identity."
That ecosystem includes digital wallets, crypto, buy-now-pay-later, digital central bank currencies and open banking, where the signals indicate payments will be the next stage of expansion.
Open banking will challenge card dominance online
Open banking payments are instant because the background infrastructure is built around real-time bank connections. It enables instant confirmation of payment authorisation yet gives the user full control over how their data is used by the provider.
It bypasses card networks, which means it’s cheaper for merchants to use, and prioritises consumer experience – a rare feature in banking – and trust.
The Future Directions for the CDR report – another leading indicator that open banking will play an important role in payments – said “action initiation”, or the power for consumers to authorise an open banking provider to take an action for them, such as making payments, should be prioritised. We expect this to be endorsed when the government responds to Future Directions later this year.
We know where Australia is going
Based on our experience in Europe and the UK, we predict a shift to open banking payments in the next five years.
Open banking payments have grown quickly in the UK and Europe, in sectors like ecommerce, wealth management and iGaming. In the UK, successful payments made using open banking providers have increased from 280,000 in July 2020, to 2.14m million in July 2021 for example.
This has been reflected in TrueLayer's experience too – since 2019, there has been a 600-fold increase in the adoption of TrueLayer’s open banking payments service.
This is where Australia is heading and, as Mr Farrell says in his payments system review, "we cannot delay" as the country's decades-old regulatory architecture for payments creaks, while other countries modernise in front of our eyes.
We have to be digital first, we must think global and interoperable, and we must facilitate people’s preferences for how they want to pay in an ecosystem that includes cash, crypto, wallets and instant open banking payments.
It really shouldn’t be hard to take your money with you wherever you go in the digital economy.
We know the future is already here, and we're excited to be at the forefront in Australia.