Australia’s financial system to ‘get with the times’

As part of the reforms, the government seeks to update and strengthen the payments system and financial market infrastructure; establish a regulatory framework for buy now, pay later; and apply more red tape around crypto service providers.

Among the changes, the Reserve Bank of Australia could get expanded powers to regulate new and emerging payments systems, such as digital wallet providers and cryptocurrency service.

Treasurer Jim Chalmers added that the government will continue its work with the RBA to explore the case for an Australian central bank digital currency.

Mr Chalmers said the regulatory architecture “has not kept pace with changes” in the market, including with new digital products and services.

“We will work closely with regulators, industry, and consumer and business advocacy groups over the coming months to get these reforms right,” Mr Chalmers said.

The RBA recently noted that Australians were ‘unconvinced’ by the use of a digital currency and more communication was needed.

The government has released a consultation paper for Australia’s payments system, which closes in February 2023 and will form the basis of its strategic plan to be released in the first quarter of 2023.

The paper proposes increased regulatory power over digital wallet providers, which facilitate tap-and-go payments, referring to Productivity Commission review that found “Government or RBA intervention may be necessary to address this issue”.

It also stated that the RBA could force digital wallet providers to use least-cost routing (LCR), where transactions are processed on the payment infrastructure that carries the lowest cost.

Giving the RBA regulatory power over digital wallets could give rise to allow banks to enter the digital wallet market and bring more competition in the face of Apple Pay, Google Pay, and Samsung Pay.

Commenting on the reform agenda during a payment summit, RBA governor, Philip Lowe, said the use of these wallets was “growing very quickly and they are often more expensive for merchants to accept”.

“Small businesses, on average, pay twice what large businesses pay to process the same transaction,” Mr Lowe said.

“The RBA’s focus is on increasing competition to help further drive down payment costs.”

Mr Lowe explained LCR would allow merchants to choose the lowest-cost card network to process their debit transactions.

“It also increases the competitive pressure between the debit networks, providing greater incentives to lower the wholesale fees that are ultimately paid by merchants,” Mr Lowe said.

Also under consideration are a new licensing framework for payment service providers and regulations covering buy now, pay later (BNPL) offerings.

The BNPL sector has grown rapidly over the last few years, with over $16 billion in transactions processed in 2021/22.

Further, in the face of a widespread collapse in the cryptocurrency sector, the government said it will improve the regulation of cryptocurrency exchange providers.

[Related: Payments times review welcomed, ombudsman says]