A Guide to Payments in Australia

Cash (including banknotes and coins) are a central medium of exchange. In Australia, the Royal Australian Mint is responsible for the production of coins and Note Printing Australia Limited (a subsidiary of the RBA) is responsible for the printing of banknotes. The RBA puts bank notes into circulation via Banknote Distribution Agreements with participating institutions, who purchase banknotes from the RBA for distribution.

AusPayNet operates the Australian Cash Distribution and Exchange System (ACDES). The ACDES regulations and procedures deal with matters such as buying and selling cash, minimum transaction quantities, documentation for transactions, hours of operation, note quality, packaging, liability for delayed delivery and discrepancies, and audit requirements between members. ACDES is open to all financial institutions and companies wishing to join the system and participate in cash distribution and exchange activities.

Cheques remain an important NCP instrument in Australia, being unconditional written orders requesting corresponding financial institutions to pay on demand sums to the identified person. Cheques are cleared and settled under the Australian Paper Clearing System (APCS) regulations and procedures, as administered by AusPayNet. Qualification for membership in APCS is subject to various eligibility criteria (including prudential supervision, financial standing and operational capability).

Historically, physical cheques were required to be delivered to the relevant institution for lodgment (or through clearing centres for exchange) and settlement. However, the vast majority of cheques are now subject to electronic presentment for settlement (subject to the APCS regulations and procedures).

Electronic presentment and settlement of cheques works in the following way:

• the cheque particulars (eg, sum, serial number, BSB and account number) are electronically presented by the collecting institution to the drawee institution;
• the net value of cheques electronically presented and exchanged are included in settlement figures presented to the National Collator at the RBA;
• the physical cheque is subsequently exchanged at a “not-for-value” exchange between the collecting institution and the drawee institution.

Daily amounts are settled on a deferred multilateral net settlement basis (as calculated by the National Collator) between banks through Exchange Settlement Accounts.

Understanding electronic funds transfers (EFTs) requires an understanding of certain central bank, clearing and settlement infrastructure concepts.

Exchange Settlement Accounts

Final settlement of all interbank payment system obligations occurs by debiting and crediting Exchange Settlement Accounts (ESAs) held by financial institutions with the RBA (ie, a ‘bank account’ that institutions maintain with the RBA).

Clearing and settlement

‘Clearing’ refers to the process where financial institutions transmit, reconcile and confirm payment instructions between themselves prior to settlement.

‘Settlement’ refers to the completion of the transaction where the payer institution transfers funds to the payee institution.

Payment systems that are not grossly settled (ie, where transactions are settled individually) typically involve bilateral or multilateral netting. That is, institutions will ‘net’ their obligations to each other over a defined period and will only pay the difference between amounts they owe to an institution and amounts they are owed by that institution. In Australia, the National Collator receives all of the payment obligations from all participating banks each day, which are then netted against each other and settled via the Reserve Bank Information and Transfer System (RITS).

RITS is Australia’s real time gross settlement (RTGS) system that enables payments to be settled across ESAs in real time. SWIFT Payment Delivery Service (ie, high value payments subject to regulations administered by AusPayNet) and the Clearing House Electronic Subregister System (ie, interbank settlements in relation to ASX transactions) are feeder systems into RITS. Transactions between ESA holders are processed and settled through RITS via various priority status designations.

EFTs

When a payer holding a bank account with a particular bank wishes to conduct an EFT (ie, transfer an amount to a payee), they provide their bank with the payee’s bank state branch (BSB) and account number, and the amount. The details are submitted with the payer bank’s instructions in its intraday reports to the National Collator. These amounts are then subject to clearing and netting across all of the participating banks. At the end of the designated period, funds will settle across the payer and payee banks’ ESAs, which will result in the EFT being settled. This can be depicted as follows.

New Payments Platform

In 2018, the New Payments Platform (NPP) was introduced to deliver enhanced payment experiences, such as near real-time settlement (available 24/7), PayID identifiers, and richer payment information (eg, expanded payment messages, transaction descriptors and details). The NPP is operated by NPP Australia Limited (a subsidiary of Australian Payments Plus) and includes a basic infrastructure layer for hardware and software protocols and a layer for rules and applications for user experience, referred to as overlay services.

The implementation of the NPP included the Fast Settlement Service (FSS) on RITS which supports the NPP near real-time settlement capability between banks. The first overlay service was Osko by BPAY, which allows for 24/7 funds transfers between NPP participants.

International payments are facilitated through Continuous Linked Settlement (CLS) and the Society for Worldwide Interbank Financial Telecommunications (SWIFT) systems.

CLS is a global initiative designed to reduce foreign exchange settlement risk by using the RTGS systems of central banks in participating countries. CLS Bank (a New York based subsidiary in the CLS group) has an ESA with the RBA and an equivalent account with the central banks of countries of the CLS currencies. CLS Bank then provides real time and simultaneous settlement of funds globally (irrespective of time zones) across the participating banks.

SWIFT is a member owned cooperative that provides safe and secure financial transactions for its members. This network allows individuals and businesses to take electronic or card payments by SWIFT assigning each member institution a unique code that identifies the bank, the country, the city and the branch, allowing each participating bank to identify other participating payee banks.

Direct debits and direct credits are used to manage low value recurring payments.

Direct debits enable payees to collect regular payments where the payer has given their financial institution authority to debit their account at the request of the payee (eg, insurance premium payments, gym membership payments). This is required to be authorised by a direct debit request authority (DDRA) from the payer.

Direct credits can be used by a payer institution to transfer funds to the accounts of a large volume of payees (eg, salary payments, dividend payments).

Direct debits and credits are cleared and settled pursuant to the Bulk Electronic Clearing System (BECS) regulations and procedures administered by AusPayNet. BECS maintains two types of membership (direct clearers and settlers and indirect clearers and settlers) which have corresponding eligibility criteria. The clearing and settlement of direct debits and credits is broadly as follows:

• files of direct entry credits and debits are prepared by financial institutions and are bilaterally exchanged between members;
• at the end of each business day, members reconcile their inward and outward exchanges and report bilateral and multilateral positions to the National Collator;
• these balances are then settled on a deferred multilateral net basis in ESAs held by the relevant institutions with the RBA across RITS.

What are card payments?

Card payments include electronic funds transfer at point of sale, debit card transactions and credit card transactions. Some important concepts in the card transaction context are as follows.

There are two types of card transactions, determined by the source of funds: debit and credit. Debit (sometimes also capturing prepaid) refers to transactions where the card will draw on funds that the cardholder has in a transaction or prepaid account held with their financial institution. Credit refers to transactions where the card will draw on the funds of the cardholder’s financial institution as a line of credit to the cardholder.

What are schemes?

Card schemes are networks linked to the payment cards of which the relevant financial institutions (ie, issuers and acquirers) are members. Scheme members can issue cards and acquire transactions through the scheme network. Schemes manage branding and have rules covering membership, technical specifications and procedures for interchange of payment instructions between institutions. There are two types of schemes: four party and three party. ‘Four party’ schemes usually involve the merchant, cardholder, issuer and acquirer (eg, Visa and Mastercard). ‘Three party’ schemes usually involve the merchant, cardholder and an entity that is both the issuer and acquirer (eg, American Express).

Companion cards involve arrangements where two card schemes are available on a single card (eg, American Express card issued with Visa capability).

Australia also has the eftpos network, operated by eftpos Payments Australia Ltd (a subsidiary of Australian Payments Plus). This network is comprised of seven proprietary networks linked through interchange agreements, making a single network. Almost all debit cards issued in Australia can process transactions via eftpos, although this is not typically available outside Australia (unless supported on dual network cards). eftpos is considered to be Australia’s cheapest network to process card transactions and is generally considered by regulators to be the payment route of choice for best consumer outcomes.

Clearing and settlement

There is no single framework governing the operation of card based payments in Australia. Rather, payments are exchanged, cleared and settled in accordance with the rules and operating procedures of the relevant scheme, as well as bilateral interchange agreements between providers. However, card payments broadly follow 3 phases:

• Phase 1: Authorisation – the cardholder presents their card at the merchant’s terminal. The transaction details are entered and routed to the merchant’s acquirer. The acquirer sends an authorisation request to the ‘switch’ facility provided by the card scheme, which is routed to the card issuer for authorisation.

• Phase 2: Authentication – the card issuer will either authorise or decline the transaction, which is transmitted through the card scheme, to the acquirer and the merchant. If the transaction is authorised and authenticated, the payment is processed.

• Phase 3: Clearing and settlement – the merchant sends the batch of approved transactions to the acquirer, which is then provided to the card scheme to distribute to the relevant issuers. The issuer will transfer the net funds less the interchange fees to the acquirer across ESAs.

AusPayNet supervises the Issuers and Acquirers Community (IAC). The IAC regulations address the Australian card environment, including issues such as PIN security, settlement of transactions and the operation of ATMs.

Australia has a strong consumer base for loyalty schemes, with differing structures. In general, loyalty schemes are operated by merchants rewarding customers for spending money at their stores by providing loyalty points (or credits). These points accrue in the customer’s account and can be used as a form of payment to purchase further goods and services.

Merchant specific loyalty schemes generally restrict the ability to use points at that merchant’s store or the stores within an affiliated group. As payments connected to these loyalty schemes are to the operator of the scheme, this does not typically involve any transfer of funds. Rather, the operator will net the amounts from their allocated pool attributable to all customer loyalty points as a means to incentivise merchant and brand loyalty (ie, a loss leader).

Loyalty schemes in Australia are expanding for use outside the merchant’s core stores or affiliated group and can be used at almost any business. This expansion will typically involve an arrangement between the loyalty scheme operator and the participating merchants under which the loyalty points will be designated with pre-determined value that the operator will provide to the merchant in connection with customer transactions.  

Closed loop payment systems have historically been used for public service systems (eg, travel cards) and gift cards, but are increasingly popular with digital marketplaces and community platforms (eg, Alipay, WeChat Pay).

This arrangement involves users linking payment instruments (eg, bank account, credit card) from which funds can be deposited into the system. This deposit is provided to the system operator, who then allocates a balance to the user’s account. Users are then able to transfer digital credits to other users within the same system (commonly via QR codes or usernames). These transfers do not correlate to a transfer of funds, rather all funds remain within the operator’s control and the operator updates its internal debt register to each user at the time they wish to exit the system. A user exits the system by withdrawing their account balance to their nominated payment instrument.

Digital wallets (sometimes referred to as ‘e-wallets’) include electronic devices, online services or software programs that allow a person to make electronic transactions. There are two core types of digital wallets: pass through digital wallets and staged digital wallets.

Pass through digital wallets

Pass through digital wallets act as a digital proxy for physically or virtually issued cards. Most mobile based digital wallets (eg, Apple Wallet) store a customer’s card details through a process of tokenisation. Tokenisation involves the customer submitting their card details to the wallet operator, who in turn submits them to the issuing institution to generate a number series (ie, token) that corresponds with the card. Most pass through digital wallets include near field communication (NFC) capability such that it can interact with point of sale terminals in a similar manner to ordinary cards. A pass through digital wallet does not store any customer funds, it acts as a digital representation of the customer’s underlying card and the wallet operator does not typically process the transactions.

Staged digital wallets

Staged digital wallets are characterised by facilitating payments through two stages:

• Funding stage: the customer links a payment instrument (eg, bank account, credit card) to their account and from which funds can be prefunded into their wallet. These funds are provided to the wallet operator, who then allocates a balance to the user’s wallet.
• Payment stage: when the customer wishes to make a payment, they will instruct the wallet operator to pay the specified amount to the specified payee. This will then either result in a ‘transfer’ of funds to the payee’s wallet account (if they both have an account with the operator) or a transfer to the payee’s nominated account (eg, bank account).

An example of a staged digital wallet is PayPal.

Australia has an expanding class of payment service providers that enhance payment experiences and processes for both cardholders and merchants. Some example include the following.

Payment gateways

Payment gateways are technological interfaces integrating with merchant websites allowing merchants to securely collect payment instrument details and submit payment data to their acquirer. When a customer places an order via a website, they will typically enter their card details. These details are encrypted and sent through the payment gateway to the merchant via a series of message conversions. These details are provided to the payment processor, who provides the details to the acquirer to submit for authorisation and authentication by the issuer via the relevant scheme. This authentication is transmitted back through the gateway and the merchant website confirms the payment. Clearing and settlement of the transaction takes place through ordinary payment rails.

Payment facilitators

Payment facilitator services are broad and include payment facilitators that allow merchants to use the facilitator’s card payment acquiring services on a sub-merchant platform (sometimes referred to as master merchants or merchant acquirers). That is, payment facilitators will onboard sub-merchants onto their account with an acquirer to access payment acquiring services. As acquiring functions are costly and lengthy to setup, payment facilitators provide an easy and cheaper onboarding function by passing on their acquiring function to sub-merchants. There are various payment facilitator models that are dictated by the acquirer’s requirements (eg, criteria regarding MIDs). Under this model, while payments may be acquired by the payment facilitator through the acquirer, funds are routed to the sub-merchant’s nominated account.

Payment aggregators

Payment aggregators provide similar services to payment facilitators (ie, they allow merchants to acquire transactions without direct access to an acquiring function). However, payment aggregators will collect payments (through the acquirer) in the aggregator’s own account on behalf of the merchant prior to disbursing the funds to the merchant. These services may be provided with or without the acquirer’s knowledge or consent. While payment aggregators provide an easier onboarding experience, there is increased credit risk for the merchant than payment facilitators as merchants must rely on the aggregator’s ability or willingness to disburse transaction funds.

Australia is one of the world’s most established markets for alternative forms of credit, particularly in relation to the buy now pay later (BNPL) model. The BNPL model is prevalent as it is often structured in a way that removes it from the application of credit licensing and responsible lending laws. As with standard credit products, BNPL providers provide transaction funds to the merchant on the customer’s behalf for the relevant goods or services. This extends a line of credit to the customer for the transaction amount, which is typically required to be repaid to the BNPL operator in 4 or more instalments. While most BNPL operators do not charge interest on loaned amounts, they will include account fees or fees for late repayments. BNPL products in Australia have received much industry and regulatory attention regarding the need to impose quasi-responsible lending obligations or consumer outcome requirements on BNPL providers.

Australia continues to implement the national consumer data right (CDR) framework, which gives customers certain rights to share their data with accredited service providers (currently including banks, comparison services, fintechs or other third parties). The CDR framework was first applied to the banking sector under the Open Banking regime in 2020, through which consumers can exercise greater access and control over their banking data. This has been applied through 3 core product phases, starting with standard savings and transaction accounts, loan products and business financing products. Open Banking was subject to a phased rollout across accredited data recipients, major banks and other financial institutions. Banks and organisations seeking to become accredited data recipients should ensure they are prepared, including by establishing processes that meet eligibility criteria in a manner that will allow them to leverage the opportunities that shared banking data provides.

Carrying on a financial services business in Australia requires organisations to comply with financial services laws, primarily under the Corporations Act 2001 (Cth) (Corporations Act), the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and associated regulations as administered by ASIC. This includes the requirement to hold an Australian financial services licence (AFSL) unless an exemption applies. Relevant financial products in the payments context include deposit products (basic and non-basic), foreign exchange products and non-cash payment (NCP) facilities. In particular, the broad wording of ‘NCP facility’ in the Corporations Act means that an expanding class of digital payment and acquiring products are being captured as financial products (eg, alternative acquiring services, marketplace and digital platform payment services, digital wallets). It is vital to understand whether your business may be operating an NCP facility.

Businesses that advise or deal in financial products will trigger the requirement to hold an AFSL or rely on an exemption. There are various AFSL exemptions that apply for payment products, which typically relate to low value and limited services, gift cards, loyalty schemes or otherwise being supervised by an appropriately licensed entity.

Financial service providers should also be aware of the conduct and disclosure obligations that attach to providing financial services to retail clients, including the requirement to issue statements of advice, financial services guides and product disclosure statements. Product issuers and distributors should also ensure compliance with design and distribution obligations (DDO), including the requirement to develop and comply with appropriate target market determinations (TMD).

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Organisations advising or dealing in relation to consumer credit must comply with credit laws, primarily under the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) (including the National Credit Code (Credit Code)), the ASIC Act and associated regulations as administered by ASIC. This includes the requirement to hold an Australian credit licence (ACL) unless an exemption applies. Relevantly, the ACL requirement applies to credit (ie, contracts for deferred debt) regulated under the Credit Code, meaning credit that is provided:

• to natural persons or strata corporations;
• for predominantly personal, household or domestic purposes;
• for a fee or charge; and
• in the course of carrying on a business of providing credit in Australia.

Principal issuers of credit contracts will trigger the requirement to hold an ACL. However, this requirement also captures a broad range of businesses that provide credit services such as credit assistance (eg, suggesting or assisting a person in relation to credit) or credit intermediation (eg, acting as an intermediary in relation to credit). There are various ACL exemptions that apply for credit products, which typically relate to low value and short term credit arrangements or otherwise being supervised by an appropriately licensed entity. Reliance on these exemptions is common in the BNPL space.

Credit providers should also be aware of the conduct and disclosure obligations that attach to dealing in consumer credit, primarily in relation to responsible lending and issuing credit guides. Product issuers and distributors should also ensure compliance with DDO, including the requirement to develop and comply with appropriate TMDs.

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Organisations that provide designated services with a geographical link to Australia (referred to as reporting entities) must comply with associated AML/CTF laws, primarily under the Anti-money Laundering and Counter-terrorism Financing Act 2006 (Cth) (AML/CTF Act) and associated rules as administered by AUSTRAC. This includes the requirement to enrol (and sometimes register) with AUSTRAC as a reporting entity and comply with various compliance, transaction monitoring and reporting obligations. Relevant designated services include a broad range of dealings in accounts with financial institutions, foreign exchange, digital currency exchange, stored value cards and remittance services. In particular, the broad wording of ‘remittance service’ in the AML/CTF Act means that an expanding class of digital payment and acquiring products are being captured as remittance services (eg, alternative acquiring services, marketplace and digital platform payment services, digital wallets). It is vital to understand whether your business may be operating a remittance service.

There are limited exemptions to the requirements under the AML/CTF Act. However, in some circumstances AUSTRAC may publish no action positions or grant application based exemptions from these requirements where the money laundering and terrorism financing risk profile of a particular business or service is low.

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Prudential regulation exists across a range of legislation and regimes. While the issuance and distribution of deposit products falls under the remit of ASIC and the Corporations Act, the operation and financial stability of businesses providing banking services falls under the Banking Act 1959 (Cth) (Banking Act), associated regulations and prudential standards published by APRA. In the payments context, organisations carrying on a banking business (eg, taking money on deposit and making advances of money) in Australia are required to be authorised by APRA as an authorised deposit-taking institution (ADI) and comply with associated obligations and prudential standards.

The Payment Systems (Regulation) Act 1998 (Cth) (PSRA) (as administered by the RBA) requires entities that are holders of stored value in connection with a purchased payment facility (PPF) to be an ADI authorised by APRA. A PPF is a facility (other than cash) where the customer is able to make payments up to the amount available under the facility and those payments are made by the provider of the facility (or another person acting in accordance with instructions) (eg, gift cards, prepaid cards). A PPF provider is a sub-class of ADI; there are currently only two authorised PPF providers in Australia.

The RBA has issued various declarations exempting certain PPFs from the application of the PSRA or exempting certain entities from the requirement to be an ADI. These broadly relate to loyalty schemes, gift cards, road toll devices, pre-paid mobile phone accounts, limited value and participant facilities or otherwise where the holder of stored value has its obligations guaranteed by an existing ADI.

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The RBA also regulates designated payment systems in accordance with the PSRA. A payment system is a funds transfer system that facilitates the circulation of money, and includes any instruments and procedures that relate to the system. The RBA has the power to ‘designate’ certain payment systems as being subject to regulation under the PSRA. This has occurred in relation to card schemes such as Mastercard, Visa and Eftpos. Once designated, the RBA has the power to issue access requirements and standards associated for that system. For example, setting limits on interchange fees, acceptance of other systems and limits on benefits provided to system members. 

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Payments service providers or businesses using payments instruments should also be aware of various consumer protections. These exist in the form of prohibitions on (among other things) unconscionable conduct and misleading and deceptive representations, as set out in the ASIC Act (administered by ASIC) and the Australian Consumer Law, as set out in the Competition and Consumer Act 2010 (Cth) (administered by the ACCC). However, there are also payment specific protections, including limitations on excessive surcharges on card transactions, appropriate price displays and setting prices (including unit prices for groceries).

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In recent years, the Australian Government has been undertaking various reviews into aspects of payment systems regulation, including:

• the Council of Financial Regulators’ review into the regulation of stored value facilities (see our update 'Stored value facilities: CFR releases regulatory recommendation paper');
• the Treasury’s review into Australia’s payments system (see 'Review of the Australian Payments System – Final report');
• the Parliamentary Joint Committee Inquiry into Mobile Payments and Digital Wallets (see final report 'Mobile Payment and Digital Wallet Financial Services'); and
• the Australian Law Reform Commission’s review in to the simplification of Australia’s financial services laws (see updates available 'Review of the Legislative Framework for Corporations and Financial Services Regulation').

Some of these reviews have indicated significant shifts in how certain digital payments products should be regulated. While various of these recommendations have been generally endorsed by the Government, political turmoil in recent years has affected implementation of these recommendations.

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