Reforming the Australian Payments System: The State of Play

The key objective driving reform in payments clearing and settlement in Australia is enhancement of the safety and integrity of the system. It is also important to improve the efficiency with which payments instructions are handled and funds made available, and to introduce greater competitive equity among service providers. At one level, these key objectives are all likely to lead to less paper and more electronics as the basis for transactions. Electronic funds transfers are more efficient than paper-based transactions, as well as being more secure, cheaper and faster, and capable of providing finality of payment with greater certainty. Electronic funds transfers can be integrated directly with the ordering and delivery of goods and services, and can substitute more effectively for currency than can paper. Electronic funds transfers, while providing the opportunity to reduce risk, also change its location. Unlike cheques, there is no uncertainty about whether payers have the wherewithal to pay – EFT transactions do not proceed unless the customer’s capacity to pay is established beforehand. As a consequence, electronic funds transfers shift risk away from ordinary customers (who may not be well placed to assess and manage risk) towards financial institutions (which are more adept at both). The use of electronic funds transfer technology can also enhance the competitiveness of the market for financial services. Effective entry into the EFT payments system is, in a number of ways, easier than into the cheque system. Electronic payments can be cleared immediately against both the paying customer’s balances and the receiving institution’s exposure limits against the paying institution. This means that prudentially sound financial institutions (including relatively small non-bank players) that meet the required technical standards can be accommodated more readily. Conversely, the cheque payments system is less amenable to accommodating new entrants on the same terms as the well established players, because the attendant risks on institutions cannot be managed as effectively in advance, and the systems for physically processing paper are more cumbersome and expensive. The inherent advantages of electronic systems, however, do not mean that cheques will disappear overnight. Cheques have some obvious attractions in a community so accustomed to their use. With appropriate reforms to processing (e.g. truncation,