The float is dead! Standby for a new round of moaning and groaning from analysts, big shareholders and other ‘friends’ of our big banks next year when they realise that the day of the multi-day settlement and clearance of transferred funds etc have ended.
The new Reserve Bank Governor, Phil Lowe yesterday laid out for the first time more details of the new financial payments platform planned or the Australian economy – it’s a ripper for consumers and businesses or all sizes, and it’s going to hit bank revenue and profits as hard as any other change.
It will end the one to three days or so it takes to clear cheques and other payments – consumers will be able to get instant value – and so will businesses of all sizes when they make or receive a payment – and for the banks, that ends the free use of the money they had, especially over weekends and public holidays.
But the banks will get almost instant value as well, meaning they will know from minute to minute what their financial position (especially liquidity) is so far as the tens of billions of dollars that flow through the Australian economy and payments system every day.
In his first appearance before the House of Representatives Standing economics Committee, Dr Low revealed that mobile phone numbers and internet addresses will replace bank account numbers as fund are transferred near-instantly between customers and institutions.
Although a joint project with the banks, the central infrastructure will be owned and managed by the Reserve Bank and will replace the web of computer systems that date back to the days of programming by punch cards. It has the potential to increase the cost of money for the banks because it will eliminate the free use they had of customer funds
“When this work is finished we will be able to make instantaneous payments to one another, with the money transferring between our accounts in a matter of seconds – and that is regardless of who we bank with,” Dr Lowe told the committee.
"You can think of it as a central database that might have your phone number in it and a link to your account. You can change that link if you subsequently want to change where your money is going to. It may well make the whole issue of BSBs and account numbers less important."We will also be able to send a lot more information with the payments. You will no longer be restricted to just sending 14 characters if you go onto your internet bank to make a payment."
Dr Lowe said the origin of the 14-character rule was a limitation of the amount of information that could be fitted on to the punch cards used in computing in the 1980s.
In his statement at the start of the hearing yesterday, Dr Lowe said that when this work is completed “ e will all be able to make instantaneous payments to one another, with the money transferring between accounts in a matter of seconds, even if the funds have to move between banks.”
"The first payments using this new system should be able to be made late next year. As one part of our contribution to this project, the Reserve Bank is building the necessary infrastructure to allow funds to be transferred between financial institutions in real time.
And he revealed a third major project for the RBA “ third major project is the renovation of our banking infrastructure. The Reserve Bank is the main transactional banker for the Australian Government. Like other financial institutions, we need to keep investing in technology so that we can provide a high level of service to our customers. As part of this work, we are developing systems so that the government can use the New Payments Platform to make, and receive, some of its payments.”
The RBA has already been running what it calls the RITS, which will interface with the new platform, or The Reserve Bank Information and Transfer System (RITS) (http://www.rba.gov.au/payments-and-infrastructure/rits/about.html).
The RBA website says it is Australia’s high-value payments system, "which is used by banks and other approved institutions to settle their payment obligations on a real-time gross settlement (RTGS) basis. Final and irrevocable settlement is achieved by the simultaneous crediting and debiting of Exchange Settlement Accounts (ESAs) held at the Reserve Bank of Australia.”
"Transactions are entered into RITS directly, or delivered via the external feeder systems – SWIFT and Austraclear. These include payments that settle through CLS, a multi-currency settlement system designed to reduce foreign exchange settlement risk.
"Some settlement obligations are also settled in RITS periodically on a multilaterally netted basis. This includes obligations arising from payments exchanged through low-value clearing systems for cheques, direct entry and retail card transactions.”
"Direct entry payments are settled on a same-day basis, while cheque and retail card obligations are settled on a deferred basis the following day by around 9.00 am. These obligations are sent to RITS via the Low Value Settlement Service (LVSS), which enables clearing system participants to send their settlement instructions directly to RITS at the same time as clearing activity takes place between institutions.
“The LVSS uses some of the infrastructure developed for the Low Value Clearing Service (LVCS), established in June 2010, which provides network connectivity between SWIFT and the Community of Interest Network (COIN), administered by the Australian Payments Clearing Association (APCA), to facilitate the exchange (or clearing) of cheque and direct entry payment files between payment system participants.”
All this means that when you tap and go at Coles or Woolies from late next year or in 2018, your account is debited straight away and transferred from your bank/credit card account to that of Coles (or other merchants). When you pay your Telstra mobile bill or your utility bill, the payment will be made from your account to the bank account of the utility?mobile phone group or whatever. There should be no delays, no floats and instant value if you are receiving a payment.
