Pay your dues

Streamlining the payments process will see cheques and cash payments outmoded by innovation

By Kelly Bayer Rosmarin

December 11, 2009

To many, payments are a humdrum part of everyday life, necessary and, in Australia at least, ubiquitous. The ability to make trusted payments is one of the foundations on which we function, and yet there is more that we can do. It is the opportunity to positively impact people's lives by making payments quicker, simpler and more efficient that is driving innovation.

In the 1930s, Schumpeter wrote that innovation is "bunched" at certain times and plays a key role in fuelling growth. He coined the term "creative destruction" which describes the process of how innovation creates value whilst replacing the old. While he was writing from a macro-economic perspective, his points apply today at a micro-economic level. System level innovation will tend to bunch, and this innovation will contribute to growth and opportunity. Payments is one of those areas where there is great potential for innovation over the coming years. While we may start to see certain forms of payments diminish, like cheques or cash, new creative payment methods will take their place and grow our ability to transact.                                                         

The Federal Government has an important role to play in facilitating innovation - its Department of Human Services is responsible for 304 million health and welfare outbound payment transactions each year. The Department's recent discussion paper, Better Dealings with Government: Innovation in Payments and Information Services, invited the industry to make recommendations on how it can improve delivery and provide more tailored payments services to its customers.

The Commonwealth Bank was one of many organisations that responded to the paper and discussed a range of potential innovations.

We see contactless payments as an innovation with terrific opportunity to deliver faster, more convenient payment services for cardholders and retailers, while displacing cash transactions. This is the first step towards mobile payments and, on the merchant side, it offers security improvements as there is less need to hold cash in order to provide change to customers. The Commonwealth Bank is leading the market in contactless payments, having issued more than three million Commonwealth Bank MasterCard PayPass cards. And, by the end of the first quarter 2010, we will have 3,000 readers in place with merchants across the country.

The security factor
Security is another area where technological innovation can provide significant advantages to government. Improvements in security will enable government to exchange not just payments, but also information more easily. Two examples of this would be: increased ability to deliver and receive online payments to and from constituents; and utilising EMV chip credit and debit card technology to facilitate enhanced information flows. A chip card has a microchip embedded in the card, which contains security data and payment software, providing greater protection to the cardholder. For governments, this chip could also potentially contain individual customer information such as Medicare, health and other data.

Another recent payments innovation that is already proving advantageous is the MediClear payments system, which gives patients and doctors the ability to receive Medicare refunds through a doctor's point of sale terminal, offering convenience and cost savings for all.

Online banking also provides a wealth of opportunities. As reported in the government's paper on Australia's Digital Economy, online banking is the second most popular online activity after email. With a lower cost per transaction it can provide greater efficiency in payment processing for government, often removing the need for manual intervention.

Plus, it can happen any time of the day or night, and thanks to Internet enabled hand-held devices, from any location.
Of course, innovation does not happen overnight and it is often faced with impediments. From a payments perspective, potential impediments include:

• Challenges imposed by the scale of investment required for innovation;
• Complexities in trying to coordinate industry norms and standards;
• An increasingly interwoven and fast-moving economic environment;
• The need for a genuine network effect Ð both payers and receivers (or their equivalent); and
• Risks on both sides of the market.

Notwithstanding these challenges, the high speed economy will foster an environment where innovation in payments is likely and indeed, necessary.

While Schumpeter's early theories on entrepreneurship and innovation named entrepreneurs as the drivers of a nation's innovation and technological change, he later asserted it is big companies with the resources and capital to invest in research and development who are the agents of innovation in the economy. In this context, it is certainly encouraging to see large agents like the government actively pursuing payments innovation through collaboration with the industry.

Kelly Bayer Rosmarin is the executive general manager of business products and development in the institutional banking and markets and business and private banking division of the Commonwealth Bank of Australia.