How Australian Payment Systems are regulated
In this post I talk about the legal framework that governs payments in Australia.
Money in Australia is controlled by the federal government.The parliament has delegated control (through the Reserve Bank Act 1959) over 'monetary policy' to the Reserve Bank of Australia (RBA).
That means the RBA decides how much money should exist within the country.[1].
Money can exist in one of two forms. It can either be 'cash' (notes or coins), or it can be 'electronic' money.
Regulating the supply of cash is fairly simple - Apart from negligable amounts of conterfeiting and lost/destroyed notes, the amount of cash circulating is however much the RBA prints. There is a physical token (i.e. the banknote or coin) that gets transferred along with ownership of the money. Since the token can only ever be in one place, it's obvious who is the owner of any money that is in the form of cash.
But the whole point of 'electronic' money is that it is not represented by physical tokens, so payments can be made instantaneously over great distances, and huge quantities of money can be accumulated and transferred without needing to be stored in Giant Vaults.
So the RBA wants electronic money to circulate freely, but also it wants to ensure that it is never created or destroyed by anybody else.
One way of achieving this would be for the RBA to hold a single database that records how much electronic money every individual person or business holds, and for that database to be updated whenever any electronic money is transferred between two parties. This would ensure that any 'credit' to one persons account is matched by a 'debit' to another account. But it would also mean the RBA would have to nationalise the entire retail banking sector and run every ATM machine and EFTPOS terminal. Which is a lot of work, and after the Australia Card debacle it was obvious that folks just aren't happy with that kind of centralised government control.
So instead we have a 'federated' system. Individual bank accounts are managed by a small number of 'Authorised Deposit-taking Institutions' (ADI's). Each ADI is responsible for managing a pool of money. Each institution runs their own database that records how much money belongs to each individual account, while the total money held by each ADI is tracked by the RBA. A movement of money between 2 accounts held at the one ADI is performed by the ADI modifying the records in it's own database. Any movement of money between accounts held at 2 different ADI's (i.e. a BECS direct deposit or a CECS/EFTPOS payment requires the RBA to be notified of the movement of funds between the ADI's. Note the RBA gets notified only of the net daily movements between ADI's, it doesn't know or care which individual sent or received the money, only the ADI's know that.
This system puts a lot of trust in the ADI's, so to ensure that the ADI's are trustworthy, they are regulated by APRA - the Australian Prudential Regulation Authority. They make sure that ADI's are honest, have good record keeping, and don't do silly things with the funds that people have deposited with them. The federal government has mandated (via the Banking Act 1959 that only APRA regulated ADI's can hold 'deposits' on behalf of other people. In a later post I'll look at what this means for anyone planning on building a new payment or stored-value system in Australia (such as gift cards).
The other big player in Australian Payment Systems is APCA - the Australian Payments Clearing Association. This is basically a co-op created by the major banks. It is not a government agency or have any particular status under legislation, however it publishes the rules and file specifications used in processing BECS and EFTPOS transactions. It also sets the rules and regulations under which cheques get settled.
Footnotes