[Insert Title]

Presented by [Insert Speaker]

[Insert date as: Day, # Month Year]

“Embracing innovation in e-payments”

A play in one act byRod Tasker, Payments Consulting Network

Michael Anastas, HWL Ebsworth

Wednesday, 7 October 201525th Annual Credit Law Conference 1

About Rod

• 1980s:

o EFTPOS

o mobile EFTPOS

o smart cards

• 1990s:

o Windows e-banking

o Web shopping payments

o High value payments

• 2000s:

o Internet B2B

o POLi

• 2010s:

o Smart phone payments

o Crypto-currency

• EFTPOS

• BPAY

• RTGS

• EDI

• Dismissing PayPal

• MAMBO

About Michael

• Working with leading global

and Australian brands to

deliver payment innovations

to market

• Working with regulators to

deliver innovative solutions

• Advising on banking and

financial services and

payments regulation for

over 14 years

• FSR implementation /

refinements

• Payments reforms

• AML/CTF implementation

• NCCP implementation

• Privacy reforms

What one usually hears at conferences

about payment innovation……

What’s going on … Who’s doing it …• Mobile Phones

• Social Media

• E-Wallets

• Prepaid

• BitCoin and Block Chain

• The New Payments Platform

• Contactless Card Payments

• Biometrics

• Wearables

• ISO 20022

• Uber

• PayPal

• Alibaba

• Apple

• Amazon

• Optus, Samsung

• AMEX, M/C, Visa, CUP

• Facebook, Twitter

• VeriFone

• CBA, Heritage Bank

How we usually help a bank with

payments planning …

“The payments industry is going through an

unprecedented level of change, driven by …

And we look at things like product portfolio health, demographic trends,

competitors’ activities, … with a view to developing a “target state” and a

road map from today to the future.

• Changing customer preferences and expectations (mobile, online,

real time, segment of one, …)

• Regulatory demands (Licensing, AML, Privacy)

• Technology Evolution (Cloud, PAAS, SAAS, IAAS, …)

• New competitors (start-ups, retailers, …)

• Globalization (trade deals, connectivity of people and things,

standards, laws, ….)”

• We look at the nature of the product, the structure of the

offering and the channels to market.

• We advise on how to bring the product to market having to

regard to the regulatory requirements, regulatory risks and

efficiencies to be achieved.

• This often involves a staged approach to product launch and

implementation and arrangements with third parties to assist

in overcoming regulatory restraints.

Navigating the regulatory highway

A number of different

options or is it a

combination of all?

Financial Institutions

Technology Companies

TelCoProviders

Merchants

The RBA’s “Strategic Review of

Innovation 2012” …

• Identified systemic impediments to innovation

• Recommended changes that could unlock innovation over

medium term, 5 to 10 yearso same-day settlement of Direct Entry (DE) payments

o real-time settlement into payee accounts

o out of hours availability

o additional remittance data

o identification via email or phone number

• Led to the “New Payments Platform” (NPP) industry initiativeo in the “build and internal test” stage, scheduled to complete

2017

o initial members : ANZ, ASL, BAB, CBA, Citi, CUSCAL, Indue,

ING, MBL, NAB, RBA, WBC

Financial System Inquiry Final Report

• Identified:

• a low awareness of, and impediments to, innovation

• siloed perspectives and inability to identity system wide

opportunities

• an inability to influence regulators / Government in a

coordinated way

• a lack of a single point of entry for new entrants

• potential impacts on international competitiveness

• Actions include:

• clearer graduated payments regulation

• clear guidance of the framework for industry

• narrowing the AFSL regime and introducing a two-tiered PPPF

regime

Today we explore payments innovation at a grass roots level …

As a consultant, people call me and say “I’ve got this great idea

for a new payment service. It will be as big as (choose from)

PayPal/BPAY/Visa. All I need is … (choose from)

• an introduction to bank/card scheme product managers

• a business plan to raise money

• validation that there’s nothing fundamentally wrong

• a fancy presentation deck with the right acronyms

We’ve taken a collage of experiences to bring you a payments innovation case study…

Some observations before we start,

most of which we’ll revisit …

Payments innovation is hard.

Payments innovation is deceptively hard.

Payments innovation is rare and protracted.

Most of what we call “innovation” is window dressing and incremental

change to existing mechanisms. Genuine innovation takes time

because there’s always more than one party involved.

R I PPayment Innovator

The graveyard is littered with dead payment concepts. Is it harder than

any other innovation? There are reasons to think so; it takes two to

tango; it’s all about the money; nobody gets up in the morning and says

“I feel like making a payment today”.

We all know how to make a payment, right? How hard can it be?.

Economics of payment products is rarely understood by innovators.

Regulation of payments is complicated. How many regulators do we

need? Why is Australian law different?

Payment Instrument Timeline

Money

Lenders

Merchant

Banks

Central

Banks

World

Bank

Bartering

Livestock

Shekels

Shells

Coins

Leather

Notes

Paper

Notes

Letter

of Credit

Bill of

Exchange

Cheque

Charge

Card

Credit

Card

Electronic

Payment

Electronic

Collection

Digital

Coin9000 BC 1920

1950

1970

1980

20003000 BC

100 BC

800 1000 BC

1000 BC

1400

1700 1100

2015

Digital

Note

“Embracing innovation in e-payments” …a play in one act, about

Iva Goodin an inventor who woke up one morning with an idea for a new e-payments product to revolutionize bill payments using crypto-currency for loyalty. Iva’s plan is to raise venture capital and launch “DebtPay” in 2016, so he can sell the company and retire in 2017, just in time for his 40th birthday party. What could go wrong?

Rod Tasker, alternatingly plays Iva and himself, a consultant specialising in e-payments product development.

Michael Anastas, alternatingly plays Iva and himself, a lawyer specialising in banking law and payments regulation.

Cast

Earn money by paying your bills!

DebtPay helps you pay your bills on time, making payments electronically to registered billers and handled for you by our experienced team.

Store money in your DebtPay e-wallet, earn rewards in “BatNotes” to spend on rewards in-store, online or redeemed for cash!

Each $10 transaction processed with DebtPay earns 1 BatNote (BN)

BatNote beats BitCoin, hands down.

[Iva: I’ll need some terms and conditions, won’t I? I’ll get some legal help …]

Let me tell you about …

DebtPay, a revolutionary way to pay your bills!

DebtPay Framework

USER

Biller

EARN

BATNOTE

S

(LOYALTY)

PREPAID

STORED

VALUE

Merchant

Pay Redeem

Is DebtPay …

Carrying on a banking business? Purchased payment facility?

A Financial Service? Non-cash payment facility?

A potential tool for money laundering or terrorist financing?

Subject to ASIC’s ePayments Code?

A scheme facility or a closed loop system?

The regulatory framework

Exploring the requirements

Banking Act

banking business includes the provision of a PPPF if APRA

determines the facility:

is of a type allowing payment to be demanded in Australian currency

of all or part of the balance held by the HSV (i.e. akin to a deposit]

is available of a wide basis as a means of payment having regard to

restrictions limiting purchasers or payees [ie open loop]

Payment Systems (Regulation) Act

regulates non-ADI holders of stored value (HSVs) for PPFs

exemptions apply – gift cards, limited value ($10M), limited

participants (50)

unless an exemption applies, an authority or exemption from the

RBA is required

Exploring the requirements

Corporations Act

Financial product includes non-cash payment facilities

subject to certain exemptions including:

single payee facilities or where payees are related companies

wire transfers and money remittance depending on settlement

timeframe – useful for non-prepaid payment services

gift facilities and low value facilities ($1000 per person and

$10M float cap)

ePayments Code

regulates consumer electronic payments transactions

voluntary

consumer terms, receipts and statements, liability and

mistaken payments

How will DebtPAY make money?

o Fees, float, arbitrage, seigniorage, …

Who will use DebtPAY?

o At least three target markets: consumers; billers; merchants.

How will they know they can use it?

o Promotions, referrals, re-sellers, …

Why would people change?

o Each party has to perceive a benefit, now. Further the benefit has to overcome the status quo. Benefits have to be shared.

The commercial frontier, some things to contemplate:

How will incumbents react?

o By and large, banks, schemes, payment processors, and other incumbents, won’t welcome you. The exception is if they can sell you something or use you to access a market they can’t reach.

What finance do you need?

o All these things take money. Are you financing it yourself? Development, testing, promotions, legal and compliance fees, …

o Whether you need to be licensed, and how you do it, will affect costs and cash flows.

Rod: my guess is that DebtPay would need an AFSL, have you considered the options for achieving this?

Iva: Time to re-visit that creepy legal guy …

The commercial frontier, some things to contemplate:

Facilities which are not pre-funded are relatively unregulated

(eg money transfer business. AFSL may be required

depending upon settlement timeframe)

Closed loop facilities are relatively unregulated

Significant entry barriers remain for open loop (except where

exemptions apply – eg gift cards) – ADI status and scheme

membership requirements

The legal characterisation of a prepaid card facility is

important to determine whether a range of laws apply

The impact of licensing requirements

White Labelling

Tripartite Alliances

Even the card schemes need a sponsor

Specialist platform operators manage most prepaid card

programs

Pure BIN sponsorship

BIN Sponsor acting as issuer (BIN sponsor assumes full

regulatory responsibility but the distributor might need an

AFSL)

The impact of licensing requirements

Cryptocurrencies and Loyalty

A cryptocurrency harnesses strong encryption techniques to create

a digital coupon that is so secure that it can be used as a store of

value and a medium of exchange.

The most famous today is BitCoin, but it wasn’t the first. Mondex

and Digicash both date from the 1990s. They had limited success,

but pre-dated the internet and pervasive communications.

Beenz was an early (pre-2000) attempt to create an internet

currency based on loyalty. A decade or so after its creation, and

several hundred million dollars down the drain, it was rated as one

of the biggest dotcom disasters.

The top 100 cryptocurrencies represent about US$4B of stored

value globally. Bitcoin comprises about $3.5B, so there are 99 also-

rans, including Unobtanium ($250K) and CannabisCoin ($150K). Do

we need another one?

Cryptocurrencies and Loyalty

BitCoin was intended more as a demonstration of principles than an

attempt at a commercially attractive system.

The BitCoin approach spawned various offshoots including

LiteCoin, FeatherCoin, PeerCoin. These are variations of the

BitCoin technology, which is often referred to as the “Block Chain”.

Each variant tries to address a different BitCoin shortcoming, but

mostly these are technical in nature.

A more commercially oriented approach can be seen in Utoken,

which aims to curb volatility by providing backing for each coin

issued (like the Gold Standard for fiat currency).

Will cryptocurrencies become mainstream?

Cryptocurrencies and Loyalty

There’s a huge amount of innovation occurring in this space today,

and for good reason. Cryptocurrencies and the Block Chain can

make lots of things easier and cheaper.

But there’s a long way to go.

Some wild, unsubstantiated predictions, based on my view of the

world:

o In 25 years, … most countries in the world will issue cryptocurrencies in

addition to notes and coins.

o BitCoin will be like Diners Club – there at the beginning, and a minor

player, but not compelling compared to MasterCard and Visa.

o Cost and convenience will drive adoption, not loyalty. BatNotes will not

be there.

o Major factors in my thinking are the regulatory and legal challenges

…

Non-cash payments

Anti-money laundering

Taxation

Investor protection

Legal aspects of cryptocurrencies

Some challenges:

Crowded, sophisticated market.

Lots of regulators. Lots of regulation. Some annoyingly specific

to Australia.

Regulators are not “innovation friendly”.

Australia is 2% of global economy.

Hard to achieve critical mass.

Everybody has lots of options, and are generally getting by

A few players dominate every category.

Capital is hard to come by.

Is payment innovation too hard?

Some tips:- Don’t use “common sense” to assess legal or

commercial factors; ask people who know.- Focus on exactly what’s new, nothing more.- Don’t assume that what works in Australia

works elsewhere, or vice versa.- Make sure investors have the right

expectations.- Be prepared for a rocky road.

Is payment innovation too hard?

How would the case study differ if it involved a credit

facility, rather than a non cash payment facility/

purchase payment facility?

From debit to credit………

DebtPay Framework

USERBiller

EARN

BATNOTE

S

(LOYALTY)

CREDIT

FACILITY

Merchant

Redeem

Differences in the regulatory framework for credit

facilities National Consumer Credit Protection Act

National Credit Code

Privacy Act (Enhanced)

Anti-Money Laundering

Role of credit law Licensing

Responsible lending

Consumer protection

Enhanced enforcement powers

Commercial considerations

From debit to credit………

Continued grass-roots innovation, mostly doomed

Occasional major private sector innovation that

becomes mainstream and sustainable – Uber for

everything!

Continued regulatory change, both international and

domestic, including NPP, AML/CTF/, PCI …

Where to from here for payments ...

Streamlined regulatory landscape

Within Australia

Between Australia & other countries

Greater support for grass roots innovators

Capital

Resources

Guidance

Ease barriers to entry without compromising

consumer protection

and…. Embrace Innovation!

Some things we’d like to see ...

THANK YOU

AND

ENJOY THE 25th ANNUAL CREDIT LAW CONFERENCE

Rod consults in strategic management and

innovative solution delivery in the banking and

finance industry. He has experience in Australia

and internationally, and is an expert in payment

services, e-commerce and transaction banking

Rod has a track record in defining, designing and

driving profitable business change and product

innovation based on an in-depth appreciation of

both business and technology

Rod has a BSc (Computer Science), BA (Maths

and Philosophy), Grad Dip Business (Bank and

Finance) and AICD Directors accreditation

Payments Consulting Network (2013 – current)

Associate, Melbourne

Conducted market assessments on the commercial cards and prepaid

cards segments in Australia for two international clients; provided

consultancy support to an NZ client on agency banking arrangements;

and ran payments industry training seminars

Tasker Enterprises (2008 – current), Independent Consultant

Bank A: developed strategic approach for $100M payment innovation

project, acted as expert consultant to Group Payments Business

Strategy and developed an eClient strategy for the wholesale business

Bank B: developed Business Architecture and Operations Model for

Payments Services with outcomes relating to policy, procedures,

organisational structure, governance and technology deployment, with

net cumulative benefit projected to be $50+M

Various POS assignments: regulatory reform analysis and planning;

assisted vendors with business models for new devices, certifications,

impact of and planning for PCI, EMV, and convergence of mobile

mobile and traditional payments

Centricom Pty Ltd (2006– 2008), GM, Products and Operations

Managed development and operations of the POLi product, including

designers, implementers and support staff, policies and procedures,

regulatory compliance, SLA and supplier management

Previously: Westpac, ANZ Bank

Strategy formulation

Business

Improvement

Product development

and management

Ventures, M&A

Consumer payments

Business payments

Payment networks

Transaction banking

E-commerce

Private equity

Selected Experience

Functional Expertise Industry Expertise

Rod TaskerProfile

Michael Anastas

advising on banking and financial services and payments regulation for over 14 years;

providing advice to full spectrum of financial services providers in Australia and overseas including banks, other financial institutions, payment system participants, payment product issuer and distributors, bill payment providers;

advisory and project experience including new product development, advising on major outsourcing and distribution arrangements, financial services mergers and acquisitions and implementing regulatory reforms including Payment Systems, Privacy, FOFA, NCCP, PPS and AML/CTF; and

dealing with regulators including ASIC, AUSTRAC, APRA, RBA, OAIC.

2014, 2015, 2016 Michael Anastas: Financial Institutions,

Regulatory

The Legal 500 Asia Pacific2015 Leading Firm: Banking & Finance