Australia’s biggest banks will be forced to compete directly with alternative payments and Fintech providers under a highly anticipated shake-up of the New South Wales government’s core banking services contracts revealed this week.
The state’s cash swollen Treasury on Tuesday released key documents (registration required) outlining its go-to-market approach to banking and transactional services, issuing an overtly open call for expressions of interest for “banking, financial and related services” across the state government.
The new deal that Treasury is seeking to cut with banks and the wider payments and services industries is widely viewed as a potential blueprint for how other states and Canberra may soon renegotiate their own lucrative banking contracts.
Government banking contracts are highly prized by institutions not least because they represent a very big, safe, stable and generally low-risk customer. The banking business of NSW is especially appealing because of record receipts turbo-charged by asset recycling and stamp duty from the housing boom.
Treasury eyes tech prize
Treasury’s call for expressions of interest (EOI) puts a particularly sharp focus on embedding new technologies into often manual and sometimes arcane processes like issuing cheques, processing rebates or accepting money.
The potential for big cost savings to be generated through the automation of legacy or manual financial processes – like paper heavy property transactions that feed stamp duty and rates – while speeding-up administration is highly appealing for agencies.
At the same time major agencies like Transport for NSW are actively looking at letting customers use everyday tap-and-go payment cards or services like Apple Pay in lieu of separate tickets on trains, trams ferries and busses as now happens in London.
Spearheaded by Treasurer Dominic Perrottet, the NSW banking services overhaul follows a similar push instigated in the Department of Finance, Services and Innovation that wove together multiple customer facing agency functions in the form of Service NSW.“… a different mix of services, products and underlying technologies to those currently provided…”
A key element in the highly successful DFSI overhaul was a radical shake up of the previously heavily centralised technology procurement strategy. That move deliberately broke-up or unseated long-term deals with large incumbent vendors that were blamed for locking out smaller, more nimble suppliers.
At the time the reforms in DFSI were being rolled out, Perrottet as Finance minister made it clear there was substantial interest within the government for injecting innovation led reform into payments, revenue collection and other finance-related elements of government like expenses management.
As Treasurer, Perrottet gets to make that happen. The new contracts are slated to commencvein April 2019.
What’s in the mix
The scope and scale of what Treasury is seeking from the market is significant, not just because it covers the core revenue and payments functions that reach into almost all agencies but because it also clearly spells out a desire to modernise, standardise and evolve banking and finance capabilities.
In order to cover the broad depth of services it’s looking for, the EOI breaks down it’s casting call into five key modules that banks and industry can compete for.
In simple terms these are:
- Cash and liquidity management (accounts, payables, receipts, cash forecasting)
- Payments, payments capability and in person transactions (customer interfaces, merchant services, POS and security)
- Cross border payments and financial markets (foreign exchange, derivatives)
- Expense management (cards, management systems)
- Innovation and future state (hosted ledgers, New Payments Platform overlays, e-invoicing artificial intelligence and robotics)
But it’s the eye to the future that’s likely to create the fiercest contest of ideas and solutions, especially from the Australia’s growing Fintech sector which has a strong foothold in Sydney.
The Treasury papers put it this way:
“In light of the fast-evolving and often disruptive nature of banking, financial and related services and financial technology providers, it is expected that the Banking, Financial and Related Contracts(s) will have a different mix of services, products and underlying technologies to those currently provided…”
The innovation mandate and open call will also put major banks and payment schemes under more even more pressure to modernise their offerings, especially around payments, where the Reserve Bank of Australia has repeatedly expressed concerns over the systemically slow pace of innovations like real time transaction settlement hitting the market.
In some areas government agencies can potentially create payments and data markets, for example by activating public transport ticketing to accept payments from digital wallets in phones or wearable technology.
Who’s in the mix
Westpac is the incumbent transactional bank for NSW, an account it will undoubtedly fight hard to keep from arch rival CBA as well as Melbourne based NAB and ANZ.
Westpac has strong historical ties with the state government and Macquarie St, not least because it established in 1817 as the Bank of New South Wales with its incorporation signed off by the Governor Lachlan Macquarie.
Australia Post is also an incumbent as a physical retail services provider, a customer channel that the federally owned enterprise has heavily reinvested in and evolved significantly as part of its recent transformation away from letters and into an omnichannel services offering, especially in its Enterprise and Government.
A significant part of that push has been Australia Post’s development of its Digital iD™ online credential and platform, a solution it is squarely pitching at both the public sector and banks as a way to dramatically streamline online verification requirements.
At the same time, both the NSW government and the Digital Transformation Office have deployed or are developing their own digital identity products leaving open the question of how one or more credentials could be incorporated into the banking services mix.
A logical application for the use of digital identity credentials is around digitising higher value transactions that flow from government to either individuals or businesses such as the release of bonds.
House of cards
It won’t just be local banks competing for Treasury’s attention. Global card schemes including Mastercard, Visa and American Express will also have a vested interest in either lodging their own EOI’s or backing one made by an issuing institution – especially for corporate and purchasing cards.
According to Treasury data from Westpac there are 19,423 purchasing cards issued to the NSW government, a fleet made more appealing by recent procurement reforms that now allow agencies to pay their suppliers smaller amounts by credit card to expedite cash flow.
However a crackdown on interchange fees by the RBA in 2016 has now placed corporate credit cards under hard cap of 80 basis points (0.8%) for interchange fees. That change in effect slashes the amount of money banks can make off corporate cards by between 50% to 70%.
Worse still for banks, their compliance with interchange standards for corporate is now reviewed quarterly rather than three yearly, a move that prevents fees drifting north and then being reset.
The changes mean that banks will and card schemes will now need to find other ways to replace the lost revenue that was in the main extracted from merchants hit by steep fees for accepting government credit cards.
While many consumer to government payments are still based on electronic cards, changes to Australia’s wider payments networks and platforms will also feed into the mix, especially around bill payments.
The arrival of the New Payments Platform promises significant efficiency gains for customers as well as being able to transport and extract much richer data as part of the real time infrastructure overhaul.
But as digital transactions become the norm, it also raises logical questions about the longer term strategy of the wider banking industry to payments infrastructure, especially around BPAY and eftpos that are both to a large degree collectively owned by major institutions.
It’s not a small consideration either, given that Treasury puts NSW government transaction volumes at 73 million for the 2016 calendar year – although it does not call out the cash value of those transactions.
The NSW government also has around 5000 payment terminals in the market, according to Treasury.
One medium term question is whether both BPAY and eftpos can realistically remain separate infrastructure entities once the NPP arrives in earnest. The decline in cash usage has already seen some banks advocate for shared automatic teller infrastructure after all big four banks dropped their cross-bank access fees for withdrawals.
As for Apple Pay, so far only ANZ is offering that option to customers following a legal row between Apple, CBA, NAB and Westpac over access to the payments chip.
The other banks this week launched their own mobile payments app, Beem, that will compete directly with Apple Pay.