Gov targets digital wallets, BNPL in payment systems reform

Digital wallet and buy now, pay later (BNPL) providers are set to be regulated in Australia, with the federal government aiming to play a greater role in the payments system.

Treasurer Josh Frydenberg will on Wednesday reveal a set of sweeping reforms to the rules underpinning the payments system in a bid to tackle challenges presented by new technology.

The reforms aim to boost regulatory oversight, support competition and better protect consumers and investors in a regulatory environment that has remained largely unchanged since the 1990s.

In that time, BNPL services like Afterpay, digital wallets like Apple Pay and Google Pay, and cryptocurrencies have become pervasive.

BNPL now accounts for around 20 percent of online retail transactions by value, according to the Reserve Bank of Australia, with more than a quarter of all adults having an active customer account.

Digital Wallet transactions have also increased rapidly, particularly since the start of the pandemic, with the Commonwealth Bank estimating a 90 percent increase in transactions in the year to March 2021.

At the same time, the use of cash has faded, dropping from 69 percent in 2007 to just 27 percent in 2019.

Both BNPL and digital wallet operators currently fall outside the Payment System Regulation Act, making it difficult for the government and the Reserve Bank of Australia to take action against operators.

Changes to be proposed by the government on Wednesday will see the Treasurer of the day given a new designation power to intervene in these parts of the payments system.

Such a power was endorsed in the payments system review earlier this year to ensure “emerging payments issues... are able to be brought within regulation where it is in the national interest”.

It would give the Treasurer the power to “direct regulators to develop regulatory rules” and “give binding directors to operators of, or participants in, the payments system”.

The government has highlighted fees and competition – including potential open access to the near-field communications (NFC) chips in iPhones – as two areas of interest for the government.

“Given the pace of change and those leading it, if we do not reform the current framework it will be Silicon Valley that determines the future of our payments system,” Frydenberg will say in an address later today.

The government will need to bring forward legislation to introduce the additional powers, though it has not indicated when this might happen.

It has suggested, however, that the most urgent reforms will be consulted on in the first half of next year, with the remainder by the end of 2022.

The government will also consult on how to modernise the payment system framework in early 2022, including treating BNPL and digital wallets in a way that promotes competition and innovation.

Digital wallet providers may be required to hold an Australian financial services licence, though it appears likely to be enforced on a case-by-case basis.