Payments Puzzle: Figuring out the proposed payments functions in the Treasury’s payments consultation

Australia’s payment system is set to undergo radical reform which is likely to broaden the scope of payments regulation, with many more participants in the payments ecosystem likely to need an Australian financial services (AFS) licence under the broadened regime.

The proposed changes to the scope of regulation are outlined in Treasury’s consultation paper “Payments System Modernisation: Regulation of payment service providers” released on 8 December 2023.

Proposed Payments Functions

The table below outlines the proposed payment functions which will now be captured under the AFS licence regime:

Payment function	Description	Illustrative examples
Stored-value Facilities (including Payment Stablecoin SVFs) ‘traditional SVFs’)	Funds loaded onto an account or facility. Customers are able to direct the movement of these funds, for the purposes of paying for goods or services, transferring to another person, or withdrawing the funds.	Current Purchased Payment Facilities, digital wallets that store value, value stored on online accounts, virtual and physical pre‑paid cards.
Payment Instruments	A personalised or individualised set of procedures that allows a payer to instruct an entity with which its funds are held to initiate a transfer of funds to a payee.	Issuers of digital and physical cards (e.g. debit and credit cards, Buy Now Pay Later cards), cheques.
Payment Initiation Services	The initiation of payments from a payer to a payee by a third-party entity, at the request of a customer. The entity initiating a payment is a third party to the payment account where the payer’s funds are held.	PayTo services, recurring payments initiated by a third party, direct debit or credit services.
Payment Facilitation Services	The process of entering into the possession of funds for the purpose of facilitating a transfer between a payer and payee. This includes for the purpose of acquiring, aggregating, disbursing, or otherwise transferring of funds within Australia.	Merchant acquirers, payment facilitators and aggregators, certain marketplaces and platforms, payout providers, certain payment processors, domestic money transfer service providers.
Payment Technology and Enablement Services	Payment specific services provided by third parties that enable payments to be made. These services enable a transfer of funds to occur but do not enter into possession or control of the funds.	Passthrough digital wallets, payment gateways.
Cross-border Transfer Services	A service that transfers or enables the transfer of funds from Australia to a payee outside of Australia, and/or of funds from outside of Australia to a payee in Australia.	Certain remittance providers, or international money transfer service providers.

Regulatory Considerations

Treasury is still consulting on whether there is any value in Cross-border Transfer Services being distinct from domestic remittances, so it is possible this category of product will be merged with Payment Facilitation Services and/or Payment Instruments.

There is significant overlap between the scope of Payment Technology and Enablement Services, Payment Facilitation Services and Payment Initiative Services. Some payment service providers are likely to provide multiple payment functions and more information about the nature and regulation of these payments functions is needed.

The potential overlap amongst the proposed payment functions could create regulatory arbitrage if payment service providers seek to be licensed for the payment function with the least onerous regulatory obligations.

Financial Service vs Financial Product

The Consultation Paper proposes to regulate some payments functions as financial services and others as financial products. This is important because financial products have different obligations to financial services, such as the requirement to produce and maintain Product Disclosure Statements and Target Market Determinations.

The table below outlines how the proposed payment functions will be regulated.

The payment functions defined as financial services are conceptually more troublesome. If the providers of these services are providing a financial service, then to whom? The payer who is using a payment system would generally always be the client for regulatory purposes, but the providers of Payment Initiation Services and Payment Technology and Enablement Services are often invisible to the end user. This being the case, can they really be characterised as providing a financial service to the payer, and what benefit would a payer derive from receiving a Financial Services Guide from such a provider?

In our view, these services are better characterised as part of a payment product that is outsourced by the payment operator, and that it should be dealt with by requiring the payment operator (who has an AFSL) to impose certain standards on their outsourced providers of Payment Initiation Services and Payment Technology and Enablement Services (instead of requiring them to hold AFSLs themselves). How this will be dealt with will not be known until after this round of consultation.

What does it all mean?

The implications of the above changes are that, as the legislation is currently proposed, anyone who provides any kind of payment functionality or input into a payment system is likely to require an AFSL (unless they fall within specific proposed exemptions e.g. gift cards).

The days of many payments businesses being able to operate without an AFSL are likely over.

What’s Next

You can find our full response to the consultation paper here.

Next up we’ll publish our blog looking at the proposed financial services obligations for payment service providers.

For more information, please contact Jaime Lumsden and Jessica Smith.