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The Development and Legal Nature of Payment Facilities
Author: |
Rhys Bollen BBus, LLB(Hons)
LLM Candidate, University of Sydney School of Law
|
Issue: |
Volume 11, Number 2 (June 2004)
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ContentsThe Development and Legal Nature of Payment Facilities (Part 1)
Author's Note: The views expressed in this article (including any errors or omissions) are entirely those of the author, and not of his employer. This article is based on the law as 24 March 2004
- Payment facilities are as old as money itself. Money in the form of currency developed from basic payment facilities, generally goldsmith's or banker's receipts and certificates of indebtedness from the crown.[1]
Money in its wider sense has always been (and continues to be) closely associated with payment facilities. Most money is held "in the form of entitlements to be paid currency, usually by a financial institution".[2]
- If one were to ask, "how does money make the world go around?"[3]
the answer would be the payments system (all payment facilities collectively). The payments system is what allows money to do its work. The payments system is how money circulates through the economy, how one person 'pays' another. It enables money to be lent and repaid, goods and services to be purchased, labour to be hired and capital to be invested.
- The economy is heavily reliant on payment facilities for its efficient operation.[4]
Without payment facilities, the economy would not be able to function. For these reasons, commentators and governments have taken a keen interest in the operation of payment facilities.[5]
- For at least the last century or so, while most payments have been made in physical coins and notes (cash), the proportion by value of payments made by cash has continued to fall. By value, most payments are made by other means - through payment facilities other than cash (non-cash payments).[6]
As will be seen later, this paper argues that modern payment facilities operate predominantly through the circulation of debt obligations.[7]
- This article will consider the development, operation and legal nature of payment facilities. To appreciate the nature of and issues associated with non-cash payment facilities, an understanding of the basic payment infrastructure is required. The following section of this article considers the basic payment infrastructure in Australia. Although each country's basic payment infrastructure differs, a description of the Australian scenario will serve as a reasonable basis for the remainder of this article.
- The third part of this article gives an overview of a number of common payment facilities. It describes their basic features, commercial rationale and legal character.
- The fourth part of this article contains an analysis of some common legal issues and implications arising from the payments system. It looks at some legal issues arising from common payment facilities, their legal treatment and interaction with systems of contract and tort law. Together with the overview of common payment facilities, it will also serve as a basis for the discussion in an upcoming article of the risks associated with, and appropriate regulatory models for, payment facilities.
- In ancient times, barter was the primary payment system. One person would offer to exchange goods they held for goods they wanted. If there was a second person willing to accept the goods the first person was offering in exchange for the goods the second person held, a barter payment took place. Barter was also effective as payment for or with services. For example, a labourer could offer their time in return for food or accommodation.
- Due to the inefficiencies of barter,[8]
buyers and sellers looked to alternate mechanisms. One example was precious metals, which was also used as a store of value. Instead of swapping labour for food, the worker accepts pieces of gold or silver instead. As gold or silver was rare and had some useful properties (eg use in jewellery), holders could take some comfort that it would remain valuable. This meant people could hold gold to make future purchases - as a store of value for future use. These systems evolved into the cash payment system we see today.
- With direct payments, the payment instruction, clearing and settlement occur simultaneously. As we will see later, these three processes are usually separated in time and space for intermediated payments.[9]
- In the section above we saw that merchants and the public found using gold and other precious metals was a viable payment system. Over time, goldsmith's and banker's receipts became more convenient and cost-effective to use than gold itself. Money deposited with goldsmiths was the 17th century precursor to the modern banking system.[10]
- The goldsmith's receipts scenario provides a simple illustration of intermediated payments, which we can build on later in the article. The goldsmith holds gold (or other precious metals) on behalf of numerous customers. She issues a receipt to each customer, stating how much has been deposited by whom. With the goldsmith's agreement, a customer may transfer one of those receipts (or write a payment note) to a third party to whom the customer wishes to pay some money. Assuming the third party is willing to accept the receipt or payment note (and its associated right to collect a specified amount of gold) as payment, an effective payment is made.[11]
The third party (the payee in this example) can then either claim the gold to which they are now entitled, or use the receipt to make a payment to another party (again, assuming both the goldsmith and new party agree) (see diagram 1). The payment instruction occurs at the time of transfer of the receipt or drawing of the payment note (known as a drawn note)[12]
while settlement occurs when the payee presents the receipt and claims the gold to which they are now entitled[13]
- (For the purposes of this article, "payee" will be used to refer to the party receiving the payment and "payer" will be used to refer to the party making the payment.)
Diagram 1
- While the goldsmith's scenario has some awkwardness, one can see its advantages to the parties over traditional barter-type payment methods. For many people, trading with gold receipts was much more convenient (and safer, eg in terms of the risk of robbery) than trading using bars of gold themselves. With some refinements, the goldsmith's receipts could be issued in smaller amounts (eg 10 one pound receipts, rather than 1 ten pound receipt) to allow more convenient payments. In currency jargon, this is known as divisibility and is an important element of an efficient currency.
- Goldsmiths realised that their customers were likely to withdraw only a small portion of the gold deposited at any time. Thus the goldsmith was able to issue receipts in excess of the gold held, effectively lending money to customers against future repayment (in kind or cash). The goldsmith had evolved to a banker of sorts - the receipt evolved from a record of bailment to a record of debt.[14]
- Using bankers' receipts also allowed the payer to leave money with a banker earning interest until it was needed to make a payment. This was attractive vis-à-vis gold and cash; which earned its holder no return. It also enabled bankers to attract a greater amount of money to be deposited with them. We have here two of the continuing commercial incentives behind the operation of a payment scheme.
- Bankers taking money on deposit and providing interest as a return is a concept dating back at least to biblical times. In the parable of the tenants, the master when returning from a long period of travel chastised the 'lazy' servant for failing to at least place the money left with him "on deposit with the bankers, so that when I returned I would have received it back with interest."[15]
- The use of bankers also as a payment intermediary probably dates back to around the Middle Ages. Merchants and wealthy individuals with money held at a bank developed a custom of drawing a note to their banker ordering them to pay, out of the customer's balance, a sum of money to a named person. [16]
This named person - the payee - treated the note as a means of payment. They were entitled to present the note to the banker and demand payment (in cash) according to its terms (see diagram 2). Again, the payment instruction and settlement is separated in time.[17]
Diagram 2
- This payment instrument was originally known as a 'check', due to the practice of keeping a counterfoil or 'check' to reduce the risk of fraud and forgery. It became known as a cheque later, possibly around 1828.[18]
The cheque system grew quickly in popularity, with reports that by the first half of the 18th century the customers of the London banks used it as often as cash.[19]
The advantages over cash included the permanent record of payment, the ability to write cheques for the exact amount of the debt and avoiding the need to carry large amounts of cash (with the attendant cost and security risk).[20]
- To succeed as a broadly accepted payment scheme, the banker had to be a trustworthy and substantial entity. Firstly, both parties had to have confidence that the banker would make the required payment as instructed. The payer needed to be confident that the banker would only make payments that the payer personally authorised - and only on the precise terms of their instructions.[21]
The payee needed to be confident that the banker would be co-operative and make the payment as directed.
- Generally, both parties acknowledged the banker's right to refuse payment if the attempted payment was greater than the total money deposit by the payer with the banker at that time (or exceeded any overdraft agreed between the banker and payer).[22]
This meant that payments by way of an order to the payer's banker were not final until after they were presented to the banker, who could then check whether the payer's balance was sufficient.[23]
- Secondly, both parties relied on the banker's continued solvency. The payer was exposed to the most risk if the banker became insolvent.[24]
If the banker was to become insolvent before the payment order was presented and settled, the payment would never become final and the payee would be able to return to the payer and demand a valid payment be made. The payer would be left without the ability to draw on funds with the banker to complete the payment, and would have to rely on other sources of funds. The payer could attempt to recover their money from the banker, but would be in the position of an unsecured creditor and may be competing with many other creditors for repayment (especially in the case of bankruptcy of the banker). For these reasons, in most developed countries, a substantial prudential regime governs the operation of banking businesses.[25]
This is due to the importance to the economy as a whole of the banks remaining solvent and viable. In many countries, the payments system itself is also supervised by a government agency in what is a testament to its importance as a matter of public and social policy.[26]
- The payer's primary relationship with the banker is that of credit, and the banker's indebtedness to the payer is equal to the amount of money standing on deposit with the banker from time to time.[27]
This has been accepted as a primary incident of the modern banker-customer relationship in many cases, including United Dominions Trust Ltd v Kirkwood[28]
and Foley v Hill.[29]
While the banking service evolved from the essentially bailment service of the goldsmith,[30]
by 1848 at least it was clear that the primary relationship between banker and customer was that of debtor-creditor.[31]
The money the customer places with the bank is lent to the bank and the bank undertakes to repay it as directed. The right to repayment the customer holds in relation to money deposited is a chose in action.[32]
These core aspects of the banking service are important to remember in our discussion of payment facilities.
- The 'order to banker' system proved to be a convenient payment system. It was inherently more flexible and accessible than the goldsmith's system. Payments of any amount could be ordered (as long as the payer had a sufficient balance); the payer was not restricted to the receipts issued by the goldsmith. The system was also accessible to a wider class of people (ie anyone with any form of money capable of deposit with a banker or with the financial standing to obtain an advance or overdraft from a banker).
- The main weakness in the early order to banker system (other than the non-performance and insolvency risks above) was that the banker had to be known to and accessible to both payer and payee. This was workable where both were located in the same town, but became more difficult the more removed they were from each other.
- The modern cheque system is a direct derivation of the order to one's banker described above. The major development underlying the cheque system is the ability to make payments between clients of different bankers. A payee can lodge with the payee's banker (banker 1) an order (ie a cheque) written from a payer to their own banker (banker 2). The reason this works is that the two bankers have a relationship involving money they both have on deposit with a third party (banker 3) such that banker 2 can make a payment to banker 1 (again, by some form of payment order). Upon receiving the payment from banker 2 (via banker 3), banker 1 then has additional money (they are 'in funds') and is in a position to pass the money on to their client (the payee). Banker 2 deducts an equal sum of money from the balance outstanding to the payer. At the end of the process, the payee has received the sum of money promised, the payer's money held with banker 2 has been reduced by that sum and the bankers' own net positions have each been maintained (see diagram 3).[33]
Diagram 3
- In summary, modern payment facilities involve the person making the payment (payer) and the recipient of the payment (payee) agreeing that something other than cash will be good consideration for their transaction.[34]
The reasons for accepting payment by means other than cash are many and varied, and will be discussed to some extent later. It is enough at this stage to establish that non-cash payments are effective because the payer and payee are willing to proceed on the basis that the payment method they have adopted is effective to transfer money between them.[35]
- In the Australian context we can observe a layered set of payment facilities. Most retail payment facilities operate at a higher level in the system, and build upon other more fundamental or deeper layers. This is especially true for most new and electronic payment facilities. It is also true, albeit to a lesser extent, for wholesale payment facilities.
- As noted earlier, most payment facilities do not require the use of actual cash. They tend to assume (at least in theory) that the participants could obtain cash at some point in the transaction cycle if they wanted to. However, in most cases the participants do not take advantage of this right.
- Taking the multi-banker scenario above, the services provided by bankers 1 and 2 to their respective clients rely for their viability on the bankers' ability to make effective payments to each other (in that example, via accounts held with banker 3). This ability to make payments transactions between bankers (or any payment facility issuers) is a core feature of any modern payment system.[36]
- As will be seen later, the bankers need not have a monopoly on the payment system. In practice, however, most payment facilities rely on the interbank payment system to some extent.
- Most conventional payment facilities operate on the basis that there is one or more underlying clearing and settlement systems that it can rely upon.[37]
Without this, they would cease to be able to effectively operate.
- In theory, a country could operate on the basis of there being one banking and payment services provider (eg a government-owned bank). In such a case, all domestic payments would be between customers of the one bank, who would not need to clear and settle transactions with any other banks. The bank would merely increase the balance associated with the payee and decrease the balance associated with the payer each time a transaction took place (see diagram 4). This is in practice unlikely, and besides does not avoid the need for interbank payments to facilitate international transactions.
Diagram 4
- The core of the Australian payments system is the Exchange Settlement Accounts (ESAs) authorised deposit-taking institutions (ADIs) maintain with the Reserve Bank of Australia (RBA).[38]
They facilitate payments between ADIs through what can be described as the "fundamental" or "base-level" payment system in the Australian market.[39]
For the remainder of this paper, this base-level system will be referred to as the interbank payment system. It is not dissimilar to the system of accounts bankers 1 and 2 held with banker 3 to facilitate payments between bankers 1 and 2 in the earlier cheque example.[40]
- Certain larger ADIs maintain an ESA.[41]
For our purposes, these are in substance money deposited with the RBA and the ADIs receive a money market interest rate on the funds in their ESA.[42]
Understandably, the RBA requires that the accounts be kept in credit and a complex set of rules cover this. This is reinforced by the banks bilaterally matching and offsetting transactions where possible. Amongst other things, the ADIs provide the RBA with the right to sell highly liquid securities owned by the ADIs but under the control of the RBA, to fund any deficits in an ADI's account with the RBA.[43]
- Smaller ADIs have indirect access to the ESA system, by holding an account with a larger ADI (who in turn holds an ESA with the RBA).[44]
The larger ADI can then operate as a payment agent for the smaller ADI as between other ADIs.
- ADIs use the ESAs to make payments between each other. Where one ADI incurs a debt to another ADI (eg as a result of a customer of the first ADI writing a cheque to a customer of the other ADI), the first ADI instructs the RBA to debit its ESA and credit the second ADI's ESA. As a result, the debt between the two ADIs is resolved. The first ADI debits their customer's account for the amount of the cheque and the second ADI credits their customer's (the payee's) account accordingly (see diagram 5). The transfer of funds between the ADIs to cover their respective claims is known as settlement.[45]
Diagram 5
- At the end of the transaction, each ADI and the RBA are effectively in the same net positions they were. The total deposited with the RBA by all ADIs remains unchanged. The first ADI's assets have been reduced slightly (the amount of money they have deposited with the RBA has fallen by the amount of the cheque), but their liabilities have fallen by an equal amount (as the debt due to the payer - the payer's outstanding balance - has been reduced by the same amount). The second ADI's assets have increased slightly (the amount of money they have deposited with the RBA has risen by the amount of the cheque), but their liabilities have risen by an equal amount (as the debt due to the payee - their outstanding balance - has been increased by the same amount).
- Of course, in practice many thousands of cheques are written each day, and ADIs have a huge number of other payment transactions[46]
to settle daily. Larger payments are settled as they occur - a process known as real time settlement. However, for practical reasons, they settle smaller transactions on a net basis once each day. Each night the net indebtedness between each participating ADI is determined - in what is known as the clearing process - and each morning it is settled via payments between each participating ADI and each other participating ADI using their ESAs.[47]
- The Australian Payments Clearing Association (APCA) provides clearing services.[48]
APCA provides for the exchange of payment instructions between financial intermediaries and the calculation of net bilateral positions between intermediaries each day.[49]
It includes a number of sub-systems, including:
- the Australian Paper Clearing System (APCS - clearing payment instructions such as cheques),
- the Consumer Electronic Clearing System (CECS - clearing card-based payments such as EFTPOS),
- the Bulk Electronic Clearing System (BECS - clearing low-value electronic payments such as direct debits), and
- the High-Value Clearing System (HVCS - clearing high-value electronic payments).[50]
- Over 90% of interbank payments (by value) are settled in real time under the Real Time Gross Settlement system (RTGS).[51]
Transactions are settled as they occur during the day on an individual basis using the payer's funds in their ESA.
- Most payment facilities, including cheques, are settled via the interbank payment system. These other payment facilities are therefore layers built upon the underlying interbank system. There is no inherent limit on the number of notional layers. We have already seen that some smaller ADIs use a payment agent to settle transactions with other ADIs. In effect, the smaller ADI is a customer of the payment agent (larger ADI) and the smaller ADI's payments to third parties (in this case, other ADIs) are settled by the larger ADI via the interbank settlement system (see diagram 6). As will be seen below, newer NCPs impose additional layers upon this payment infrastructure. Participants in these additional layers are often service providers who are not ADIs. They are each financial intermediaries in the broader sense used in this article. It is important to remember that almost all of them rely (directly or indirectly) on the underlying interbank payment system to effect final settlement of transactions.
Diagram 6
- There is no reason in theory why an intermediated payment system could not operate without the direct involvement of an ADI and without reliance on the interbank settlement system. For example, a financial intermediary could set up a scheme whereby all members have to establish a balance with the intermediary by depositing money with them in the form of cash. Participants could then pay each other by giving instructions to the financial intermediary to debit the payer's account and credit the payee's account. It would be a closed scheme - it could only be used for transactions where both buyer and seller were members of the scheme.[52]
Such schemes tend to be fairly small scale, as their attractiveness to members vis-à-vis simply using cash is limited. Further, it is inconvenient to place substantial amounts on deposit with the financial intermediary if they only accept cash. Cash-only closed schemes tend to be feasible for either small-scale schemes or one-off purchases only.
- One example would be a university scheme providing for students to make small purchases for photocopying, snacks and other miscellaneous campus purchases. Another would be a gift card or voucher scheme. A client purchases a gift card or voucher by giving[53]
money to the operator who is generally a retail organisation. The card entitles the holder to claim a certain value of purchases from a limited range of retailers. While the card would not generally be more convenient than cash if the original purchaser and eventual holder / claimant was the same person, they have some attractiveness as a gift card. It allows the purchaser to give a gift of a future purchase of set monetary value, instead of giving cash itself (see diagram 7).[54]
Diagram 7
- The remainder of this paper will focus on the payment facilities available for payments between businesses and consumers[55]
We will keep the interbank settlement system in mind however, as at some level almost all other payment facilities rely on it. Much has been written about the interbank payment system, particularly in relation to the management of the credit and other associated risks.[56]
In this area, Australia's commercial practices and regulatory regime are well advanced. Examples of this are the RBA RTGS system described above and the Payment Systems and Netting Act 1998.
- Cash is an effective payment system. It allows complete strangers to make valid and final payments quickly and cheaply. It does not require complicated agreements or the intervention of third parties (payment intermediaries) (see diagram 8).[57]
Diagram 8
- Cash is relatively divisible and flexible. It allows a person to receive a payment, combine it with other holdings of money and make further payments of different amounts again.
- Cash in its modern form - currency issued by a sovereign government - is relatively trustworthy. People are willing to accept it and hold it, and do not generally worry about whether they will be able to exchange it for value when they wish to spend it. Indeed, most would never even seriously wonder about whether a particular merchant is likely to accept cash, other than for particularly large purchases.
- In many countries, including Australia, the law positively states that cash is always a valid and effective means of payment. Section 36 of the Reserve Bank Act 1959 provides: "Australian notes are a legal tender throughout Australia". This means that payment by cash is the default form of valid payment. Unless the parties agree otherwise, cash can be tendered to effectively repay debts, such that the creditor is obliged to accept it as satisfaction of any amount immediately due.[58]
The creditor could not later claim that the debt was still outstanding, as the cash tendered would be effective to satisfy the borrower's obligation to pay. (Of course, if for some reason the debt is not capable of repayment at that time, such as in the case of a fixed term loan, the mere tender of cash would not override such a contractual arrangement.)[59]
- The use of cash also results in final payment. Unlike a cheque, a cash payment is final when the cash is tendered. The payee does not have to wait for the payment to be cleared or for any other settlement process to take place. The payee receives the full and effective value of the payment the moment the cash is in their possession. They do not have to fear a later countermand of the payment or notification that the payer's balance with a particular financial intermediary is inadequate. As such, the payee is able to provide the payer with goods or services immediately, knowing that they have already been paid in full.
- This gives cash a universal payment status - unlike all other payment facilities, cash has universal domestic acceptance. Cash has some international acceptance but unlike domestic transactions, a payee in one country is not obliged to accept cash from another country as valid payment. Whether they do accept foreign cash as valid payment will depend both on the nature of the cash and the difficulty the payee will have in holding or using it later. For example, United States Dollars (USD) have broad acceptance in a number of overseas countries, mainly due to the fact that payees are able to bank, hold or use USD for further transactions.
- Cash in moderate amounts can be stored easily. However, there are crime and security issues surrounding holding other than small amounts of cash. This derives from cash's nature as currency - a bona fide for value holder has full ownership rights to cash. The homogenous nature of cash means that it is almost impossible for a person from whom cash has been stolen to prove in any cost-effective way that it is their cash that has been taken. As such, cash is prohibitively difficult to recover if stolen. The only viable means to protect holdings of cash is to prevent its theft. This is also costly and difficult.
- The cost and difficulty is marked for larger organisations, such as government agencies and large retailers. Cash handling and security costs are significant for governments and large businesses. This is one reason why such organisations have traditionally been early adopters of new payment facilities.
- Due to inflation, at different times cash has not always been a stable means by which to hold money. Cash, while continuing to be legal tender during periods of high inflation, loses its purchasing power.[60]
Greater amounts of cash are required to make the same purchase due to rising prices. This is a problem suffered by money itself - in all of its forms - not just cash. Money held in a bank account in the same currency as cash will suffer the same loss of purchasing power. Hence the presence of inflation of itself does not weaken cash's usefulness vis-à-vis other payment facilities.
- Cash is usually in the form of notes or coins. While this is generally cost-effective to use and store for small and moderate transactions, for transactions of thousands of dollars or more it becomes unwieldy. For example, to use cash to purchase a car is awkward. To use cash to purchase a house would be impractical.[61]
- For larger payments, some form of intermediated payment system is needed. A number have evolved - each using at least one payment intermediary. They are described below.
- Despite publicity to the contrary, no other payment system has all of the features and attributes of cash. They tend instead to have some advantages and disadvantages vis-à-vis cash. References can be made to cash as a comparison, as it helps to explain the nature of each payment system.[62]
- The cheque system is one of the oldest payment facilities. The debits and credits underlying the clearing and settlement of cheques were described in detail at Modern intermediated payments and The Australian payments infrastructure above. Cheques are an example of indirect credit transfer.[63]
Each transaction is initiated by the payer (ie a payer writes a cheque, which is an instruction to their financial intermediary to pay a set sum to a third party), however the instruction is communicated at the first instance to the payee's financial intermediary (the payer hands the cheque to the payee).[64]
- A money order operates on similar principles to cheques (substituting an entity like Australia Post for the bank).[65]
However, money orders are generally one off - so neither party has a standing account with the issuer. Customer 1 presents cash (or otherwise pays for the money order) and by doing so obtains a debt due from the issuer. This debt is transferred to customer 2 who can then collect the money from the issuer.[66]
- Telegraphic transfers and international money transfers also operate on similar principles.[67]
Like money orders, they are generally one-off. The payer presents cash (or otherwise pays for the telegraphic transfer) and by doing so obtains a debt due from a financial intermediary. The payer instructs the financial intermediary to pay the payee at a second financial intermediary. The first financial intermediary pays the money to the second financial intermediary who then credits the payee's account (eg increases the debt owed to the payee). By contrast to cheques and money orders, with telegraphic transfers the payer instructs their own financial intermediary directly as to whom they wish to pay (as opposed to the financial intermediary finding out indirectly when a cheque is presented by the payee).[68]
- While these products are sometimes referred to as electronic funds transfer products, it is in reality the instructions that are transferred electronically rather than the funds.[69]
The funds are transferred via the interbank settlement system as part of the subsequent clearing and settlement process.
- With credit transfer systems the payer initiates each transaction, generally by giving their financial intermediary an instruction to pay money to the payee's account.[70]
A funds transfer is generally known as a credit transfer if the transfer is initiated by the payer "where the funds are pushed" to the payee.[71]
If the funds are available, the payer's financial intermediary debits the payer's account and pays the funds to the payee's financial intermediary, which then credits the payee's account.
- A direct credit is where the payer directly tells their bank to make a payment to the payee.[72]
This direct order-to-banker system has been "used successfully in European countries for some years" and is known as the "GIRO".[73]
The payer's financial intermediary then pays the payee's financial intermediary (if the payee is with a different financial intermediary) or reduces the payer's balance and increases the payee's balance (if they are with the same financial intermediary).[74]
The means by which the payer instructs their financial intermediary to make the payment varies. Two common examples are described out below.
- The BPAY system is a system for exchanging data between financial intermediaries.[75]
The payer instructs their financial intermediary to pay a particular bill, the financial intermediary debits[76]
their account and either credits the payee's account (if at the same financial intermediary) or settles with the financial intermediary used by the payee (who credits the payee's account). The transaction instructions are routed via a central interchange processor operated by BPAY Pty Ltd. The payer gives the payee's details to their financial intermediary via phone or internet service, and specifies the amount to be paid. Their financial intermediary then makes the payment to the payee (via a second financial intermediary if necessary). BPAY is generally only used for payments to merchants (eg utilities), not to other consumers.
- Some internet banking services have a pay-anyone feature. The payer enters the account details for the payee and the desired payment amount. The payer's financial intermediary then makes the payment to the payee (via a second financial intermediary if necessary) in much the same way as a BPAY transaction.
- The EFTPOS system is another example of a credit transfer system.[77]
Instead of a cheque or signed withdrawal slip, the customer instructs its financial intermediary to make a payment by pressing buttons on an EFTPOS keypad.[78]
It is not generally a direct credit as such in that the payer's payment instruction is sent first to the payee's financial intermediary (eg the merchant's financial intermediary), who then relays it to the payer's financial intermediary. However, it is still a credit transfer in that it is initiated by the payer not the payee (as with cheques).[79]
A customer (the payer) attends the merchant's (payee's) premises and purchases goods or services. By entering their details into the computer system operated by the payee, they effectively instruct their financial intermediary to make a payment to the payee's account. If the funds are available, the payer's financial intermediary debits[80]
the payer's account and pays the funds to the payee's financial intermediary, who then credits the payee's account.
- The direct debit concept has much in common with direct credit payments, except for the fact that instructions begin with the payee and then flow to the payer's financial intermediary indirectly (like with cheques).[81]
A funds transfer is generally known as a debit transfer if the transfer is initiated by the payee, "where the funds are pulled" to the payee.[82]
With direct debits, the payer gives its own account details to the payee and the payee (with the payer's permission) instructs the payee's financial intermediary to initiate a payment from the payer's financial intermediary. The payer's financial intermediary decreases the payer's balance and pays the payee's financial intermediary. The payee's financial intermediary increases the payee's balance and the payee provides the payer with the relevant goods or services. The payer can of course cancel the payee's permission to demand further payments at any time (akin to the countermand of a cheque).[83]
- Plastic cards can be used to record balances and transactions. In a stored value smart-card scheme ("smart card"), the payer presents cash (or otherwise pays) for a smart card with a notional face value.[85]
Payees who agree to accept the smart card treat its presentation as payment and allow payers to purchase goods and services using the card. The smart card is equipped with a microchip capable of storing information (eg a balance) and performing simple calculations.[86]
When a payer makes a purchase, their card records a decrease in the card's balance value and the payee's computer records an increase in the payee's balance under the system.[87]
The payee then settles with the scheme operator from time to time (according to the value of payments they have accepted) and the payer either disposes of the smart card once its balance reduces to zero or reloads it (again by tendering cash or other payment).[88]
While the scheme involves presentation of a token, fundamentally it involves an accounting system operated by the issuer and a series of associated underlying debts. Like with cheques, direct debits and direct credits, it based on the matched debiting and crediting of payer's and payee's accounts.[89]
- The technology inherent in a smart card system allows purchases to be made without the need for the merchant (payee) to refer back to the issuer to check the payer's balance. Instead, the merchant can simply check the balance recorded electronically on the card.[90]
- If the card is anonymous, the holder can easily give it to another person who can then use the remaining value. Depending on the circumstances, this transfer between customers may also be a 'payment'.[91]
- Gift vouchers, similar to smart cards, involve a physical token (a paper voucher or a plastic card). They also involve purchase of the relevant instrument and its presentation to participating payees (eg a group of companies that operate retail outlets at a particular shopping centre). Unlike smart cards, generally gift vouchers are used once only (eg only one purchase is done with the voucher). Gift cards, like smart cards, are designed to be used to make multiple purchases. Otherwise, settlement is much the same.
- A closed system may involve stand-alone non-cash payment facilities (ie the payer need not hold a second linked facility). In this case, the parties transact with one another by increasing or decreasing the amount they owe to (or are owed by) that financial intermediary. For example, with a closed smart card scheme, each customer has a card that entitles him or her to spend a certain sum (and the financial intermediary has a debt to each customer equivalent to the value that each customer is free to spend on the card). When the customer makes a purchase, the merchant acquires a debt due to them from the financial intermediary (or an increase in the existing debt due), the customer's available funds decreases and the financial intermediary's debt to the customer decreases by the same amount.
- In the author's view, there is an artificial distinction drawn between stored value products and funds transfer products. The two examples above illustrate this. The concept of a 'stored value' card is a misnomer. Value is no more stored on a microchip-based 'smart' card than it is on an ATM/EFTPOS card used to make payments from an underlying savings or cheque account. This is discussed in further detail below under the heading An account-based paradigm?.
- Attempts have been made to commercialise purely software based stored value facilities (sometimes known as electronic cash or digital cash).[92]
Instead of using a smart card, the customer's balance is recorded on their PC or other device.[93]
Otherwise, the scheme has much in common with smart card facilities. Reducing the customer's balance and increasing the merchant's balance vis-à-vis the scheme operator is how the payments are made. In theory, an electronic cash system could operate at very low cost, allowing for commercially viable payments of small amounts.[94]
This would support business models such as online magazines where the operator charges a consumer (say) fifty cents to read an article.
- Some mobile phone companies offer to make payments to third parties as directed by their customers.[95]
Fundamentally, this form of payment facility conforms to the analysis above. The payer (mobile phone owner) instructs the phone company to pay a payee (usually a merchant). The payee accepts the payment and settles with the phone company later. As a result of the transaction, the payer's balance vis-à-vis the phone company is decreased[96]
and the payee's is increased.
- Loyalty scheme providers may charge a membership fee (eg annually), but otherwise the payer's balance is only increased as they make purchases as set out in the terms and conditions of the scheme. Their balance generally increases based on the volume of transactions. The payer then makes a purchase whereby they obtain goods or services in exchange for a decrease in their balance vis-à-vis the scheme operator. Depending on the scheme structure, the payer may be able to make payments to third parties (payees) who then settle with the scheme operator in much the same way as the above facilities. Other schemes are structured such that payments can only be made to the scheme issuer (who then delivers the relevant goods or services).
- Some financial intermediaries set themselves up as a payment intermediary without necessarily holding deposits. They tend to operate as an agent for either the payee or payer. Their business model takes into account the fee structure surrounding the payments system and provides alternative access to larger payment schemes.
- For example, some financial intermediaries offer a service allowing smaller merchants to accept credit card payments. The intermediary has an account with the credit card issuer (or a second financial intermediary with access to the credit card system). The first intermediary accepts credit card payments on behalf of smaller merchants and distributes monies to them as received (based on the consumer identifying the merchant for whom the payment is intended).
- This type of facility operates as another layer on top of the credit card payment schemes.[97]
It is an example of the layering of payment schemes discussed in more detail below under Rights to rights - layered facilities.
- At their core, most payment facilities rely on contracts to set out the rights and responsibilities of each party.[98]
Legislation, common law and industry codes also have some impact. That is, the contracts do not set out exhaustively the rights and responsibilities of each party.[99]
For example, the Australian Securities and Investments Commission Act (ASIC Act) prohibits providers of financial services engaging in unconscionable or harassing conduct.[100]
- Customers of the participating financial intermediaries also have the benefit of some of the rights of their financial intermediary under the clearing rules applying to the relevant payment system.[101]
There are a number of common law decisions such as Reidell that reinforce this.[102]
Agency law also governs the conduct of each financial intermediary towards its customer.[103]
- Further, industry codes of conduct limit the freedom of financial intermediaries in the terms and conditions they set, and the way that they operate their scheme. For example, the Code of Banking Practice and the Electronic Funds Transfer Code of Conduct govern the actions of payment facility providers.[104]
- The nature of each scheme, including the benefits and risks to each party, depend on the content of their constituent contracts. Being the dominant party, the financial intermediary generally prepares a standard form contract that each end-user is forced to accept if they wish to participate.[105]
In recognition of this, legislation implies certain basic warranties and terms in consumer payment facility contracts. For example, the ASIC Act implies into any such contract a warranty that the services will be provided with due care and skill.[106]
- There are generally at least three groups of contracts governing a payment system. First there are the contracts between the financial intermediary and payer clients (customers). These contracts set out most of the rights and responsibilities of the payer as purchaser of a 'payment facility' from the intermediary. It is this arrangement between system operator and client that is regulated under the state and federal legislation as a "product".[107]
- Next, there are the contracts between the financial intermediary and payee clients (merchants). These contracts set out most of the rights and responsibilities of the payee as a recipient of payments under the system.
- Finally, there are contracts between participating financial intermediaries. Of course, some schemes involve only one financial intermediary. On the other hand, some schemes are so large that a central governing body exists to coordinate the activities of the many participating financial intermediaries.[108]
The interplay of these contractual arrangements is set out below (see diagram 9).
Diagram 9
- Almost all payment facilities operate through the creation, transfer and cancellation of rights; usually in the form of debt obligations.[109]
However, the rights may also take other forms, such as bailment. The number of steps and their order varies, but the basic concept remains the same. "In modern society, all payments have one or two basic foundations, namely cash, or an instruction to transfer a claim to cash."[110]
- Take, for example, the simple goldsmith's scenario. The goldsmith is bailee of the payer's gold, following the payer's earlier deposit of gold with her. The payer is obliged to pay the payee some money - say for example to cover the purchase of some timber. If the payee is agreeable, the payer pays for the timber not in cash but by giving the payee rights against the goldsmith with a value equal to the purchase price (see diagram 1 above).
- The payer transfers her right to have the gold returned to her to the payee. The payee takes on the bailor rights - the right to demand production of the specific pieces of gold deposited. The payee has received payment from the payer by way of transfer of a pre-existing bailment right formerly owned by the payer. At the end of the transaction, value has been given to the payee without cash or other physical valuables changing hands - the payee has simply acquired valuable rights to a bailment agreement and has agreed, as between the payee and payer, that this amounts to a satisfactory payment from the payer to payee. The transfer of valuable rights has transferred funds.
- Rights to goods other than by way of bailment can also be circulated as a payment scheme. For example, some gift vouchers are designed as rights to receive goods in the future. Depending on the circumstances, these rights could be circulated between parties as the basis for a payment scheme.
- Rights to services can also be circulated to form the basis of a payment scheme. It can work in much the same way as the circulation of rights to gold or other goods. For example, the value transferred could be the right to use a transport or telecommunications service in the future.[111]
Depending on the circumstances, these rights could be circulated between parties as the basis for a payment scheme. Again, the core of the system is the presence of rights that are valuable, transferable and contractually based.
- A debt based payment scheme can be illustrated by the simple historical banker's scenario referred to earlier. The banker is indebted to the payer, who earlier deposited money with him. The payer is obliged to pay the payee some money - again, say for example to cover the purchase of some timber. If the payee is agreeable, the payer pays for the timber not in cash but by giving the payee monetary rights against the banker of an amount equal to the purchase price (see diagrams 1 and 2 above).
- The payer effectively transfers her right to be repaid by the banker (in part or full - depending on the value of the initial deposit and of the timber) to the payee. The payee takes on a debt right - the right to claim repayment of the set amount from the banker. The payee has received payment from the payer by way of a virtual transfer of pre-existing debt rights formerly owned by the payer. In reality, usually one debt is extinguished or reduced (the debt due to the payer) and a second is created or increased (the debt due to the payee), rather than a legal transfer of the original debt.[112]
At the end of the transaction, 'money' has been given to the payee without cash or other physical valuables changing hands - the payee has simply acquired valuable rights to a debt owed by the banker and has agreed, as between the payee and payer, that this amounts to a satisfactory payment from the payer to payee.
- Most modern payment facilities build upon this simple debt circulation model. "In all cases an order for payment is given to a financial intermediary. The result is a reduction in the liability of that institution to the payer and an increase in the liability of some other financial intermediary to the payee".[113]
Two or more financial intermediaries are usually involved, as well as various other payment intermediaries. The financial intermediaries may also agree to give effect to a payment without money first being deposited - making a payment on credit terms. These are essentially variations on and refinements to the above example.
- A worked example of more complex circulation of debt rights was set out under Modern intermediated payments and The Australian payments infrastructure above (see diagrams 3 and 5 above). Those sections considered in detail the example of the cheque payment system. The primary difference between this and the simple circulation of debt rights in diagrams 1 and 2 above is that a sequence of sub-payments is required for each transaction. Each sub-payment involves the respective debiting and crediting of two accounts, and each transaction involves numerous linked payments. Other than this, the cheque system is no more fundamentally complex than the system debt circulation model. In summary, it is an illustration of the general point that in "modern payment systems, individuals circulate the liabilities of ADIs and ADIs circulate the liabilities of the Reserve Bank."[114]
- While many debt circulation payment schemes operate on a 'prepayment' basis, there is no reason in principle why they cannot operate on a post-payment basis. Provided that the payer's financial intermediary is willing to clear and settle with the payee's financial intermediary before receiving money from the payer, the payer can settle with their financial intermediary well after the payment to the payee has been finalised. Credit card schemes are a common example of a payment system operating on this post-payment model.[115]
- As discussed earlier, there are generally at least three groups of contracts governing a payment scheme. The end-user contracts are those of most interest from a 'product' perspective. The arrangements between the intermediary and the payer, and the intermediary and the payee, are products in their own right. Consumer protection, financial services and taxation legislation all take an interest in such products.[116]
- Each client has their own set of rights and responsibilities. They have at law purchased a product from the financial intermediary with certain expectations and the law provides them with certain protections. Some of the ASIC Act protections, such as implied consumer warranties, were introduced above. This client-level arrangement is sometimes referred to as the individual facility or product.
- This facility, for its operation, depends on the other groups of contracts referred to above. This interconnected set of arrangements is often referred to as the payment system or scheme. To avoid confusion with the use of 'payment system' to refer to the economy-wide payments system, these more-localised groupings of arrangements are referred to in this article as a payment scheme. A typical scheme will involve at least one financial intermediary (but often multiple intermediaries), and many payers and payees. In a complex scheme, it may also have a scheme operator or administrator which is not itself a financial intermediary (and doesn't actually maintain an account for any actual clients). An example of such a complex scheme would be the BankCard credit card scheme in Australia (see diagram 9 above).
- Many commentators have distinguished between account-based facilities on the one hand and stored value facilities on the other.[117]
At times, it is also implied that it is only those facilities where an account is present that are based on the circulation of liabilities via one or more financial intermediaries, and that non-account based facilities transfer funds by some other method.[118]
Stored value facilities are sometimes alternatively described as token, electronic money or embedded rights facilities. As will be seen below, with respect this author believes the above is an unfortunate and often unhelpful dichotomy. But because it is a distinction established in the literature and some legislation (and quasi-legislation),[119]
we consider it below. As there is little case law on these relatively new products, there is yet to be consensus reached on the appropriate legal characterisation of those products.[120]
- Bank account-related products like cheque accounts are clearly account-based.[121]
At the fundamental core of the system is the account maintained by the intermediary for each payee and payer, and at a lower level in the system, between each intermediary with a final settlement authority such as the RBA. Each transaction in this system involves the debiting and crediting of two or more accounts, with the active participation of the keepers of those accounts (the financial intermediaries).[122]
Indeed, with these facilities the payment transaction cannot be effected but for the cooperation of the account-keepers. Further, the balance of each account is at all times known by the account-keeper. For example, if a person attempts to spend more than their account balance, the account-keeper will refuse the transaction and the payment will not proceed. In fact, almost all current non-cash payment schemes are account-based, at least those of an electronic nature.[123]
- This has led some people to conclude that a scheme must involve the active cooperation of the account keeper (eg the issuer), in each transaction, to be account based (ie based on debiting and crediting of intermediary accounts). Taken further, it has been suggested that to be account-based, the account-keeper must positively know (or at least have the means to ascertain) each customer's balance at all times.[124]
However, this is an unnecessary, and in the author's view undesirable, general deduction from the specific case. While it is true that many account-based facilities involve the active participation of account-keepers for every transaction, it is not therefore true that all account-based facilities must by definition have this feature.
- Traditional passbook based banking products predate the electronic banking revolution. In some cases the passbooks were effectively mirror records of the balance and transaction data held at the bank's ledger. But in other cases, the passbook contained the only record of that customer's balance and transactions. However, few would say this product was other than an account based one. It was a debt product, and based on traditional analysis the client's rights were a debt measured by an account-based recording system. Tyree has by analogy shown that an electronic 'stored value' system is no different in substance to a passbook-based system. They are both account-based systems with distributed or decentralised account keeping.[125]
- By comparison, cash clearly is not an account-based payment system. The issuer of cash (the government) does not know how much each person has at any time.[126]
Each person's balance is dependent simply on the face value of the cash they hold. A merchant need not obtain confirmation that the customer has the available funds; it is readily apparent from the cash they tender as payment. Nor does the merchant need to present the cash to the issuer to obtain value for it. Each banknote or coin is treated as if it is inherently valuable. It has rights and value 'embedded' in it.
- Some payment facilities are less clearly account based. With some facilities, the issuer does not know at all times the balance of each client. Nor is the issuer consulted at the time of each transaction to check that the payer has adequate funds. The issuer will of course have measures in place to protect its interests and ensure that it is not materially out-of-pocket, as will the merchant. So issuers usually provide merchants (payees) with an alternate means of checking the payer's ability to pay before accepting a payment.
- In older credit-card facilities, this was simply by way of credit card signature verification. As this was limited to checking the client had a valid account with the intermediary, it resulted in the intermediary and merchant taking on some risk that the client would be unable to settle with the intermediary. Mere signature based facilities are less common with Australian debit cards, as intermediaries and clients have been reluctant to accept mere (signature) verification.
- With newer microchip-based facilities, as discussed earlier each smart card can maintain its own balance record. Assuming the technology is reasonably secure, payers and payees can have some confidence that only valid payments will be able to proceed. Take for example an anonymous smart card able to process payments offline. Let us assume the card can be used to effect payments at vending machines and other merchants not continuously linked to the issuer. The vending machine does not need to contact the issuer before accepting each payment. Instead, the vending machine keeps track of transactions made with it, and each card keeps a record of transactions its holder has made. These records are reconciled with the issuer's records periodically, when the card is presented for recharging or when the vending machine operator periodically settles with the issuer (eg monthly). It is in many ways a decentralised form of ledger or account keeping.[127]
- Does the fact that the issuer doesn't know the balance of each holder at all times, and that the merchant need not confirm a payment with the issuer before accepting it, mean that the transaction is inherently different to a conventional account transaction? No. In both the credit card and smart card examples, the system still relies on the maintenance of customer accounts.[128]
- In the stored value example above, the intermediary will almost certainly reconcile records from each card with records from each merchant intermittently. And they will have facilities in place, including on the card itself, to ensure that the card accurately keeps track of the holder's balance. This is to ensure that the intermediary is not obliged to settle payment transactions in excess of value deposited[129]
by customers in the first place.[130]
- With the exception of cash, almost all current payment facilities operate on the basis of accounts kept by trusted intermediaries.[131]
A card or token-based system requires that merchants are willing to accept something less than cash as payment. And they will only do this if they are confident of receiving later reimbursement from a trusted third party (the issuer). They effectively keep a record of what the issuer owes them and settle that "account" with the issuer periodically. It is therefore still an account-based system, even if the issuer does not directly maintain the account.
- These products, which involve one or both of the devices, held by clients or the merchants maintaining accounts under the system are sometimes referred to as decentralised payment facilities.[132]
This has led some people to describe the devices on which accounts are maintained as agents of the issuer.[133]
It is a little artificial to describe these inanimate objects as agents. However, some may find it a helpful analogy, as it gives an image of the issuer as an account-keeper, albeit via thousands of electronic 'agents'.
- The preceding arguments are not to deny there are substantial differences in character between more centralised payment facilities like cheque accounts and less centralised facilities (like anonymous 'smart' cards able to process payments offline). Nor is it to deny that different regulatory and policy issues may arise, or may apply differently, to different payment facilities. For example, unauthorised transactions necessitate a different response for anonymous and offline products compared to identified and online products. This includes the risk allocation for lost and stolen accounts. However, they are each in essence account based facilities in the sense that they depend at some level on an account maintained by the issuer or on its behalf and for its benefit.[134]
- Domestic and international regulators and legislatures have imposed different regimes on centralised and decentralised payment facilities.[135]
While this is understandable, it imposes two distinct regimes on what are really points on a long spectrum along which a number of different types of facilities sit. This results in artificial and unfortunate distinctions that unnecessarily complicate their implementation and administration. It also fundamentally impedes their flexibility - which is unfortunate in what is a particularly dynamic and innovative segment of the industry.
- As described earlier, most payment facilities build upon one or more other payment facilities. This has the result that the rights being circulated via one set of payment facilities are often rights existing under another.[136]
While not a fundamental problem, this does complicate the analysis somewhat.
- This may be better explained by way of an example. Let us assume a new electronic cash scheme is being established. To become a client, each person must pay, by a method other than tendering cash, at least $100 to the scheme operator (as their opening balance). These clients will then have certain rights and responsibilities in relation to future payments through the scheme operator.
- To pay by a method other than cash, each client must have a pre-existing relationship with another financial intermediary who has provided him or her with a payment facility.[137]
The payment to the scheme operator via their existing payment facility will take place under the terms and conditions of the existing facility. It will involve the client's balance with the financial intermediary being reduced (or their credit increased if the product is a credit product). The scheme operator's balance with that or another financial intermediary will be increased accordingly. Various clearing and settlement processes will probably be relied upon to achieve this.
- At the same time, the client's balance with the scheme operator will be increased and the scheme operator will recognise a new debt obligation to the client. Should the client wish to later exit the new electronic cash scheme, the reverse payment, clearing and settlement process will be required.
- Each transaction involving the electronic cash scheme may also call upon other layers in the broad payments system. For example, if the electronic cash scheme permits the client to pay third parties who are not a direct client of the scheme operator, the scheme operator will have to utilise another payment scheme to clear and settle the payment.
- The rights and responsibilities of the client, original financial intermediary and electronic cash scheme operator are interrelated. The terms and conditions of one facility affect the others. This can result in a particularly complex interplay of rights and responsibilities. At the least, it is important that each party and relevant stakeholders are aware of and appreciate the nature of this interplay.
- Money in its wider sense continues to be closely associated with payment facilities. Most of it is held in the form of institutional liabilities, being at their most basic "entitlements to be paid currency".[138]
This paper has shown that these modern payment facilities almost always operate through the circulation of institutional liabilities, predominantly debt obligations.
- The article examined in some detail the development, operation and legal nature of non-cash payment facilities. This was done in the light of an examination of the basic payment infrastructure in Australia. It showed that each layer of the payment system demonstrates common characteristics, in that each payment involves the reduction in institutional liabilities owed to the payer[139]
and a corresponding increase in liabilities owed to the payee. This was true for the base-level payment system conducted via ESAs with the RBA, through to higher-level electronic payment systems.
- The core of each payment system, being the ledger or account kept relating to each payer and payee, was considered in some detail. The article argued that all modern non-cash payment systems rely directly or indirectly on the use of such a ledger or account and are in that sense account-based.
- The payments system (and the myriad of payment facilities which make up the system) provides for the circulation through the economy of monetary entitlements. Because of the economic significance of these facilities, most developed countries and many commentators have paid close attention to them. Non-cash payment facilities continue to grow in importance and year-by-year account for a greater proportion of total payments. As such, a clear legal understanding of the development and legal nature of payment facilities remains an important goal for practitioners, commentators and policy-makers alike. A later article will show how this understanding is important for an analysis of the appropriate regulatory regime for these facilities.
[1]
Tyree, Banking Law in Australia, 4th edition, Butterworths, 2002 at para 5.2; D Kreltszheim "The legal nature of 'electronic money': Part 1" (2003) 14 JBFLP 161 at 176
[2]
Blay and Clark, Australian Law of Financial Institutions, 2nd edition, Harcourt Brace, 1996 at para 9.01
[3]
assuming it does
[4]
WS Weerasooria, Banking Law and the Financial System in Australia, 5th edition, Butterworths, 2000 at para 7.2
[5]
See for example the Financial System Inquiry 1996 (whose final report is known as the Wallis Report).
[6]
WS Weerasooria, Banking Law and the Financial System in Australia at para 7.4
[7]
Blay and Clark, Australian Law of Financial Institutions at para 9.01; Tyree, Banking Law in Australia at para 36.2
[8]
eg due to their need for two completely compatible parties before a transaction can take place
[9]
Blay and Clark, Australian Law of Financial Institutions at para 9.08
[10]
Tyree, Banking Law in Australia at para 5.2
[11]
D Kreltszheim "The legal nature of 'electronic money': Part 1" at 183
[12]
D Kreltszheim "The legal nature of 'electronic money': Part 1" at 183
[13]
Cf Blay and Clark, Australian Law of Financial Institutions at para 9.08. Clearing and settlement occur simultaneously, however.
[14]
Tyree, Banking Law in Australia at 5.2; D Kreltszheim "The legal nature of 'electronic money': Part 1" (2003) at 176
[15]
Matthew 25:27 (NIV)
[16]
Tyree, Banking Law in Australia at para 24.4; D Kreltszheim "The legal nature of 'electronic money': Part 1" at 183
[17]
Cf Blay and Clark, Australian Law of Financial Institutions at para 9.08; Tyree, Banking Law in Australia at para 36.2. Clearing and settlement occur simultaneously, however.
[18]
Tyree, Banking Law in Australia at para 24.4
[19]
Tyree, Banking Law in Australia at para 24.5
[20]
Tyree, Banking Law in Australia at para 24.5
[21]
This requirement to follow precisely the customer's instructions remains a core element of the banker-customer relationship. See E Wentworth "Direct debits, consumer protection and payments system regulation - issues of policy and reform" (2002) 13 JBFLP 77 at 83
[22]
WS Weerasooria, Banking Law and the Financial System in Australia at para 7.3
[23]
Here it is clear that the provision of the instruction (presentation of the cheque) is separated from clearing and settlement
[24]
WS Weerasooria, Banking Law and the Financial System in Australia at para 7.3
[25]
EG in Australia, the Banking Act 1959
[26]
Tyree, Banking Law in Australia at para 1.1; WS Weerasooria, Banking Law and the Financial System in Australia at para 7.1. In Australia the two main regulators are RBA (Reserve Bank Act 1959, Payment Facilities (Regulation) Act 1998, Payment System and Netting Act 1998) and ASIC (Corporations Act 2001, ASIC Act 2001)
[27]
Blay and Clark, Australian Law of Financial Institutions at para 9.01
[28]
[1966] 2 QB 431 per Lord Denning at 446. See also judgement of Diplock LJ.
[29]
(1848) 2 HL Cas 28, 9 ER 1002; approved in Croton v R (1976) 117 CLR 326
[30]
Tyree, Banking Law in Australia at para 6.1
[31]
R Bollen "The Regulation of Internet Banking" (2001) 12 JBFLP 5 at 7; Tyree "The legal nature of electronic money" at 277
[32]
Perrin v Morgan [1943] AC 399 per Viscount Simon LC at 406
[33]
Blay and Clark, Australian Law of Financial Institutions at para 9.06
[34]
Galvin "The legal nature of stored value transactions" (1999) 10 JBFLP 54 at 54
[35]
Unlike with legal tender, intermediated payment systems only result in effective payments because the parties agree that the payments are effective.
[36]
Tyree, Banking Law in Australia at para 36.2
[37]
Tyree, Banking Law in Australia at para 36.2
[38]
Blay and Clark, Australian Law of Financial Institutions at para 9.09; WS Weerasooria, Banking Law and the Financial System in Australia at para 8.25
[39]
Payments between local and foreign parties are settled via network of banks, in part under a similar system to the domestic interbank payment system. For example, Continuous Linked Settlement Bank (CLS Bank), a special purpose company providing for international payment settlement, also holds an ESA with the RBA and can be used to settle payments between clients of Australian ADIs and foreigners. See http://www.rba.gov.au
[40]
See "Modern intermediated payments" above
[41]
Tyree, Banking Law in Australia at para 36.3.13; Blay and Clark, Australian Law of Financial Institutions at para 9.09
[42]
WS Weerasooria, Banking Law and the Financial System in Australia at para 8.25
[43]
Eg: by the system's auto-repo facility (which allows the ADIs to quickly sell holdings of Commonwealth Government Securities to release extra funds if their ESA balance is too low)
[44]
Blay and Clark, Australian Law of Financial Institutions at para 9.09
[45]
Blay and Clark, Australian law of Financial Institutions at para 9.08
[46]
eg electronic payment transactions such direct credits and debits
[47]
Blay and Clark, Australian law of Financial Institutions at para 9.08; Tyree, Banking Law in Australia at para 36.2. Again, some smaller ADIs settle using the account they hold with a larger ADI.
[48]
Blay and Clark, Australian Law of Financial Institutions at para 9.08
[49]
see http://www.apca.com.au
[50]
Blay and Clark, Australian Law of Financial Institutions at para 9.09; E Wentworth "Direct debits, consumer protection and payments system regulation - issues of policy and reform" at 82
[51]
RBA website (http://www.rba.gov.au, accessed 9 March 2004)
[52]
In practice, all schemes other than cash are closed schemes. That is, they are all limited to those who are members (even if the membership is particularly wide).
[53]
Whether such a payment amounts to a deposit is debatable. The case law is mixed on this point.
[54]
In practice, most gift card and voucher schemes are linked back to an ADI, as purchasers of the cards or vouchers can be via payment facilities other than cash
[55]
Including to each other (ie business to business and consumer to consumer)
[56]
See http://www.rba.gov.au and http://www.apca.com.au
[57]
D Kreltszheim "The legal nature of 'electronic money': Part 1" (2003) 14 JBFLP 161 at 175
[58]
If the parties agree another means of payment, this will prevail over cash's default status as payment method. See Tyree & Beatty, The Law of Payment Systems, Butterworths, 2000 at 3
[59]
NB some legislation provides borrowers with a unilateral right to repay their loan (on conditions), regardless of the contractual provisions. See the Consumer Credit Code, for example.
[60]
From time to time, however, the value attributed to currency falls dramatically. See for example, the situation in Germany in 1923, Argentina in 2002 and Zimbabwe in 2004.
[61]
Although not technically impossible
[62]
Beatty, Aubrey and Bollen "E-payments and Australian regulation" at 494
[63]
Tyree, Banking Law in Australia at para 36.1.2; Blay and Clark, Australian Law of Financial Institutions at para 9.04-9.06; cf Tyree & Beatty, The Law of Payment Systems at 9
[64]
There is some debate amongst commentators as to whether it is the party who initiates the transfer or the party who initially passes on the instruction to their financial intermediary that determines whether the transfer is a debit or credit transfer. This paper adopts the position that it is the party that initiates the transfer that determines the characterisation, but the author acknowledges there are contrary views (see references above).
[65]
WS Weerasooria, Banking Law and the Financial System in Australia at para 8.10
[66]
Some are structured so that a debt due to the payee is created from the outset, rather than a debt due to the payer which is then transferred to the payee. Otherwise the analysis is basically the same.
[67]
WS Weerasooria, Banking Law and the Financial System in Australia at para 8.12
[68]
The flow of instructions means that this system is what is known as a credit transfer system.
[69]
D Kreltszheim "The legal nature of 'electronic money': Part 1" (2003) 14 JBFLP 161 at 168
[70]
Tyree, Banking Law in Australia at para 36.1.2; Blay and Clark, Australian Law of Financial Institutions at para 9.04-9.06; cf Tyree & Beatty, The Law of Payment Systems at 9
[71]
Blay and Clark, Australian Law of Financial Institutions at para 9.04; Tyree, Banking Law in Australia at para 36.1.2; WS Weerasooria, Banking Law and the Financial System in Australia at para 8.14; D Kreltszheim "The legal nature of 'electronic money': Part 1" at 168; cf Tyree & Beatty, The Law of Payment Systems at 9
[72]
Blay and Clark, Australian Law of Financial Institutions at para 9.05
[73]
Tyree, Banking Law in Australia at para 36.1
[74]
Blay and Clark, Australian Law of Financial Institutions at para 9.08
[75]
http://www.bpay.com.au; Beatty, Aubrey and Bollen "E-payments and Australian regulation" (1998) 21 UNSLJ 489 at 492
[76]
The underlying account can be a debit (deposit) or credit (credit card) account. The same underlying principles apply. For a further explanation, see the 'negative liabilities' explanation by Tyree "The legal nature of electronic money"
[77]
Blay and Clark, Australian Law of Financial Institutions at para 9.05
[78]
Blay and Clark, Australian Law of Financial Institutions at para 9.08
[79]
Tyree, Banking Law in Australia at para 36.1.2; Blay and Clark, Australian Law of Financial Institutions at para 9.04-9.06; cf Tyree & Beatty, The Law of Payment Systems at 9
[80]
again, the underlying account can be a debit (deposit) or credit (credit card) account (see above)
[81]
Blay and Clark, Australian Law of Financial Institutions at para 9.13; Tyree, Banking Law in Australia at para 36.1.1; WS Weerasooria, Banking Law and the Financial System in Australia at para 8.15
[82]
Blay and Clark, Australian Law of Financial Institutions at para 9.04; D Kreltszheim "The legal nature of 'electronic money': Part 1" at 168
[83]
Tyree, Banking Law in Australia at para 36.1.3; Esso Petroleum Co Ltd v Milton [1997] 2 All ER 593
[84]
WS Weerasooria, Banking Law and the Financial System in Australia at para 8.16
[85]
As we will see later, it is the author's view that the concept of a 'stored value' card is a misnomer. Beatty, Aubrey and Bollen "E-payments and Australian regulation" (1998) 21 UNSLJ 489 at 490
[86]
D Kreltszheim "The legal nature of 'electronic money': Part 1" at 170
[87]
Blay and Clark, Australian Law of Financial Institutions at para 9.19
[88]
Beatty, Aubrey and Bollen "E-payments and Australian regulation" at 494
[89]
Blay and Clark, Australian Law of Financial Institutions at para 9.19
[90]
D Kreltszheim "The legal nature of 'electronic money': Part 1" at 171. These cards have elaborate security systems based on complex cryptography, to limit the potential for fraudulent manipulation of their balance and transaction records.
[91]
Certainly, one can imagine a hypothetical case where two customers could agree to settle a debt (or make a payment) between themselves by transferring between themselves a card with associated value or purchase rights (as consideration).
[92]
WS Weerasooria, Banking Law and the Financial System in Australia at para 8.16; D Kreltszheim "The legal nature of 'electronic money': Part 1" at 170; R Bollen "The Regulation of Internet Banking" at 7; A Tyree "Digital Cash in Australia" (1998) 9 JBFLP 5 at 5; Beatty, Aubrey and Bollen "E-payments and Australian regulation" (1998) 21 UNSLJ 489 at 490
[93]
Eg a Personal Digital Assistant or mobile telephone
[94]
Blay and Clark, Australian Law of Financial Institutions at para 9.20
[95]
AAP "Now, text messages to tell you your meter is up", The Age, 19 March 2004 (http://www.theage.com.au/articles/2004/03/19/1079199414084.html, accessed 21 March 2004)
[96]
or the debt is increased, for post-paid phone products
[97]
See for example Australia Post's 'Post billpay' service (http://www.auspost.com.au)
[98]
D Kreltszheim "The legal nature of 'electronic money': Part 1" (2003) 14 JBFLP 161 at 163; Tyree "The legal nature of electronic money" (1999) 10 JBLFP 273 at 273; Beatty, Aubrey and Bollen "E-payments and Australian regulation" at 494
[99]
Tyree "The legal nature of electronic money" at 273-274; cf Galvin "The legal nature of stored value transactions" at 56
[100]
Sections 12CA, 12CB and 12DJ
[101]
Tyree, Banking Law in Australia at para 37.1; Dimond (HH) (Rotorua 1996) v Australian and New Zealand Banking Group Ltd [1979] 1 NZLR 739; Riedell v Commercial Bank of Australia [1931] VLR 382; R Bollen "The Regulation of Internet Banking" at 13
[102]
Riedell v Commercial Bank of Australia Ltd [1931] VLR 382; Tyree "Riedell gets a credit card" May 2003 (http://austlii.edu.au/~alan/riedell-cc.html, accessed 1 March 2004)
[103]
Tyree, Banking Law in Australia at para 37.1
[104]
see http://www.asic.gov.au
[105]
R Bollen "The Regulation of Internet Banking" at 13-14
[106]
Section 12ED; A Tyree "Digital Cash in Australia" at 9
[107]
It is regulated under the Corporations Act and ASIC Act as a financial product, as a purchased payment facility under the Payment Facilities (Regulation) Act and as a good or service under the state and territory fair trading legislation.
[108]
Eg Visa International
[109]
Blay and Clark, Australian Law of Financial Institutions at para 9.02; Tyree "The legal nature of electronic money" at 278
[110]
WS Weerasooria, Banking Law and the Financial System in Australia at para 7.2
[111]
Theoretically, a prepaid transport or telephone card could be used as the core of a payment system. If multiple parties were willing to accept as payment the tender of prepaid transport card, then the card could be used as the basis for the payment system. Each payer would tender one or more cards when making a payment, which they would transfer to the payee (presumably by delivery).
[112]
Tyree & Beatty, The Law of Payment Systems at 42-46
[113]
Tyree, Banking Law in Australia at para 36.2
[114]
A Tyree "The legal nature of electronic money"
[115]
Eg: see the Visa and MasterCard schemes.
[116]
Eg Chapter 7 Corporations Act 2001, ASIC Act 2001
[117]
Eg D Kreltszheim "The legal nature of 'electronic money': Part 1" at 174; D Kreltszheim "The legal nature of 'electronic money': Part 2" (2003) 14 JBFLP 261 at 267; cf A Tyree "The legal nature of electronic money" (1999) 10 JBFLP 273 at 274
[118]
Taken to the extreme, the argument is that if the scheme is not 'account-based' it is not based on the circulation of institutional liabilities.
[119]
Financial Services Authority, Handbook of rules and guidance, "Electronic Money"; Payment Systems (Regulation) Act 1998, EFT Code (ASIC)
[120]
D Kreltszheim "The legal nature of 'electronic money': Part 1" at 172
[121]
D Kreltszheim "The legal nature of 'electronic money': Part 1" at 168
[122]
Blay and Clark, Australian Law of Financial Institutions at para 9.02
[123]
D Kreltszheim "The legal nature of 'electronic money': Part 1" at 167. There are some paper-based systems relying on a negotiable instrument model, although many of these are account based as well in its broadest sense (ie they do also rely on the circulation of institutional liabilities for their fundamental effectiveness).
[124]
D Kreltszheim "The legal nature of 'electronic money': Part 2" at 267
[125]
Tyree "The legal nature of electronic money" at 275
[126]
It does presumably know how much cash (in total) is on issue from time to time.
[127]
D Kreltszheim "The legal nature of 'electronic money': Part 2" at 268
[128]
Tyree, Banking Law in Australia at para 37.3
[129]
or prepaid
[130]
Tyree "The legal nature of electronic money" at 276
[131]
Tyree, Banking Law in Australia at para 37.3
[132]
D Kreltszheim "The legal nature of 'electronic money': Part 2" at 271
[133]
D Kreltszheim "The legal nature of 'electronic money': Part 2" at 268
[134]
Tyree, Banking Law in Australia at para 37.3
[135]
Financial Services Authority (UK), Handbook of rules and guidance, "Electronic Money"; Payment Systems (Regulation) Act 1998, EFT Code (ASIC)
[136]
Tyree "The legal nature of electronic money" at 277
[137]
Beatty, Aubrey and Bollen "E-payments and Australian regulation" at 494
[138]
Blay and Clark, Australian Law of Financial Institutions at para 9.01
[139]
Or sometimes an increase in the liabilities owed to the institution by the payer, in the case of credit-based products