15 February 2019

Robert Milliner Chairman Australian Payments Council Level 23, 3 International Towers 300 Barangaroo Ave SYDNEY NSW 2000

Dear Robert

REVIEW OF THE AUSTRALIAN PAYMENTS PLAN

Thank you for inviting Optus Business to participate in the triennial review of the Australian Payments Plan released in December 2015. As a longstanding member of the Payments Community, Optus Business is pleased to provide this submission on the critical technological developments shaping the future of the payments industry and wider ecosystem.

In 2018 Optus Business' Centre for Industry 4.0 investigated how ready Australian industries, enterprises and executives are for the 4th Industrial Revolution, referred to as Industry 4.0 and how their enterprises are progressing with their current digital transformations. This was the largest study of its type conducted nationally.

The report titled ‘Enterprise 4.0 – The Blueprint for Success in the Fourth Industrial Revolution1’ provides insights into:

1. The issues and technologies expected to have the biggest impact in the future; 2. How advanced enterprises are in their digital transformations; 3. The potential of Australian enterprises to perform exponentially, and; 4. What enterprises must do to succeed in the Fourth Industrial Revolution.

In Enterprise 4.0, Optus Business found while many Australian enterprises recognise the impact Industry 4.0 will have, most are not yet strategically built to capitalise on it.

Cyber/information security disruption tops C-executives list of disrupters. For half of the Australian executives surveyed, five other Industry 4.0 emerging technologies stood out:

• Big Data, Analytics & Algorithms (82 per cent); • Artificial Intelligence (76 per cent); • Application Programming Interface (74 per cent); • The Internet-of-Things (57 per cent), and; • Advanced 5G Wireless Networks (45 per cent).

Optus Business applies the label “Enterprise 4.0” to those enterprises that appropriately arrange their processes to capture the economic value of Industry 4.0.

1 https://www.optus.com.au/enterprise/industry-4-0

1 | P a g e Four distinct forces underpin the blueprint for Enterprise 4.0:

• Multi-sided markets; • Hyper-scaled platform orchestration; • Network marketplaces, and; • Next generation software-defined networks.

For Australian enterprises to unlock new economic value in Industry 4.0, they must transform their business design. In the past, business designs created value in a linear value chain flow. New business designs have now emerged that leverage the technologies of Industry 4.0 that enable producers and consumers to connect, interact and transact in ways not previously possible resulting in the creation of new economic value. They flow in an exponential way behaving according to a new economic physics. They are platform based, data intelligent and capital light in structure and operate predictively, are self-learning, self-provisioning and self-adapting to their ecosystem intelligently, autonomously and in a decentralised manner (see Figure 1).

Figure 1: Enterprise 4.0 Blueprint

Source: Optus Business – Centre for Industry 4.0

This submission therefore draws upon the key thought leadership insights of that study and provides perspectives of how some emerging technologies associated with the 4th Industrial Revolution may impact the Australian Payments ecosystem.

Kind regards

Rocky Scopelliti Director, Centre for Industry 4.0 Optus Business

2 | P a g e 1. 5TH GENERATION MOBILE NETWORKS (5G), HYPER-CONNECTIVITY AND THE INTERNET OF THINGS (IOT)

1.1. 5TH GENERATION MOBILE NETWORKS (5G)

5G will usher in an age of boundless connectivity and intelligent automation, changing the game for consumers, businesses and governments alike. Not only will they continue to facilitate the continued growth of Australia’s digital economy estimated to grow to $139 billion by 2020i, but enable new advanced use cases through the inclusion of factories, buildings, logistics systems, autonomous vehicles and many others into the ecosystems. The evolution of the Internet-of-Things, remote health monitoring, autonomous vehicles, home automation, virtual and augmented reality for education and healthcare etc. will lay the foundation for the next evolution of Australia’s digital economy (see Figure 2).

Figure 2: Example use cases for 5G

Source: Optus Business

Many of these examples and use cases require features such as ultra-reliable low latency, security, network slicing for virtual private networks that 5G technology offers. Network slicing is where a network is split into separate sub-networks that enable these to be dedicated to users and applications (see Figure 3).

3 | P a g e Figure 3: Illustrative 5G network slicing

Source: ITU News

4G has changed the way we communicate, with significant data transfer speed increase over 3G network. With the production launch of 5G in Australia in 2019, telecommunication providers are set to reshape many industries. 4G network delivered 50 millisecond response between device and a server, with 5G reducing this to one millisecond. This will bring lighting real-time experience to the service provided. 5G will mean “near zero” waiting time. Building on the generation over generation improvements of mobile networks, 5G introduces the concept of network slicing, which allows network operators to split a single physical network into multiple virtual networks. In a single 5G network, network slicing will cater for reliable connectivity for smart parking meters and connected cars, which connects Internet-of-Things devices with a high reliability data only service with a guaranteed low latency, data rate and security characteristics. At the same time, another network slice will be catering for an ultra-high definition personalised TV service and an augmented reality. Optus Business expects its 5G network to fuel the revolution in machine to machine communications, bringing significant advances to both human and machine to machine digital payments and transactions.

With the volumes of electronic payments transactions increasing through innovations such as contactless, and the increasing mix of mobile connected acceptance devices in merchants, the questions for the payments industry to consider in relation to 5G, hyper-connectivity and IoT are:

4 | P a g e 1. Will a 5G network slice dedicated to payments traffic, improve the performance and resilience resulting in increased consumer confidence, experience and in reduced technological risk, of consumer-based payments? This question needs to be considered whether those payments are originating from Automated Teller Machines (ATM) for cash dispensing at merchant mobile connected points of service or mobile connected ATM cash dispensing machines respectively. 2. Will a 5G network slice dedicated to financial institutions, retailers, government agencies, others, stimulate innovation of value-added applications augmented with a payments transaction at merchant mobile connected acceptance devices in merchants or ATM cash dispensing machines respectively? 3. Have mobile EFTPOS device or ATM cash dispensing machine manufacturers incorporated e-Sim with remote provisioning capabilities that promote competition and choice of communications providers within their product roadmaps?

1.2. HYPERCONNECTIVITY AND THE INTERNET-OF-THINGS (IOT)

Increasing affordability of sensors and other wireless technologies, all connected to the internet, introduced a range of services to consumers, including smart appliances, energy meters, wearable devices, connected cars, smart healthcare devices and many more. IoT proliferation or hyper- connectivity will have an enormous impact on the consumer payment’s ecosystem, with increasing machine to machine communication and decision point moving from humans to the machine itself, automated, even algorithmically initiated. This scenario exists today in use cases such as high frequency algorithmic trading between institutions and financial markets. IoT can be thought of as the enabler of the consumerisation of this use case into micropayments.

A common example reported is where an internet connected fridge can initiate an automated workflow based on a predetermined set of rules to re-stock the goods, or a car that automatically pays for the fuel at the petrol service station, with no need for the driver to physically use payment terminals. With a burst to micro transactions from IoT devices, augmented with lifestyle use case experiences, a whole new world of innovation is anticipated to open centered on the experience economy2. For example, platforms such as Uber disaggregated the payments element from the user experience which leverages a central storage of payment methods, linked to the user account.

Hypoconnectivity will be a catalyst for a completely new digital eco-system of accepting and providing payments for those user accounts. All services in the system will most likely be accessible via programmable interfaces (API) and have seamless, possible token based, but string security mechanisms, allowing for instant authentication and authorization. Furthermore, with introduction of open data for banking systems, previously closed financial payment systems can now be accessed by more 3rd parties, which will be augmenting payment services within lifestyle processes, further stressing the need of digital API enabled eco-system.

2 The experience economy is the idea that products and services can outcompete by creating an experience that customers value. In an economy where many products and services have become a commodity, experience is a valuable competitive advantage.

5 | P a g e 1.3. BY 2023, AUSTRALIAN 5G IOT MARKET PREDICTED TO HIT ~$2,3BN

For the Australian IoT market, ‘Services’ are predicted to become the largest category of opportunities (31 per cent) in the IoT technology value chain by 2023 (see Figure 4). At an industry level, whilst Transport, Consumer, Utilities, Manufacturing, and Healthcare sectors are predicted to be the primary drivers of IoT growth by 2023, we can see that the ‘Services’ category, represents a significant category of growth across all industry sectors. This Services growth forecast can be used as a predictor and indicator of innovation opportunity anticipated in human to machine and machine to machine services that hold potential for payments augmentation.

McKinsey estimates that “40% of IoT value is captured by inter-operability”– a key mediating factor in IoT’s $23bn market size. For Optus Business we have brought these analyst predictions to life by running a series of pilots in shopping centres, partnering with some of Australia’s market leading players in the property retail sector. We see real time IoT connectivity and data access from the built environment, where deep learning algorithms predict and provide recommendations to modifying the “operational behaviour” of buildings as a game changing activity. Providing both significant uptick in operational efficiencies and opportunities for business growth via value added services. Market leading property sector players are seizing this opportunity by embedding technology into operating environment and infrastructure, initially to simplify and centralise their operating models.

Figure 4: Australian IoT Market 2023

Source: IDC Australian IoT spending guide 2018, adjusted for 5G take-up (estimated at 10% of total IoT spend)

6 | P a g e 1.4. BLOCKCHAIN AND 5G

A blockchain is a decentralized peer-to-peer network that maintains a public or private ledger of transactions. Because a ledger can store all kinds of information, blockchains can be used in many different contexts. These ledgers are considered decentralized because transactions are often stored on several thousand computers connected to a common network overlaying the Internet. Each node contains a complete history of every transaction completed on a blockchain beginning with the first transaction that was processed into the first block on that blockchain. This network of nodes is connected via the Internet, but in a completely decentralized manner.

The promise of secure, real-time data about goods in transit requires bandwidth having capacity that doesn’t exist with our current infrastructure. 5G-enabled IoT is intended to greatly increase this capacity. Blockchain technology is particularly well-suited to respond to both the challenges and opportunities of a 5G-enabled IoT. Therefore, it is very likely that each technology will spur greater adoption of the other.

More specifically, blockchain can serve as both a way to log data in a form highly resistant to tampering and a tool to fight the introduction of malicious IoT devices into our networks. Keeping this network of devices secure is also important to ensuring privacy rights are respected and sensitive information kept out of the hands of bad actors. By registering an IoT device on a blockchain, other devices on the network will know with a high degree of confidence that a device is what it says it is, without having to rely on a centralized server which might be more easily compromised in some circumstances. Blockchain approaches can make the 5G IoT better.

With a secure 5G/IoT network, supply chains and trade finance can leverage the integrity of a blockchain’s logs (or ledger), which, when properly implemented, are nearly impossible to alter. Without this integrity, otherwise valuable data collected about goods in transit or the vehicles transporting them would be the subject of much more skepticism about their accuracy. The use of blockchain technology, enhanced with the power of 5G can streamline the supply-chain process and allow for the automatic payment of goods upon receipt and eliminate the need of having to deal with accounts receivables, waiting a 30-day period for payment of goods received, and paying for billing department personnel to track down distributors with outstanding invoices.

With frictionless, augmented payments increasingly becoming the new desired user experience in IoT enabled 5G lifestyle and value chain processes, so too will this present new opportunities for the exploitation for fraud, and other risks that may emerge in these systems. The challenge with low to no human involvement in augmented and automated payments processes, will be the facilitation of ‘trust’ and security methods that balance user experience and risk and its assignment. As such, Optus Business believes there are critical questions to be addressed in relation to IoT and its implications to payments, such as:

7 | P a g e 1. How will ‘trust’ be established, maintained and provided at scale, frictionless in a hyperconnected machine to machine world where micro or other payments are augmented within the user experience? 2. How, if at all, does the current draft digital identity trust framework, relate to machine-to- machine communication? 3. How will risk be determined, assigned, and threat surveillance performed in a hyperconnected machine to machine world? 4. Whilst blockchain and or distributed ledger technology, has made significant inroads in demonstrating the value of immutable ledger in relation to payment transaction and data security, Optus Business believes there is significantly more to be done in securing payments in the era of machine to machine communication. 5. What role will payments providers play in the creation of value-adding IoT Services with enterprises and the orchestration of new IoT digital ecosystems?

2. PAYMENTS INTEROPERABILITY: GLOBAL AND DOMESTIC DIMENSIONS

2.1. QUICK RESPONSE CODE (QR) CODE PAYMENTS

QR code-based payments have grown exponentially over the recent years throughout Asia, enabling a wide variety of applications, including promotion and rewards, peer-to-peer and merchant offline and online payments. Globally, payment industry players which have long focused on plastic card or Near Field Communication (NFC) based payments are now reviewing their digital payments strategies and roadmaps to encompass QR payments. QR based payments offer a seamless, convenient and efficient way to transact, benefitting both merchants and consumers in the following ways:

• Credit/debit card acceptance can be relatively more expensive for merchants, particularly small-medium enterprises, due to the high costs of procuring POS terminals. QR payments offers a terminal-free or light alternative which is both cost-efficient and quick to deploy at approximately a quarter of the price. The self-service QR code scanner has become the mainstream offline payment option in China, now it holds 70% of the Chinese mobile payment device market; • They offer consumers the ease and speed of paying with a wide range of mobile phones; • It promotes financial inclusion in emerging markets, where consumers are likely to own a mobile phone and digital wallet before they may own a credit card, and; • Greater security and convenience of electronic payments, without the hassle of cash management (pilferage, theft, reconciliation etc.)

First popularised by WeChat and Alipay in China, QR payments have become a way of life for Chinese consumers, spanning sectors from retail, financial services, charity and entertainment. Further, WeChat and Alipay have formed strategic partnerships with offline payment players globally, enabling their QR codes to be universally accepted by Chinese tourists traveling abroad.

8 | P a g e Outside of China, QR payments are increasingly gaining traction due to the regulatory, commercial businesses and consumers support for its incorporation in the electronic payments mix (see Figure 5).

Figure 5: QR code-based payments are the entry point to digital payments

Source: CB Insights

Another well documented case study is India which revolutionized digital payments with the launch of Bharat QR, the world’s first fully interoperable QR code payments in February 2014. In Southeast Asia, QR-backed digital wallets have proliferated amongst banks such as Paylah! by DBS in Singapore, Maybank QRPay in Malaysia, ride-hailing behemoths such as Go-Pay and GrabPay, and leading Telecom carriers such as Tcash by Telkomsel in Indonesia, Boost by Axiata in Malaysia, and GCASH by Globe in Philippines (see Figure 6). According to the Global Payments Report by payment technology provider Worldpay, e-wallets will become the top payment method globally with a usage rate of 46% by 2021. In the Asia Pacific, it is expected to reach 51%ii.

Figure 6: Usage of QR code payments (scanning merchant’s QR code)

Source: RFi Group 2018 H1 Priority & Retail Banking Council

9 | P a g e 2.2. MOBILE WALLET INTEROPERABILITY

The rapid expansion of QR payments has led to a strategic challenge for industry players. This refers to interoperability.

• Most digital wallets today are using proprietary QR codes, creating a “closed-loop ecosystem” whereby wallet usage is only limited to merchants which use the same QR code distributed by the wallet provider; • This limitation has manifested in a highly fragmented landscape of digital payment solutions, which are not compatible with each other and still lack widespread merchant acceptance online and offline. To a consumer or merchant, carrying multiple wallets and QR brand marks at point-of-sale is neither efficient, economical and barrier to adoption; • To address this challenge, platforms and regulatory policies that promote domestic and international interoperability and common standards are key; • Interoperable solutions allow merchants, to use a single QR code to accept different schemes instead of displaying multiple QR brands to customers, and; • Interoperability streamlines payment processes, brings greater efficiency to payments systems and merchants, bolstering the scalability of QR payments. It further offers a seamless payment experience to consumers globally. An “open-loop ecosystem” importantly democratizes electronic payments to those currently excluded from access providing financial inclusion.

Testament to its strategic importance, there has been a surge in initiatives on QR interoperability led by both regulators and private sector in recent years:

• India launched Bharat QR in 2014, the first standardized QR-code based payments; • Between 2017 and 2018, Thailand, Singapore and Hong Kong launched the common national QR standards, dubbed “Thai QR Payment”, “SGQR” and “HKQR” respectively. • Across Asia, regulators in Indonesia, Malaysia, Philippines have also announced plans to launch national QR payments in their respective countries; • The Singtel International Group launched Asia’s first interoperable cross-border QR payment platform (“VIA Alliance”) in October 2018 (see Figure 7). The platform connects wallets in Singapore and Thailand for international payments, enabling Singapore Dash consumers to enjoy the convenience of paying with their domicile wallets in Thailand at over 1.6M mPay and Kbank merchants, and vice versa. VIA is in talks with Singtel Associate partners, GCASH in Philippines, TCASH in Indonesia, Airtel Payments Bank in India, Optus in Australia and external partners to launch new corridors.

10 | P a g e Figure 7: Mobile Wallet Interoperability

Source: Singtel

2.3. IMPLICATIONS FOR AUSTRALIA

A confluence of factors is expected to drive the exponential growth of interoperable QR payments soon. Firstly, the growing wave of national standardization of QR payments and conducive regulatory policies across multiple markets. Secondly, the significant investments in building awareness and adoption of digital QR payments by major industry players on their digital apps. Thirdly, merchants are getting increasingly well-acquainted with QR payments due to the prevalence of Alipay and WeChat. Lastly, tech savvy consumers in the digital age, are increasingly demanding a seamless digital experience in every facet of their lives, including commerce and payments.

Australia has long been a pioneer in the payment’s ecosystem, for example, it’s currently ranked as the country with the highest contactless NFC transactions globally and one of the highest per capita concentration of merchant terminals. Alternative payment form factors, such as QR codes, in the face of changing consumer and merchant behaviours are a natural expansion of this development.

Australia’s proximity in the Asian region, now representing approximately a third of the world’s population, and the importance of industries such as education and tourism to the Australian economy, require a payments system that incorporates geographical applications underpinned by strong interoperable standards and ease of access to various payment methods such as QR codes, serves as an important engine for commerce and regional development.

11 | P a g e It is therefore of paramount importance that the Australian regulatory and payment system continue to foster innovation through developing a framework and regulatory policies that support QR payments and cross-border payments interoperability, even amongst alternative payment networks, such as the VIA Alliance, to the likes of traditional schemes such as Visa or Mastercard.

i Deloitte Access Economics, (2017), ‘5G mobile – enabling businesses and economic growth’ ii https://worldpay.globalpaymentsreport.com/#/

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