Australian Payments Systems reform – Seven proposed Payment Functions to replace non-cash licensing regime

20 June 2023
Matthew Bode, Partner, Brisbane Michael Kenny, Partner, Melbourne Sinead Lynch, Partner, Sydney Daniel Maroske, Partner, Brisbane Kate Mills, Partner, Sydney Caroline Ord, Partner, Melbourne

As part of the Government’s ambitious Strategic Plan for Australia’s Payments System unveiled this month, Treasury also published the Payment System Modernisation (Licensing: Defining Payment Functions) Consultation paper (Consultation Paper). The Consultation Paper invites feedback on the proposed list of defined Payment Functions that would be regulated under the new licensing framework proposed under the Strategic Plan, essentially replacing the current ‘non-cash payment’ regime under the Corporations Act 2001 (Cth) (Corporations Act).

Further consultation will take place later this year to facilitate the introduction of legislation for the new licensing framework anticipated to come into effect in 2024.

Gadens provides an overview of the key aspects of this initial Consultation Paper below.


The Consultation Paper focuses on a defined list of Payment Functions that are intended to underpin a new tiered, risk-based licensing framework for ‘payment service providers’ (PSPs), reflecting the recommendations of the Review of the Australian Payments System (Payments System Review).

The six objectives of the proposed payments licensing framework set out in the Government’s Strategic Plan are:

  1. Ensuring consistent and appropriate regulation of PSPs based on the payment function they provide.
  2. Improving regulatory certainty for PSPs by making it clear when a PSP is providing a payment service that requires a licence and what the associated regulatory obligations are.
  3. Supporting a more level playing field for PSPs seeking to access payment systems, promoting greater competition, diversity and innovation within the ecosystem.
  4. Better targeting regulatory obligations based on the level of risk posed to end users by PSPs, balancing protections for consumers and businesses with regulatory burden.
  5. Streamlining the process for businesses that require multiple licences or authorisations to minimise the regulatory burden.
  6. Better aligning Australia’s payments regulatory framework with international jurisdictions, helping to reduce barriers to entry for providers seeking to enter the Australian market.

Current non-cash payment regime

By way of brief recap, currently, the Corporations Act typically requires those who deal in financial products to hold an AFSL. A financial product (with some exceptions) is a facility through which a person makes a financial investment, manages a financial risk, and most relevantly for PSPs, makes a non-cash payment.

A person makes a non-cash payment ‘if they make payments, or cause payments to be made, otherwise than by the physical delivery of Australian or foreign currency in the form of notes and/or coins’. This definition under the Corporations Act captures only certain functions and services involved in a payments chain. The legislative framework also provides exclusions from the definition of a financial product or a non-cash payment facility and exemptions from AFSL requirements for some non-cash payment facilities.

In addition to the uncertainty relating to the scope of the regulatory perimeter for non-cash payment facilities, for some time stakeholders have also reported a lack of clarity about the application of the exemptions and exclusions that are purported to apply. This means an uneven playing field for businesses providing effectively the same payment services to customers where some have an AFSL and others don’t.

The seven proposed Payment Functions

To establish the new regulatory perimeter of the payments licensing for PSPs, the Consultation Paper proposes seven distinct Payment Functions within two categories:

  • stored value facilities (SVFs); and
  • payment facilitation services (PFSs).

These Payment Functions are outlined in more detail below. The precise wording and description of each Payment Function will be considered as part of the Consultation and legislative process, so to some extent the devil remains in the detail as to how widely these will be applied across the sector.

It is anticipated PSPs may perform several functions across the proposed list of Payment Functions. PSPs will only need one AFSL, which will specify which of the seven Payment Functions they are authorised to perform.

TypePayment FunctionProposed DefinitionPotential entities
Stored-value facility (SVFs)1. Issuance of payment accounts or facilities (‘traditional SVFs’)Providers of payment accounts or facilities that store value for more than two business days and can be used for the purpose of making payments.ADIs, including entities currently regulated as Purchased Payment Facilities, digital wallets that store value, issuers of pre-paid accounts.
2. Issuance of payment stablecoins (‘payment stablecoin SVFs’)Issuers of payment stablecoins that store value and control the total supply of payment stablecoins through issuance and redemption activities.Payment stablecoin issuers.
Payment facilitation services
3. Issuance of payment instrumentsIssuers of a payment instrument that is unique to a customer and can be used to make a transaction or provide instructions on their account or facility.Issuers of payment instruments (eg cheques and digital and physical cards). This includes Buy Now Pay Later providers that issue a virtual card and issuers of a set of procedures/credentials (such as a PIN, password, biometric data) to initiate a payment instruction order.
4. Payment initiation servicesServices that allow the instruction of a payment transaction at the request of the customer (payer or payee) with respect to a payment account or facility held at another PSP, or from some other source of value or a credit facility.Services that allow a customer to request a payment transaction be initiated.
Examples include recurring payment services and third-party payment initiation services.
5. Payment facilitation, authentication, authorisation and processing servicesServices that enable payment instructions to be transferred (facilitation), provide the verification of customer credentials (authentication), payment authorisation, and/or processing of payment instructions.Pass-through digital wallets, merchant acquirers, card issuers, payment gateways and processors, and payment routing.
6. Payments clearing and settlement servicesServices for clearing or settlement of payment obligations or for the exchange of payment messages for the purposes of clearing or settlement of payment obligations, including clearing and/or settling account to account payments.Payments clearing and/or settlement providers.
7. Money transfer servicesServices that send or receive money overseas or within Australia for a customer, including through the creation of a payment account or without a payment account.Remittance service providers and domestic money transfer providers.

Incorporating the proposed Payment Functions

The manner of incorporation of these Payment Functions into the licensing legislative framework is a matter to be determined. The Consultation Paper proposes three options to replace the existing concept of non-cash payment facilities:

  1. The list of Payment Functions could replace the existing concept of a facility through which a person makes non-cash payments. This approach would be broadly consistent with functions-based approaches overseas. Under this option, arrangements under which Payment Functions are provided are financial products, and persons who deal in or advise on those arrangements would generally require an AFSL.
  2. Add the Payment Functions list as a non-exhaustive list of inclusions to a new definition of ‘payment services’, replacing the non-cash payments concept. This option may provide greater capacity to capture payment services not specifically included in the list, but could provide less regulatory certainty for PSPs.
  3. Regulate SVFs as a type of financial product, replacing the concept of non-cash payment facility, and regulate PFSs as a financial service. This may better reflect that SVFs provide the customer with a product, for example an account, whereas PFSs typically do not.

Excluded and exempted activities

Treasury proposes to retain the existing exclusions and exemptions under the Corporations Act and related regulations (such as the single-payee exemption), except for certain exclusions and exemptions, including:

  • Payments debited to a credit facility, eg credit card. This exclusion may be inconsistent with the intention to cover providers of one or more of the proposed PFSs, such as payment initiation services;
  • Unlicensed product issuers that use licensed intermediaries to make offers to arrange for the issue of non-cash payment products. Reliance on this exemption may be inconsistent with the intention to capture SVF providers and impose specific requirements to ensure customer funds are protected; and
  • Relief given to specified entities and non-cash payment facilities. These exemptions may no longer apply if they are not consistent with the wider range of Payment Functions that are expected to be covered by the licensing regime.

It is also proposed that the existing class order relief for low-value and limited-purpose facilities (eg gift facilities such as vouchers or cards, loyalty schemes and electronic road toll devices) be maintained, but be transferred into primary legislation or regulation. However, ‘open-loop’ products such as open-loop gift cards and loyalty schemes (ie those that can be used at a wide variety of retailers) may be excluded, so as to ensure that only facilities that are for a genuinely limited purpose are exempt.

Proposed consequential regulatory obligations for PSPs

The Consultation Paper also sets out the high level risk-based regulatory obligations it proposes should apply to the seven Payment Functions:

Type of activityRegulatory obligations to mitigate risk
Storing valuePrudential regulation (ie by APRA) and/or AFSL protections (including client money rules) would apply to address the risk of customers losing funds.
Consumer facing PSPs not storing valueObligations that address consumer protections (eg mandating a revised ePayments Code for unauthorised transactions and mistaken payments, requirement to obtain an AFSL to enable access to redress under the AFCA and remedies under the Corporations Act).
Obligations that address operational risks related to payments technologies (eg mandatory industry technical standards to ensure interoperability and security).
Non-consumer facing PSPs that do not store valueObligations that address operational risks related to payments technologies (eg mandatory industry technical standards to ensure interoperability and security).
Payments clearing and settlementCommon access requirements, to address financial and operational risks.

There will be a separate consultation on these regulatory obligations later in 2023, however the Government encourages early views, particularly on whether PSPs that are not customer facing and do not store value, such as certain payment facilitation, authentication, authorisation, and processing service providers, ought to hold an AFSL, or whether these services should only have to comply with relevant industry standards.

It is anticipated that the proposed reforms will mean certain existing requirements in the Corporations Act, such as licensing, disclosure requirements, the design and distribution obligations and the hawking prohibition, could extend to entities who may currently not be subject to these requirements. Feedback is sought on whether any of these requirements ought to be ‘switched off’ for particular functions or activities.

Gadens – key observations

  1. The existing non-cash payments regime will substantially remain intact (albeit under another name), although the Consultation Paper is silent on any transition arrangements for existing AFS licensees who should be thinking about which of the seven Payment Functions they perform and the likely regulatory obligations they may (or may not) be subject to.
  2. It is clear that many more ‘PSPs’ are likely to be caught by the new licensing framework, particularly those who currently operate without an AFSL and have taken advantage of the existing regulatory uncertainty or relied on the intermediary authorisation exemption, which Treasury proposes to exclude for PSPs on policy grounds. There may however be a case for retaining this exemption for intra-group arrangements.

Responses to the Licensing Consultation Paper are due by 19 July 2023 and all payments providers and players in the broader eco-system are encouraged to submit.

Gadens will be working with clients to assist them in making submissions on aspects affecting their payment products. Please get in touch with us if you’d like to make a submission or contribute to an industry-wide one, or if we can help with any questions you may have on the Consultation Paper.

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Authored by:

Caroline Ord, Partner
Sinead Lynch, Partner
Oma Murad, Lawyer

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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