Navigating the future of payments: Embracing regulatory change and harnessing opportunities for innovation

The payments industry in Australia is at a pivotal moment, undergoing significant transformations driven by regulatory reforms, technological advancements, and evolving consumer expectations.

As businesses navigate this complex landscape, understanding the challenges and opportunities is crucial for staying competitive and compliant. This article delves into the key aspects of the payments industry's future, highlighting the regulatory changes, implementation challenges, and the immense potential for innovation and growth.

We recently collaborated with international law firm Hamilton Locke to bring together leaders across the industry to discuss the latest in payments regulations, and to explore both the risks and opportunities as the landscape continues to develop and innovate. This collaboration provided invaluable insights on navigating the evolving regulatory landscape and seizing new opportunities.

The regulatory landscape

The regulatory landscape for payments is set to undergo major changes with Treasury proposing to release exposure draft legislation in early 2025 to introduce a new payments licensing framework, Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) changes and changes to card surcharges.

These changes are set to reshape the industry, aiming to enhance transparency, consumer protection and security. These regulatory changes will bring a host of benefits, including better alignment with global standards, reduced fraud risk, and a larger regulated population. However, the path to compliance can be challenging. Those companies that readily adapt their technical infrastructure, invest in resources and capabilities to keep up with rapid change, address potential roadblocks, and develop robust strategies are best placed to smoothly transition and leverage the opportunities that follow regulatory change.

What’s changing?

Australia’s payments system has increased in complexity with new entrants, technology and participants, which has disintegrated the payment ecosystem and increased the number of PSPs involved in the payment chain. To date, the current regulatory framework hasn’t kept up with the pace of innovation and change in the payment industry. To recalibrate this, the Government is proposing to introduce legislation for a new payments licensing in 2025. The new proposed licensing regime will broaden the scope of payments regulation to cover more payment products and services, with many more participants in the payments ecosystem likely to need a license. It will also simplify and better delineate the responsibilities of the different regulators in relation to PSPs.

Another development is the revision of the ePayments Code, which enhances consumer protections by setting out clear rules for electronic transactions, including liability for unauthorised transactions and processes for recovering mistaken payments. The Code also mandates technical standards that PSPs must adhere to, ensuring the security and reliability of electronic payment systems.

On top of these changes, the expansion of anti-money laundering regulations, which aims to bolster the existing regulatory framework, will further impact PSPs.

The AML/CTF Amendment Bill 2024 was passed by both houses of Parliament at the end of November, and now awaits assent to become law. To comply, PSPs will need to update their AML/CTF programs to include risk assessments, policies, procedures, and controls that address the new value transfer services, international funds transfer instruction (IFTI) reporting requirements and a number of other changes. These amendments seek to strengthen Australian measures in line with the Financial Action Task Force’s (FATF) recommendations and to ensure Australia does not become a grey listed country.

Whilst some of these regulatory changes cover a wider scope, they also align Australia to some of the global regulations covering payments such as the EU’s Payment Services Directive 2 (PSD2 and the Electronic Fund Transfer Act in the USA, bringing us closer to the approach of global peers.

Overall, these changes mean increased compliance requirements and PSPs will need to update systems and processes to meet new risk management and operational standards and to address financial, operational, and misconduct risks. Smaller fintechs typically will face challenges with compliance costs and resource limitations compared to some of the larger players.

They may also need to invest in training and development to equip employees with the necessary skills and knowledge to ensure consistent compliance.

Opportunities for innovation and growth

The risks of non-compliance are well known and documented, but while regulatory change may initially pose challenges, they are designed to create a more secure, efficient, and competitive payment ecosystem. By fostering a level playing field and enhancing consumer trust, regulatory change aims to benefit both providers and consumers in the long run and can foster innovation and new payment solutions that are moulded to the ever-evolving needs of consumers and businesses.

By embracing regulatory changes, businesses are well placed to stay ahead of the curve and harness opportunities to keep a competitive edge. Some of these opportunities include:

• Acquisitive activity – Payments is a scale game and complying with regulatory change can be expensive. This presents transaction opportunities. Whether you are looking to sell or buy, you can de-risk a transaction and better align interests if all parties have a sound understanding of the applicable regulatory requirements, the business’ risk profile and operational practices.
• New technology – Regulatory change can facilitate the adoption of new technologies for payments. Blockchain technology presents unique benefits for payment solutions and financial infrastructure resilience, particularly with the advent of real-word asset tokenisation. Businesses and regulators alike are interested in the potential use case of blockchain technology and Project Acacia has been launched by the Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Centre (DFCRC) to further explore the opportunity for central bank digital currencies (CBDCs) in the payments landscape. The project will initially consider the benefits of a wholesale CBDC to enhance the efficiency, transparency, and resilience of financial transactions.
• Automation and operationalisation - Regulatory change presents an opportunity to re-design or uplift operational risk frameworks to take advantage of automated controls and risk processes to embed risk and compliance at a system level. This approach can produce operational efficiencies and provide real-time feedback on risk issues, providing the business with more meaningful data on inherent and residual risks.

Getting it right

Maintaining a right-sized risk focus and building scalable frameworks are essential for navigating regulatory change. Compliance by design is key and most effective when the business builds the right team, with the right skills, backed by the right processes and technology to reduce and control risk. This approach will better position your business for longevity. Importantly, building and embedding a risk framework is not a set and forget exercise, it is critical that you revisit and uplift your framework to scale as your business grows and matures.

Leaders should focus on hiring teams with a deep understanding of regulatory requirements, risk management, and technology. With the ever-evolving nature of the landscape, continuous training and development programs will ensure your people can keep updated on the latest industry trends and regulatory changes and as the organisation grows.

Alongside this, implementing robust processes that align with regulatory requirements is essential. Organisations should develop clear policies and procedures, conduct regular audits, and make sure that all processes are well-documented and transparent, so approaches can be improved and scaled in line with organisational growth.

Finally, organisations can streamline compliance and risk management processes by leveraging technology to supported automated monitoring and reporting, implementing secure payment systems, and adopting newer technologies like AI and blockchain to enhance security and efficiency. Again, scalability should be considered to ensure there is a right sized focus, aligned with growth.

Future trends

Looking forward, the increased presence of digital currencies and the expansion of cross-border e-commerce are driving the need for regulatory frameworks that balance innovation, financial stability and consumer protection. We expect to see further regulatory change addressing this in the next few years.

Payments are becoming more than just the transfer of value and data is becoming a key enabler and value driver. We are also seeing a move to embedded payment solutions, where payment services are provided real-time in connection with other products and services. These developments are coinciding with the rise of open banking, which is transforming how financial data is shared and used, fostering greater competition and innovation. Data privacy and security is essential, especially in light of recent data security incidents in the past 12 to 18 months. Artificial intelligence and biometrics are also playing a crucial role in fraud prevention, enhancing the ability to detect and mitigate fraudulent activities. We expect to see further developments and adoption in this space. However, this will also raise privacy and security risks, and it is important that organisations work through these issues upfront to maximise the deployment of these technologies.

The payments industry is expected to continue to evolve rapidly, so remaining compliant and ahead of regulatory developments will help organisations to better leverage benefits and new opportunities.

How BDO and Hamilton Locke can support your organisation

Regulatory change will continue to change and challenge the payments landscape, with no sense of slowing down. BDO and Hamilton Locke have experts working with clients of all sizes across the payment industry, who can support you on your journey as you and your organisation navigate changing regulations, now and in the future.

If you’d like more information about any of the topics raised in this article, contact our fintech advisers at BDO, or if you’re looking for legal support, contact the Funds and Financial Services team at Hamilton Locke.