Time for a better system says Bank chief

Sam Knowles says banks have been focusing on profit

Despite bumper profits, banks have under-invested in the electronic payments infrastructure that underpins the banking system, increasing the risk of fraud, says Kiwibank chief executive Sam Knowles.

The banking industry was coming to the end of a period of golden weather in retail and small business banking, during which growth had outstripped wider economic expansion, Knowles said in an interview in the KPMG Financial Institutions Performance Survey released last week.

During that time "the focus has been on meeting that demand and maximising short-term profits ... The consequence has been under-investment in building for the future.

"Greater investment could easily have been made, given the profits generated during this period, but was not and now we have a legacy problem."

Knowles said parallels could be drawn between the level of investment in the payments system and other key infrastructures such as telecommunications, electricity, gas, rail and roading.

Too often the banking industry had adopted work-arounds to give the impression the payments system is fine, "without really addressing the underlying issues".

Westpac NZ chief executive Ann Sherry disagreed with Knowles' assessment.

"We've actually got one of the most efficient, most secure payments systems in the world."

She said Westpac was constantly looking at how it could reinvest in the payments system, as were the other banks.

"Probably half the technology investment we've made in Westpac in the last couple of years has been in payments-type infrastructure including over-the-counter payments, clearing and settlements systems and obviously ATM and online settlement and clearance systems," Sherry said.

"The only challenge we have is that a number of us have core parts of our payments systems on our mainframe systems which are starting to get a bit old by technology standards these days, but we are continuing to invest to make sure the payments system works efficiently."

Knowles highlighted potential problems arising from the lack of real-time settlement of some forms of electronic payments including automatic payment of wages.

There is a time delay in providing value on automatic payments with the paying bank able to get recourse to the funds for a period of two days.

"This twilight period where the payee appears to have received value but does not have cleared funds increases the risk of fraud. There are cases of automatic payment fraud and the risks of fraud are higher than they need to be today."

But Sherry said the risk of fraud meant that in some cases there were good reasons for not having payments go through in real time. That was a view shared by Maarten Kleintjes, national manager of the Police E-Crimes Laboratory. "Sometimes it's good when there's a bit of delay. Say someone steals money out of your account and puts it in mine, I can't use it immediately. Because there's a two-day delay there's a bigger chance you'll notice it."

The Reserve Bank will discuss the payments system in its six-monthly Financial Stability Report this month.

Switching funds

* Kiwibank chief executive Sam Knowles says the New Zealand banking industry's payments system needs upgrading.

* The payments system consists of all the arrangements used to transfer money, whether using currency, cheques, or a variety of electronic channels.

* During 2004 the system handled on average more than $35 billion a day in a little over 4000 transactions in the "wholesale" systems and about $6 billion a day in more than 4 million transactions in the "retail" systems.