E LAW - MURDOCH UNIVERSITY ELECTRONIC JOURNAL OF LAW
ISSN 1321-8247
Volume 11 Number 2 (June 2004)
Copyright E Law and author
ftp://law.murdoch.edu.au/pub/elaw-issues/v11n2/bollen112.txt
http://www.murdoch.edu.au/elaw/issues/v11n2/bollen112.html
________________________________________________________________________

The Development and Legal Nature of Payment Facilities

Rhys Bollen
ASIC

Contents

   * Introduction
   * History and development of payment facilities
        o Direct payments
        o Early intermediated payments
        o Modern intermediated payments
   * The Australian payments infrastructure
   * Some common payment facilities
        o Cash - the benchmark
        o Cheques
        o Money transfer services
        o Debit and credit transfers
        o Other "stored value" products
             + Card-based
             + Software-based
             + Further variations
        o Other intermediated payment facilities
   * Legal implications of common payment facilities
        o Contractual arrangements
        o Circulation of rights
             + Rights to goods or services
             + Debt
        o Scheme v facility
        o An account-based paradigm?
        o Rights to rights - layered facilities
   * Conclusions
   * Notes

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

     Introduction

  1. 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]

  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.

  3. 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]

  4. 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]

  5. 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.

  6. 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.

  7. 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.

     History and development of payment facilities

     Direct payments

  8. 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.

  9. 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.

 10. 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]

     Early intermediated payments

 11. 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]

 12. 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]

 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]

                                    Diagram 1

 14. 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.

 15. 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]

 16. 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.

 17. 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]

 18. 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]

                                    Diagram 2

 19. 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]

 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.

 21. 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]

 22. 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]

 23. 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.

     Modern intermediated payments

 24. 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).

 25. 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.

 26. 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]

                                    Diagram 3

 27. 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]

     The Australian payments infrastructure

 28. 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.

 29. 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.

 30. 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]

 31. 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.

 32. 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.

 33. 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]

                                    Diagram 4

 34. 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]

 35. 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]

 36. 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.

 37. 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]

                                    Diagram 5

 38. 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).

 39. 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]

 40. 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:

        o the Australian Paper Clearing System (APCS - clearing payment
          instructions such as cheques),
        o the Consumer Electronic Clearing System (CECS - clearing
          card-based payments such as EFTPOS),
        o the Bulk Electronic Clearing System (BECS - clearing low-value
          electronic payments such as direct debits), and
        o the High-Value Clearing System (HVCS - clearing high-value
          electronic payments).[50]

 41. 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.

 42. 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]

                                    Diagram 6

 43. 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.

 44. 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]

                                    Diagram 7

 45. 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.

     Some common payment facilities

     Cash - the benchmark

 46. 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]

                                    Diagram 8

 47. 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.

 48. 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.

 49. 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]

 50. 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.

 51. 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.

 52. 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.

 53. 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.

 54. 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.

 55. 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]

 56. 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.

 57. 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]

     Cheques

 58. 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]

     Money transfer services

 59. 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]

 60. 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]

 61. 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.

     Debit and credit transfers

 62. 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.

 63. 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.

 64. 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.

 65. 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.

 66. 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.

 67. 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]

     Other "stored value" products[84]

     Card-based

 68. 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]

 69. 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]

 70. 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]

 71. 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.

 72. 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.

 73. 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?.

     Software-based

 74. 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.

     Further variations

 75. 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.

 76. 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).

     Other intermediated payment facilities

 77. 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.

 78. 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).

 79. 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.

     Legal implications of common payment facilities

     Contractual arrangements

 80. 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]

 81. 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]

 82. 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]

 83. 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]

 84. 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]

 85. 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.

 86. 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]

                                    Diagram 9

     Circulation of rights

 87. 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]

     Rights to goods or services

 88. 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).

 89. 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.

 90. 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.

 91. 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.

     Debt

 92. 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).

 93. 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.

 94. 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.

 95. 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]

 96. 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]

     Scheme v facility

 97. 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]

 98. 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.

 99. 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).

     An account-based paradigm?

100. 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]

101. 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]

102. 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.

103. 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]

104. 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.

105. 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.

106. 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.

107. 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]

108. 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]

109. 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]

110. 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.

111. 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'.

112. 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]

113. 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.

     Rights to rights - layered facilities

114. 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.

115. 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.

116. 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.

117. 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.

118. 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.

119. 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.

     Conclusions

120. 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.

121. 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.

122. 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.

123. 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.

Notes

[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