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NZ payments systems ripe for regulation, Orwell CEO Sanchez says

New Zealand's payments and settlements system is lagging behind the rest of the world in terms of regulation, and a new framework is needed for a sector that's undergoing rapid change, according to the head of London-based Orwell Group, which is trying to stake a claim in the global payments network.

Orwell Group is in discussions with Reserve Bank officials to introduce its payment system in New Zealand, which aims to replace inter-banking payments with standardised real-time peer-to-peer transactions to enable greater innovation in cash management and allow for inter-operability between firms.

At the moment New Zealand lags behind other nations that have started to regulate those systems, and the central bank will have to determine the regulatory framework as new firms enter the market, depending on what services they plan to offer, Orwell chief executive and co-founder Carlos Sanchez told BusinessDesk.

"Their concern as a central bank is - 'what is going to happen if all of a sudden players which are not regulated by us start playing in the payments market'? The only solution is to start regulating payments market like every other developed country has done," Sanchez said. "They are going to have to start classifying those services as it is the case in Europe, and say if you want to play in those services you need to have this structure, and have these anti-financial crime structures as well provisions and capability.

"That is going to be a necessity, that will be unavoidable," he said.

New Zealand has embraced the use of credit and debit cards, which account for about 69 percent of core retail sales, and more recently Visa Inc has reported a rapid increase of local contactless card use, which accounted for almost a fifth of its transactions in September, three times the volume a year earlier.

New payment methods and point-of-sale systems have been an attractive investment option in recent years, with a raft of companies from software start-ups to banks seeking to develop services that can deliver new earnings streams or lock in existing customers with a broader range of applications.

Orwell's Sanchez was in Auckland this week as a speaker at the Payments NZ conference, which updated industry participants on changes in the sector. Reserve Bank deputy governor Grant Spencer spoke at the event on Tuesday, and outlined plans to introduce oversight of global infrastructure entities that facilitate wholesale market transactions.

Speaking yesterday at the release of the Reserve Bank's financial stability report, Spencer said the regulator was focused on protecting systemic-wide systems that can spill-over to the whole economy, rather than small retail systems.

The Reserve Bank's six-monthly report on the country's financial system said the regulator is monitoring developments in digital infrastructure to enable smartphone point-of-sale transactions, and intends to engage with industry as the technology develops.

A long-standing concern of the central bank's over intra-day settlement and operational risks in the retail payment system over the length of time it takes to settle retail transactions is likely to be addressed by shortening the payments pipeline to at least hourly exchanges between banks, which the regulator expects to be in place by the end of next year, the report said.

Orwell's Sanchez said the firm is targeting Europe, North America, Australia and New Zealand, which are traditional trading partners, to launch its global roll-out and take advantage of a highly fragmented market which has been slowed by major banks' reluctance to allow greater interaction between payments systems.

Where the banking sector typically views payments from a national view, "we are talking about the problem from global point of view," Sanchez said.

Banks have been reluctant to allow for increased inter-operability between systems, as that would break up their own integration between cash management functions and credit facilities, which lets lenders control the entire chain from the creation of products through to their delivery, he said.

"A model separating cash management from credit makes sense," Sanchez said. "The current integration in banks created a very obvious and permanent conflict of interest."

Orwell wants to be become a component of the broader payments network, servicing retail and wholesale transactions.