A Guide for PSPs on Australia’s New Payments Licensing Reforms

Introduction

Australia’s payments system is undergoing its most significant regulatory reform in over two decades, as the government modernises the framework for payment service providers to ensure it is fit-for-purpose, clear, and proportional to risk. This payment system modernisation replaces the outdated ‘non-cash payment facility’ concept with a new, function-based licensing framework designed to keep pace with financial innovation and technology.

These reforms will expand the Australian financial services (AFS) licensing regime to cover a broader range of payment services, impacting many previously unregulated businesses, from digital wallet providers to payment gateways. This guide provides essential information on the new payments licensing framework, helping payment service providers understand their new obligations and prepare for the changes ahead.

Why Australia Is Modernising Its Payments Regulation Framework

Australia’s payments regulatory framework has remained largely unchanged for over two decades, making it ill-equipped to handle the rapid evolution of technology and consumer behaviour. The existing legislation was designed for a financial landscape that predates the widespread use of digital wallets, buy now, pay later services, and other innovative payment methods.

This gap between outdated rules and modern payment services has created regulatory uncertainty and inconsistencies. The previous system was built around the broad and often ambiguous concept of a ‘non-cash payment facility’, which has struggled to adapt to the diverse range of new products and providers in the payment ecosystem.

In response, the Australian government is undertaking a comprehensive payment system modernisation. The goal is to create a regulatory framework that is:

• Fit-for-purpose
• Clear
• Proportional to the risks involved

This reform is a key initiative of the Strategic Plan for Australia’s Payments System, which aims to ensure the system remains safe, efficient, and innovative.

The core of the new payments licensing framework is a shift to a function-based and risk-based approach. Instead of focusing on the type of entity, regulation will now be based on the specific payment function a business performs and the level of risk associated with that activity. This technology-neutral approach ensures that as the payments landscape continues to evolve, the regulatory framework can adapt accordingly.

This modernisation effort is designed to achieve several key objectives for the payments industry, including:

• Ensuring consistent and appropriate regulation for all payment service providers
• Improving regulatory certainty, making it clear when a licence is required and what obligations apply
• Supporting a more level playing field to promote greater competition and innovation
• Better aligning Australia’s payments regulatory framework with international standards

Understanding the New Licensing Framework for PSPs

New Payment Functions Explained

The reforms replace the outdated ‘non-cash payment facility’ concept with new categories of financial products and financial services, bringing a wider range of activities under the Australian Financial Services Licence (AFSL) regime. These new payment functions are defined by the activity performed, making the framework technology-neutral.

The newly defined financial products include:

Category	Function	Description
Financial Product	Stored Value Facilities (SVFs)	Facilities that store customer funds for future use, such as prepaid cards and digital wallets that hold a balance.
Financial Product	Tokenised Stored Value Facilities	A specific type of SVF regulating fiat-backed stablecoins, where redemption is linked to a digital token.
Financial Product	Payment Instruments	Facilities providing the terms for non-cash transfers, including debit/credit cards, virtual cards, and online account management services like BPay or PayTo.
Financial Service	Payment Initiation Services	Services that initiate a payment on behalf of a customer from an account held at another institution, such as PayTo or direct debit arrangements.
Financial Service	Payment Facilitation Services	Services that receive funds to be transferred onward according to instructions, covering merchant acquiring and remittance services.
Financial Service	Payment Technology & Enablement Services	Services that enable payments without holding funds, such as payment gateways, pass-through digital wallets, and identity verification services.

Tiered Risk-Based Approach for PSPs

The new licensing framework introduces a tiered, risk-based approach to regulation, applying graduated obligations based on the level of risk a payment service provider (PSP) presents. This ensures that the regulatory burden is proportional to the scale and complexity of the business.

The Australian Securities and Investments Commission (ASIC) will serve as the primary licensing authority for all PSPs performing the new payment functions, requiring them to obtain an AFSL.

A second regulatory tier involves the Australian Prudential Regulation Authority (APRA), which will provide prudential oversight for certain high-risk entities. This additional layer of regulation is specifically designed for ‘Major SVF’ providers. A provider is classified as a Major SVF if it, along with its related corporate bodies, holds more than $200 million in stored value for customers on a group-wide basis.

These entities will be required to:

• Register with APRA
• Comply with tailored prudential standards
• Hold an AFSL from ASIC

This dual-regulator model ensures that PSPs holding significant customer funds are subject to higher standards of financial stability and risk management.

Practical Implications & Key Actions for Your PSP Business

What Existing & New PSPs Need to Do

For payment service providers already holding an AFSL, the reforms introduce a transition rather than a complete re-licensing process. Treasury has proposed that existing licensees will be deemed authorised under the new regime. Instead of applying for a new licence, these businesses will be required to notify ASIC of the specific payment functions they perform using a prescribed form.

Incumbent PSPs should take several immediate steps to prepare:

Action	Description
Identify and map services	Analyse your current products and services to determine which of the new payment functions they fall under (e.g., SVF, payment instrument, payment initiation).
Update compliance documents	Review and update legal and compliance materials, including Product Disclosure Statements and Target Market Determinations, to align with the new payment categories.
Prepare for safeguarding	If your business holds customer funds, you must prepare to meet enhanced safeguarding rules, which will likely involve setting up segregated trust accounts.
Review existing exemptions	Assess any transitional relief or exemptions your business currently relies on, as many are expected to be amended or removed in Tranche 1b of the reforms.

For new and emerging PSPs, such as fintech startups, the first step is to determine if the new rules capture your business activities. A simple self-assessment can provide clarity.

Consider whether your business performs any of the following actions:

• Stores customer funds or issues stored-value accounts like e-wallets
• Creates payment instruments, such as virtual cards or tokenised vouchers
• Initiates or processes payments for others, including offering PayTo, direct debits, or remittance services
• Operates a payment gateway, provides a digital wallet backend, or verifies identities for transactions

If you answer “yes” to any of these questions, it is highly likely you will need to obtain an AFSL or become an authorised representative of a licensee.

Preparation involves allocating sufficient time and budget for the legal and compliance work required for an AFSL application. Additionally, if your business model involves holding substantial customer funds (potentially over $200 million), you should also factor in the additional requirements for registration with APRA.

Key Obligations Under the New Payments Licensing Framework

The new payments licensing framework introduces several key obligations for licensed PSPs designed to enhance consumer protection and financial system stability.

One of the most significant is the requirement to safeguard client funds, which is a core component of the financial requirements for an AFSL. It is proposed that all money held in or transferred through SVFs, payment instruments, or payment services must be protected, typically by segregating these funds in a trust account with an Australian Authorised Deposit-taking Institution (ADI). This rule is designed to protect customer money in the event of a PSP’s insolvency.

Another critical obligation involves dispute resolution. AFS licensees that provide payment services will be required to cooperate with the Australian Financial Complaints Authority (AFCA) to resolve any complaints. This duty extends to situations where an intermediary licensee is involved, ensuring that retail clients have a clear path for redress. Furthermore, licensees must also cooperate with one another to facilitate internal dispute resolution procedures.

Finally, providers of tokenised SVFs, which include fiat-backed stablecoins, will face enhanced disclosure requirements. These obligations are intended to provide greater transparency to consumers and regulators.

Key requirements include:

Requirement	Description
Publishing material changes	Providers must publish a notice of any material change or significant event that could reasonably be expected to affect the value of their reserve assets or their ability to meet obligations.
Monthly reporting	Tokenised SVF providers must publish a monthly statement detailing the reserve assets held to meet their obligations and their outstanding liabilities.

Self-Assessment Checklist for PSPs

To help founders and executives quickly assess whether their business activities fall under the new licensing regime, this practical checklist can help you evaluate your services. Answering “yes” to any of the following questions is a strong indicator that your business will need to apply for an AFSL or become an authorised representative of a licensee.

You should consider whether your business performs any of the following actions:

Assessment Question	Description & Examples	Likely Payment Function
Do you hold or control money for customers?	This includes offering services like digital wallets or prepaid accounts where users can store a balance of funds for future payments.	Stored Value Facility (SVF)
Do you issue credentials that let a user pay someone else?	This applies if you create payment instruments such as virtual cards, e-vouchers, or digital tokens that enable a user to make a payment.	Payment Instrument
Do you trigger payments on behalf of others?	This applies if your service initiates a non-cash transfer from a customer’s account, for example by offering PayTo or direct debit arrangements for merchants.	Payment Initiation Service
Do you receive funds to pass on to others?	This function applies if you handle funds between a payer and a payee. Examples include merchant acquiring and domestic or cross-border remittance services.	Payment Facilitation Service
Do you provide the technology that enables payments?	This includes providing back-end software or infrastructure such as payment gateways, pass-through digital wallets, or identity verification services.	Payment Technology & Enablement Services
Do you hold a large volume of customer funds?	Your business and its related corporate bodies collectively hold more than $200 million of customer money or stablecoin reserves.	Major SVF (Requires APRA oversight)
Are you currently relying on an existing licensing exemption?	You should carefully review any exemptions to your business uses, as many are expected to be narrowed, amended, or removed.	N/A (Compliance Review)

Each “yes” answer suggests your business falls within the scope of these significant reforms. If this is the case, it is crucial to begin preparing for the new licensing and compliance obligations to ensure your operations remain compliant.

Implementation Timeline & Next Steps for Payments Reform

Phased Approach to Reform Implementation

The Australian government is rolling out the payment system modernisation reforms through a carefully planned series of stages. This structured approach ensures a smooth transition for the payments industry, allowing payment service providers adequate time to understand and adapt to the new regulatory framework.

The reform process is divided into two main tranches, with the first tranche further split into two parts to effectively manage the complexity of the changes:

• Tranche 1a: This initial phase has already commenced with the release of exposure draft legislation on 9 October 2025.
  • The consultation period closed on 6 November 2025
  • Focuses on establishing core concepts and licensing obligations of the new framework
• Tranche 1b: Expected to begin consultation in early 2026, this stage will address more detailed operational aspects of the new regime.

Following these consultations, Treasury plans to combine both parts into a single legislative package for introduction into Parliament during 2026.

Key Areas in Tranche 1b

Tranche 1b will address several critical areas of the reform, including:

• Specific rules for safeguarding payment-related money
• A comprehensive list of licensing exemptions and exclusions
• The powers of APRA concerning Major Stored Value Facilities
• A new framework for managing unclaimed monies
• A rule-making power to enable the introduction of a mandatory ePayments Code
• Formal transitional arrangements to help businesses adapt to the new requirements

Transition Period & Business Preparations

Once the consolidated Tranche 1 legislation is passed, an 18-month transition period will begin before the new rules fully commence. This generous timeframe gives payment service providers sufficient time to prepare their operations for the new regulatory environment.

During this period, existing licensees will need to notify ASIC of the new payment functions they perform within six months of the law being enacted.

Future Developments: Tranche 2

Looking further ahead, Tranche 2 of the reforms is planned for consultation in 2026 and will address broader, industry-wide issues. This future stage will focus on structural elements of the payment ecosystem, such as:

• Common access requirements for payment systems
• The potential establishment of an industry body for setting technical standards

This comprehensive approach ensures that all aspects of the payments system modernisation are addressed in a logical, sequential manner.

Conclusion

Australia’s payment system modernisation is replacing the outdated ‘non-cash payment facility’ concept with a new function-based, risk-based licensing framework. This significant reform expands the AFS licensing regime, requiring many payment service providers to assess their new obligations and prepare for compliance.

To navigate these significant changes and ensure your business is prepared for the new regulatory landscape, it is crucial to seek expert guidance. Contact the specialist AFSL lawyers at AFSL House today for a consultation to leverage our trusted expertise and turn these regulatory challenges into strategic opportunities for your payment services business.

Frequently Asked Questions (FAQ)