Transcript of Question & Answer Session Panel participation by Tony Richards, Head of Payments Policy, at the Australian Retail Banking Summit 2017

It's great to see so many of you still here. I know that we've got the graveyard shift after two days of full conference agenda so thank you for staying with us. I'd like to welcome up to the stage each of our panellists. As you will see on the agenda, I've got quite the broad brush title of Current Issues in Payments, which I'm going to interpret quite broadly and then seek to cover quite a lot of ground in a relatively short period of time.

I would, whilst I've got some questions noted down here, I would certainly give you all the opportunity to fire questions at the panellists and I'll seek to check in on the Slido app at various points during this session. So without further ado, I'll jump straight into the questioning. My plan is actually to start with Tony first of all and to give Tony the opportunity to report back some of the findings of the recent RBA payments diary, and the reason I'm intending to start this way is I think the findings of the diary will provide us with some good context for some of the other topics and issues that I'm seeking to discuss.

So, Tony, over to you if that's okay?

Thanks Alex. So there's a number of topics I'd be happy to touch on later in the panel, including regulatory developments such as the forthcoming changes to our interchange regulations and the Bank's involvement in the new payments platform. But as Alex said, I thought I'd start our discussion with some observations from the bank's latest consumer payments survey.

So every three years the Bank commissions a survey firm to do a detailed study of household payment behaviour where we ask households to record details of all their transactions over a week. So for the survey that we conducted in November 2016 we've got data for around 17,500 payments made by just over 1,500 individuals. So this provides a very rich picture of payment patterns. The most striking result from our latest survey is that consumers are continuing to switch to electronic payment methods for their transactions. Compared with three years earlier, there was a 10 percentage point decline in the proportion of transactions that used cash and a similar increase in the share of transactions that used credit and debit cards. Up to the 2013 survey, cash was the most frequently used payment instrument. However, in the 2016 survey, credit and debit cards together now account for 52% of the number of transactions, while cash accounted for 37% of transactions.

Now the increase in the use of cards is not predominantly due to the growth in online transactions. Surprisingly card use for online retail purchase has barely increased as a share of total payments in the latest survey. Nor was that increase primarily due to growth in mobile payments. The survey showed that mobile payments accounted for only 1% of the number of point-of-sale transactions over the week of the survey, or around 2% of all in-person card payments. Rather the growth in the use of cards largely reflects that cards are increasingly being used for lower value transactions which mostly reflects the adoption of contactless or tap and go functionality at the point-of-sale.

Contactless cards we used in around one-third of all point-of-sale transactions in the latest survey, and they accounted for nearly two-thirds of all point-of-sale card payments. While the use of cash declined across all types of respondents, cash remains an important payment method. As I indicated, it accounted for 37% of the number of all transactions and it remains the most common payment method for some groups of respondents. In particular, for those aged 65 and over and those in the lowest income quartile. In addition, there's still a sizeable portion of the population, 13% according to the survey, that use cash for essentially all of their transactions, or 80% or more of their transactions.

The final result I'd highlight is that the survey also gave us further evidence of the decline in use of cheques by households. Cheques accounted for only 0.2% of payments made by participants in the 2016 survey which is down from 1.2% of all payments back in 2007. Furthermore, only 12% of respondents reported that they had made a personal cheque payment in the previous year, which is down from around 20% of respondents in 2013. Not surprisingly, cheque use is concentrated among older Australians but even this group has significantly reduced its use of cheques. In 2007 cheques represented a little over 2% of the payments made by consumers over 65 years old, but in 2016 this had fallen to less than 1%.

So these trends that I've just highlighted are the result of a range of factors reflecting both technological change and household preferences and I'm sure that we'll continue to see significant further change in Australia's payment mix with the launch and the growth of the New Payments Platform.

These ongoing changes in payment patterns are likely to provide a few challenges for our payment industry. Some of these include first, how to manage the ongoing decline of the cheque system where we expect a further fall in usage once the NPP is operational. Second, although cash remains an important part of the payments system, its use for transactions is clearly declining. This may have particular implications for the ATM industry for example. Third, how to manage payments fraud, especially the growing problem of card not present fraud. And fourth, how to implement an efficient system of digital identity that helps to deal with fraud problems. It also helps to maximise the benefits to end users that'll be made possible with increased data sharing, and the ongoing shift to faster electronic payments.

So Alex, those questions may be ones that the other panellists may wish to comment on.

Thanks Tony. Andrew, any questions on the app?

As it turns out there are, Alex. Very good. So the first one's a fairly retail type of question. The 50 cent card surcharge is now ubiquitous. What is the RBA doing to empower banks and consumers to tell merchants that this is unacceptable? We know about that one, Tony.

Right. The new surcharging framework became operative for large retailers on September 1 of last year and there'll be … then the framework becomes effective for small retailers September 1 this year. And that'll mean that no merchant will be able to charge more than their payment cost for a particular payment method, so if a particular payment systems costs them 1% for a transaction, that's the most they'll be able to surcharge a customer so that I expect that you will see a reduction in surcharges. Surcharging is not actually that frequent. Our recent survey suggests that only 3.5% of card transactions are actually surcharged but you can probably expect to see that number coming down and the average rate of surcharges that are applied will also come down.

And the second question is how soon do you think that we'll start to see them come down?

I would … well the new framework takes effect September 1. I expect there'll be some publicity in advance of that including from the ACCC.

So from September 2?

Absolutely. And we saw last year that the large airlines reduced their surcharges on September 1 last year to be in compliance with the new framework.

Excellent. Tony, here's one for you. The stability of the payments system is the responsibility of the RBA. What specific challenges has NPP presented you and how are they being overcome?

Good question. There are currently two payments systems that are used in Australia that we consider as systemically important and that's the reserve bank's RTGS' system RITS, and also the CLS system which is an international payment system for dealing with foreign exchange settlement risk. Both of those, the Reserve Bank takes the stability of those two payment systems very seriously.

There's a lot of other payment systems that we don't consider are systemically important so we don't regulate forces or we don't oversee for stability purposes. We hope that the NPP will be very successful and that it will, at some point, become what we'd call a systemically important payment system. At that point we would hope that it would meet … we would expect that it would meet all the international standards that are set by CPMI and IOSCO.

The good news is that the NPPA board and SWIFT are, in building the NPP, have decided that they want to meet those international standards already so that there's every reason to think that when the NPP is up and running, it will already meet the best practice international standards. But we will have the ability to designate it and to regulate it if we have particular concerns.

Excellent. Alex, I think that's probably it for the moment?

Yeah, I've plenty more to get through.

Away you go.

There's actually another question for Tony. So obviously I dare say that for many in the room, the interchange reforms have been consuming a lot of time and energy over recent months. Interested to get your take on the RBA's objectives and what it hopes to be the consequences from the regulation.

The new interchange standards take effect on July 1. I'd say they are evolutionary rather than revolutionary. The weighted average benchmark for credit will remain unchanged at 50 basis points but there'll be a cap on the maximum interchange rate that can be charged for any transaction to an acquirer and a merchant. So what we think this will do is it'll bring down payment costs for some merchants that don't get strategic … that don't get the benefit of strategic interchange rates. So bring down their payment costs, and hopefully bring down surcharges that they charge if they choose to surcharge.

In the case of debit, the interchange benchmark was 12 cents on a weighted average basis and that's being reduced to 8 cents on a weighted average … 8 cents per transaction. I'd say there hasn't been … it hasn't been particularly controversial in the industry. I think industry's digested it pretty well. But what it means is that the costs of debit to most merchants will fall a little bit on … or should fall a little bit on July 1 and so that if you're a merchant and you're not getting a better price on your debit acceptance costs, you might want to talk to your acquirer and ask why not.

Perfect. Okay, I'm very conscious of time so I might wrap things up there. So thank you to my panellists. So Peter, Tony, Lela and Marie and Andrew over to you.

I think great panel discussion, ladies and gentlemen. So much to look forward to in payments. It is really … I remember when we never used to talk about payments and then now it seems that it's all we ever talk about and I'm very happy to do that because I think it's a really exciting part of the financial services sector. So thank you again ladies and gentlemen, for giving us your time and your expertise and Tony, for joining our panel today, that's really great.

Please put your hands together for our panel.

[Applause]