Transcript of Question & Answer Session Fireside Chat by Ellis Connolly, Head of Payments Policy, at the AFR Banking Summit

Ellis has been in his role for about two years, running payment policy at the Reserve Bank. There are a lot of issues going on in payments, as we’ve been hearing this morning already, so I want to start there, if I could. As James said in his introduction, we’ve got some issues about cash and cash in transit, which we’ll get to second, but I want to start on the issue of digital platforms. We have a piece of legislation in the federal parliament at the moment, ladies and gentlemen: the Payment System Reform Act. It hasn’t been passed yet, but it will give the Reserve Bank more powers, alongside the Treasurer, to designate different digital platforms as payment systems. Ellis, I wonder if you might just be able to explain to us the context of those new powers and how urgent it is, in the bank’s eyes, for those to be received.

Thanks very much. First, I want to emphasise that Australia’s payment system actually does function pretty well on a global standard. Nevertheless, there have been some significant changes to the landscape: a lot more complexity in the payments landscape than there was when the Payment Systems (Regulation) Act was first introduced back in 1998. Back then, it was a pretty simple world. There were card schemes, there were issuers and there were acquirers, and the PSRA was fit for purpose for regulating those sorts of entities. These days, it’s much more complicated. As you know, there are new platforms that are transforming the payments experience and there are lots of new players in the ecosystem as well, from fintechs through to big techs. So, from our perspective, the reforms that the government has introduced, which will broaden the scope of the RBA’s regulatory powers to include these new platforms, these new players, is really important to enable the RBA to continue to promote the safety, efficiency and competitiveness of Australia’s payment system.

So, presuming that this law is passed—I’m not sure when that will be—what is it that you might be able to do with the powers? Could you run us through some examples of some potential interventions. I’m not talking about companies specifically, but what’s the sort of stuff that you’re able to do, once you’re armed with these new powers?

Well, the first thing that we’re planning to do, once the legislation passes, is to launch a comprehensive review of retail payments regulation in Australia to enable all stakeholders to engage and let us know what you see as the issues in Australia’s payment system. There are a few themes, a few focus areas, which are already emerging. One of those is mobile wallets, another one is the cost of payments, and another one is surcharging. On mobile wallets, we really have seen Australians embrace the use of mobile wallets for payments. In the data that we collect, over a third of card payments are now going through mobile wallets. At the same time, we can see that some efficiency and competitiveness issues are arising, particularly around the access to the underlying technology for competing digital wallet providers and also around the transparency of the fees being charged by some mobile wallet providers. On the issue of the cost of payments, we know, from the data that we collect, that small businesses pay a lot more than large businesses for payment services. This suggests that there may be some inefficiencies in the Australian payment system here; it’s also a challenge for the broader competitiveness of the Australian economy. So we really are keen to look at what further can be done to help reduce the cost of payments for small businesses. Then, on surcharging, there is quite a lot of community concern around card surcharging at the moment, so we think it is time for us to do a comprehensive review of whether our framework is still fit for purpose.

Just to go into a little bit more detail on that point on surcharging, when you imposed your surcharging rules, which allow merchants to surcharge the cost of credit card payments, cash was the main way that most people paid. So I suppose that a buyer of goods could decide to use cash and avoid the surcharge but, as more payments are being made electronically, that option—some people don’t even have a physical wallet with cash in it; I mean, most people, probably—it’s harder to avoid the surcharge. I suppose it raises questions about whether or not there should be a surcharge at all, does it, or what are you planning on looking at in that review?

These are exactly the things that have changed. So, if you go back to the early 2000s, when we originally enabled merchants to be able to surcharge card payments, back then, well over half—I think, in the data that we collected in 2007, almost 70 per cent of payments were in cash. It’s hard to believe these days, looking back on it, that that’s how we were paying, but it was. So, back then, the surcharging regime that we put in place we thought made very good sense. It enabled merchants to have a bit more bargaining power, when they were speaking with their payments service providers basically going, ‘If you charge me those rates, I’m going to need to surcharge the customers.’ It also helped to put some pressure on the card schemes to keep their costs low. It also provided a signal to consumers to use a cheaper payments method, which back then, indeed, was cash. Times have changed. The use of cash has declined dramatically. In the latest data that we collected, it’s down to 13 per cent of consumer payments that are made in cash, compared to that 70 per cent back in 2007. At the same time, card payments: it’s the way that people pay. Three-quarters of payments are using cards; half of payments are using debt cards. So circumstances have changed. We’ve seen a bit more use of surcharging as well—you probably all see them in cafes and restaurants quite often as well—and an increased use of the same surcharge across the board, whether it’s a debit card or a credit card. What this means is that the many consumers who aren’t walking around with cash in their wallets anymore—in the survey we ran a couple of years ago, 30 per cent of consumers indicated that they didn’t have any cash in their wallets anymore—really feel that they can’t avoid the surcharge, because any card that they use is going to be surcharged in that circumstance. So it is time for a review of this. All options are on the table, including potentially placing some limits on surcharging. For instance, given the extent to which debit cards are now the most frequently used means of payment, is it time for debit card payments to be surcharge-free? These are the sorts of questions that we’re going to ask. We’re going to try and reduce the frustration for customers at the same time as retaining some of those benefits of surcharging for merchants and the broader payment system.

While we were talking about implications of the declining use of cash, Ellis, I was just interested in the role that the Reserve Bank is playing to help solve the short-term financial pressures on Armaguard and the cash-in-transit industry—we’ve heard a little bit about that already this morning—and also to develop, like, a longer-term structure for this industry. How urgent is this issue in your mind?

The RBA places a high priority on Australians continuing to have reasonable access to cash services. Late last year, the Governor of the Reserve Bank convened some industry discussions about the challenges with access to cash, particularly around the viability of cash-in-transit services. We’ve heard today from Anna Bligh on how those discussions are going and also from Gina Cass-Gottlieb as well, so you’ve had quite a good uptake along with your article in the AFR, James. So there’s not much that I can comment on in terms of the negotiations that are going on. What I can say is that we place a high priority on this. Finding long-term solutions here is a complex challenge in a declining cash environment; it’s going to take time. The Governor has encouraged all of the participants in the cash distribution industry to approach these issues with the public interest in mind.

Okay, thank you for that. Another issue on your plate is looming changes to the payment licensing regimes for payment providers. As I understand it, the sort of basic push here is to encourage more fintechs and payment providers to be directly connected into the Australian payment system in a more pro-competitive environment. Could you just talk us through how you’re seeing that: what risks there might be with more connections and more providers—it sounds like a broader number of players will be coming inside your regulatory remit—and the extent to which you want to see more competition at that payment-provider level with these licensing reforms.

Yes. We’re very strongly supportive of the government’s plans to introduce a payment service provider licence to enable non-banks to be able to get direct access to some of Australia’s key payment systems. At the moment, when these non-banks are having to compete, if they want to try and get their customer funds transferred, they need to use a bank as an intermediary to be able to access Australia’s payment system.

Or, in the case of wires, become a bank themselves.

The alternative is to actually get an ADI licence and go through that full process. So the idea here is to have a more fit-for-purpose, targeted payment service provider licence, which is not quite the full ADI-style licence, given that many of these entities are not engaging in the full set of services that a bank provides.

Well, they’re not lending.

For instance, that’s right. So we think there’s a lot of promise in that. As for what it can do, a well-designed payment service provider licence can give the confidence to the operators of payment systems that these non-banks can directly participate and transact in the payment system without injecting lots of risk into it, and that’s because a well-designed licence will help to ensure that those payment service providers are appropriately managing, say, their financial and operational risks. So we think this is very promising; it could help to increase competition and innovation in the payment system, and the end beneficiaries will be customers and merchants who, hopefully, will receive lower prices and better services.

By bypassing the institutional banks.

Yes, through more competition and also, quite often, it’s fintechs that come up with great new ideas.

Okay. Another thing that’s looming is at the end of this decade, which is six years away—so we’re getting a little bit ahead of ourselves here—but there’s a bit of work to do, I think—

Not on the payment system. 2030 is, like, tomorrow in a payment system.

Yes. At the end of BECS, ladies and gentlemen, which is the Bulk Electronic Clearing System, which is the workhorse of the payment system that processes the vast majority of debit payments, your salaries and superannuation contributions, and all the overnight batch processing; it’s ‘old system’. In the last few years, the banks have built new debit infrastructure, called the New Payments Platform, which is a real-time system. Some volumes are going over the NPP at the moment; the plan is for the BECS volumes to eventually shift that way. But what more uplift do we need to see in the NPP, in order to get this BECS volume onto this new infrastructure within five years, say? How much work is there to do to hit those industry targets?

Yeah. I mean, there is plenty of work to do. The NPP infrastructure itself will need to be able to handle the much greater volumes, and that is something that the industry is working on. Some of the new functionality that is required to be able to transfer a lot of the volume from BECS to NPP, for instance, relies on a new service called PayTo. PayTo will enable the modernisation of direct debits in Australia. It will give customers much more control over their recurring payments; you’ll actually be able to see them in your banking app and decide which ones you want to continue with. It will also enable third parties to initiate payments, actually getting quite a lot of the benefits of CDR action initiation up and running.

So what do the major banks need to be doing on PayTo? I get the impression that there’s not a lot of push out of PayTo into the utility or institutional sort of customer base of the banks who are big billers.

It’s a slow rollout. It’s been a slow rollout—

Yes. Does it need to be faster?

There is more work to be done here. So it’s got to the point where the major banks, in particular, have connected their customer accounts, but what we need to see is enablement across all of the key channels, so internet banking and also in-app banking as well. We also need to see more connection of business customers to this, particularly to be able to initiate the payments. So there’s quite a bit of work still to be done there. Then there’s also the promotion of the service to business customers. So we would really like to see the banks taking full advantage of this.

Obviously, Visa and MasterCard debit schemes are the dominant networks for processing debit payments as well as EFTPOS. But as you move more payments into the NPP, which is domestic debit real-time infrastructure, do you envisage any kind of blowback or resistance from Visa and MasterCard? How are they sort of viewing this encouragement by you of more volume into the national infrastructure?

So the international card schemes have interchange arrangements, which do encourage the participation of issuers. Equivalent to this, there’s a modest interchange-like payment associated now with the NPP, which can also encourage the banks to participate there. Our perspective on this is very much that the same rules, with regard to pricing and competition, apply to the international schemes as apply to domestic schemes, such as the NPP. Specifically, in the case of interchange, our longstanding view on this is that interchange should not be set at a level which impedes the efficiency or competitiveness of the Australian payment system. Now, as long as everyone is playing on that same level playing field, we think competition between the schemes should help to generate better outcomes for consumers and merchants.

It should. Another topic is the Consumer Data Right on open banking. We heard from Gina Cass-Gottlieb in her speech just before lunch that the ACCC is encouraging of the CDR and is even looking to take more enforcement action against banks to make sure that the quality of the data is up to scratch. We heard from Matt Comyn a little bit earlier that perhaps the banks had overinvested or spent a lot in open banking and weren’t yet seeing the benefits of that, and he raised business banking as an area where he thought it could have some productive use, but we’re still waiting to get that off the ground. What do you feel about the open banking policy and, specifically, the intention to extend it into the merchant acquiring space? So this is payment terminals that sit on the merchant retailer side, and that’s a proposal to extend it. Would it be useful for the Reserve Bank if that did, indeed, happen?

We think that would be very, very helpful. In general, CDR, open banking: we’re very supportive of that to help encourage more competition in the banking system. It also has implications for the payment system. One avenue of it is action initiation, enabling third parties to be able to, for instance, trigger payments. Actually, PayTo delivers quite a few of those benefits, which is great. Another area that—as you highlight, James—we think is very promising would be open banking for acquiring services. We really think that could help small businesses make best use of their acquiring data to shop around and get a better deal on their payment costs.

Okay. We’ve just got one more minute. I’ve just got one more question, and this is on the future of money. The Reserve Bank has been working for a couple of years now on Central Bank Digital Currency. Should banks be preparing, Ellis, for a world where they’re providing payments on blockchain-based systems that allow for the atomic settlement of real-world assets that have been tokenised onto the blockchain and potentially facilitated by a wholesale eAUD backed by the Reserve Bank?

Well, that question just rolled off the tongue, didn’t it?

It’s the last question, so—

Yeah, it’s a good one. So it’s really up to the banks, in terms of what infrastructure they want to invest in; options include blockchain for tokenised assets. We maintain an open mind as to what role a CBDC could play in the settlement of those assets. We ran a CBDC pilot last year and we saw that there was a lot of interest in industry for the use case where a CBDC would be supporting the settlement of tokenised assets. We can see some benefits from tokenisation in terms of speeding up settlement, reducing settlement risk and making it more efficient. At the same time, there are potentially risks, particularly operational risks, around blockchains that would need to be managed. So our next research project in this space is going to explore whether different forms of digital money could help to support the settlement of tokenised assets. We’re looking forward, as part of this project, to engaging with industry again—we learn a lot from industry—on what benefits these new technologies could potentially have for Australia’s financial system.