Speech Opening Statement to the Inquiry into Taxpayer Engagement with the Tax System

Chair, Members of the Committee

Thank you for your invitation to this session to provide the Committee with some perspectives from the Reserve Bank on the evolving payments system. The Bank, through the Payments System Board (PSB), is the principal regulator of the payments system. Its mandate is to promote competition and efficiency, and to control risk in the payments system. My colleague and I are from the Bank's Payments Policy Department. As part of our work to support the PSB, our department conducts research into payments trends and technology. I should note upfront that we are not experts in taxation matters.

In this statement I will cover some key trends in the way Australians pay, including developments in the use of cash. I will then note some technology issues that may be of interest to the committee, including issues relating to digital currencies and the development of the New Payments Platform.

Payments System Trends

The Bank publishes aggregate monthly data on a wide range of payments undertaken in Australia which we collect from banks and other participants in the payments system. We supplement these data every three years with a detailed survey on the use of different payment methods by Australian households. In our most recent survey in late 2016, over 1,500 people recorded the details of every payment they made over a week. This survey provides us with some excellent perspectives on the payment choices made by households and the factors behind those choices.

The key trend in the retail payments system over the past two decades has been the switch away from ‘paper-based’ payment methods like cash and cheques towards electronic methods. I would like to provide the Committee with a graph, based on one in the PSB's recent annual report, which demonstrates this trend (Graph 1).

Graph 1
Graph 1: Transactions per Capita

When we did our first survey in 2007, cash was used for nearly 70 per cent of payments (in terms of numbers, not values). In 2016, this was down to 37 per cent. In contrast, the use of credit and debit cards has been increasing, and in the 2016 survey cards accounted for just over half of the number of transactions.

The switch from cash to cards has been a longer term trend, but an important element in recent years has been the widespread adoption of contactless ‘tap and go’ functionality by consumers and merchants at the point of sale. In particular, contactless cards are increasingly being used instead of cash for low-value payments. The survey showed that the use of mobile devices to make card payments – for example, Android Pay, Apple Pay and Samsung Pay – remains relatively low, but this is likely to grow.

However, the growth in electronic payments is broader than the shift to cards. For example, there has also been strong growth in the use of direct debits and credits, and of BPAY. The trend towards electronic payments that I have described is clearly a global one, though I think it is fair to say that Australia is somewhat more advanced than the typical high-income economy.

This trend is also relevant to today's hearing. The ATO makes extensive use of electronic funds transfers to process refunds, and offers taxpayers a number of different electronic payment methods to pay their tax. In fact, the majority of taxpayers use BPAY to make their payments. Agencies like the ATO and DHS have been very proactive in reducing their use of cheques.

The Use and Holding of Cash

Our recent survey showed a decline in the use of cash for payments across a wide range of demographic groups and merchant types. However, cash remains the most common payment method for certain types of transactions, and is used intensively by some segments of the community. For instance, many older Australians continue to use cash for a significant share of their payments, and cash remains the most commonly used payment method at small food retailers such as cafes, restaurants and bars. Around 12 per cent of respondents to our survey reported that all of their point-of-sale payments in the week of the survey were made using cash.

Even though the use of cash for transactions has been declining, the broader demand for cash remains strong. The ratio of currency to nominal GDP has risen over recent years in Australia. This is consistent with developments in most high-income economies – Sweden is an often-noted exception. In Australia, the ratio of currency on issue to nominal GDP is actually at its highest level in more than 50 years.

While the role of cash in society is evolving, it is likely to remain an important feature of the payments system and economy for the foreseeable future. Given the ongoing importance of cash, the Reserve Bank aims to maintain the public's confidence in Australia's banknotes by continuing to ensure that banknotes are of high quality and secure from counterfeiting. We are investing in the Next Generation Banknote program, which is resulting in an upgraded series of banknotes with a range of innovative security features that have not previously been used in Australian banknotes.

The role of cash in the economy has been one of the issues recently discussed by the Government's Black Economy Task Force. The Bank has participated in the Task Force. Given that the final report is not yet published, there may be constraints on what we can say about possible recommendations in this area.

However, when the Task Force's interim report was published it raised the possibility of a limit on the size of cash transactions, as exists in a number of other countries, including in Europe. The Bank is supportive of the concept of a cash transaction limit, but we consider that a limit that constrained the ability of ordinary Australians to undertake legitimate cash transactions would be undesirable.

Digital Currencies

We note that Committee members have expressed interest in digital currencies or cryptocurrencies. This, and the broader area of distributed ledger technology, is a topic that the Bank has been monitoring closely over recent years.

There have been substantial increases in the prices of cryptocurrencies like bitcoin and ether over the past year. Most of this seems to relate to speculative demand and in particular the use of digital currencies as the means of participation in Initial Coin Offerings. The use of bitcoin and other digital currencies as an actual method of payment remains relatively limited in Australia, as elsewhere. From the Bank's payments policy mandate, digital currencies do not currently appear to raise any pressing regulatory issues.

Cryptocurrencies can serve as a means of payment in the illicit economy. Accordingly, their use may have some implications for tax authorities and they raise more significant issues for authorities tasked with crime prevention and detection. The distributed and cross-border nature of digital currencies like bitcoin means that regulation of the core protocols of these systems is unlikely to be effective. Authorities have therefore tended to focus on the ‘on-ramps’ and ‘off-ramps’ – that is the links to the traditional payments system. In some jurisdictions, central banks and other authorities have taken action in relation to digital currency exchanges, such as the measures undertaken by the People's Bank of China earlier this year.

While the longer-term prospects for private digital currencies are unclear, the Bank has previously noted that the distributed ledger and blockchain technologies underlying them have potential for widespread use in the financial sector and many other parts of the economy. The greatest potential is likely to be in sectors where workflows involve lots of different parties with no trusted central entity, and where current practices are quite inefficient. Some frequently suggested financial sector use cases include correspondent banking and remittances, as well as trade financing.

The New Payments Platform

Over the past few years, the banking industry in Australia has been building the New Payments Platform (NPP). This project stemmed from the PSB's Strategic Review of Innovation in the Payments System. The review was conducted over 2010–12 and concluded with a call to the industry to develop a payment system that would allow Australians to make real-time, easily addressed and data-rich payments on a 24/7 basis. The Bank is a participant in the NPP in its role as banker to the Government. In its role as infrastructure provider, it has also built the underlying settlements architecture, the Fast Settlement Service, which will allow interbank settlement of NPP payments on a 24/7 basis.

The project is now in its final stages of testing and the public launch is scheduled for early 2018. The NPP has been a significant project for the payments industry and the Bank recognises the very substantial collaborative effort by participants – both large and small – to develop this new world-class infrastructure.

The NPP has been designed as a platform for innovation that will benefit end-users of the payments system – households, businesses and government entities. One key feature that will facilitate new services will be the ability to include much more data with a payment – up to 280 characters of data as opposed the current limitation of just 18 characters in the direct entry system. Richer data will facilitate e-invoicing and straight-through-processing, and is likely to offer enhanced functionality to Government agencies including those under the DHS umbrella. And in the superannuation industry, for example, there is currently a lot of manual processing and checking as part of making payments: the NPP could streamline and automate many of these. In addition, at some point after the initial launch to the public, a ‘request to pay‘ functionality will be introduced that will enable one party to send a payment request to another party. The payer will then be able to accept that request and initiate an NPP payment. This functionality could be attractive to the ATO: it could send through a request for tax to be paid following the receipt of a tax return.

NPP Australia Ltd is the entity responsible for managing the NPP and it is reaching out actively to encourage the development of new services that will use the NPP. This outreach is directed in particular at non-traditional players in the financial system, including fintechs.


In summary, the broad trend in the Australian payments system over the past decade has been a move away from cheques and cash and towards the use of electronic methods. This is likely to continue with the launch of the NPP. The increased use of electronic payments means more transactions will go through visible channels. Overall, this trend is likely to be favourable for the operation of the tax system, both in terms of collection of obligations and reducing compliance costs for taxpayers.

My colleague David Emery and I are now available to answer your questions.