Speech The Central Bank and the Payment System
Assistant Governor (Financial System)
Remarks at Panel Session
‘Central Banks Initiating Change – Different Means for Different Ends?’
Thank you very much for the invitation to be part of this panel. It is a pleasure to be here this morning.
I do, however, owe an apology to the organisers. They emailed me a number of times over recent months asking what music I would like played as I approached the podium. Lacking inspiration, I finally replied, no doubt to the organisers' disappointment, that I was happy not to have any music. But on the day that I gave this reply, my young children gave me the inspiration that I was lacking, but by then it was too late. When I went home that evening, the children were watching one of their favourite DVDs – Bob the Builder. Apparently, Bob is quite an international figure, but for those who don't know him, he is – as his name suggests – a builder, and he has a very sunny disposition, as do the many friends who help him. Each episode of the show starts and ends with the same tune. I will spare you my rendition of it, but each verse ends with the line: ‘Working Together They Get the Job Done’. And in the chorus, Bob and his friends loudly ask the questions ‘Can We Build It’ or ‘Can We Fix It’, and they always confidently and proudly proclaim ‘Yes We Can’.
Bob's little ditty is an appropriate theme to my remarks today. Working together the central bank and industry can get the job done. And where things need fixing, we can fix them!
So what I would like to do this morning is to reflect on the various ways that central banks, often together with industry, can work to improve the stability and efficiency of the payments system. In doing so, I will draw on the experience that we have had here in Australia.
Broadly speaking, there are at least three ways in which a central bank can influence payment system outcomes. The first is in its role as an operator of individual payment systems. The second is in its role as a regulator. And the third is by prompting industry and public discussion of payment system issues. The Reserve Bank of Australia (RBA) has used all three of these methods recently, and I would like to talk briefly about each of them.
The Central Bank as Operator
Firstly, the central bank as an operator of payment systems. In many countries, including Australia, the central bank operates the interbank real time gross settlement system (RTGS), and in some countries, it also operates a variety of other payments systems. As the operator of the system, the central bank can obviously influence its design and evolution.
A good example is the development of the RTGS system in Australia. By the early 1990s, there was a general consensus in Australia, as in many other countries, that settlement risk needed to be addressed. We set off on a path that would have provided a protected netting system, but after some time it became clear to the RBA and some others that the tide was clearly shifting towards RTGS systems. The RBA actively encouraged this shift, and then once it was accepted, the Bank worked very closely with industry on the technical design and implementation of the system.
I think it is fair to say that the process was aided by the various participants sharing a common objective – that of reducing settlement risk. At times, there were heated debates about how the system should be designed, but these debates were generally carried out in a spirit of goodwill. At the end of the day, the design incorporated the best of the ideas of the central bank and of industry. Working together the job got done!
The Central Bank as Regulator
A second way of influencing outcomes is through regulation. Here, the RBA's experience is a little different to that of many other central banks. In the late 1990s, the Australian Parliament amended the Reserve Bank Act to give the RBA responsibility not only for the stability of the payments system, but also for efficiency and competition. A separate Board was established to carry out this responsibility, with the staff responsible for supporting the Board being clearly separate from those operating the RTGS system.
In carrying out its responsibilities for efficiency and stability the RBA has sought to: improve access arrangements; ensure that restrictions imposed by various participants in the system do not distort competition; and improve publicly available information. Controversially, the Bank has also regulated interchange fees in the credit and the debit card systems. These fees are not subject to the normal forces of competition and were set at levels that were distorting payment patterns in Australia.
At the risk of over simplifying things, I think it is fair to say that it has been more difficult to obtain industry support for reforms designed to improve competition and efficiency than it has for reforms designed to promote stability. The main reason for this is that reforms that enhance competition and efficiency of the overall system – and thus promote the public interest – are not always seen by all existing participants to be in their own commercial interests. This same tension between public and private interests is not as evident in reforms that promote stability. Often, these reforms are seen to be in everybody's interests.
Notwithstanding this tension, the RBA has always encouraged industry-based reforms, although in a number of cases – particularly relating to interchange fees – voluntary reform has not proved possible. As a result, regulation has been used. In other cases, a more co-operative approach has been possible. In particular, the Bank and industry have worked together to clarify access arrangements to Australia's EFTPOS system. The Bank has also worked with the card schemes to liberalise access to the schemes. This co-operative approach has much to commend itself.
The third way of influencing outcomes is through promoting public discussion of payments system issues. As I mentioned a moment ago, the central bank's perspective on issues can differ from that of other participants. Given this, the central bank can play an important role in stimulating analysis and discussion.
Recently, the RBA has used this approach in raising the question of whether the current architecture and governance arrangements in a number of payments systems are conducive to the efficient evolution of the overall system. A central issue here is the arrangements through which the industry makes decisions about standards and the common architecture of the system. Often, co-ordination amongst competitors is difficult, but it may sometimes be necessary for the ongoing development of the system.
The decision to raise these issues was not – as some have feared – the first step in further regulatory intervention by the Bank. Rather, it was taken in the hope that doing so might prompt greater industry and public scrutiny of existing practices. Recently, we have been encouraged by a number of steps in this direction, and I hope and expect that there will be further steps in the months ahead.
We have a strong view that the issues of architecture and governance are best dealt with by industry, rather than through regulation. After all, it is industry that, at least in the first instance, must pay for any investment in the system, and it is industry that must operate the system. At the same time, given the RBA's responsibilities, we have a strong interest in seeing arrangements that promote the development of a robust, vibrant, and efficient payment system that serves both consumers and businesses well. If this is to be done, existing practices do need to be periodically reviewed and analysed. Again, this is an area where working together, the central bank and industry can get the job done.
Thank you for your time this morning.