Transcript of Question & Answer Session Payments: The Future?

Thank you, Governor. And, it’s a delight to actually sit down face to face with you. I know you’ve suffered more than most with Zoom. I know you had your stiff neck issue a couple of months ago. So it’s nice to be in person.

Thank you.

You’ve prompted a range of questions. We might start near the end. I think your opening remarks that there’s a lot going on was right and that absolutely emphasised by the range of topics that you spoke about and the range of questions that we’re seeing through the app. If we start near the end though, piece around the reviews and Treasury’s announcement yesterday, there’s a question in the feed about, is this a shift in the balance of power on payments from the RBA to the Treasury? I think my take on that would be, with the review of the PSR Act, actually, it’s helpful in allowing the RBA to look at areas where previously it hasn’t been able to, but I’d be interested in your view.

Yeah, I don’t think of this in terms of a shift in power between the Bank and the government. The couple of things that I really valued out of yesterday’s announcement was first of all, that the government is committed to a greater leadership role in the payment sector, and I think that leadership role will help solve some of the coordination problems we’ve been grappling with. So that’s one very positive initiative. The second is the commitment by the government to look at a whole range of legislation. It’s not just the technical definition of a payment system and the Payment System Regulation Act, but the regulatory regime for crypto assets, the licensing arrangements, the custody arrangements, disclosure arrangements. So there’s a lot to welcome in yesterday’s announcement and the Reserve Bank will be working with the government and the Treasury. So I’m not looking at shifts in balance of power, I think what we’ve seen yesterday is a decisive step by the government to move Australia forward here, which is going to benefit us all.

I think that’s might take as well, I think the leadership is really welcome and the coordination point is a point really well made. On that, you mentioned the strategic plan and that being one of the key pieces that government was keen to get to. I wondered hearing you talk about those near-term priorities and particularly talk about how all of them involve technology whether that strategic plan is a way of helping with that and cutting through some of that, and really emphasising the order for those priorities to be delivered. And particularly with an end user focus of what actually are the benefits to end users and maximising those.

Yeah, there may well be an advantage in getting a broad agreement within the industry of just how these projects sequence. As I know, from the experience of the Reserve Bank, as we’re a bank as well, and we’re having to invest in all these things, and it’s the same people working on many of these projects. So the sequencing is important. I think it’s also important though, that when the industry commit to doing things by a certain time that they meet those commitments. And my understanding is that some of the political reaction we’re seeing here is a reaction to industry not meeting the deadlines they’ve agreed to, and to the extent that the political process can accelerate that whole process of meeting the deadlines, I think that would be positive as well.

Thank you. Inevitably, your comments on digital currency have sparked a range of questions and it’s interesting that you mentioned the RBA’s role as a bank in that. So questions that I know you’ve thought long and hard about in terms of the relative role of the RBA versus commercial banks, particularly if an eAUD were to come into existence. And whether that creates any competition issues between the Reserve Bank and commercial banks, or any sort of flight risk from commercial banks to the central bank.

They’re the issues that we’re working through internationally. And when I spoke about this issue, I think maybe three years ago, that I explained about an eAUD, one of the concerns that was prominent at the time was that in a period of stress, where there was concerns about the health of the bank system, that depositors would take money out of their bank accounts and want to invest in the central bank digital token and that could destabilise the banking system. At the moment, people can run to bank notes but it would be a different matter to be able to run to a central bank backed liability. So that’s an important issue to be worked through. In some of the discussions that are taking place internationally, people are working through the possibility of putting limits on holdings of the digital tokens, so they can be used for payments, but not as an ultimately store of value.

A related issue that’s being discussed internationally is whether these tokens should carry interest. If they did carry interest, then they would be a direct competitor to bank accounts. This is not something that I think is in the public interest, but who knows what could happen over time. But I just don’t see us going down a path where these tokens attract interest and are a direct competitor to bank accounts, because that could change the whole structure of the financial system. The liability structure of the bank system would change. And then the Reserve Bank would end up with a … We’ve got a large balance sheet today because of monetary policy operations, but we could have a very large balance sheet because people have all these tokens, so there are a lot of issues here. This is why it’s worth taking time. Because people from a technology focus look very much at the technology aspects of this and they’re very exciting and you know, it’s innovative and it’s great to explore those.

But there are deep issues about how it could affect both the stability and the operation of our payment system that need to be worked through. And the meetings I’m often doing late at night, these international conference calls, we’re talking about those.

And that’s actually one of the couple of questions around the detail of that. If you’re able to talk to that coordination internationally, particularly with BIS and other central banks, and this is asking you to have a bit of a crystal ball, as you rightly pointed out, no one has. But it’s a possible timeline for introduction of CBDC.

I don’t have a good insight into when we’ll see actually one out in the marketplace. At the moment, it’s really around proof of concepts and small trials to see how the technology works. So we’re all doing these experiments at the moment, we’re working with the Monetary Authority of Singapore Bank, Negara Malaysia and the South African Reserve Bank on the feasibility of a platform with multiple central bank digital currencies. And that would allow cross border payments to be made without correspondent banks. If we could do that, it’d be fantastic. But as we work through the issues, we’ve got to solve, not just the technology problems, but the governance issues, the legal issues, and issues about the finality of settlements. I still think it’s going to be quite a few years before we see anything more than small scale proof of concepts.

Thank you. I might switch gears slightly and just talk about cash that also prompted some other questions. You rightly referred to the consultation that you’re doing around bank note distribution, as I think of it, bank note distribution underpins cash in society. And then there are questions around both access to cash, which again, the RBA does some research on in terms of the average Australian’s ability to access cash and the acceptance of cash by merchants. But we are of course at an interesting point with cash where, as you pointed to in your remarks, cash transactions have declined, but we know bank notes in circulation are at record highs. So how do you sort of think about that and the role of cash in society and what needs to be monitored over time in those access and acceptance areas?

Well, we currently monitor very closely the distance that people have to travel to a cash access point and as ATMs have closed and bank branches have closed, the average distance has increased a little bit, but by and large Australians still have very good access to cash. The broader issue is as cash use declines, what is the community’s view about merchants being required in some way to accept cash? That’s not an issue that the Reserve Bank would directly tackle itself, but it’s really one that could be covered as part of this national roadmap. And it’s as much a kind of political and community question as one for the Reserve Bank. What is the size expectation to be able to pay in cash? Clearly in many places we can’t pay with cash and we accept that perfectly well, but in other cases, people still want to pay in cash in bank notes. And I really see this as a political issue that we have to address rather than something for the central bank to determine how it’s going to work out.

And understanding the motivation of the reason behind the bank notes in circulation, I guess, is part of that analysis there.

Well, I think I understand why most of the bank notes are out there and they’re held as a store of value. At the moment, there are 16 $100 notes out there for every single person in Australia, 16. I don’t think most of them are in anyone’s physical wallet, they’re under the bed, in the cupboard, in the safe at home, if you’ve got to safe at home. So the vast bulk of Australia’s bank notes are being held as a store of value. The low interest rate environment is part of that, but still people want to hold bank notes as a store of value.

And I suppose a fallback mechanism as well, to your point about resilience.

Yeah.

Final quick question. Just on your thoughts on the cost of payments to merchants, there are a couple of questions around surcharging and also BNPL in the feed. And I know, both of those points were addressed through the review the RBA just did, but just your thoughts on that aspect.

Yeah, that’s a very good question. It’s an issue the Payment System Board spends a lot of time talking about because as payments become electronic, there’s rightly a huge focus on getting the cost of those electronic payments down. My view, there’s still kind of where the society is still paying too much for its electronic payments and over time that’s going to need to come down. The initiatives that we’ve announced on Least Cost Routing are part of that. I think the ability of merchants to surcharge is important. Most merchants don’t like surcharging, but they do like the ability to discuss with the payment provider that if you don’t lower the cost, then I will contemplate that the reduction in the cap on debit card interchange from 15 cents to 10 cents, as part of the recent review, is going to help there as well.

And I think over time, open banking and the Consumer Data Right, will help. So put all that together and the payment costs are coming down. The innovation we’re seeing in the payment system will come down. As we said, in the conclusions to the review just recently, we think over time, it would be good if the Buy Now, Pay Later operators removed their no surcharge rules. It’s important there’s a level playing field, the credit card and debit card operators can’t have such rules and I think it would be good over time if the Buy Now, Pay Later operators didn’t have those rules as well. They could do that voluntarily or regulatory arrangements might evolve over time to allow that to be done. All those things together, I think are going to put downward pressure on payment costs, which is important.

Excellent. Thank you. That’s a perfect way to finish, Governor, and thank you for your time and thank you for your address, as you say, for the fifth consecutive year, it’s very valuable to us and to our members.