'Modernising Australia's Payments System' - Speech by Michele Bullock, Governor

of The Reserve Bank Michelle bulock she's been in the role for about three months now and I reckon that every day since she's taken it on either she or the RBA has been in the media Spotlight it is possibly the most scrutinized public role in Australia right now and we're thrilled to welcome her for her first annual payments address many of you will already be familiar with the governor's work because she has a very strong background in payments Miss Bullock has held a number of Senior Management roles with in the RBA including head of the payments Policy Department and assistant assistant governor for financial systems business services and currency and before this current role she was Deputy Governor of the RBA before we welcome Miss bulock to the stage just a quick note regarding your questions the purpose of today's speech is to talk about payments policy not monetary policy as much as we would all love to dig around in there especially our friends from the media so uh please submit your questions on payments via the QR code and we'll get to as many as possible and payments questions will uh receive priority but now please welcome the governor of The Reserve Bank of Australia Miss Michelle bulock thank you Anita um thanks John for the invitation to be here um payments I love payments and um I'm in a room of likeminded people so I'm I'm ecstatic to be here so as John's also talked about payments landscape is changing rapidly we've got new business models we've got new technologies entering the space the industry is moving from Legacy systems towards new platforms that can deliver payment systems that are faster safer and more convenient for everyone we therefore need to modernize our regulatory architecture and payments infrastructure to support these Innovations and we've been working with the government government to update the regulatory framework this morning I'm going to talk through how the payment system board is responding to this changing environment I got a slide yep um I'll begin by highlighting the board's strategic priorities through this period of change and then I'm going to focus on three issues for 2024 um the rba's plan to undertake a comprehensive review of retail payments regulation under its expanded regulatory perimeter how industry and government can work together to maintain access to cash and how to ensure a SE successful transition from Becks to Modern Payment Systems now the payment system board recently there we go the payment system board recently refreshed its strategic priorities given the changes in the payment system and the regulatory landscape we set them out in the payment system board annual report for 2023 you can see the priorities here the first first is to strengthen the resilience of Australia's payments and markets infrastructures businesses and consumers are more reliant on electronic payment systems than ever before with outages becoming increasingly disruptive to everyday life we therefore UPS um going to um step up our oversight of these systems particularly the new payments platform and the card schemes the second priority is to advance and implement the government's payments reforms these reforms will Moniz the regulatory architecture and they'll ensure that the RBA can continue to promote a safe efficient and competitive payment system the third priority is to promote competitive costeffective and accessible electronic payments consumers and businesses are benefiting from new payments technologies that are more flexible and easier to use but greater use of these electronic methods is also adding to payment costs for businesses we expect payment service providers to to help Merchants lower their payment costs by implementing lease cost routing we also expect financial institutions to deliver more fast payment capabilities to Consumers and businesses through the NPP in particular npp's pay2 service will help to modernize how we make direct debits giving customers greater visibility and control over these payments and in fact when I entered payments in 1998 direct debits and lack of control over them that was the number one one problem for consumers and here we are only finally starting to address it the fourth priority is to enhance crossb payments so Australia is working with other G20 countries to make crossb payments cheaper faster more transparent and more accessible one key initiative here is standardizing the messages associated with crossb payments so what information is mandatory for such payments what is optional and how is it presented in the message message I recently ched an international working group that developed harmonized messaging standards for crossb payments and the aim is to implement these requirements globally by 2027 The Operators of systems that process crossb payments in Australia have publicly stated their intention to meet these requirements on that timeline we expect financial institutions to also be ready to use the standardized messaging by 2027 so there customers can enjoy more seamless crossborder payments another key initiative in this space is the npp's international business payments service which will allow the Australian dollar leg of inep inbound crossborder payments to be processed via the nppp on a realtime 24/7 basis this service was due to be implemented by all NPP participants this month but some of them are not ready which is disappointing we expect the Australian payments industry to deliver on this commitment as soon as possible our fifth strategic priority is to shape the future of money in Australia now this year many of you would know we completed a research project that explored the potential use cases for a central bank digital currency building on this we're now planning a project that will examine how different forms of digital money and infrastructure could support the development of tokenized asset markets in Australia and we're looking forward to in continuing our engagement with the industry on this work we're also continuing to work closely with treasury in exploring the policy case for a central bank digital currency in Australia and we expect to release a joint paper by mid 24 which will take stock of cbdc an analysis in Australia so far and lay out a road map for future work now Within These strategic priorities there are three key issues that I highlighted that are going to be particularly important in 2024 and I'm going to talk about those now one of the key projects under our second strategic priority that is advance and implement the reforms is a comprehensive review of our retail payments regulation the reserve bank's regulatory remit will soon be expanded as part of the government's payments reforms and you'll hear from n on some some of that later specifically the payment systems regulation act which was enacted in 1998 is being amended to ensure that newer payers in the p payment system including buy now pay later providers payment gateways payment facilitators Mobile Wallet providers all of these can be regulated by the RBA we expect these reforms to be in place sometime in 2024 at which point we will launch a holistic review of the re of retail payments regulation this is going to be an opportunity to consult on current regulation as well as on areas where regulation might be required in the instance in the interest of safety competition and efficiency and this will help us to set our regulatory priorities in the expanded regulatory perimeter the rba's payments regulation over the past couple of decades has been shaped by some key principles that have helped promote safe efficient and competitive markets these include the cost of payment services should be clear for businesses and consumers because transparency helps to promote competition businesses should be free to choose which payment methods they accept and businesses should be able to pass on the cost of the payment methods chosen by end users some initial questions for the review are whether these principles are still sufficient and how to apply them to the wider range of payment systems and participants that will fall within the rba's expanded regulatory perimeter I think I've gone the wrong way the review will also focus on some specific issues so and they're shown on this Slide the first is least cost routing this is important because it puts competitive pressure on card payment schemes to lower fees to Merchants now while some progress has been made to enable LCR from businesses it's been slow so formal regulation may be required to get acquirers and other service providers to deliver the full benefits of LCR to businesses the second specific issue is mobile wallets usage of mobile wallets as you all know has grown very rapidly but the costs associated with these Services remain opaque and payment service providers can face barriers to access we'll need to consider whether regulatory action is needed in this area and the final area is by now pay lat services in previous reviews we've concluded that Merchant should have the right to searge buy now pay lat Services which are an expensive means of payment and this is just as they have the right to search charge card payments so the right to sech charge for payment methods provides an important incentive for payment schemes to keep their fees low formal regulation may be required to allow this so as part of this holistic review we'll look forward to engaging constructively with the industry and many of you on all of these issues we also remain focused on access to cash for Australians this this has received some attention in the Press recently and I suspect it's going to get a lot more and I'd like to provide some context on this and discuss the work that's underway so the use of cash in payments has been decline for many years as consumers have switched to digital payments so the share of consumer payments made during cash declined from 70% in 2007 when we did our first survey of payments and it declined at 133% in 2022 that was when our L latest consumer payment survey was conducted now despite despite this decline cash does remain an important method of payment for some people and it's widely held as a precautionary or store of wealth sort of u means cash is also an important backup method during system outages or natural disasters when um electronic payments might be unavailable I had no sympathy with my son when his card didn't work and he had no cash on him at the petrol station for example for these reasons the RBA places a high priority on the community continuing to have reasonable access to cash withdrawal and deposit Services now the government has also highlighted the importance of maintaining adequate access to cash Services as a key priority in its strategic plan for the payment system now the challenge we face is that as the trans trans transactional use of cash declines it's affecting the economics of providing cash services and it's putting pressure on the cash distribution system these challenges prompted the RBA to launch a review of bank note distribution Arrangements in 2021 which we sought to identify changes to make the distribution system more effective efficient sustainable and resilient the review made some recommendations focusing on areas where the RBA has direct relationship with industry to improve transparency and to support industry input into distribution Arrangements however the review also acknowledge that the changes in themselves would be unlikely to fundamentally reshape the medium-term economics of the industry the challenging economics of cash distribution was one of the main factors behind the recent merger of the two largest cash in transit providers linf Fox armag guard and pra which the Australian competition and consumer commission approved earlier this year the merger was approved subject to a three-year undertaking from the firms regarding pricing and service levels as part of this linf fox armag guard gave an undertaking to continue supplying CIT services to existing customers until 2026 now the merger was intended to address the structural Decline and overc capacity in the CIT industry and reduced the risk of one or both of the CIT companies suddenly exitting exiting the industry which would cause a lot of disruption in the availability of cash in the economy now despite the merger having taken place as proposed linf Fox armag guard is now indicating that its CIT business continues to be unsustainable given these issues the RBA recently convened a round table discussion with industry participants to discuss what more could be done to promote the sustainability of the cash distribution system these discussions are ongoing and Industry regul ators and government will need to continue to work together to put in place sustainable arrangements for cash distribution I'd have to say that many other countries are facing similar challenges associated with declining transactional use of cash there's been a range of policy and even legislative responses contemplated overseas including measures to maintain cash access and acceptance and to shore up wholesale cash distribution Arrangements we'll continue to monitor closely the developments overseas through the diversity of policy options being considered suggests that Solutions tailored to Australian circumstances are going to be required here in terms of wholesale distribution Arrangements one model that has been considered in some countries is a utility in which a number of organizations form a single entity to carry out the H wholesale cash distribution function utility models aim to share fixed costs among the participants and Achieve efficiencies though Cooperative Arrangements I'd have to say can also be challenging to implement as we know there are examples overseas where industry was unable to reach consensus on moving to a utility structure and legislative options to address risks to cash access have therefore been pursued nevertheless it may be worth exploring the mer merits of a Cooperative arrangement in Australia to facilitate the development of options to put the cash distribution system on a more sustainable footing the Australian banking Association recently applied to the A C for authorization to develop in principle solutions to the challenges facing the cash distribution industry the A C has granted interim authorization for the ABA and other stakeholders to discuss these issues and the RBA will also be involved in these discussions the declining use of cash is also challenging the provision of retail cash services this has been evident in the significant reduction in the number of cash access access points over recent years including ATMs and Bank branches despite this the distance people need to travel to access cash Services has been little changed in recent years but this may not be the case in the future if access points continue to decline ATMs Remain the preferred means for accessing cash for most Australians the RBA regulates pricing aspects of the ATM industry via an access regime these regulatory Arrangements were introduced in 2009 to promote competition in the ATM industry at a time when cash was much more heavily used we recently consulted industry participants on the future of the access framework given the substantial changes to the industry since 2009 the feedback was that the access regime still plays a useful role in protecting Fair access and promoting competition in the industry So based on this we've decided to retain the access regime however we have recognized the ongoing challenges the industry faces from declining cash and ATM use and the rising costs of deployment we're keen to see the industry maintaining a broad coverage of ATMs at reasonable prices particularly in Regional and remote areas so we're going to continue to engage with industry participants to determine whether any changes are required to the rba's regulation of the ATM industry to facilitate this now the final issue I'd like to discuss is the industry's plan to transition from the bulk clearing bulk electronic clearing system as we commonly known fondly know as beex direct entry to more modern Payment Systems beex has been a lowcost reliable Workhorse for the payments system for decades processing salary and welfare payments recurring payments to Merchants and other account to account transfers in 2023 22 23 beex processed around 3ars of non-cash payments by value and it's still heavily relied on by many businesses and government agencies since the NPP was launched in 2018 account toac account transfers have been migrating across to the fast payment system with around 30% of account to account transfers now made over the NPP the payments industry through o payet has been discussing whether to transition away from beex and has recently decided to retire the beex framework with a Target end date of 2030 we understand why the industry wants to wind down beex apart from the cost of maintaining the system it has limitations compared with more modern Alternatives such as the NPP it processes payments in batches only on business days compared with 247 operation of the NPP with funds transferred in close to real time beex isn't able to send complete remittance information as many of you know maybe not some of the younger ones of you The Limited number of characters stems from the number of characters that could be carried on a punch card in the old Computing days decades on this is clearly no longer fit for purpose it prevents automating the reconciliation of payments and it makes it harder to screen for financial crimes the NPP uses data Rich ISO 2022 messaging format which is the new global standard for payment systems payments through backs can only be addressed using BSB and account numbers by contrast the NPP incorporates the pay ID addressing service allowing payments to be addressed to an email address or a phone number and it also provides a confirmation of paye service these features can help to reduce mistaken payments and combat some scams but not all the limitation of Becks are becoming more significant as users expect fast payments and the economy becomes increasingly digital but there are significant challenges to be overcome if we need to trans if we going to successfully transition beex payments to more modern Payment Systems the first is that financial institutions need to connect all relevant accounts that currently send and receive payments via backs to the NPP some financial institutions still haven't connected to the NPP While others that have connected have not made all their accounts reachable until all counts are connected it'll be difficult for companies and governments to migrate existing payments such as payroll through the NPP completing this will take considerable investment and time so it's important that work begins now to ensure that end users are not disrupted when beex is retired we're monitoring industry progress on making accounts reachable via the nppp we're also engaging with institutions that are not yet connected to discuss their plans to make NPP services available to their customers another key issue is cost we hear from users that processing payments through Becks is significantly cheaper than processing them through the NPP especially for regular payments such as payroll employers are typically making such payments every couple of weeks sometimes for thousands of employees so the cost of every individual transaction can really add up here we expect that as the volume of payments processed by NPP Rises the per transaction cost will come down it's also important to recognize there are some less visible costs associated with Beck's payments that includes manual reconciliation and M and managing mistaken payments given Beck's limited messaging and addressing capabilities given the Mandate of the payment system board to promote safety efficiency and competition in the payment system we plan to take an a undertake a review of enduser costs of account to account payments through Becks and the NPP to provide more transparency financial institutions will also need to ensure that their NPP Services can be reli reliably handled the full range of payments that are currently processed by Beck and um important Milestone has been the launch of npp's pay2 service as a modern alternative to direct debits most NPP participants have now enabled pay 2 for retail customers but there's more work to do to make the service widely available to business paye customers looking to use pay2 as an alternative to direct debits another important beex use case is bulk payments such as salaries and welfare payments which are currently processed as b as batch files through beex the industry is going to need to find a way to efficiently process bulk payments through the NPP which operates on a line by line rather than a batch basis many businesses and government agencies have bulk payment capabilities and it's going to take time and effort for them to enable these payments to be processed by the m PP given the common challenge here there may be value in developing a standardized industry approach to processing bulk payments through the NPP this could promote interoperability efficiency competition in processing bulk payments and give businesses and government entities more time to transition their systems financial institutions will also need to uplift their processing capacity to ensure beex payment volumes can be reliably processed through NPP Australian payments plus has built cap a capacity uplift into their road map further capacity upgrades are likely to be required in coming years another challenge is the reliability of MPP Services provided by financial institutions we collect data from financial institutions on the reliability of various retail payment services they provide and these data show a substantial rise in the number and total duration of operational outages in recent years with with NP Services being the least reliable as more volume shifts from beex to NPP it's important that providers improve the reliability of their NPP Services decommissioning Beck should reduce the costs and complexity involved in running two of these account to count Payment Systems in parallel but it also mean that beex isn't available as a backup when NP Services go down there's going to be even less tolerance from the community for outages in the NPP when most wages and benefit payments start going through the NPP improving the reliability of NPP Services across the industry will be a major focus of the RBA over coming years now not withstanding these various challenges it is appropriate that the industry has set a Target end dat for the beex framework and this will hope Focus industry attention and effort on the migration process given the significant opportunities and challenges associated with the beex migration we'll be closely monitored ing industry efforts in this area so in conclusion the payments landscape is changing rapidly got a lot of work to do to continue modernizing the payment system the government's reforms will enable us to promote safety efficiency and competitiveness across the payments ecosystem at the same time industry government and the RBA will need to work together on maintaining access to cash and transitioning from Becks to more modern Payment Systems I personally look forward to continuing the C operation between o payet and the RBA as we navigate these challenges in the interests of the Australian public so thank you for listening and I'm happy to answer some questions thank you thank you so much Michelle bulock who's making her way to the hot seat uh ready for your questions so while we're waiting for the last of your questions to come in uh let's see if we can take a look at the artist's impression of Michelle Bullock's speech yet have we got anything from tatm Kenna coming through aha here we go okay this is graphic representation or graphic recording uh and as I explained it's a very creative visual way of capturing the essence of a message so I'll just give you a little bit of time to to take that in um apparently 60% of us identify as visual Learners which means that if you give us a visual map of a presentation we're much more likely to remember what was in it um so here's tum has come up with Michelle bulock what do you make of that do you re just capture Ence can't actually see it it's quite complex it is quite complex have you ever had a speech um of yours kind of recorded in that way before not not quite in that way I have to say but uh there's lot there's computers I see and there's a picture of me yeah all right well we've got plenty of uh questions coming in from our audience but I've got one that I want to get in quickly first and that is um how are you finding the job after 2 and a half months especially the level of scrutiny uh the level of scrutiny um is yes um challenging I have to say um the other thing is I've been to doing two jobs I've been doing Deputy Governor and Governor so that's that's been particularly challenging but um I have to say I work with a great bunch of people um they are so supportive the boards have been really really supportive The Reserve Bank board the payment system board um so I've had so much um uh help assistance support um so and the scrutiny um I just sort of having to learn to live with you would know all about it that's right no all right well let's get on to questions from the payments people here that's why they're here um first one in the context of financial inclusion what initiatives are being discussed to ensure broader access to payment services for all segments of the population so Financial inclusion isn't sort of one of our key mandates we don't have a mandate for that having said that um in a lot of the work we're doing here in terms of migrating from Legacy Payment Systems to digital payment systems we do have at in our minds inclusion because and and this goes to the heart of the uh cash issue and it also goes to the heart of the checks issue very I suspect very few people in this room use use a check and I presented a check to my uh my daughter got a check for um work the other day and she didn't know what to do with it um but there are people who do rely on it and so I think while we are transitioning away from Legacy systems I think it's really important that we keep in mind that we've got to bring people with us on the and and for purposes of financial inclusion so it's it's not a direct mandate but I think it's it's got a very important um overlay onto the work we're doing in the transition that sort of ties in with the next question with the push to replace Becks will The Reserve Bank move to mandate NPP capability on all bank accounts well mandate's a big big word um uh we don't do a lot of mandating and we try not to do a lot of regulating we it it really is a last resort um for us um we we are encouraging the industry I know you've got a lot on we've got a lot on too but to the point about um moving from beex there is going have to be capabilities which currently aren't there in the NPP um as we retire beex so I'd like to think we won't have to mandate but what we will be doing is um publishing talking about when we're not happy with progress in the industry um we'll be talking to your Executives we'll be talking to uh the ABA we'll be talking to people and pushing very hard um in the end if it requires a mandate date legislation then we'll do it or or not legislation so much as as regulation but um we'd prefer really just to work with the industry to get it done okay can you discuss the recent cbdc case study in terms improving the efficiency and user experience of the payment sector um so the recent project had a number of of a variety of use cases um one of one of my favorites actually was using cbdc um to settle a cattle auctions um which um from my um rural upbringing I found quite intriguing um but I think what came out of that for us was that we are still not convinced on the retail cbdc side a lot of the very useful things that came out of the cbdc trial that we did and and it was quite unusual usual it was a pilot it was a real claim on The Reserve Bank it wasn't just play money um and one of the things that came out of it was really that some of these wholesale cases and particular cases where Central Bank digital currency could be used to settle assets and this is why we're embarking upon this next step of looking at tokenized assets if you tokenize assets put them on the Ledger can you use a cbdc to make that a much more efficient process a much more efficient settlement process a much safer U settlement process so for me the thing that came out of that um particular experiment of all the case studies was that that's a sensible next direction in which to take this I know other countries are looking at retail cbdc and we'll continue to keep in touch with that but that's probably not our main focus for the next little while okay here's a question we might tackle in the big debate as well it's an interesting one do we need to start reflecting on the true cost of processing cash for businesses and therefore not represented as a fee-free option for customers while always charging customers when they use their credit card when you know there's no other option really yeah um so look it is um a good question and the issue with cash has always been that um businesses don't really understand I think the costs of of cash in their business um uh they are at the moment I think think uh understanding it a bit more um but um in the past they haven't really um they've called shrinkage as their main cost which basically means theft um but really they haven't really um internalized if you like the costs of processing um I think what the challenge with cash is that it really does have a big Community um Public Public Service sort of um um uh Aura attached to it if you try to charge people to use cash that they're prepared to pay to get it out of an ATM but if if um if businesses started charging people to use cash I suspect there would be um a very big uh backlash having said that it's also true that as economists you want people to face the prices of using particular services that reflect the cost of those services so um the moment I think we're probably in a position where um it's very difficult to actually enforce payment for cash but it's going to end up what's going to happen and what does happen at the moment is that the costs end up embedded in the costs of the financial institutions that are providing the services um and people don't face them I think I think it'd be a very big challenge though to get people to face the cost of cash does the Reserve Bank have any plans for a technical sandbox for finex and Banks uh this this is another a very topical question um we don't have a specific plan but out of the one of the lessons that came out of the cbdc project that we did was that the regulatory issues were quite difficult um that's that's the fault of no Regulators it's just the way the legislation is set up now what we've been observing overseas is that some countries have been um putting in place sandboxes which allow much Freer Innovation to happen without running into uh regulatory issues so this issue popped out of the also popped out for us after our cbdc trial um we've been talking about this among the agencies I'm chair of the Council of financial Regulators now as well and this is an issue that it's only just on our radar nothing's going to happen uh tomorrow but I think it is it is a very valid question and it's something that we will be talking to to the government about talking to treasury about and we'll be watching what others are doing overseas in terms of their sandboxes on LCR what would constitute success for the RBA and if the goal is not achieved could you provide details as to the regulations the RBA may put in place so at the moment we've got about 54% I think is is enabled and actually active in LCR um I don't think we can expect 100% but somewhere in the 80s might be nice um really so um what what are the regulations we might put in place I don't know what they might look like I don't know what a standard might look like in that case but it would Pro it would involve some sort of uh requirement on acquirers to actually offer LCR in some form so I don't know what the specifics would be but I think the industry I think you can all do a lot better you don't need us to regulate you you can do a lot better here which leads us to this question how will the RBA balance its regulatory role while promoting Innovation what steps will it take to back new payment Technologies like cbdcs and open banking um we I guess what we want to do and this is why we don't like to regulate if we can avoid it is we we'd rather stand out and let the industry do it itself and I think actually the NPP was a good example of this we um we said we were prepared to go in and do something about this if the industry couldn't actually do anything itself but the industry did the industry ended up getting together and cooperating to create the NPP and I I think that was a really good example of where Innovation was encouraged by us but we didn't we didn't regulate and we didn't get in the way we we participated we helped um but we didn't get in the way of it so I think there is a model there which shows that we can be um encouraging of innovation we can help we can um we have a lot of expertise well as well in the payments area ourselves so we can help with all of this we don't have to stand in the way so I I think you know we we've got a good model here okay well guess what a question on monetary policy has slipped through let's go to it us us CPI is tipped to be 3% tonight keeping us rates on hold at 5.5% how far behind the rest of the world is Australia falling in its fight against inflation I don't think we're falling behind at all I think we are trying to make sure that we slow the economy enough to bring inflation down to our Target band provided inflation expectations don't get out of control and they're not at the moment um we think we can do that in um the next couple of years and we can do that while preserving the employment gains that we've we've won one through the um one through the pandemic and coming out of the pandemic so um I don't think I don't think we're behind at all I think we've taken a cautious approach and we'll continue to watch the data okay well thank you and thank you everyone who sent in questions we're almost at the end of our Q&A session so I I just wanted to ask you as our as the nation's Chief Economist we're coming up to Christmas any Christmas message you'd like to give us and what we can look forward to in the economy next year now that's a nasty question wiita my only uh message to people is that look I know everyone's worked really hard this year I know um certainly in this room I can speak for all of my teams and I'm quite sure for all of the other teams here it's been a hard year it's been a hard year for people at work it's been a hard year for people who are dealing with Rising interest rates and Rising inflation I'd like to think that we can all take some time to be with our families um and um hopefully things are going to get better next year thank you very much Michelle bolock please show your appreciation of The Reserve Bank Governor Michelle Bullock thank you so much you'd like to go that's the way

Channel: Reserve Bank of Australia

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Length: 40min 0sec (2400 seconds)

Published: Tue Dec 12 2023