"Intelligent Insight"
Today the Senate held their first hearing (at short notice) on the Cash Restrictions Bill.
I discuss the lead up and hearing with Robbie Barwick.
Note the next hearing has been scheduled for SYDNEY on 29th January 2020!
https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019
You can watch the full sessions via ParlView: http://parlview.aph.gov.au/browse.php
In the latest from Nucleus Wealth, Head of Investment Damien Klassen, and Head of Operations Tim Fuller, chat with Economist and Hon. Prof. of the University College of London, Steve Keen.
You can find Steve’s work at: https://www.patreon.com/ProfSteveKeen
Topics include credit creation and its limits, weighing up its pro’s and con’s, central banks reaching the end of the road for interest rate cuts with debt being at near record highs, the drivers of weak demand and inflation globally, Modern Monetary Theory (MTT) and its differences with Keynesian Stimulus, which countries are closest to incorporating MMT, Steve’s ideas for central banks depositing directly into citizens bank accounts and “Universal Basic Carbon.” Nucleus Wealth is a Melbourne based investment house that can help you reach your financial goals through transparent, low cost, ethically tailored portfolios.
Listen in podcast form: http://bit.ly/NucleusPod
Disclaimer: The information on this podcast contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen and Tim Fuller are an authorised representative of Nucleus Wealth Management. Nucleus Wealth is a business name of Nucleus Wealth Management Pty Ltd (ABN 54 614 386 266 ) and is a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796
I was interviewed by Adam Stokes who runs his own YT channel, mainly covering Crypto. This is my version of the discussion.
The show covered a wide range of issues, from Crypto, Central Banks, Cash Bans and Negative Rates through to politics and democracy.
Adam’s version: https://www.youtube.com/watch?v=vWzhuqM_aoU
Check out his channel: https://www.youtube.com/user/adamstokes224
Twenty-six additional lenders have been appointed to the initial panel of the government’s First Home Loan Deposit Scheme, including major bank, Commonwealth Bank. Via The Adviser.
The National Housing Finance and Investment Corporation (NHFIC) has announced its full panel of lenders taking part in the federal government’s First Home Loan Deposit Scheme (FHLDS).
Following on from the announcement that NAB had been chosen as the first major lender for the panel, CBA has been named as the second major bank to offer loans under the scheme, along with 25 non-major lenders.
The participating lenders will have the ability to write loans for first-home buyers (FHBs) who have saved deposits as little as 5 percent, with the government set to guarantee the rest of the deposit under the FHLDS.
CBA and NAB will reportedly be able to issue up to 50 per cent of the 10,000 annual guaranteed loans provided per financial year, according to the NHFIC Investment Mandate.
The two major banks will be accepting applications for the scheme from 1 January 2020.
The other 50 per cent of guaranteed loans will be written by the other non-major lenders on the NHFIC lending panel.
The non-majors will be taking applications from 1 February 2020.
The full list of lenders on the panel, along with NAB and CBA, are as follows:
Applications for the scheme will begin on 1 January 2020, and can be made either directly to participating lenders, or via the broker channel. The NHFIC will not be taking any direct applications.
According to the NHFIC, members of the panel have been chosen on the basis of competitiveness of offerings, geographic reach, customer care, and their ability to meet the deadline for the implementation of the scheme.
Further, the NHFIC and federal Minister for Housing and Assistant Treasurer Michael Sukkar have stated that members on the lending panel, will not be able to charge eligible customers higher interest rates than equivalent customers outside the scheme.
Additional lenders may be “periodically” added to the panel after the scheme has launched, according to the NHFIC.
Panel will ‘enable strong activation of mortgage broker channels’
Commenting on the news, the federal Minister for Housing and Assistant Treasurer, Michael Sukkar, commented: “The Morrison Coalition Government is committed to helping make home ownership a reality for more Australians and to get them into the property market sooner.
“Today, the government welcomes confirmation from the National Housing Finance and Investment Corporation (NHFIC) that 27 lenders have been selected, from a wide pool of applicants, to form the initial panel offering guarantee-backed loans under the First Home Loan Deposit Scheme.
“The National Australia Bank (NAB) and Commonwealth Bank of Australia (CBA), together with 25 non-major lenders have been appointed as participating lenders in the Scheme.
“Importantly, all lenders have committed not to charge eligible customers higher interest rates than equivalent customers outside of the scheme,” he said.
Mr Sukkar continued: “The scheme has been warmly welcomed by major industry peak bodies, and the composition of the initial lending panel reflects the industry’s confidence in the Morrison Coalition Government’s plan to assist first home buyers.
“Further, the scheme has been deliberately designed to ensure strong representation of smaller lenders on the panel. This will promote competition between the large and small banks, and ensure the Scheme has broad geographic reach, including in regional and remote communities.
“The composition of the panel should also enable strong activation of mortgage broker channels and promote choice for first home buyers,” he concluded.
The Australian economy is being almost entirely propped up by public sector jobs growth and infrastructure spending, according to BlackRock, via InvestorDaily.
Consumers and businesses just aren’t spending money, despite the Reserve Bank cutting the cash rate by 50 per cent over the last 12 months. Google searches for “Australia recession” reached GFC levels in October.
While the RBA is battling with the federal government over fiscal stimulus, BlackRock head of Australia fixed income Craig Vardy explained that there is an enormous amount of infrastructure spending going on at the moment with quite a substantial pipeline.
“Really, it has been holding up growth in Australia for quite some time now. That is clearly a concern. Strip away the government proportion of real GDP and you are not left with much at all,” he said.
It remains very important for the RBA that infrastructure spending continues, particularly after three rates cuts in 2019 have failed to drive economic growth or see the Reserve Bank hit its inflation and employment targets.
“The concerning thing about employment is that almost all of the jobs created over the last 12 months have been in the public sector,” Mr Vardy said. “There [have] been almost no jobs growth in the private sector. That is quite concerning.”
BlackRock is predicting the RBA will cut rates to 50 basis points in the first quarter of 2020 and again to 25 basis points in the second half. Reserve Bank governor Philip Lowe has already flagged that 25 basis points is the lower bound for the central bank; once it reaches a cash rate of 0.25 basis points it will enact quantitative easing by buying Australian government bonds.
While few economists have called out the risks of a recession, in some ways the Australian economy has already experienced a number of mini recessions in 2019 if measured on a GDP per capita basis.
What is preventing the economy slipping into a technical recession (two consecutive quarters of negative GDP growth) is population growth, which is currently running at 1.5 per cent annually.
“It is actually very difficult to get a recession in Australia when you’ve got that tailwind behind you,” Mr Vardy said.
For the RBA however, strong population growth presents another issue: creating enough jobs.
“You’ve always got this new employment funnel of people coming through. The RBA has very little chance of hitting its 4.5 per cent unemployment target when population growth is so strong,” Mr Vardy said.
“They need to get the underemployment rate down. That has stalled. The lever they pull is cutting rates. Rates will continue to be cut. I think they have to keep rates low to try and generate employment.”
Information received since the Federal Open Market Committee met in October indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1‑1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
I discuss the stats with FreshCanvas. Can we believe the figures reported in the MSM?
APRA remains in a low risk bubble, according to their paper today, which keeps the counter-cyclical buffer at 0. However they flag that may change ahead. I have to say this seems perverse, given the high debt levels and low economic performance and increased risks. Plain weird, and a million miles off the Reserve Bank NZ’s approach.
The Australian Prudential Regulation Authority (APRA) has decided to keep the countercyclical capital buffer (CCyB) for authorised deposit-taking institutions (ADIs) on hold at zero per cent, but has flagged the likelihood of a non-zero default level in the future.
The CCyB is an additional amount of capital that APRA can require ADIs to hold at certain points in the economic cycle to bolster the resilience of the banking sector during periods of heightened systemic risk. It has been set at zero per cent of risk-weighted assets since it was introduced in 2016.
In its annual information paper on the CCyB, APRA today confirmed it considers that a zero per cent CCyB remains appropriate at this point in time based on an assessment of the systemic risk environment for ADIs.
Among the factors APRA considered in making its decision were:
After carefully examining
these dynamics, APRA concluded that the current policy setting remains
appropriate.
In conjunction with the other agencies on the Council of Financial Regulators,
APRA will continue to closely monitor financial and economic conditions. APRA
reviews the buffer quarterly, and may adjust it if future circumstances warrant
this.
However, the information paper notes that APRA is also giving consideration to
introducing a non-zero default level for the CCyB as part of its broader
reforms to the ADI capital framework.
APRA Chair Wayne Byres said: “Given current conditions, and the financial strength
built up within the banking sector, a zero counter-cyclical buffer remains
appropriate.
“However, setting the countercyclical capital buffer’s default position at a
non-zero level as part of the ‘unquestionably strong’ framework would not only
preserve the resilience of the banking sector, but also provide more
flexibility to adjust the buffer in response to material changes in financial
stability risks. This is something APRA will consult on as part of the next
stage of the capital reforms currently underway.
“Importantly, this would be considered within the capital targets previously
announced – it does not reflect any intention to further raise minimum capital
requirements.”
APRA expects to commence the next stage of its ADI capital consultation in the
first half of next year. APRA’s revised capital framework is currently
scheduled to come into effect from 1 January 2022.
The countercyclical capital buffer information paper is available on the APRA
website at: https://www.apra.gov.au/countercyclical-capital-buffer-0
With Westpac shares trading at a seven-year low following the alleged breach of anti-money laundering laws and three of the four big banks recently cutting dividends or franking credits, investors should consider cutting their exposure to the big banks to avoid the erosion of their wealth and income. Via InvestorDaily.
Early in November, even before AUSTRAC claimed Westpac did not comply with anti-money laundering laws 23 million times, the company shocked investors when it announced that it was cutting dividends for the first time since 2008 after its full-year 2019 cash profit fell 15 per cent to $6.85 billion. The bank slashed its final dividend to 80 cents from 94 cents a share. ANZ too recently cut the level of franking of its dividends to 70 per cent from 100 per cent while NAB cut its final and interim dividends to 83 cents a share from 99 cents for 2019.
The big banks will most probably find it difficult to maintain existing payouts to shareholders given the economic climate of historically low interest rates and lacklustre economic growth. The graph below highlights that the big banks are much less profitable now than they were 10 years ago. The return on equity to shareholders has fallen from around 20 per cent in 2008 to close to 10 per cent at current levels. This is sounding alarm bells for investors looking for reliable income and capital growth. As the banks’ profitability falls, the risk is that shareholders will see more dividend cuts and even more capital losses on top of those they have already sustained.
The chart below highlights that the big banks’ net interest margins (NIM) have also dropped to their lowest level of around 2 per cent, which is putting downward pressure on their profits. Falling NIMs and a rising regulatory spend in the aftermath of the Hayne royal commission are combining to reduce banks’ profits.
The outlook for profitability is not good. Low interest rates are likely to persist for a long time in Australia and abroad. High levels of household debt in Australia will inevitably hamper future growth in earnings from mortgages and households save more. Household debt sits at around 190 per cent of household income, higher than in most other countries. While most households are comfortably making their debt repayments now, any shocks to the economy such as significant rise in unemployment could push some households over the edge.
Added to this are remediation costs for the banks associated with poor customer outcomes and regulatory non-compliance, which, according to Reserve Bank figures, have amounted to $7.5 billion across the financial sector over the past two years and are still rising. That figure does not count Westpac’s likely escalation in remediation costs, law suits and potentially record-breaking fine following AUSTRAC’S prosecution of its alleged 23 million breaches of anti-money laundering laws. APRA has also imposed additional capital requirements on the major banks to account for poor risk management practices. All of these are weighing on banks’ ability to make money.
This is sobering news for shareholders. Dividend cuts and falling share prices and profits are alarming outcomes for the many Australian investors whose portfolios have significant exposure to the big four, which represent around one-quarter of the S&P/ASX 200. In other words, if you hold a blue-chip portfolio or are invested in an active or passively managed Australian equity fund that tracks or is benchmarked to the S&P/ASX 200, $1 out of every $4 is likely to be invested in banks and therefore vulnerable to the risks they face. In the last month alone (to 4 December), Westpac shares are down 10 per cent and over five years, they have fallen 25 per cent. NAB shares are down 16 per cent and ANZ 23 per cent. Commonwealth Bank has lost a relatively modest 0.6 per cent. But these are dire financial outcomes for shareholders.
Governor Lowe spoke at the Australian Payments Network Summit yesterday. He discussed the rise of electronic transactions, especially though the New Payments Platform, the high relative costs of international retail payments, and the need for, and potential of a Strong Digital Identity System. He also highlighted the decline in cash transactions which now accounts for just around a quarter of day-to-day payments.
A recurring theme across these summits has been the need to improve customer outcomes. I am very pleased to see that this focus has been continued at this year’s summit. The focus on customer outcomes aligns very closely with the focus of the Payments System Board. The Board wants to see a payments system that is innovative, dynamic, secure, competitive, and that serves the needs of all Australians.
Increasingly, this means that the payments system needs to support Australia’s digital economy. With the digital economy being an important key to Australia’s future economic prosperity, we need a payments system that is fit for purpose. We will only fully capitalise on the fantastic opportunities out there if we have a payments system that works for the digital economy. The positive news is that we have made some substantial progress in this direction over recent years and in some areas, Australia’s payments system is world class. However, in the fast-moving world of payments, things don’t stand still and there are some important areas we need to work on.
In my remarks today, I would like to do three things.
The first is to talk about some of the progress that has been made over recent years.
The second is to highlight a few areas where we would like to see more progress, particularly around payments and the digital economy.
And third, I will highlight some of the questions we will explore in next year’s review of retail payments regulation in Australia.
Over recent years there have been significant changes in the way that we make payments. We now have greater choice than ever before and payments are faster and more flexible than they used to be.
The launch of the New Payments Platform – the NPP – in early 2018 has been an important part of this journey. This new payments infrastructure allows consumers and businesses to make real-time, 24/7 payments with richer data and simple addressing using PayIDs.
After the NPP was launched, it got off to a slow start, but it is now hitting its stride. Monthly transaction values and volumes have both tripled over the past year (Graph 1). In November, the platform processed an average of 1.1 million payments each day, worth about $1.1 billion. The rate of take-up of fast retail payments in Australia is a little quicker than that in most other countries that have also introduced fast payments (Graph 2).
I expect that we will see a further pickup in usage once the CBA has delivered on core NPP functionality for all its customers. The slow implementation has been disappointing and we expect the required functionality to be available soon.
There are now 86 entities connected to the NPP, including 74 that are indirectly connected via a direct NPP participant. There are at least six non-ADI fintechs that are using the NPP’s capabilities to innovate and provide new services to customers. All up, approximately 66 million Australian bank accounts are now able to make and receive NPP payments.
Use of the PayID service has also been growing, with around 3.8 million PayIDs having been registered to date. If you have not already got a PayID, I encourage you to get one. I also encourage you to ask for other people’s PayIDs when making payments, as an alternative to asking for their BSB and account number. It is much easier and faster.
One specific example of where the NPP is bringing direct benefits to people is its use by the Australian Government, supported by the banking arm of the RBA, to make emergency payments. During the current bushfires, the government has been able to use the NPP to make immediate payments to people at a time when they are most in need, whether that be on the weekend or after their bank has shut for the night.
One other area of the payments system where we have seen significant change is the take-up of ‘tap-and-go’ payments. Around 80 per cent of point-of-sale transactions are now ‘tap-and-go’, which is a much higher share than in most other countries. This growth has been made possible by the acquirers rolling out new technology in their terminals and by the willingness of Australians to try something different. There has also been rapid take-up of mobile payments, including through wearable devices.
Progress has also been made on improving the safety of electronic payments, particularly in relation to fraud in card-not-present transactions. The rate of fraud is still too high, but it has come down recently (Graph 3). I would like to acknowledge the work that AusPayNet has done here to develop a new framework to tackle fraud. This framework strengthens the authentication requirements for certain types of transactions, including through the use of multi-factor authentication.[1] This will help reduce card-not-present fraud and support the continued growth in online commerce.
As our electronic payments system continues to improve, we are seeing a further shift away from cash and cheques. The RBA recently undertook the latest wave of our three-yearly consumer payments survey. We are still processing the results, but ahead of publishing them early next year, I thought I would show you the latest estimate on the use of cash (Graph 4). As expected, there has been a further trend decline in the use of cash, with cash now accounting for just around a quarter of day-to-day transactions, and most of these are for small-value payments. Given the other innovations that I just spoke about, I expect that this trend will continue.
The progress across these various fronts means that there is a positive story to be told about innovation in Australia’s payments system.
At the same time, though, there are still some significant gaps and areas in our payments system that need addressing and where progress would support the digital economy in Australia. I would like to talk about four of these.
The first of these is further industry work to realise the full potential of the NPP, including its data-rich capabilities.
The NPP infrastructure can help make electronic invoicing commonplace and help invoices be paid on time. It can also support significant improvement in business processes, as more data moves with the payment. Real-time settlement and posting of funds also enables some types of delivery-versus-payment, so that the seller can confirm receipt of funds and be confident in delivering goods or services to the buyer.
The layered architecture of the system was designed to promote competition and innovation in the development of new overlay services. Notwithstanding this, one of the consequences of the slower-than-promised rollout of the NPP by some of the major banks is that there has been less effort than expected on developing innovative functionality. Payment systems are networks, and participants need to know that others will be ready to receive payments and use the network. Some banks have been reluctant to commit time and funding to support the development of new functionality given that others have been slow to roll out their ‘day 1’ functionality. The slow rollout has also reduced the incentive for fintechs and others to develop new ideas. So we have not yet benefited from the full network effects.
The Payments System Board considered this issue as part of its industry consultation on NPP access and functionality, conducted with the ACCC earlier this year. As part of that review we recommended that NPPA – the industry-owned company formed to establish and operate the NPP – publish a roadmap and timeline for the additional functionality that it has agreed to develop. The inaugural roadmap was published in October and NPPA also introduced a ‘mandatory compliance framework’. Under this compliance framework, NPPA can designate core capabilities that NPP participants must support within a specified period of time, with penalties for non-compliance. This is a welcome development.
One important element of the roadmap is the development of a ‘mandated payments service’ to support recurring and ‘debit-like’ payments. This new service will allow account-holders to establish and manage standing authorisations (or consents) for payments to be initiated from their account by third parties. This will provide convenience, transparency and security for recurring or subscription-type payments and a range of other payments.
Another element of the roadmap that has the potential to promote the digital economy is the development of NPP message standards for payroll, tax, superannuation and e-invoicing payments. The standards will define the specific data elements that must be included with these payment types, which will support automation and straight-through processing. We would expect financial institutions to be competing with each other to enable their customers to make and receive these data-rich payments.
Less positively, there is still uncertainty about the future of the two remaining services that were expected to be part of the initial suite of Osko overlay services. These are the ‘request-to-pay’ and ‘payment with document’ services. We understand there are still challenges in securing committed project funding and priority from NPP participants to move ahead, even though BPAY has indicated it is ready to complete the rollout. The RBA strongly supports the development of these additional NPP capabilities, which are likely to deliver significant value for businesses and the broader community.
A second area where the Payments System Board would like to see further progress is the provision of portable digital identity services that allow Australians to securely prove who they are in the digital environment.
Today, our digital identity system is fragmented and siloed, which has resulted in a proliferation of identity credentials and passwords. This gives rise to security vulnerabilities and creates significant inconvenience and inefficiencies, which can undermine development of the digital economy. These generate compliance risks and other costs for financial institutions, so it is strongly in their interests to make progress here. It is fair to say that a number of other countries are well ahead of us in this area.
The Australian Payments Council has recognised the importance of this issue and has developed the ‘TrustID’ framework. The Government’s Digital Transformation Agency has also been working on a complementary framework (the Trusted Digital Identity Framework), which specifies how digital identity services will be used to access online government services. The challenge now is to build on these frameworks and develop a strong digital identity ecosystem in Australia with competing but interoperable digital identity services.
The rollout of open banking and the consumer data right should bring additional competition among financial services providers, and digital identity is likely to reduce the scope for identity fraud, while providing convenient authentication, as part of an open banking regime.
A strong digital identity system would also open up new areas of digital commerce and help reduce online payments fraud. It will also help build trust in a wide range of online interactions. Building this trust is increasingly important as people spend more of their time and money online. So we would like to see some concrete solutions developed and adopted here.
A third area where we would like to see more progress is on reducing the cost of cross-border payments.
For many people, the costs here are still too high and the payments are still too hard to make. It is important that we address this. It is an issue not just for Australians, but for our neighbours as well. I recently chaired a meeting of the Governors from the South Pacific central banks, where I heard first-hand about the problems caused by the high cost of cross-border payments.
Analysis by the World Bank indicates that the price of sending money from Australia has been consistently higher than the average price across the G20 countries (Graph 5). And a recent ACCC inquiry found that prices for cross-border retail payment services are opaque. Customers are not always aware of how the ‘retail’ exchange rate they are being quoted compares with the wholesale exchange rate they see on the news, or of the final amount that will be received in foreign currency.[2] There are also sometimes add-on fees.[3]
As part of the RBA’s monitoring of the marketplace, our staff recently conducted a form of online shadow shopping exercise, exploring the pricing of international money transfer services by both banks and some of the new non-bank digital money transfer operators (MTOs).
This exercise showed that there is a very wide range of prices across providers and highlighted the importance of shopping around.
The main results are summarised in this graph (Graph 6). In nearly every case, the major banks are more expensive than the digital MTOs. For the major banks, the average mark-up over the wholesale exchange rate is around 5½ per cent, versus about 1 per cent for the digital MTOs.
The graph illustrates why the cost of cross-border payments is such an issue for the South Pacific countries. These costs are noticeably higher than for payments to most other countries. This is a particular problem as many people in the South Pacific rely on receiving remittances from family and friends in Australia and New Zealand. In many cases, low-income people are paying very high fees and it is important that we address this where we can. As is evident from the graph, most digital MTOs do not service the smaller South Pacific economies, which limits customers’ choice of providers.
In part, the high costs – and slow speed – of international money transfers is the result of inefficiencies in the traditional correspondent banking process. It is understandable why some large tech firms operating across borders see an opportunity here. Where people are being served poorly by existing arrangements, new solutions are likely to emerge with new technologies. This represents a challenge to the traditional financial institutions to offer better service at a lower cost to their customers, while still meeting their AML/CTF requirements.
Central banks have a role to play here too, and there is an increased focus globally on what we can do to reduce the cost of cross-border payments. One example of this is the promotion of standardised and richer payment messaging globally through the adoption of the ISO20022 standard. The RBA is also working closely with the Reserve Bank of New Zealand, AUSTRAC and other South Pacific central banks to develop a regional framework to address the Know-Your-Customer concerns that have limited competition and kept prices high.
A fourth area where we would like to see more progress is improving the operational resilience of the electronic payments system.[4]
Disruptions to retail payments hurt both consumers and businesses. Given that many people now carry little or no cash, the reliability of electronic payment services has become critical to the smooth functioning of our economy.
We understand that, given the complexity of IT systems, some level of payments incidents and outages to services is inevitable. But it is apparent from the data we have that the frequency and duration of retail payments outages have risen sharply in recent years. In response, the RBA has begun working with APRA and the industry to enhance the data on retail payment service outages and to introduce a suitable disclosure framework for these data. These measures will provide greater transparency around the reliability of services and allow institutions to better benchmark their operational performance.
The third and final issue I would like to touch on is the Payments System Board’s review of retail payments regulation next year.
The review is intended to be wide-ranging and to cover all aspects of the retail payments landscape, not just the RBA’s existing cards regulation. As the first step in the process, we released an Issues Paper a couple of weeks ago and have asked for submissions by 31 January.[5] There will also be opportunities to meet with RBA staff conducting the review.
The review will cover a lot of ground, including hopefully some of the issues that I just mentioned. There are, though, a few other questions I would like to highlight.
The first is what can be done to reduce further the cost of electronic payments?
Both the Productivity Commission and the Black Economy Taskforce have called for us to examine this question. It is understandable why. As we move to a predominantly electronic world, the cost of electronic payments becomes a bigger issue. The Payments System Board’s regulation of interchange fees and the surcharging framework, as well as its efforts to promote competition and encourage least-cost routing, have all helped lower payment costs.
At issue is how we make further progress: what combination of regulation and market forces will best deliver this? Relevant questions here include: whether interchange fees should be lowered further; how best to ensure that merchants can choose the payment rails that give them the best value for money; and whether restrictions relating to no-surcharge rules should be applied to other arrangements, including the buy-now-pay-later schemes.
A second issue is what is the future of the cheque system?
Cheque use in Australia has been in sharp decline for some time. Over the past year, the number of cheques written has fallen by another 19 per cent and the value of cheques written has fallen by more than 30 per cent, as the real estate industry has continued to shift to electronic property settlements (Graph 7). At some point it will be appropriate to wind up the cheque system, and that point is getting closer. Before this happens, though, it is important that alternative payment methods are available for those who rely on cheques. Using the NPP infrastructure for new payment solutions is likely to help here.
Third, is there a case for some rationalisation of Australia’s three domestically focused payment schemes, namely BPAY, eftpos and NPPA? A number of industry participants have indicated to us that they face significant and sometimes conflicting investment demands from the three different entities. This raises the question of whether some consolidation or some form of coordination of investment priorities might be in the public interest.
Fourth, and finally, what are the implications for the regulatory framework of technology changes, new entrants and new business models?
The world of payments is moving quickly, with new technologies and new players offering solutions to longstanding problems. At the same time, expectations regarding security, resilience, functionality and privacy are continually rising. Meeting these expectations can be challenging, but doing so is critical to building and maintaining the trust that lies at the heart of effective payment systems. The entry of non-financial firms into the payments market also raises new regulatory issues. As part of the review, it would be good to hear how the regulatory system can best encourage a dynamic and innovative payments system in Australia that fully serves the needs of its customers.