RBA eyes level field for payments, leaves door open for new players

The demand for $50 and $100 bank notes as a ‘store of wealth’ is strong and the cost of payments for small businesses is too high, the RBA says.

The government will work with the RBA, led by Philip Lowe, to explore the policy case for an Australian central bank digital currency. Picture: NCA NewsWire / Gary Ramage

Reserve Bank governor Philip Lowe says it costs too much and takes too long to transfer money overseas, as he called on the banks to do more to solve the problem.

In a speech on Wednesday at the annual summit of AusPayNet – the self-regulatory body created by the payments industry – Dr Lowe said “the G20 countries have committed to making cross-border payments cheaper, faster, more transparent and more accessible”.

“Australia needs to play its role here. The cost of international payments is too high. This is a particular problem for our neighbours in the South Pacific, where too often people on low incomes face very high charges for sending money back home,” he said.

Dr Lowe said the importance of lowering costs and improving efficiency in the payments system had been amplified by the shift away from cash transactions.

Dr Lowe noted the value of cash withdrawals from ATMs was down 17 per cent from three years ago, while spending had increased by 27 per cent.

“Despite this decline in the use of cash for day-to-day transactions, there is still strong demand for banknotes as a store of wealth, with 38 of the $50 banknotes and 18 of the $100 banknotes on issue for every Australian,” he said.

Dr Lowe said the improvements which have been thanks to a “number of cheaper digital non-bank money transfer operators entering the market and pushing costs down”, as well as online tools which offer consumers a chance to compare the relative costs of providers.

“In addition, some of Australia’s largest banks are now waiving fees on some transactions in the South Pacific corridors,” he said.

But Dr Lowe said “there is a lot more to be done here, and we need the assistance of Australia’s financial institutions to make further improvements”.

“One current issue is the speed of cross-border payments. According to data from SWIFT, more than 80 per cent of the time taken for a cross-border payment to reach an Australian recipient is due to the final Australian dollar leg,” he said.

“A number of other comparable countries process incoming payments more quickly, including some in similar time zones. We need to do better here.”

Dr Lowe also detailed how the cost of EFTPOS transactions to store owners had been declining steadily over recent years.

“In the mid-2000s, merchants paid an average of 1.4 per cent on MasterCard and Visa transactions. Today, they pay 0.7 per cent,” he said.

“The big reduction in fees followed the bank stepping in to regulate interchange fees and giving merchants the choice as to whether they recover their payment costs through surcharging. While surcharging is not popular with consumers, it has resulted in pressure on card schemes to lower fees and this has resulted in lower payment costs,” he said.

But there were factors weighing against the trend of falling payment costs, including increasing popularity of more expensive international cards, online transactions which tended to be more costly for merchants, and the growth in digital wallets.

Payments through digital wallets such as Apple Pay, Google Pay and Samsung Pay now account for 25 per cent of all card transactions, from 10 per cent two years ago.

“Use of these wallets is growing very quickly and they are often more expensive for merchants to accept,” Dr Lowe said.

“I would also like to highlight the fact that there are large differences in the payments costs incurred by small and large businesses. Small businesses, on average, pay twice what large businesses pay to process the same transaction. While economies of scale explain some of this difference, they are not the full story,” he said.

“Given these various developments, the RBA’s focus is on increasing competition to help further drive down payment costs.

“This is where giving merchants choice over which payment network is used – so called least-cost routing (LCR) – is particularly important and it is a priority of the Payments System Board. LCR allows merchants to choose the lowest-cost card network to process their debit transactions.

“It also increases the competitive pressure between the debit networks, providing greater incentives to lower the wholesale fees that are ultimately paid by merchants. This is especially important for small businesses that typically can’t negotiate discounted fees with the card schemes.”

Dr Lowe chairs the RBA’s Payments System Board, which is responsible for ensuring the stability and efficiency of the payments system.

The Reserve Bank welcomed the federal government’s consultation paper on the nation’s strategic plan for the payments system, with a new licencing regime for payment service providers (PSPs) seen as a “reform priority.”

Dr Lowe said the bank was working on a set of common requirements for payment service providers seeking to access payment systems, as part of the new licensing regime.

“From our perspective, one reform priority is the establishment of a new licencing regime for payment service providers,” Dr Lowe said. “This could help overcome some of the challenges faced by PSPs seeking to enter the Australian market.”

It comes after the federal government released a consultation paper ahead of its strategic plan for the future of Australia’s payments system in the first quarter of 2023 – in collaboration with regulators, industry, consumer and business representatives.

The strategic plan will be a comprehensive, long-term strategy that sets out the government’s policy objectives and priorities for the payments system, that will also help co-ordinate decision-making between government and other stakeholders, Federal Treasurer Jim Chalmers said on Wednesday.

A second priority for the RBA is the development of regulatory arrangements for payment stablecoins, saying he can “envisage a possible future in which stablecoins are used for payments, as long as they are well-designed and well-regulated.”

“In many ways, the regulatory issues are similar to some stored value facilities, such as prepaid travel cards and digital wallet services,” Dr Lowe said.

In addition to its strategic plan, the government plans to update the Payment Systems (Regulation) Act 1998 to ensure the RBA has the ability to regulate new and emerging payment systems, such as digital wallet providers.

It will also consult on a new ministerial designation power that would allow particular payments services or platforms that present risks of national significance to be subject to additional oversight by appropriate regulators, and a new payments licensing framework for payment service providers.

The aim is to clarify the types of payment activities that are regulated, making it easy for a business to understand whether they require a licence and their associated regulatory obligations.

The government said it will work with the RBA to explore the policy case for an Australian central bank digital currency, and “take action to improve the regulation of crypto service providers and ensure additional safeguards for Australians” in the wake of the FTX.com scandal.