Reserve Bank of Australia Annual Report – 2006 Business Services

The Reserve Bank provides a range of services to the community, the most important of which are:

• the provision of banking services to the Australian Government for the core public accounts operated by the Department of Finance and Administration, and other transactional banking services to a number of government agencies;
• the operation of Australia's high-value payments and interbank settlement systems; and
• the supply of Australian currency notes.

In addition to these core services, some banking services are also provided to central banks abroad and international agencies, and registry services are provided to the Australian Government.

These activities are carried out by Business Services Group, which comprises the Banking, Payments Settlements and Note Issue Departments. Services are delivered through Head Office in Sydney, the branch in Canberra, and for currency services, through the National Note Processing and Distribution Centre (NNPDC) at Craigieburn in Victoria.

The transactional banking and registry services provided by the Reserve Bank to Australian Government agencies are operated on a commercial basis. These activities are run as individual businesses under competitive neutrality guidelines, which require full cost recovery, including earning an appropriate rate of return on notional capital, through fees and charges paid by the users of these services.

Banking

Banking services are provided to the Australian Government and to other customers, including around 46 overseas official institutions and central banks.

The Reserve Bank provides a facility to the Australian Government that is used to manage a group of bank accounts, known as the Official Public Account (OPA) Group, the aggregate balance of which represents the Government's daily cash position. This facility is operated on behalf of the Government by the Department of Finance and Administration, and includes the provision of a term-deposit facility for the investment of surplus funds, the sweeping of balances to and from agencies’ accounts held with transactional bankers, and access to a strictly limited overdraft facility. To assist in monetary policy and liquidity management, this service also includes the electronic collection of forecasting data and reporting on high-value transactions from agencies and transactional bankers.

The Reserve Bank also provides transactional banking facilities to Australian Government agencies. These services are provided only to a specific range of customers, which tend to have banking requirements that are similar to each other but different from those of most other users of banking products. Because of its particular focus, the Reserve Bank is able to provide facilities tailored to the specific requirements of this group. These facilities include features such as extremely high standards of system reliability and availability, and the flexibility to adapt quickly when changes in government policy require consequent changes in systems or processes. The Reserve Bank also has dedicated internal IT resources and business analysts involved in researching and developing new banking solutions specifically for the needs of government. Under the Australian Government's competitive neutrality and procurement policies, the Reserve Bank is required to compete with other potential providers when making these services available to customers.

Transactional banking services offered by the Reserve Bank include bank account facilities and the processing of transactions such as deposits, cheques, bulk direct entry, and high-value payments. Access to these services is usually by way of ReserveLink, the Reserve Bank's electronic desktop banking package, or by way of a direct connection over leased communications lines. An internet-based delivery system known as RBANet allows agencies to initiate account and transaction enquiries, perform statistical analysis of transactions activity at aggregate and account levels, and manage the status of unpresented cheques. The major services provided to government agencies are described below.

The Government Direct Entry Service (GDES) receives and processes bulk electronic direct credit and direct debit transactions from government agencies and distributes these to financial institutions. This service makes use of an extensive communications network and warehousing capabilities, and is the main vehicle used for transactional banking activities by government customers. GDES transactions include welfare, Medicare, salary and vendor payments. During 2005/06, 257.8 million GDES transactions were processed.

Overseas banking services enable customers electronically to request overseas payments to be made via cheque, electronic funds transfer (wires) or direct entry. This service provides government agencies with a secure, timely and cost-effective delivery mechanism for regular overseas payments. The largest group of such payments consists of direct entry payments initiated by Centrelink to recipients of Australian Government pensions who live abroad. The Reserve Bank's agent bank sends these payments directly to recipients’ bank accounts in local currencies using the relevant country's automated clearing house arrangements. This overseas direct entry service is available in 24 countries.

Document printing services enable customers electronically to request the Reserve Bank to issue cheques and electronic documents on their behalf. For cheques, the service includes the production, enveloping and mailing of the cheque together with an attached remittance advice. For electronic payments, the service provides for the delivery (by post, email or facsimile) of a remittance advice, with the actual payment occurring via direct entry.

Cheque reconciliation and verification services consist of a full cheque reconciliation and cheque repository service for government agencies as well as a verification system to detect whether or not a cheque has been fraudulently altered. The verification service, developed by the Reserve Bank, provides customers with high-resolution images of cheques presented for payment (both front and back) and allows the issuing agency to confirm that the details of each cheque match details of the cheque when it was originally issued. This system enables the Reserve Bank to detect changes to cheque information quickly, thereby protecting itself and its customers from losses arising from fraudulent alteration of cheques. The system has proven to be highly beneficial to government agencies because it substantially minimises their exposure to cheque fraud.

Payment collection services allow government agencies to receive payments from clients using major credit cards or the BPay system over the telephone or internet, or over the counter using cash, cheques and EFTPOS payments. The volume of over-the-counter collections through these channels continued to increase significantly during 2005/06.

Earnings after tax in 2005/06 for the Reserve Bank's transactional banking services were $2.9 million, compared with $3.4 million in the previous year.

Registry

The Reserve Bank provides registry services to the Australian Government and a number of official foreign institutions which have Australian dollar debt programs. Services provided to all clients include the issue, transfer and registration of securities, the maintenance of ownership records, the distribution of interest payments and the redemption of securities at maturity. Additional services that are specific to the Commonwealth Registry include management and encashment of physical securities; maintenance of records relating to unclaimed CGS monies; provision of reports to the AOFM summarising transactions arising from its CGS lending facility; undertaking historical searches; and the provision of a small-investor facility, which enables retail investors to access CGS. Information relating to the small-investor facility, including indicative buying/selling prices, is available on the Reserve Bank's website.

With most large institutions holding and settling their transactions in CGS electronically outside the Reserve Bank's registry system, the level of traditional paper-based registry activity is extremely low and consists mainly of small retail holdings. Earnings after tax for the CGS registry business in 2005/06 were $0.1 million, the same as in the previous year.

RTGS and Other Settlement Services

The Reserve Bank provides the real-time interbank payment and settlement service for the Australian financial market through its Reserve Bank Information and Transfer System (RITS).

About 90 per cent of the value of all payments in Australia is settled on a real-time gross settlement (RTGS) basis through the RITS system. This includes the settlement of wholesale debt and money market transactions, a range of time-critical customer payments, and Australian dollar foreign exchange dealings (including those foreign exchange trades settled by CLS Bank for which a net settlement is made each day in RITS).

In 2005/06, the average number of RTGS settlements rose by 6.3 per cent to around 25,000 each day. The total value of transactions in the year was on average around $145 billion daily, equivalent to an average individual transaction size of $5.8 million.

In addition to RTGS payments, RITS settles two batches of netted interbank payments each day. One relates to low-value payments (cheque clearings, direct entry credits and debits, and retail electronic payments originating in systems such as EFTPOS), which are cleared overnight and settled at 9.00 am. The other settles net positions for equity transactions on the Australian Stock Exchange, which are first cleared through the Exchange's electronic settlement system CHESS before the net payments are settled over RITS.

The Reserve Bank has recently developed an improved Batch Settlement Facility, which will be implemented in the coming year. Under the new facility, the Reserve Bank will authorise entities to act as a Batch Administrator for particular streams of payments. These entities will then be able to submit batches of netted payments to RITS at any time during the business day. The facility is expected to be implemented for the CHESS batch in the second half of 2006, and is expected eventually to be used for electronic conveyancing and settlement of property transactions.

Settlement services are also provided for currency note lodgements and withdrawals by commercial banks, and for transactions for Reserve Bank customers, including the Australian Government and overseas central banks and official institutions. The Reserve Bank also uses RITS and related systems to settle its own financial market transactions in domestic securities and foreign exchange markets, including market operations for the implementation of monetary policy.

The Reserve Bank introduced a new browser-based interface for RITS during 2005/06. The new interface provides benefits to RITS users in the form of improved access to information on payments being settled through RITS and improved efficiency in the management of payments that are awaiting settlement. It also incorporates significant security improvements, and will enhance the ability of RITS members to manage access by their staff. The new interface was implemented for external users in June 2006, after having been tested through several months of use by internal Reserve Bank users. All remaining external RITS users are expected to migrate their activities to the new interface by the end of 2006.

Note Issue

The Reserve Bank's note issue activities cover three main areas:

• the issue and redemption of currency notes, including organising the production of new notes and making arrangements with commercial banks for the distribution of notes;
• maintaining the quality of notes in circulation, including quality control for new notes, making arrangements with commercial banks for sorting of notes, machine processing and evaluation of notes returned from circulation, and the destruction of notes no longer fit for further use; and
• research into and development of note designs and security features, and research into counterfeiting activity.

Notes on Issue

During 2005/06, the value of Australian notes on issue rose by $2.4 billion, or 6.9 per cent, to $38.1 billion. This is about the same rate of growth as the average rate of growth for the note issue since 2000, although the growth rates have been volatile from year to year, reflecting changes in distribution arrangements after 2001. Among the different denominations, the $50 continues to account for the largest number of notes on issue as well as the largest value; in June 2006, it accounted for over 47 per cent of the value of all notes on issue.

Note Quality

The Reserve Bank aims to have a high quality of currency notes in circulation, to ensure that notes remain fit for use by the general community (including in the growing number of note accepting and dispensing machines in the community) and that counterfeit notes are able to be detected readily. Achievement of this goal requires that notes are sorted for quality by those institutions involved in the distribution process, with the unfit notes returned to the Reserve Bank's NNPDC for destruction and replacement. Note-sorting performance, and its impact on note quality, is monitored at the NNPDC through a program of evaluating sampling notes taken from notes in approved cash centres across Australia.

Over the past year, the Reserve Bank has worked with a number of commercial banks and armoured car companies to develop a new framework for ensuring an appropriate quality of notes in general circulation. This work identified that the note quality standard sought by the Reserve Bank is higher than that which the commercial banks require for their own commercial purposes, especially for the lower denomination notes. In order to achieve the standard sought by the Reserve Bank, commercial banks would have to invest in improved note-sorting infrastructure either by purchasing additional sorting equipment or procuring note-sorting services from external providers. The Reserve Bank and the commercial banks have agreed to resolve the differences in standards by applying a system of incentive payments to commercial banks if notes exceed the commercial bank standard; the incentive payments are set at a level consistent with the investment which would be required to achieve that outcome. Notes will be sampled by the Reserve Bank from cash centres and incentive payments will be based on the quality of these sampled notes. Incentive payments will be made to the commercial banks when these sampled notes exceed the commercial bank quality standard, and payments made by the commercial banks to the Reserve Bank when sampled notes fall below that standard.

The new arrangements are due to commence in the final quarter of 2006. In the meantime, an operational trial is underway, monitored by a working group comprising representatives from the Reserve Bank and the commercial banks. The Reserve Bank is also preparing to sample notes from the wider community to confirm that the improved outsorting of unfit notes by the commercial banks and the armoured car companies is reflected in an improved level of quality of notes in general circulation.

Some notes become accidentally damaged in circulation, beyond the normal levels of wear and tear, and become unsuitable for sorting using processing equipment. The Reserve Bank has a policy of paying value for these severely damaged notes, depending on the amount of the note which remains recognisable and can be authenticated. Commercial banks can assess damaged notes and pay the assessed value for them, but all damaged notes are returned to the NNPDC for final assessment and destruction. Under this policy, most damaged notes receive full value, but where a large piece of a note is missing, and the different pieces of the note could be presented to the Reserve Bank at different times, only the appropriate partial value is paid on each piece. During 2005/06, the NNPDC assessed nearly 28,000 note claims, with a total value of $3.5 million.

Distribution

The commercial banks act as the conduit for the issue and withdrawal of currency notes from circulation. The commercial banks hold working stocks of surplus notes and coin in approved cash centres (ACCs) located throughout Australia and draw on these stocks when they need additional notes and coin to meet customer demand. The commercial banks deal directly and actively with each other in order to manage short-term surpluses and deficits in their working stocks. They also draw notes from the NNPDC to meet demand when they cannot meet this demand from their own stocks or from other commercial banks, especially at the times of seasonal peak demand for cash associated with Christmas and Easter. Commercial banks’ holdings of surplus working stocks in ACCs have increased over the past year by about 11 per cent.

Armoured car companies transport notes to and from the NNPDC on behalf of the commercial banks. Some notes are returned to the NNPDC because they are unfit; these are processed through high-speed sorting equipment to confirm their quality and authenticity, and the unfit notes are destroyed. Other notes are returned to the NNPDC as part of the Reserve Bank's quality sampling programs and are processed in a similar way, with fit notes packaged for reissue and unfit notes destroyed. Notes that are fit but surplus to requirements can also be returned to the NNPDC at specified times following the Christmas and Easter peaks in demand; these notes are not processed at the NNPDC, but are reissued to the commercial banks at the first opportunity to satisfy orders.

During 2005/06, 265 million notes with a value of $8.0 billion were returned to the NNPDC, representing a 3 per cent increase on the previous year. Of these, 234 million notes were returned either as unfit notes or notes from sampling programs, and required processing by the NNPDC. The remaining 31 million notes were surplus fit notes.

Notes deemed fit for reissue represented 52 per cent of notes processed during 2005/06, up from 45 per cent in the previous year. Encouragingly, the increased emphasis by the Reserve Bank on improving the general quality of notes in circulation over the past two years has been reflected in a rise in the proportion of notes from sampling programs that are found to be fit for reissue.

The Reserve Bank issued 315 million notes with a value of $10.4 billion from the NNPDC in 2005/06, an increase of 10 per cent from the previous year. Of these, 147 million were previously circulated notes that were reissued after processing, where necessary, by the NNPDC, and 168 million were new notes.

As well as meeting the cost of producing new notes, the Reserve Bank bears the costs associated with the return to the NNPDC of unfit notes and notes required for quality and authenticity assessment. The Reserve Bank also pays commercial banks for interest forgone on their surplus working stocks of notes and coin held in ACCs, up to a specified amount. All other costs associated with the distribution of cash are met by others, including commercial banks, specialist cash handlers, retailers and the general public.

New Note Orders

An increase in the issue of new notes from the NNPDC, and an increase in the level of reserve stocks deemed appropriate for the Reserve Bank to hold, led to an increase in purchases of new notes from Note Printing Australia. The Reserve Bank took delivery of a total of 220 million new notes in 2005/06, across most denominations, up from 160 million in the previous year, an increase of 38 per cent. There were no purchases of new $100 notes, as has been the case for several years, as the Reserve Bank continues to run down the stock of $100 notes acquired as a contingency for Y2K.

Counterfeiting Activity

Counterfeiting activity in Australia remains low. In 2005/06, a total of about 5,100 counterfeit notes were passed, with a face value of around $263,000, up from about 4,300 in the previous year. Measured against the number of notes in circulation, counterfeit notes rose slightly to six per million notes in circulation from five per million in the previous year. These rates of counterfeiting are very low compared with the experience in other industrialised countries.

In 2005/06, the $50 was the most counterfeited denomination, accounting for about three‑quarters of the total. Almost all were reproduced on paper rather than polymer, and as the quality was generally poor, they were quickly and easily detected. About 90 per cent of the counterfeit notes were detected by the public, and the remaining 10 per cent during authentication at the NNPDC (representing about two counterfeit notes in every million notes processed by the NNPDC).

One notable development in May 2006 was the interception, by local authorities working in conjunction with Interpol and the Australian Federal Police, of a criminal operation in Colombia attempting to counterfeit the Australian $100 note. The authorities seized a printing press, computer and printing materials, including partially printed counterfeit notes. These partially printed counterfeit notes were printed on plastic film, but not on genuine polymer substrate. The seized material would have been sufficient to have counterfeited notes with a face value of around $5 million if they had been completed. No finished counterfeit notes were discovered, and there is no evidence to suggest that the counterfeiters had succeeded in completing any counterfeit notes or that any counterfeit notes had reached Australia or been passed.

The seizure in Colombia highlights the ongoing threat posed by counterfeiting. As part of its anti‑counterfeiting strategy, the Reserve Bank maintains an active research and development program into note design and security features. The Reserve Bank's aim is to improve the security of polymer notes continually, making counterfeiting more difficult, more time‑consuming and more costly for would‑be counterfeiters, and easier for the public to detect. The Reserve Bank also works closely with the Australian Federal Police, and other central banks and international agencies, in monitoring developments in counterfeiting activity.