Fireside chat at Australian Payments Plus Beyond Tomorrow

So, Brad, there is a lot to talk about in payments at the moment, several areas of focus, several areas of improvement and change. But I’m going to warm us up with: what you think Australia is getting right in payments?

Thanks, Lynn. I’m glad you started there, because there is a lot to be proud of, I think, in this country in our work in payments. I say that from a couple of perspectives. One, of course, as a central banker, we look at the data and when we look at the data what we see is a picture of costs having come down significantly, certainly in the retail space for merchants in the last couple of decades. We’ve seen the speed of payments go up in no small part because of the NPP. When we look globally at how the uptake of fast retail payment transaction volumes are tracking in Australia vis-a-vis the rest of the world, there’s a good story to tell there. There are one or two countries that might have seen slightly faster uptake, but we are tracking ahead of most of the pack. I think that’s a good story to tell.

In addition to that, a particular area of passion for me, and consistent with our mandate at the bank, we see parts of the payments ecosystem become real hotbeds of innovation. Given the national productivity challenge we’re all wrestling with, our sense is that the payment system is one of those sectors of the economy that’s making a really important contribution. So, all of those things are really welcome. Now, that’s not to say that there are not some challenges and we’ll get into that, I’m sure.

We’re just going to stay on the good stuff. But, no, we definitely have seen that March change and lowering the cost of payments. Obviously we have a budget coming out tonight. It’s really interesting. I’ve spent a bit of time in Canberra over the last year and with small business, and every line item counts, right, for a small business? What used to be just a line item that went through, there’s a huge amount of focus on. So, I’m going to stick with that theme around the cost of payments. Earlier this year, the RBA conducted the first stage of the Merchant Card Payments Costs and Surcharging review. I understand you had over 100 submissions. Clearly, the issues paper was very topical to have such a strong response, but I’m sure it also had a lot of strong, diverse views that were expressed as well. Are you able to talk about some of the themes that have come from your team’s analysis of those submissions?

Yes. For those perhaps less familiar, the current surcharging framework was put in place more than two decades ago. At that time, or basically since that time, we’ve seen a number of important, I think, public policy outcomes achieved. We introduced basically a price signal. So, consumers began to understand the implications of choosing different payment methods. And merchants had an ability to recoup the costs of the choices that their customers were making, which is one of the reasons why surcharging is a bit different to the costs incurred by businesses in other ways.

The problem is that 20-odd years on the landscape is quite different to the landscape of the early 2000s. What we observe now is that it’s much more difficult for consumers to avoid surcharging costs. It’s also the case that we’ve seen a proliferation in single rate or blended price plans, which has had the practical effect of debit card users subsidising credit card users, which from a price signalling perspective is not ideal. What we’ve heard from merchants also is some concern over the opacity of fee structures that are wrapped up into their plans. We felt like it was time to do stocktake and ask ourselves is that regime still fit for purpose? Or do we need to make some adjustments? Those adjustments could span a spectrum from very minor tweaks all the way up to including scrapping surcharging on both debit and credit. So, they’re like the boundary cases, if you like, and then there’s a spectrum of possibilities in between.

The Payments System Board has had an initial discussion about the trade-offs around different options, and we’ll be having a subsequent discussion at our next board meeting in June. What I can say is there is a laser-like focus on making sure we fully understand all of the various stakeholder concerns and preferences. You alluded to that in your question. This is an area where it’s not unusual to have diametrically opposed perspectives. We see our role here as to step back, think a bit beyond just a narrow interest and think about the public interest more broadly. We haven’t yet landed on a policy proposal, but we are thinking very hard about, if we are to make an adjustment on surcharging, just making an adjustment downstream -- making no adjustment upstream -- is just going to redistribute cost in the system. What we are looking very hard at is how do we get wholesale costs down? If we can get wholesale costs down, the need for merchants to surcharge diminishes and we’re in a different sort of equilibrium. That’s just to give you a flavour of the sorts of issues we’re wrestling with.

The surcharging one has been really topical in the last number of months and it is quite complex, as you mentioned. It sounds, though, like one of my questions -- and I feel like you’ve nailed it -- is: do you believe there is a way to ban surcharging and still provide that protection to small business who really carry the cost of payments? Do you believe that’s an achievable outcome?

It is, but the starting point for our deliberation here is to think about surcharging in the context of an ecosystem. You cannot pull one lever here and not expect it to have consequences that will ripple right throughout that system. We’re really trying to think holistically and make sure that the outcome we arrive at strikes the right balance between the competing priorities and interests of the various stakeholders.

Excellent. The one other thing that was highlighted in the paper that I just quickly wanted to ask about was the need to make the various payment fees and charges more visible, as well as possibly making them easier to compare if you are a merchant. That could really support merchants and users to actually have more informed choices in the payment options and methods they accept. But I’m assuming that is going to be as complex as surcharging in terms of getting alignment around appetite for disclosure. Any thoughts on that?

All I can say at this point is that we’re favourably disposed to looking at solutions that reduce complexity, increase simplicity, increase transparency. They’re sort of the organising principles, if you like.

Great. I think it would be beneficial for all to have that greater transparency. I’m going to go to the hot topic of the risk review on the move to the NPP. You’ve obviously spent a lot of time reviewing the risks over the last number of months. I might start at the highest level. If you were able to give us a report card with five years to run on the clock, how would you assess us at the moment as an industry?

Our risk assessment has revealed that there are some significant challenges that industry -- frankly the country and all participants in this system -- need to lean into as a matter of priority. I would say as a matter of urgency. At the same time, in the last few months we have detected a notable shift in the way that the key stakeholders are engaging on this project. We take some comfort from this pivot that is now starting to generate some momentum. We welcome that, we encourage it and we will do what we can to facilitate and build on that momentum. But there are some quite material challenges that our conversations with the entire ecosystem have revealed. The risk assessment was really designed to surface those, make sure that everyone had visibility over the breadth and depth of the challenges that are in front of us, give us a consistent, if you like, single source of truth that we can each now lean into and start to address as a matter of priority. The five years will go fast.

This is a project of national significance. I can tell you at the outset that the way that the Bank will be engaging in this project is we will be looking to ensure that the public interest, the national interest, is enshrined from the outset in whatever functional features our account-to-account payment system eventually generates. That will be the prism through which we’ll look to engage here. What is in the national interest -- not the parochial interest of one stakeholder, but the national interest writ large?

Excellent. I think, speaking to many people over the last week -- we welcomed the report to crystallise the work that needs to be done. I do think many people in this room have also welcomed it for their organisation to make sure it’s getting the priority that it needs to within their organisation. I didn’t get an A, B or a C there, so I’m just going to -- not looking for an F. So, we’ll just pass that. Two things you called out were a defined vision for what the future of A to A payments should be in this country. And you also spoke a little bit in the report about has there been a real assessment of the business case to close BECS? Did the industry look at options to keep it open? Can you talk about why those two things are really important, the vision and the alternative to keeping BECS open?

What the quite extensive amount of consultation between our supervisory team and industry revealed was a few things. The highest level finding, I would say, though, is that a lot of the challenges that the risk assessment has laid out start from one proposition. That proposition is that there has not been sufficient governance or coordination mechanisms up until this point. And from that a whole bunch of things have flowed. One has been that end users have told us that they don’t feel that their interests and perspectives were adequately captured in the initial part of the transition planning. That’s one point. Another was that there was a presumption that all payments would be shoehorned onto one rail because some institutions had the view that they had to just recoup their costs.

Now, recouping costs is one quite reasonable desire. We understand that to build rails you need the private sector. The private sector -- it’s not unreasonable for them to want to recoup their costs. But that cannot be the only or the defining motivation for the system that we land on. There has to be a broader range of considerations, including public interest tests. They weren’t fully articulated. There was a sense that, ‘Well, we’ll just default to the system that we’ve already made an investment in.’ And there was not a larger discussion, a more foundational discussion about, ‘Let’s begin with a clean sheet of paper. What are the core features that industry believe should define our future account-to-account payment system, not just in 2030 but for the 10 or 20 years after that point?’ That conversation never happened. At least it never happened in a way where a broad range of stakeholders felt like they were included. Because of that there has been a sense of a lack of legitimacy, because there was no inclusive discussion about what those central features were. And, then, okay, how do we build a plan backwards from that point? That was reflected in maybe the third element, which was there was no cost-benefit analysis done on alternative paths to get to that end state or where the consensus has been formed to agree on these key features. So, there’s no weighing of alternatives. There was not enough consultation. That’s where we were late last year. In our discussions and discussions with industry we have detected a notable shift now, particularly on the governance and coordination piece. I highlighted that at the outset because as I said, if we can get that right, a lot of things will flow. If we don’t get that piece right, we are pushing a big rock up a steep hill.

Yes. I know you’ve welcomed the setting up of the NPP steering committee with an independent chair. That’s really important for us too, because we need to be held accountable that we’re meeting our milestones as we go. It’s a big step forward from a governance point of view to have the right people, including RBA, Treasury and AusPayNet working together clearly under an ACCC authorisation, of course. You have spent some time -- back to pricing -- thinking about and exploring the end user pricing of NPP transactions. I know it hasn’t been an easy review, but have you taken anything away from that initial review of the pricing of NPP?

A couple of things there. One is what we have been able to deduce is a difference in wholesale costs for NPP transactions vis-a-vis BECS. It’s been harder to get good visibility into differences in costs faced by end users. That’s an area that the bank wants to do more work in -- work with industry to lift the visibility over end user costs. There’s a related issue here beyond just cost, which is value. We would very much encourage industry to think in those terms. This is where I was encouraged, Lynn, by your opening remarks when you referred to the importance of developing batch solutions. One of the very clear pieces of feedback we heard from very important end users in BECs was their desire to ensure that they can continue to receive value for money in whatever batch settlement solution is made available to them. Their starting point is that, ‘We don’t need all of the bells and whistles of the NPP. We value reliability, security and batch settlement a handful of times a day offered at very low cost, which is actually a good trade-off for us and we’re comfortable with that. So, why would we be shoehorned into a more expensive set of rails that offers functionality that we derive no benefit from? Why would we want to engage in that?’ It’s like the old Foxtel subscription. You’ve got 3,000 channels; you’d never watched any of them. Why do you want to pay for that? It’s not an unreasonable starting position. So, as we start to move from just a cost-based framework to think about value for money and making sure that end user needs are firmly embedded in the solution set that’s devised, recognising that not all end users have the same needs will be, I think, a really important feature in building legitimacy for this migration.

We’ve heard that loud and clear in our conversations with members and with users. There is a variety of views. Some want to embrace every bit of value that real-time payments and 2000-plus characters can give them to really achieve something different. And there is a view that we just for now need to make sure the payment will flow when it flows at the right time to the right person. But I’m also hopeful once we’re across the line they’ll also be open to exploring the value that the NPP will give them. But we’re trying to meet users where they’re at with what their particular issues are. Just a last question before I move on, and there have been quite a number of questions that have come through on Slido about value. So, it’s great that you’ve hit on that. We do focus on the cost of payments, but it truly is about not only the cost; it’s about the value that’s being delivered. With five years to run before the planned decommissioning date, what role is the RBA going to play to monitor the risks from this point forward?

At a high level, we will be monitoring and reviewing that migration and reporting and our staff will be reporting back to the Payments System Board on a regular basis. And where our supervisory team is becoming concerned that, say, public interest considerations are being subordinated to purely to commercial decisions, that would be the sort of context where you would expect issues to be elevated. We’re at the start of, I think, a series of roundtable discussions, steer cos and so on, where RBA staff will have roles as observers and will have a role in trying to ensure that some of those public interest considerations like safety and reliability, value for money, end user choice, and so on, are embedded into the solution set. There’s a couple of different ways that we’ll be engaged.

Wonderful. I’m just going to switch gears. I wanted to talk about cybersecurity. One of your defined priorities is uplifting cyber resilience and clearly defined cyber strategies and, along with that, rigorous cyber testing programs. I think in the current environment there is a real heightened awareness and risk. I wanted to just cut straight to it, if I can. Can you share what it is you’re worried about and, more importantly, what the industry and the people in this room need to do to be prepared?

You’re talking about cyber. There’s clearly a non-state and a state-based element to this. I would say that our growing concern is the state-based dimension to cyber risk is very unlikely to decline. We’re going to need to step up -- when I say ‘we’, the community of regulators and industry, are all going to need to step up the intensity of how we address this challenge. I would say for almost everyone in this room we have grown up in an era of the peace dividend. That has meant we could focus on, say, speed over resilience. If you think about the global trading system, what’s been the defining feature of the last three or four decades in the global trading system? Speed over resilience. We’re now at an inflection point. The Payments System Board had a really good discussion at the last board meeting about features of the new world order that are with us now. The era of geostrategic competition is clearly going to be one of those and will really define the context for everything that we’re doing. With that in mind, the types of practical things that we think industry can do for financial market infrastructures is ensuring that they are regularly testing their cyber controls against industry standards. We also offer the CORIE program, which enables key FMIs and payment systems to subject themselves to very robust resilience tests. So, that’s key. We’re also engaging with a number of institutions as part of a new program on geopolitical risk which is designed to build offline payments capacity. If one of our platforms is subject to a massive cyber attack, do we have a fallback operational capability to ensure that payments, critical payments, can still be made? Perhaps not on a real-time basis, but they can still go through? There’s a broad suite of things that we’re doing as regulators and that we’re also urging and encouraging industry to take on.

Yes, and I know that the industry is having lots of conversations around contingency and backup plans. I think that work is definitely progressing. One, I just thought I might, if you’re comfortable, pop over here in the slido, which is really interesting is that if we think about the role of global tech at the moment, clearly they are influencing, and have seen a lot of influence over the last decade, on how we pay and how everyday people choose to make a payment. There’s a question here: do you have a view about whether that global tech influence is in any way eroding domestic confidence in new value propositions such as the NPP? So, how do you think? Competition is good. I know the RBA loves competition, but there is an influence beyond what we do here domestically, right?

You’re right; we are predisposed towards competition. In fact, it’s in our mandate. We also value sunlight. So, if entities are engaging in our payment system in an opaque way and preventing sunlight from radiating out, including on their cost structure, that will be problematic for us.

Now, we’re at a quite interesting juncture where we were hopeful a really important piece of legislation would go through in this sitting of parliament. It looks like that’s not going to happen now. All I can say for the record is the bank is very strongly, and the Payments System Board, supportive of the payment system reforms that were proposed. Once the election has passed our support will be just as firm as it is today that those reforms go through, because we are operating under a regulatory regime that was set up for a different world. It’s no longer fit for purpose, and we really need to expand the perimeter of the sorts of entities that we can regulate so that we can meet some of the challenges that I think were implied in that question.

Yes, great. I’m going to cast our minds a bit forward beyond the current payment rails and reflect on what’s coming down the track. Treasury just really recently, even maybe in the last week, announced a statement about developing an innovative Australian digital asset industry. It’s important because that shows that there is momentum around getting some clarity around digital assets in Australia. Very much like to hear your thoughts on the potential benefits of a wholesale central bank digital currency, and also just to hear your aspirations for Project Acacia, which is, I think, currently under assessment for all of those who’ve submitted, including us.

I can maybe link our interest in wholesale CBDC back to your first question, Lynn, which was: tell us all of the good things about retail payments? Just at a really high level, part of the reason why in Australia we haven’t seen the public policy case really emerge for a retail CBDC is because we already have a fast payment system that’s working well. The usage is going up. We hope costs continue to come down. There’s nothing obviously broken in our retail payment system that would motivate us to, certainly within the next few years at least, really seriously consider that. Now, that framing is not the case for a number of other countries. For a number of other countries they are pushing towards issuing a retail CBDC because there’s some big issue in their retail payment system that they think a CBDC could address. That’s not where we’re at.

On the wholesale side, we haven’t seen quite the same level of innovation that we have on the retail side. We don’t have quite the same level of transparency. We can see there being potentially a stronger public policy benefit from uplifting the performance of wholesale clearing and settlement. And it would arguably be less disruptive than, say, introducing a retail CBDC, because we already issue central bank money to a select number of wholesale institutions. So, it would be more evolutionary than revolutionary. We see bigger potential benefits, fewer potential disruptions from moving into the wholesale CBDC space. One area of particular interest for Project Acacia, which for those that are less familiar is our new project, is we’re interested in looking at the role that tokenisation/tokenised assets could play in helping to uplift the performance of our wholesale markets. There could be a role for wholesale CBDC to facilitate those new markets, if wholesale CBDC was the settlement asset that basically allowed those transactions to be settled.

There are also alternative worlds where private digital money acted as a settlement asset. One example would be stablecoins, which are very much in scope for Project Acacia, and also tokenised bank deposits, which is an area where I think generally there has been less progress relative to stablecoins. But we are going to have a really good look at the role that tokenised bank deposits could also play in this future system.

Excellent. We’ve got a plus talk this afternoon from the DFCRC, which will include a lot of that conversation, so that’s great. I’m going to go to a few questions that are on the Slido, and you are welcome if there are any there that really jump out at you. I felt like there’s one that’s probably for me. I might start with that. In consultation around end users preferring to stay with batch, how well do you believe the downstream cost of managing the unhappy paths in batch is understood? Now, clearly I think that was meant for Brad, but I think the onus is on AP-plus to really understand the implications of unhappy paths in batch. We have been doing a lot of work. Particularly right now that work has focused largely with government and government agencies spending time in Canberra to truly understand the outcomes around batch payments. We are listening and we are learning, and obviously I think now that we have applied for the ACCC authorisation to be able to work closer with AusPayNet -- I think having the two organisations working together will help us understand that. We still have work to do right across corporate Australia to understand the end user impacts. But if you want to add anything to that? I think there’s clearly a lot to learn in terms of the impacts around batch.

I think you’ve summed it up well, Lynn. Understanding what are the features of batch settlement that end users most value today. There may be some ways to introduce features that they would equally value in the future. I think that’s absolutely worth exploring. But without the value-for-money proposition holding, I think we’re really going to struggle. Industry is really going to struggle to get those end users brought in. Back to that Foxtel analogy that I drew, paying for TV stations you don’t use does not represent value for money.

This first one, radical idea -- I’m going to go there even though I won’t have a job! Has the RBA considered making the NPP rails a public service where payments are free in the same way that UPI and Pix have done?

No.

Phew! Okay.

Just stepping back a bit from first principles, the central bank has a really important role to play in the financial system and in payments in a couple of ways. Providing confidence in the finality of settlement. Trust in the value of money. And providing a level playing field for competition. Beyond that, we look to the private sector to take up the challenge of competing and offering the best possible services at the lowest possible price for consumers. That’s something the private sector is perfectly equipped to do. You can do that better than the public sector. You don’t want the public sector in that space. So, no.

We’ve got quite a number of PSPs with us today and there is a question here about the BECS risk review. The question is: what triggered the inclusion of the statement about ensuring a PSP does not create a proprietary solution to problems in the BECS transitions risk paper?

I think what that statement was getting at was this issue around interoperability. We want interoperability as a guiding principle to be reflected in whatever our future solution set looks like. Similarly, we don’t want walled gardens to pop up all over our payment system. We don’t think that will be particularly helpful. That’s basically the subtext.

Yes. So, not locking in, and allowing people to move freely?

SMEs pay a lot more for payments than big business. Is the RBA concerned about this, particularly if surcharging is banned and blended rates stay? Clearly, volume discounts seem to be alive and well for larger organisations. What’s your concern level on that difference between small business and large business?

Significant and ongoing.

Wonderful. Just two more questions here. The risk assessment points prioritising low end user prices -- would the RBA consider taking a similar approach to merchant costs by looking at the full ecosystem? I think you’ve started that with some of the NPP pricing work already.

Yes, we are thinking very hard about full ecosystem costs. One of the areas in particular on merchant costs that has been surfaced by some of our discussions is the lack of transparency also around scheme fees. That’s a particular area where we want to learn more and where we’re inclined to want to have more sunlight on those fees.

Yes, very similar to the merchant -- transparency, visibility, simplicity. We’ve had a question about crypto. What do you observe in recent changes with how other countries are regulating crypto and the implications of that for Australia’s thinking?

A quite landmark paper dropped out of Treasury late last week, which I think was designed to give industry a sense of the direction of travel. Certainly the feedback that we’ve heard for some time, and that our colleagues at Treasury have heard, is they need a bit more guidance; industry needs a bit more guidance. Industry has been certainly communicating to us and to ASIC and Treasury. There’s a lot of activity now going on globally. If we don’t move, if legislation is not updated, if regulation is not updated, we risk a brain drain. People very astute in the digital asset space. They will just go to Singapore, Dubai or the UK. I think that message has got some traction, and now you are seeing momentum building again. We would welcome that. We think this is a really important space for the country. At the Reserve Bank, we’ve got some ability to move the needle, and that’s what Project Acacia is trying to achieve. Within our constraints, we’re prepared to push into use cases, different types of ledgers, different types of wholesale infrastructure that haven’t really been explored -- certainly not explored in Australia and even relative to some other countries. We want to do our bit. I know our colleagues at Treasury want to do their bit. One of the areas that our colleagues at Treasury are also committed to doing, which I think is really important, including for some folks in this room, is facilitating the review of the enhanced regulatory sandbox. There’s some, I think, really good prototypes internationally, including in the UK, where we could learn a lot about adjustments we could make there that would help facilitate more early stage innovation and smooth the pathway from ideation to commercialisation. I know our colleagues at Treasury are very attuned to that and want to play a constructive role. I want to assure industry that, from a regulator’s perspective, we are watching what’s going on internationally very closely and we are committed to doing what we can to provide that extra clarity that we know is essential for business planning purposes.

Excellent. I’ve got one more question here and one more question for me, but I just have to call out the first question. Why is it that people from the RBA look so fit, healthy and relaxed? Honestly, just take that compliment and don’t even …

I’m not going there!

I do want to just ask you a wrap-up question. If we go back to the theme today of unleashing opportunities, looking ahead five years, what opportunities do you want to see unleashed for the Australian payments landscape by the people in this room?

Most regulators of the last 30 or 40 years would equate more innovation with less resilience; that there was a trade-off. The dream I have -- and I talk to my team about this -- is that we can break that nexus, that we can move into an era where the Australian payment system becomes this hotbed of innovation in a way that actually reinforces resilience. Given the sort of world that we’re moving into, it’s going to be a more dangerous, less stable world. We need innovation -- actually reinforcing resilience in the system, not undermining it. So, why don’t I end on that note?

Fantastic. I am so pleased. We have had 13 pages of questions. So, clearly, Brad, people really wanted to hear from you. I’m sorry that we didn’t have you for a whole morning, because there was a lot of appetite to ask you questions. So, we’ll ask you back next year. Please join me in thanking Dr Brad Jones.