Last month, Australia launched its New Payments Platform (NPP), the result of the Strategic Review of Innovation conducted by the Payments System Board that was released in June 2012. Other reforms of the country’s payment system included the introduction of same-day settlement for direct entry transactions and the formation of the Australian Payments Council.
The reformist zeal is not limited to Australia, of course. Across the world, payments infrastructures are being overhauled to cope with the inexorable shift towards electronic payments. World Payments Report 2017 found that global non-cash transaction volumes grew 11.2% during 2014-2015 (the most recent full year of analysis) to reach 433.1 billion, the highest growth of the past decade. Two regions fuelled this increase: emerging Asia (which includes China and India) with a growth rate of 43.5% and Central Europe, Middle East and Africa, with growth of 16.5%.
Payments authorities are seeking to create new infrastructures for electronic payments and to increase competitiveness, while creating information-rich, faster and more secure payments. Reforms are under way in the UK, led by the Payment Systems Regulator, and in Canada, the US, Japan, Norway and Nigeria to name but a few.
Speaking at the Australian Payment Summit in Sydney during December last year, Philip Lowe, governor of the Reserve Bank of Australia, said in Australia most money is already digital or electronic. “Only 3½ per cent of what is known as ‘broad money’ in Australia is in the form of physical currency,” he said. The rest is in the form of deposits, which, most of the time, can be accessed electronically. The bulk of what is called money in Australia is already electronic.
With most money available electronically, there also has been a substantial shift to electronic forms of payments. According to the RBA’s regular survey of consumers, in 2007 cash accounted for 70% of transactions made; it has now fallen to 37%. Another indicator of the shift to electronic payment is the fall in cash withdrawals from ATMs, which reached a peak in 2008, but has since fallen by nearly a quarter. Finally, the number of debit and credit card transactions using the direct entry system has grown at an average annual rate of 10%.
“There has been a significant shift away from people using banknotes to making payments electronically. Most recently, Australia’s enthusiastic adoption of ‘tap-and-go’ payments has added impetus to this shift. In many ways, Australians are ahead of others in the use of electronic payments, although we are not quite in the vanguard. It is also worth pointing out, though, that despite this shift to electronic payments, the value of banknotes on issue is at a 50-year high as a share of GDP. Australians are clearly holding banknotes for purposes other than for making day-to-day payments,” said Lowe.
The continuing existence of cash in circulation is a global phenomenon identified by World Payments Report. It found: “Despite the increased adoption of digital payments, cash continues to be in the mainstream, especially for low-value transactions such as payment for food and personal care supplies, general merchandise and gifts. It is also used for peer to peer (P2P) transfers, despite the increasing popularity of P2P money transfer apps such as Venmo and PayPal.”
Other key factors contributing to the persistence of cash are the anonymity a cash transaction provides, a lack of modernised payment infrastructure in some countries and limited or no access to the banking system in developing markets.
The ratio of cash in circulation (CIC) to GDP is increasing at a higher pace globally except in Denmark, the UK, Sweden, Canada and South Africa. The Report suggests that this increase may hamper efforts to create cashless societies. “The continued rise in the total share of cash in overall GDP has become a key challenge globally and could emerge as an impediment to the transformation into digital, or cashless economies.”
However, many countries have recognised the problems associated with an increasing CIC to GDP ratio and are taking measures to embrace digital payments. These measures include structural reforms and payments infrastructure modernisation.
In Australia, Lowe believes that the shift towards electronic payments, and away from the use of banknotes for payments, will “surely continue”. The increased use of mobile payment apps and other innovations will drive this. However, for many people, and for some types of transactions, banknotes are likely to remain the payment instrument of choice.
Lowe points up that the banking system has provided the infrastructure that has made the shift to electronic payments possible in Australia. In some other countries, such as China and Kenya, the banking system has not done this. Here, non-bank entities have been at the forefront of recent strong growth in electronic payments. “A lesson here is that if financial institutions do not respond to customers’ needs, others will,” said Lowe.
Given the substantial investment Australia’s financial institutions have made in the NPP, it seems likely that the banking system will continue to provide the infrastructure that Australians use to make electronic payments, he added.
The key features of the NPP include
- 24×7 instant payments and real time, line by line settlement via the RBA
- PayID, which links a financial account with an identifier such as a mobile phone number, email address or Australian Business Number for businesses
- Open access infrastructure that encourages innovation through competition
- Overlay services framework that will provide new value services to Australian consumers, businesses and government
Brussels-based financial messaging consortium Swift helped to design, build and deliver the NPP and will play a role in operating the infrastructure. The Platform is a component within Swift’s broader global instant payments strategy, which includes the provision of an instant payments messaging service for the euro area. This will be launched in November 2018, to coincide with the launch of Target Instant Payment Settlement (Tips), the euro real-time payments service commissioned by the Eurosystem. Swift’s messaging service will allow instant payments to be made in euros across Europe through both TIPS and EBA Clearing’s RT-1 instant payments system. The Eurosystem’s moves are part of its ‘2020 vision’, which envisages a single market infrastructure gateway to provide access to Target2, Target2 for Securities (T2S) and Tips.
RBA’s Lowe argues that banks are likely to remain at the centre of the shift to electronic payments. The RBA has built a critical part of the NPP infrastructure to ensure interbank settlement occurs in real time. Payments will be able to be made by just knowing somebody’s email address or mobile phone number and plenty of information will be able to be sent with the payment. This system has the potential to be transformational and will allow many transactions that today are conducted with banknotes to be conducted electronically, he said.
The further shift to electronic payments through the banking system is not a given, he says. It requires that the cost to consumers and businesses of using the NPP is low and that the functionality expands over time. If this does not happen, then the experience of other countries suggests that alternative systems or technologies might emerge.
Another idea Lowe raised was that a new form of electronic payment method could emerge in the form of electronic banknotes, or electronic cash. For example, an electronic Australian dollar banknote could coexist with the electronic account-to-account-based payments system operated by the banks, just as polymer banknotes coexist with the electronic systems today. The technologies for doing this on an economy-wide scale are still developing. It is possible that it could be achieved through a distributed ledger, although there are other possibilities. The issuing authority could issue electronic currency in the form of files or ‘tokens’. These tokens could be stored in digital wallets, provided by financial institutions and others. These tokens could then be used for payments in a similar way that physical banknotes are used today.
Lowe highlighted some questions such a system would raise. If such a system were to be technologically feasible, who would issue the tokens: the RBA or somebody else? Would the RBA developing such a system pass the public interest test?
“In terms of the issuing authority, our working hypothesis is that this would best be done by the central bank,” he said. “In principle, there is nothing preventing tokenised eAUDs being issued by the private sector. It is conceivable, for example, that eAUD tokens could be issued by banks or even by large non-banks, although it is hard to see them being issued as cryptocurrency tokens under a bitcoin-style protocol, with no central entity standing behind the liability. So, while a privately issued eAUD is conceivable, experience cautions that there are significant difficulties and dangers associated with privately issued fiat money.”
The history of private issuance is one of periodic panic and instability, he warned. In times of uncertainty and stress, people don’t want to hold privately issued fiat money. This is one reason why physical banknotes are backed by central banks. It is possible that ways might be found to deal with this financial stability issue – including full collateralisation – but these tend to be expensive. This suggests that if there were to be an electronic form of banknotes that was widely used by the community, it is probably better and more likely for it to be issued by the central bank.
Such issues aside, Lowe then asked if there was a case for the RBA to develop such a system. Such a case would need to be built on electronic banknotes offering something that account-to-account transfers through the banking system do not. The RBA would also need to be confident that there were not material downsides from moving in this direction.
“Our current working hypothesis is that with the NPP there is likely to be little additional benefit from electronic banknotes. This, of course, presupposes that the NPP provides low-cost efficient payments. One possible benefit of electronic banknotes for some people might be that they could have less of an ‘electronic fingerprint’ than account-to-account transfers, although this would depend upon how the system was designed. But having less of an electronic fingerprint hardly seems the basis for building a public policy case to issue an electronic form of the currency. So, there would need to be more than this.”