review focused on three questions, which i could sum up as gaps, governance and hubs. on gaps, the question is, are there potential innovations that would be in the public interest that are not happening because of coordination failures? responses to the consultation suggested that there might be. the main points highlighted as possible areas for improvement were : faster or real - time payments at the retail level greater availability of payments systems outside normal banking hours improved capacity to send information with payments and, greater ease of addressing payments the last one of these can be illustrated by analogy with the cheque. a cheque payment can be addressed very easily when all you know is the name of the recipient. but we don ’ t yet have a comparably easy mechanism for addressing electronic payments. obviously it is not costless to deliver these things, and so a coordinated decision process would need to have some way of taking into account both the costs and benefits, including benefits to end - users, in order to determine whether an investment is worth making. that raises the further question of who should provide that leadership and under what arrangements – the general question of governance. to make it more concrete, we can pose the following questions. in the australian case, should the payments system board take a more prescriptive approach to setting objectives for payments system innovation? could it, for example, set an objective of real - time consumer payments, or the adoption of new messaging standards, by a specified target date? could it then perhaps delegate the implementation of those targets to an industry body with the necessary technical expertise? all of that would amount to a governance model where the regulator makes high - level decisions as to the public interest, while industry participants determine the most efficient means of implementing them. i won ’ t foreshadow what we might conclude on these things, but these are the sorts of questions the payments system board is now considering. bis central bankers ’ speeches the board is also considering a third area, namely hubs, or specifically the question of whether there needs to be greater use of centralised architecture for clearing and settlement of retail payments. this is a particular issue in australia, because many of our payments systems are built on bilateral links between institutions. arguments can be made in favour of hubs on the basis that they may be more efficient than bilateral networks and more conducive to both competition and innovation. but these considerations need to be balanced against the costs of the investment. again, this is a key question of system

malcolm edey : inertia and coordination problems in payment networks remarks by mr malcolm edey, assistant governor ( financial system ) of the reserve bank of australia, at a panel session on “ public policy and innovation ” at the federal reserve bank of kansas city payments conference, kansas city, 30 march 2012 ( to be delivered 31 march 2012 ). * * * the question i have been asked to address is whether inertia ( or coordination failure ) is an obstacle to payments system innovation. and if so, what do we do about it? to begin with, it helps to distinguish between two types of innovation : proprietary and systemic. an example of the first type might be a new piece of card technology, or a new customer platform for an individual bank. an example of the second might be the adoption of a new interbank messaging standard or a system - wide shift to faster payment times. the difference lies in whether the benefit can in some sense be captured by the innovator, or whether the benefits are more dispersed and dependent on coordinated action. payments service providers are good at proprietary innovation, as you would expect – they have an incentive to be good at it. it ’ s in the second area that problems of inertia and coordination failure can come into play. i can think of two general reasons why this is the case. the first is the problem of capturing benefits so as to give a return to the innovator. to give a concrete historical example, think of the question of faster cheque clearing. for a given cost, faster clearing is obviously an improvement, but it can only be achieved collectively. yet doing so confers no competitive advantage to any individual participant in the chequeclearing system, so there is little incentive to agree on costly action to make it happen. to make the example more up - to - date, the same problem exists with incentives to deliver faster ( or real - time ) electronic transfers at the retail level. faster payments can only happen if the system as a whole is set up for it, and then only if a critical mass of the individual participants are set up to provide timely access. but putting this in place will obviously involve some cost, with little or no proprietary benefit to the investor, particularly where it may cannibalise other potentially profitable product lines. this problem would exist even if all the payments industry participants faced identical incentives. without an effective coordinating mechanism, industry will tend to under - invest in this kind of innovation.