glenn stevens : issues in payments systems remarks by mr glenn stevens, governor of the reserve bank of australia, to the annual general meeting of the australian payments clearing association, sydney, 23 october 2014. * * * thank you for the invitation to speak on the occasion of australian payments clearing association ’ s ( apca ) annual general meeting. the reserve bank and apca have a long history of working constructively as they carry out their respective responsibilities in australia ’ s payments system. we both have an interest in ensuring a safe, efficient and competitive payments system that meets the needs of end - users. when i last addressed an apca gathering in may 2012, we were at a particularly interesting juncture for the payments industry. the bank was approaching the end of a two - year period of public discussion and consultation about innovation in the payments system. this extensive public process, involving all the key industry players, and users of the payments system, had not been done before. after a roundtable attended by most members of the payments system board, numerous meetings at staff and management level, extensive feedback about published material and so on, the bank released the conclusions of its strategic review of innovation in the payments system in june of that year. the reserve bank regards that document, and the process that led up to it, as a landmark for the payments system in australia. interestingly enough, the innovation review was not mainly motivated by concerns, on our part, that innovation was not occurring, even though it was sometimes claimed that the regulatory regime inhibited it. on the contrary, we were seeing, and continue to see, rapid innovation in some elements of the system, as financial institutions, payment schemes and a variety of other players seek to deploy new technology to compete with one another or to draw business away from traditional payment forms like cash and cheques. the most obvious recent example is the use of contactless payments. in mid 2012 relatively few of us would have made a contactless payment. now they have become second nature to most of us and australia has become the leading contactless market in the world. while this does not represent a fundamental change in underlying payment systems, it is a quite significant change in the way consumers interact with the payments system and changes the cost of payments to both merchants and consumers. our recent diary survey suggests that the adoption of contactless has largely reflected a switch from traditional contact - based card presentment, but that there has also been some displacement of cash, particularly at smaller transaction sizes

small extent on system architecture, as well as governance. the technical architecture – for example, hub - and - spoke architecture versus bilateral links – can make it easier for new or established players to take advantage of technological change to bring new services to customers, or harder. governance around processes can be accommodating to change or resistant to it. overall, the record in australia in instances where innovation requires cooperation between established players, especially where one or more of them feels the need to protect an existing line of business, is mixed. we are all aware of important cases where things have run into the sand. this isn ’ t just a problem for the industry. it ’ s a problem for the users of the system as well. innovation in the “ cooperative space ” – where no single entity has control – is critical because it is this space that determines the limits on the services that the rest of the payments system can provide. these issues have been a matter of concern for the payments system board for quite a long time. the board has always seen fostering innovation as part of its “ efficiency ” mandate under the payment systems ( regulation ) act 1998. an important speech by philip lowe as long ago as 2005 focused on payments system architecture ( in particular the bilateral nature of a number of important payment systems ), the limitations of governance arrangements and the challenges for the industry in making cooperative investment decisions. his overall observation was that the then - existing arrangements were hindering innovation. 2 of course the technical architecture of systems is largely a legacy of decisions taken in an earlier era, probably for good reason at the time. changing that architecture is difficult and costly, though that is not a reason not to try and certainly not a reason not to adopt better architecture for new systems. the establishment of epal, for example, has provided an opportunity to improve the network architecture of the eftpos system to allow it to better adapt to the demands of the modern economy. there have also been some important developments in industry governance. first, apca itself has this year implemented some significant reforms to its governance. the new board structure includes representatives of the major banks, the mid - sized and foreign banks and lowe p ( 2005 ), ‘ innovation and governance of payment systems ’, address to banktech. 05 conference, sydney, september. bis central bankers ’ speeches the credit unions and building societies. it also includes an independent chair and two other independent directors. new types of players are also represented at other levels within the