malcolm edey : card payments regulation – from wallis to murray speech by mr malcolm edey, assistant governor ( financial system ) of the reserve bank of australia, at the cards & payments conference, melbourne, 21 may 2015. * * * thank you for the invitation to speak here today. i have been asked to talk about the outlook for payments regulation. this is a subject that is very much front of mind at present, given that the murray inquiry only recently presented its findings in that area and the reserve bank payments system board ( the psb ) is conducting its own review following on from the murray recommendations. i ’ ll say a bit more about that later, but i have to begin by saying that the psb ’ s review process is still underway, and i am not going to pre - empt any conclusions that might come from that. instead, i want to address the topic in a more indirect way, by giving an overview of the psb ’ s general approach to retail payments since it first entered the field. in doing so, i hope to bring out some key principles that have been consistently applied and which remain part of the ongoing policy framework. the reserve bank ’ s role as a regulator of retail payments systems was established following the report of the wallis inquiry in 1997. like murray, the wallis inquiry was about more than just payments. it was about the financial system as a whole, and wallis took a holistic approach to understanding the role of payments within the wider system. i suggest there were four key observations that determined the overall shape of the wallis recommendations. first, wallis observed that the business model of traditional banking was fundamentally changing. in simplified terms, banks could be thought of as suppliers of a portfolio of products, the three main ones being deposits, loans and transaction services. in the earlier highly regulated world, these were bound together in full - service banking institutions. credit was heavily rationed and potential borrowers needed to demonstrate loyalty to a bank in order to qualify for loans. this environment tended to produce outcomes where net interest margins were high, customers were immobile and banks cross - subsidised payment services effectively as a utility. this model broke down over time because of the combined effects of deregulation and financial innovation. these forces enabled new players to compete separately for the most profitable business lines. examples were cash management trusts on the deposit side, which enabled depositors to gain access to wholesale interest rates, and mortgage securitisers on the lending side,

appropriate setting of policy. the fact that inflation was still high as these events unfolded did not constrain the decision to reduce the cash rate. again, the flexibility and forward - looking nature of the framework together with its recognition of both the real, as well as the nominal goals, of monetary policy provided the necessary scope for action. 13 so throughout its 25 years, the specification of the framework has allowed the bank to focus on the medium - term outlook for inflation and not be unnecessarily constrained by any current level of the inflation rate. that seems obviously appropriate behaviour now, and reflects the decisionmaking process in all inflation - targeting frameworks today. but it was not obvious that this was the appropriate approach to monetary policy back at the inception of inflation targeting. while the confidence in being able to use the flexibility in the framework has undoubtedly increased, the willingness to use it has always been there. you will note that i have not included the current cycle of monetary policy in this assessment. that is still to play out and i will leave it to a later iteration of this conference to conduct a post - mortem. communication while the flexible operational approach to inflation targeting has been present throughout, the communication by the bank has changed quite substantially. prior to the introduction of the inflation target, the principal vehicle for the bank ’ s economic commentary was the annual report and the rba bulletin. this commentary often ran to no more than a few pages. there were speeches on macroeconomic issues by the governor and deputy governor. changes in the stance of monetary policy had been announced since 1990 ( which was quite innovative at the time ), but were generally a one line statement announcing the decision to change the cash rate. that was the extent of the public communication. there was not much information to understand the central bank ’ s general approach to monetary policy or the central bank ’ s reaction function. financial markets had to employ large teams of analysts to divine the central bank ’ s intentions. the advent of the inflation - targeting framework saw communication increase, though it should be noted that this was a worldwide phenomenon and not confined to inflation - targeting central banks. why was there such an increase in communication? one reason that i have stated before is that the inflation - targeting central banks did not have a good track record of monetary policymaking. so there was a need to build that track record. a track record requires a track and inflation targeting provided that track. but then you also need to make it clear to people