philip lowe : innovation and regulation in the australian payments system address by mr philip lowe, governor of the reserve bank of australia, to the australian payments network, online, 7 december 2020. * * * i would like to thank my colleagues in payments policy department for assistance in the preparation of this talk. introduction thank you for the invitation to join you today. it is very good to see the tradition of auspaynet ’ s annual summit continue, even if it is taking a different form this year. as we all know, the world of payments has become an area of excitement : it brings together two things that people have a fascination with – money and technology. the pace of change is rapid and the payments landscape is complex and evolving quickly. new technologies are creating new ways of moving money around and new business models are emerging. there are also new players, including the big techs and the fintechs. and blockchain and distributed - ledger technologies are opening up new possibilities. this innovation is raising many issues for both the payments industry and for regulators. this morning i would like to discuss some of these issues and their implications for the regulatory framework. i will then discuss some of the payments system board ’ s preliminary views from its review of retail payments regulation. innovation the payments system board has a long standing interest in promoting innovation in the australian payments system. those of you who have followed our work over the years will recall that back in june 2012 the board released a report titled ‘ strategic review of innovation in the payments system ’. in promoting innovation we have employed a mix of strategies. we have used a combination of : i. suasion and pressure on industry participants to do better ii. regulation to promote competition and access iii. using our position to help overcome coordination problems, which can act as a barrier to innovation in a network with many participants iv. helping the industry establish benchmarks that can be aspired to collectively. i will leave it to others to judge the success of this mix of strategies. but from my vantage point, australians enjoy an efficient and dynamic payments system. there are still gaps that need addressing, but by global standards we have done pretty well. australians were early and rapid adopters of tap - and - go payments and increasingly are using digital wallets. we have a very good fast payments system, which after a slow start, is seeing continuing strong volume growth. and there is a roadmap for the development of new payment capabilities using this fast payments infrastructure

over time, a stronger case will emerge for lower credit card interchange fees in australia. there is one aspect of the interchange regulations where the board is considering a change as part of the review – that is the cap on the fees that can be applied to any particular category within a scheme ’ s schedule of debit card interchange fees. currently a 20 basis point cap applies when a fee is expressed in percentage terms and a cap of 15 cents applies when the fee is expressed in terms of cents. the board sees a case to lower this 15 cents cap. this case has emerged as there has been an increasing tendency for interchange fees on transactions to be set at the 15 cents cap, particularly on transactions that are less at risk of being routed to another scheme. at the same time, the international schemes are setting much lower strategic rates for some merchants, particularly larger ones, in response to least - cost routing. this is resulting in large differences in interchange fees being paid on similar transactions, with unreasonably high interchange fees on some low - value transactions, especially at smaller merchants. for example, a 15 cent interchange fee on a $ 5 transaction is equivalent to an interchange rate of 300 basis points, which is far higher than would apply to that transaction if a credit card had been used. over the coming months, bank staff will be seeking further information from the industry on this issue as the board considers a lower cap. dual - network debit cards and least - cost routing the second issue is dual - network debit cards and least - cost routing. the board has long held the position that merchants should have the freedom and the capability to route debit card transactions through the lower - cost network. the government and a wide 4 / 6 bis central bankers'speeches range of stakeholders have a similar view. it is understandable why : this choice promotes competition and helps keep downward pressure on the cost of goods and services for consumers. over recent years, the board has discussed the right balance between regulation and suasion to achieve this outcome. its judgement has been that the best approach was for the industry itself to support least - cost routing, pushed along by pressure from the rba. while progress has been slower than we would have liked, the slow progress by the major banks did create competitive openings for other players, which led to some innovation. the major banks now also all offer least - cost routing, with some making it the default offering for small and medium - sized businesses. so there has been significant