FINLAY, Dr Richard, Senior Manager, Analysis and Policy, Note Issue Department, Reserve Bank of Australia

RICHARDS, Dr Anthony (Tony), Head of Payments Policy, Reserve Bank of Australia

CHAIR: We will resume the Senate Economics Legislation Committee inquiry into the provisions of the Currency (Restrictions on the Use of Cash) Bill 2019. I welcome officials from the Reserve Bank of Australia. Thank you very much for appearing before the committee today. I remind officials that the Senate has resolved that an officer of a department of the Commonwealth or of a state or territory shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. I advise that answers to questions on notice need to be back by 10 January 2020. Do you wish to make any opening remarks?

D r Richards : I do. Thank you for the opportunity to appear before the committee. Let me begin by stating that the Reserve Bank is supportive of policy measures to combat the black economy. We do not have particular expertise in the area of tax policy enforcement and the black economy, but as background for the committee we thought it may be useful to begin with a brief opening statement on the role of cash in Australia's payment system, and we're happy to leave this statement for you and for Hansard.

CHAIR: Thank you very much.

D r Richards : The Reserve Bank has four roles in the payment system: as policymaker or regulator of the payment system, as issuer of Australia's banknotes, as operator of Australia's real-time gross settlement system and as a provider of banking services to the government. We will be very happy to answer any questions relating to the bank's payments policy and note-issuing roles.

The bank has powers under the Reserve Bank Act and the Payment Systems (Regulation) Act which are to be directed towards controlling risk in the financial system, promoting the efficiency of the payment system and promoting competition in the market for payment services consistent with the overall stability of the financial system. In addition, the Reserve Bank Act tasks the bank with issuing and redeeming Australia's banknotes. In this role, the bank issues cash as it is demanded by financial institutions, which are in turn responding to demand from their customers.

In the bank's role as regulator of the payment system, it seeks to promote a payment system that meets the need of end users—that is, households, businesses and government entities—in terms of being convenient, low cost, and safe and reliable. While there's always room for improvement—and the governor made a speech on Tuesday that noted some areas—I think we can say with some justification that Australia's payment system ranks pretty well by international standards. This is certainly true with the launch early last year of the new payments platform, which allows consumers and businesses to make real-time 24/7 payments with richer data and simple addressing using pay IDs. In addition, I note that by international standards Australia has a fairly low cost payment system, whether that's measured in terms of the overall resource costs of household payments or the average merchant service fees paid by Australian businesses to accept payment cards.

As you will be aware, over the past year or so there's been a significant shift from cash to electronic payments in everyday transactions. We see evidence for this in the data on the value of cash withdrawals from ATMs, which peaked in 2009 and have been falling gradually since then. We also have some information about the use of cash from a survey of household payment patterns that we undertake every three years. We contract a survey firm to ask at least a thousand Australians to record all the payments for goods and services they make for a week. Participation is voluntary, but we ensure that we match population benchmarks, and the aggregate results generally match other aggregate information on payment patterns. Our first survey of consumer payments in 2007 showed that around two-thirds of household payments were made in cash at that time. Our most recent survey suggests this had fallen to around a quarter of all household payments in 2019. This reflects a range of factors relating to household preferences and advances in technology, and it indicates that many households are increasingly finding that electronic payments are better meeting their needs for many types of transactions.

Our survey showed that cash is primarily used in low-value transactions, with cash used in around two-thirds of payments under $10 in 2016. The average size of all cash transactions was $28. Our surveys also showed that cash is still a very important payment method for a significant portion of the population, especially for older and lower-income households, those living in regional and remote areas and those with disabilities. We should also note that the value of Australian banknotes outstanding continues to grow, despite their falling use. This appears to reflect growing use of banknotes as a store of value. Reserve Bank research published late last year suggested that only around one-quarter of our outstanding banknotes by value are used to buy and sell things, while around two-thirds are held as a safe store of wealth by residents and foreigners. Indeed, our surveys also confirm that many households hold cash as a store of value and for precautionary purposes. We estimate that the remaining 10 or so per cent of issued banknotes are split roughly evenly between banknotes that are lost and banknotes that are used for shadow economy activities.

As long as physical currency continues to play an important role in the payments system and the broader economy, including as a backup for when electronic payment systems are down, the Reserve Bank will ensure our banknotes are high quality and secure from counterfeiting. The current banknote series upgrade reflects this commitment.

Finally, and relevant for today's hearing, we can provide a little information on the use of cash in high-value transactions by households. When we look across the five household surveys we've undertaken since 2007, we have a total of about 82,000 consumer payments by 5,700 individuals. Among those 82,000 payments, there were 20 transactions reported for more than $10,000. None of those used cash. But, to get a slightly bigger sample of large transactions, we might look instead at transactions between $5,000 and $10,000. Altogether, there were 61 transactions over $5,000. One of these was in cash. Nearly half of these transactions used bank transfers, while other payment methods included cheques, credit cards, BPAY, debit cards and PayPal in that order. So, while we cannot rule out some reporting bias, including because some people may be reluctant to report all their spending for privacy reasons, our survey suggests that very large transactions by households are very infrequent and, when they occur, they use electronic payment methods or occasionally cheques.

We're now happy to answer the committee's questions.

CHAIR: Thank you for providing that to us. Alex, do you have any objection to that being tabled?

Senator GALLACHER: No.

CHAIR: There's been a bit of commentary, which perhaps you've read, about this bill being somehow linked to the idea of a bank bail-in or the imposition of negative interest rates having an impact on Australia's overall monetary policy. Have you seen some of that commentary, and would you care to comment?

D r Richards : I can talk to that. I think that discussion is not really relevant for the current bill. The issue for the current bill is: should there be a ban in business of the use of very large transactions in cash? But the concerns that you referred to are very different. It's a scenario that is something like this: somehow this is a precursor to the imposition of negative interest rates and the government deciding to withdraw cash from circulation. I'll make three points on that scenario. The first one is that monetary policy is set by the Reserve Bank board; it's not set by Treasury, the ATO, the Black Economy Taskforce or, with the greatest respect, the parliament. It's set by the board according to the mandate that has been given to the board under the Reserve Bank Act.

The second one is that the governor has spoken recently on this issue. Talking about the possibility of the policy rates—that is, the cash rate target—he said that he views the prospect of negative interest rates in Australia as extremely unlikely. He also made the point that even in countries where the policy interest rate has gone slightly negative, the interest rates received by households on their deposits haven't. There are almost no examples of negative interest rates for household deposits in those few countries that have had negative policy rates.

The third point I would make is that the notion that cash might be about to be withdrawn seems a little far-fetched. The Reserve Bank and the government have both said in different contexts recently that cash is a very important part of our payments system and our economy. With respect, I think some of those concerns that you've alluded to are a little far-fetched.

CHAIR: Thank you very much. Do you monitor the cost of electronic transactions? We've had presented to the committee today the idea that a cash transaction is a way of saving consumers money. Do you monitor the cost of electronic transactions, and how are they trending?

D r Richards : We do in at least two ways. One way we do it is we publish data in our bulletin on the average merchant service fee paid by businesses to receive different types of cards—debit and credit cards. Those data show that the cost of card acceptance for Australian merchants is actually very low by Australian standards and it's actually fallen significantly over the past 15 years or so. The Payments System Board, which is the Reserve Bank's other board, took some regulatory actions in about 2003-04 which had the effect of bringing down the cost of payments. The cost of payments in Australia is actually low by international standards—that's the cost of accepting payments by card. The cost of debit cards is around, on average, 50 basis points, or half a per cent; and the cost of receiving credit cards is in the order of about 80 basis points, or 0.8 per cent. That's low by international standards.

The other thing we do, infrequently, is a broader survey on the cost of household payments—in general, for the entire economy, the broader resource cost, not just the costs paid to banks, but the cost in terms of the time that consumers or businesses spend in making payments et cetera. We published this data most recently in 2014. I think it shows that Australia has got a fairly low-cost payment system by international standards.

CHAIR: I'm not even sure this is the correct phrase any more but clearance times—the speed and efficiency of transactions? How have they trended over time? There was a new payment platform put in place, I think, a year ago. Is there anything coming up in that regard to reduce the friction?

D r Richards : Clearance times have improved. The payments industry did something called same-day settlement in 2013, which meant that there were clearing exchanges, exchanges of payment instructions between banks, several times a day rather than just once a day. As you said, in early 2018 the industry launched the new payments platform. That infrastructure allows instant payments. I could, using my bank app, even if you're with a different bank, send some money to you and you would have it probably in about three seconds. That's been gradually rolled out to customers. Most banks have started rolling it out to their household customers, but it's increasingly being rolled out to business accounts too. And so that has very significantly improved the quality of banking services and electronic payments to households, businesses and governments. The government is using it to make emergency payments. It can make payments at night and on weekends, and the recipient gets the money straight away, within about three seconds.

CHAIR: Finally, there's been some suggestion that this will inevitably drive people to the banks, particularly the big four banks. Are there payment paths that don't involve the banks? I'm not sure you're qualified to answer that, but if you are? And what percentage of the transaction flows would they be? Do you know?

D r Richards : The bigger picture is that payments are already flowing to the banks. There's been a significant shift away from the use of cash and towards electronic payments, and those electronic payments overwhelmingly go through banks. There are some non-bank electronic payment methods. For example, you could probably think of PayPal as being that.

CHAIR: We also had cryptocurrency raised as a potential pathway earlier today.

D r Richards : I am happy to chat about that. I actually have some bitcoin in a wallet on my phone. I've had that for about five or six years now for purely experimental purposes, and it hasn't become a mainstream payment. It doesn't meet many of the criteria that we would normally attach to money such as that it's a stable store of value. It hasn't proved to be that. As a unit of account, people don't post their prices in bitcoin. Even bitcoin conferences don't post their conference fees in bitcoin. Then, as a means of payment, it's a possible means of payment for person-to-person transactions, especially cross-border ones, but it's not something that people are using in day-to-day transactions. I have actually once used bitcoin to buy a cup of coffee in Sydney. There are a few places in Sydney that will accept bitcoin for things like that, but they don't actually want bitcoin. They would be converting it straight back to Australian dollars. So it's interesting from a conceptual point of view and a theoretical point of view, but it hasn't become a mainstream means of payment. But it's something we continue to study. As you're aware, there are proposals for other forms of stablecoins, as they're called. Facebook has got a proposal, but it remains to be seen if and when that will ever launch.

CHAIR: Okay. Senator Gallacher.

Senator GALLACHER: I was struck by one of the paragraphs in your opening statement. You note that the value of Australian bank notes outstanding continues to grow and you go on to say that it appears as if only—does it say a quarter of the notes in circulation are actually used to buy and sell things?

D r Richards : Yes.

Senator GALLACHER: What level of notes are in circulation on a daily basis?

Dr Finlay : It's roughly $80 billion outstanding.

Senator GALLACHER: Eighty billion dollars are outstanding every day?

Dr Finlay : It is something like $3,000 per person.

Senator GALLACHER: And about 25 per cent of those are used to buy and sell things?

Dr Finlay : Yes. That includes cash in wallets, tills, ATMs and bank branches.

Senator GALLACHER: So it appears as if people have quite legally made a decision to store a considerable amount of wealth in physical bank notes.

Dr Finlay : Yes.

Senator GALLACHER: If you extrapolate that out across each household, how much would each household have?

Dr Finlay : If you just take the numbers literally, it would be roughly $2,000, but in actual fact it's probably the case that most households have very little and a few households have a lot, and maybe people overseas hold Australian dollars. It is unlikely to be spread evenly.

Senator GALLACHER: I had the opportunity to go to your facility in Keilor, where you wanted to put in some extra note-making facilities. We said, 'Why would you do that, because people are tapping and going?' but that's not true about cash. Cash is growing in circulation, isn't it?

Dr Finlay : Yes, the amount outstanding is growing. I should say the growth rate has slowed over recent years, but the total amount of cash—

Senator GALLACHER: You're still making lots and lots of notes, and only 25 per cent of those notes are used to buy and sell things?

Dr Finlay : That's our best estimate, yes.

Senator GALLACHER: So we've got this situation where there's a huge amount of cash there which now will be impacted by legislation saying that, if you have $50,000 under your bed, you can't spend it in more than $10,000 lots. Is that essentially correct?

Dr Finlay : That's probably true. You can still deposit it at your bank.

Senator GALLACHER: It's legal to get it and legal to save it, but you can't go out and spend all of it.

Dr Finlay : That's the intention of the bill.

Senator GALLACHER: Why would we do that? Why do we want to stop people from spending their money which they've legitimately saved or decided to park under their bed and not in the bank? Are you suggesting that there are nefarious transactions if someone has $50,000 under the bed?

D r Richards : This was a recommendation of the Black Economy Taskforce.

Senator GALLACHER: We're going to go to that.

D r Richards : It was one of many recommendations that was an attempt to reduce black economy activity.

Senator GALLACHER: I fully support reducing black market activity, but no-one's suggesting that deciding to place your store of valuable notes in cash is a black market activity.

Dr Finlay : No, and this bill doesn't talk to that, I don't think.

Senator GALLACHER: No, it just puts a limitation on how you can spend it once you've got it.

Dr Finlay : Yes. As Tony noted, as far as our data goes, cash transactions above $10,000 are incredibly rare anyway.

Senator GALLACHER: But, if people have a store of wealth, wherever they've decided to put it—in their safe or wherever—the effect of this bill would be to limit how they would be able to spend that.

Dr Finlay : Yes.

Senator GALLACHER: Is there any evidence as to the size of the black economy? How much of that store of wealth would be, from the task force's view, black market activity?

D r Richards : I think it's probably better you ask Treasury or the task force itself.

Senator GALLACHER: You raised the task force, so I thought you might have had some view on that. But very clearly there's a decision made by some consumers or users of cash bank notes that they don't spend it—that they save it.

Dr Finlay : Yes.

Senator GALLACHER: And the implications of this bill are simply that, if they have $20,000, they can only spend it in three $7,000 lots or whatever?

Dr Finlay : Yes.

Senator GALLACHER: Are foreign people holding Australian bank notes? Is this an international hedge? I did read years ago that Japanese consumers, when faced with negative interest rates, would just buy Australian dollars because that seemed to be a commodity that might give them a better return than their bank interest rates. Is that still the truth?

D r Richards : Richard will be able to talk about what we know about shipments of Australian bank notes abroad, for example; but, at a slightly broader level, the Australian dollar actually punches above its weight in terms of its global importance. If we look at all the currencies used in wholesale foreign exchange trading, we see that the Australian dollar is the fifth-most-traded currency in the world. If we look at the currencies that are held by central banks in their foreign reserve portfolios, we see that the Australian dollar ranks as No. 7. We're not the fifth- or seventh-largest economy in the world, but the Australian dollar is viewed as a credible currency. That's at the wholesale level, so it's not impossible that there could be very significant holdings by individuals offshore, and Richard may be able to tell you about shipments of cash.

Senator GALLACHER: But don't you have that $10,000 limit? You can't just take any amount of Australian bank notes out of the country.

Dr Finlay : I think you have to declare if you take more than $10,000 in or out.

Senator GALLACHER: Oh, so you can take it, but you have to declare it.

Dr Finlay : Yes. There's no prohibition on doing so. The big armoured car companies routinely ship many hundreds of millions of Australian dollars offshore.

CHAIR: What companies?

Dr Finlay : The armoured car companies such as Armaguard and Prosegur—the companies that physically move cash in a safe way. Essentially, we know how much cash flows offshore. A lot of that will come back in tourists' wallets, because they'll go to a bureau de change overseas, get cash and then come here and spend it.

Senator GALLACHER: How do we know that that is not being used by the black economy? How do you transact that? If somebody puts in an order for A$20 million in Taiwan, how do you know that black money is not being used to do that?

Dr Finlay : The money that goes offshore is going from bank to bank. At least at the first destination it is going to a big reputable overseas bank.

Senator GALLACHER: Like Westpac?

Dr Finlay : Westpac might be the Australian bank. They will be sending it to Bank of China or JPMorgan or some foreign bank, who will then pass it on to their customers.

Senator GALLACHER: You estimate that the remaining 10 per cent or so of issued banknotes are split roughly evenly between banknotes that are lost and banknotes that are used for the shadow economy activity. Can you delve into that a bit? What does that look like in monetary terms?

Dr Finlay : I should say upfront that it's hard to be definitive about what banknotes are used for. Once they leave our vaults, we don't track or trace them. To try and understand the shadow economy aspect we use data from the ABS, who, in 2012, estimated the size of the shadow economy in Australia. The Black Economy Taskforce also came up with some estimates; I think their estimates were the ABS numbers times 1½. Those estimates gave us a sense of the size of the black economy in terms of spending. Because one banknote can be used multiple times, we had to come up with estimates of how fast cash circulates. Based on those two, given a certain amount of spending and how many times one banknote can be used per year, we estimated that the amount of spending on shadow economy activities as estimated by the ABS could be facilitated by roughly five per cent of the banknotes outstanding. The RBA put this research out, so it's all on the public record. It was put out in late 2018.

Senator GALLACHER: Does the Reserve Bank, in its purview, estimate what the shadow economy is and what it looks like?

Dr Finlay : No. We relied on ABS estimates. We've got no expertise—

Senator GALLACHER: How does the ABS estimate the shadow economy? Does someone in the shadow economy volunteer and say, 'Put me in that box'?

Dr Finlay : The ABS does lots of good work. The short answer is: I don't know. Any economic estimate is a hard thing to do. They estimate inflation. They estimate GDP. They've got a lot of very skilled statisticians.

Senator GALLACHER: Turning this argument on its head, given the volume of transactions via EFTPOS and 'tap and go', how does a business exist in the shadow economy? You would literally have to be a stallholder in a marketplace, operating every Saturday and Sunday. That would be the only way you could exist outside of the legitimate economy, I would've thought.

Dr Finlay : I've got no personal experience that I can share. Anecdotally, tradespeople and shops could take payment and not declare it.

Senator GALLACHER: I can understand that. A tradesman comes around, no receipt is required and they avoid the GST. But they still bought the materials for the job. They still have to run their logbook for their vehicle. They still have to put in a return sooner or later, unless they're going to go broke anyway and, one way or another, they will get found out. The incentive, really, is to get the GST, because you can take it off your other side. There are two sides to the GST, aren't there? Is this a serious problem?

Dr Finlay : We have no expertise on how—

CHAIR: I think that's probably a question for Treasury. Can we go to Senator Patrick?

Senator GALLACHER: Yes.

Senator PATRICK: I heard in response to a question that the chair asked that you do keep track of household expenditure on bank charges. Can you give some details as to what they are?

D r Richards : The figures that I quoted are the merchant service fees paid by all sorts of merchants, retailers and other businesses that accept card payments; that's the percentage fee in total that Australian merchants and businesses pay to accept card payments. The Reserve Bank also publishes data on bank fees. They are published once a year in our bulletin. I don't have those numbers in front of me, but if you have specific questions we can take them on notice.

Senator PATRICK: If you could direct the committee to where it can find that on the web, that would be useful. In relation to those merchant fees and bank fees, has the Reserve Bank examined whether or not there is justification for the size of those fees?

D r Richards : The bank has a number of regulations that have impacted the level of card fees paid by merchants. We have some regulations which cap interchange fees that are paid between banks. These fees are set at much lower levels than in many other economies. The bank has also taken regulatory action regarding no- surcharge rules, and this has had the effect of bringing down the fees paid by Australian merchants. I think we have a good understanding of what goes into those fees, and our policy actions have actually exerted a fair bit of downward pressure on them.

Senator PATRICK: That's an answer to a different question. You're saying there are regulatory impositions and constraints upon the banks and, indeed, merchants. My question went to an analysis as to whether or not those fees actually generate income for the companies as opposed to covering off the cost involved in the transaction.

D r Richards : I think I'd probably fall back on my earlier comment that the merchant service fees paid by Australian merchants are significantly lower than in most other countries. There's every reason to think that it's a reasonably competitive market and that our policy actions in this respect have been successful—the fact that Australia has got a fairly low-cost payment system.

Senator PATRICK: Can you provide the committee with your comparison data?

D r Richards : We'd be happy to do so.

Senator PATRICK: Once again, I reiterate that you're talking about how they compare with other jurisdictions as opposed to whether, as I think most Australians would suspect, the banks and merchants make money from these transactions. The relevance of that to this inquiry is that this legislation will in fact force people to go to electronic transactions. My question is—and the answer can be no—have you conducted analysis, or are you aware of any other government entity that has conducted analysis, as to the actual cost of conducting a transaction versus the cost or the charge that is levied on the consumer?

D r Richards : I don't have any specific evidence for the banks on that question. As regards any fees charged by merchants, I can comment on that. In 2016 there was regulatory reform on merchant surcharges. Where the merchant surcharges a consumer for a particular payment method—for example, a particular type of credit card—the merchant may not pass on an additional cost that is any larger than their cost of acceptance that they are being charged by their bank. As a result of those reforms which the Reserve Bank implemented and in which the ACCC was given investigative and enforcement powers, the surcharges charged by the domestic airlines came down very significantly. I think we can be confident that any surcharges charged by merchants for card acceptance are no more than their cost of acceptance that they have to pay their provider of financial services.

Senator PATRICK: Then the question goes to: is the provider of those financial services profiting from the fees? It just transfers the question back up the chain.

D r Richards : We'll provide you with the data that we have, and that might be able to shed some light on this.

CHAIR: We will need to move on, Senator Patrick.

Senator PATRICK: Can I just ask another quick question?

CHAIR: This will have to be the last one.

Senator PATRICK: You talked about cryptocurrency and perhaps the low take-up. Do you have any data that you could provide on notice that shows the take-up of cryptocurrency over perhaps the last five years? Indeed, has any thought been applied to the idea that, if this legislation were to be enacted, there would be a drive towards cryptocurrency, noting it would avoid the traceability being sought under this legislation?

D r Richards : I'll take on notice your question to see whether we can provide any data. On the question of whether there could be a shift towards cryptocurrencies, I suppose, at the margin, if an entity is currently transacting in cash for nefarious reasons and decides that it's no longer going to use cash, it could potentially shift into cryptocurrency. I note that to get into cryptocurrency you typically have to get in via a bank transfer, so there may be some limits on that. To get your money either into or out of cryptocurrency you probably have to go through the domestic banking system. Once it's in cryptocurrency, something like bitcoin, it's not completely untraceable; it's less traceable than a bank deposit but it's actually more traceable than cash. I note that the bill defines currency to include cryptocurrency, though the Treasury may be exempting cryptocurrency initially.

CHAIR: Thank you for your time today. We appreciate it.