RESERVE BANK REFLECTIONS ON REGULATING RETAIL PAYMENTS 
	A DIFFERENCE OF OPINION	
On 21 May 2015 an assistant-governor of the Reserve Bank (RBA) made a presentation to a Cards & Payments conference titled Card Payments Regulation: From Wallis to Murray -- see     http://www.rba.gov.au/speeches/2015/sp-ag-2015-05-21.html. 
What was said there is illustrative of problems that can arise when regulatory agencies with an aura of infallibility reflect on their performance, colouring an historical record to suit while gilding prospects for the future.
Truth be told, however, a more faithfully full and correct perspective on this historical record leaves a quite different impression of the way the RBA, as the appointed regulator, has overseen and regulated Australia’s retail payments systems over the past 30 years.
SOME BACKGROUND
Conveniently erased history – RBA disinterest from Campbell to Wallis
The RBA’s formal responsibility for overseeing the retail payments system dates from 1984 when, in the wake of the Campbell/Martin reports, Treasurer Keating created the Australian Payments System Council (APSC). The RBA, as chairman and convenor of meetings of providers of retail payments services, had a general brief to coordinate the more independent participation of building societies and credit unions in retail payment and clearing-house arrangements dominated by the major banks – as well as overseeing the development of retail payments systems.
The APSC existed for some 14 years -- it published annual reports and background material, including on payments system developments. Good initial intentions lasted briefly before the APSC degenerated into thinly disguised dysfunction as the major banks resisted and frustrated the ambitions of ‘non banks’ to provide retail payments services directly. 
The feeling around the Council table was once nicely summarized by a non-bank spokesperson jocularly opining that ‘the only hand that will beat four-aces will hold a Colt 45’: some Council members found this assessment objectionable.
The eventual devolution of the APSC to a polite irrelevance included the development of a scheme for the non-bank intruders to pay fees to the major banks for access to the payments clearing house which they ‘owned’ and the embarrassment of contriving legislation relegating non-banks to issuing ‘payment orders’, instruments identical to ‘cheques’ in all but name – only banks could issue cheques.
The RBA oversaw this devolution -- initially sanctioning the demands of the major banks before more commonsense attitudes prevailed. In its latter years there was no effective leadership or direction of a Council doing nothing.
The tortured path towards commonsense, and Wallis, saw the Australian Payments Clearing Association established in 1992, with the RBA as ex-officio chairman, along with separate payments clearing streams for cheques, direct entry, cards and high value. 
These arrangements were also less than ideal in so far as they did not embrace the operation of Visa and MasterCard credit cards (or scheme-debit cards) nor did they prevent the major banks derailing reforms to the direct entry system while secretly establishing, in 1997, a competing system, BPay, which the major banks owned and operated on their usual monopolistic terms. 
Not to labour the point, the major banks were facilitated rather than constrained when aggressively protecting their collective monopolisation of the retail payments system.
Concurrently the RBA’s mishandling of the deregulation of retail banking in the 1980s underwrote the ever burgeoning dominance of the four major banks – this mishandling not only destabilized a couple of the major banks, it effectively made commercially untenable the ‘competitive’ position of the new foreign banks, the long-treasured state-banks and the converted building-society banks which soon either ‘failed’ or withdrew or were taken over by a major bank.
It is not surprising that RBA reflections on its role in regulating the retail payments system now start well after the Wallis committee reported – no one at the RBA would want to remember the prior sad history or to be reminded of it.
One incident illustrative of regulatory insouciance came at a 2011 Senate Economics Committee hearing: asked to explain the failure of ‘all’ the foreign retail banks that were newly licensed in 1985, the RBA governor (and chairman of the Payments System Board) gave a ‘no idea’ reply which was twice noted to have been ‘nonchalant’. The RBA never explained.
Even so, this inconvenient history should not be ‘erased’ from official commentaries –important lessons are buried in this history and its sadly lingering consequences.

Wallis ‘pre and post’ – repainted in high gloss
The RBA’s remembered history of retail-payments regulation seems to date from the establishment of the RBA’s separate Payments System Board in 1998 as proposed by Wallis in 1997 – unfortunately that remembering also seems to be both defective and Jack-Horner-like selectively self congratulatory.
Again, as above, it is fair to say: 
Truth be told, a more faithfully full and correct perspective on this historical record also leaves a quite different impression of the RBA’s contribution to the oversight and regulation Australia’s retail banking and payments systems over the past 17 years (as well as the 14 prior to that).
-	first, an  aside
The RBA’s relationship with Wallis was always fraught – not least because one outcome, well-known to be pre-determined, was that responsibility for ‘bank supervision’ would be taken from the RBA and relocated in a new agency – the Australian Prudential Regulatory Authority (APRA). The general plan -- known as ‘twin peaks’ – was hatched by the UK Treasury but adopted in Australia first.
This development in Australia is still, and was then, best seen as bastardry engineered by Treasury with political encouragement to ensure payback for the RBA so badly mishandling the deregulation of the retail banking system a decade earlier. That mismanagement then had left the banking system on the ropes -- effectively, many banks failed and while the four aces survived, two of them nearly did not.  Nothing explicit was said then – but incompetence brought retribution.
APRA then got off to a bad start when the HIH failure was booked to the new ‘peak’. 
-	back to payments systems.
The RBA’s reflections made last week, and reviewed here, could be read as suggesting the RBA was only waiting for Wallis to shine the light on payments policy problems – and, at long last, ensure the RBA was given the formal regulatory powers it needed to do the payments regulation job ‘properly’.
That over-paint job, using high-gloss shimmer, is somewhat misleading.
For starters, in 1996, the RBA very deliberately made no meaningful submission on payments policy issues to Wallis -- nor did it formally provide Wallis with any useful background material on payments system matters.
Eventually Wallis, bereft of any guidance about what to say on payments system matters sought someone likely to be helpful. A duly circulated diary note of some helpful comments to Wallis staff, was returned with an annotation to the effect -- ‘do not speak to these people – they are not trusted’.
Though curtailing discussions with Wallis staff it was courteous, nonetheless, to alert them to the best work then being done globally on payments policy issues – it was being done in Scandinavia, especially at the Bank of Norway and Bank of Finland, and was published there through the mid-90s in a raft of ‘bulletin articles’, ‘discussion papers’ and ‘annual reports’.
Photocopies of this stuff provided to Wallis staff ensured there was no need to say much more. The Wallis report duly recast the Scandinavian stuff in the Australian context, exposing entrenched inefficiencies and associated needs for substantial reforms – as intended to be delivered by their proposed RBA Payments System Board.
[There was a pleasingly explicit Wallis recommendation to have closely reviewed the interchange-fee arrangements for the local operations of the Visa and MasterCard schemes.]
   -- a ‘horrified’ reaction to the Wallis report
Wallis delivered the RBA two things – the loss ‘supervision’, that it wanted to keep, and the addition of a formal payments-policy regulation agenda that it did not want. On Wallis Day, 9April 1997, the climate in the RBA payments policy bunker was very chilly. The ‘management’ did not want any riding instructions.
Next best was to manage this unwelcome development from the outset -- and so it came to pass: 
•	first, while the legislation literally sought a sound, efficient and competitive retail payments system, the parliamentary speeches of the Treasurer, suitably drafted and edited by advisers, ensured the RBA would be a ‘reluctant regulator’ relying mainly on the voluntary co-operation of the major banks to achieve its objectives; and 
•	second, making sure the independent members of the PSB board included suitable people (as well as having the RBA governor as chairman along with the executive member being from the RBA). The idea that two recently-retired appointees -- a former CEO of Citibank’s operations in Australia and a former head-of-payments-policy at the ANZ bank -- were ‘independent’ was not clear to all. [Suggestions, then, that a couple of prominent media-economists be appointed to represent the community were not well received.]
The problems inherent in having a reluctant regulator in charge of the payments policy reform program soon became clear.  
The evidence is most clearly documented in published transcripts of responses given by the RBA Governor (and chairman of the Payments System Board) to questions put at the RBA’s half-yearly appearances before the House Economics Committee from 1998 to 2006. 
All questions, including on payments policy, being answered by the Governor himself soon made it clear enough that the RBA did not have its heart in the appropriate regulation of the retail payments system. The shortcomings are too painfully embarrassing to recall in detail but, eventually, in 2006 the Treasurer gave the RBA a blanket exemption from any need to account for its stewardship of anything – and from then on the House Economics Committee never asked a useful question on payments policy issues.
That exemption remains in force – the RBA can do as it likes on payments policy matters without being subject to formal independent reviews of the merits of its decisions. 
[That exemption should be withdrawn in so far as it extends to RBA responsibilities beyond monetary policy matters – which are competently tested for their merits by a raft of professional analysts in the media and elsewhere.]
-	the regulation of credit card fees
Apparently, with the passage of time, the RBA is now inclined to portray itself as welcoming a Wallis recommendation to investigate the interchange fees being charged by Visa and MasterCard for payments made with credit-cards (and scheme debit cards).
Truth be told, the RBA was dragged k&s to this task – long aware of what needed to be done it had also long determined that ‘there was nothing to see here’.  
Along the way the RBA made sure the ACCC, a regulator inclined to deal with this monopolistic and cartel-like rort, was removed from the field of relevant regulatory players. Put differently, once the RBA had any responsibility for payments system regulation no one else would retain any -- it would be brooking no interference from the ACCC which it simply shouldered aside. 
The subsequent history of the RBA’s contribution to reforming the retail payments system is similarly about a tortured journey where regulatory reluctance was compounded by the circus that has typified the yes-we-will/no-we-wont tactics of the major banks when asked to co-operate in delivering needed reforms.
The ‘yes-we-will’ stage of negotiations has the effect of buying time, especially when payments system work likely to benefit others is not a priority for banks. The eventual ‘no-we-wont’ impasses then put the reform agendas back to taws – there was some sense of banks taking turns to pull out of proposed innovations when unanimity was essential. The RBA was reduced to threatening regulatory retribution (e.g. lower fee caps) but in the wash up the promised penalties were never imposed.
Suffice to say the decades-long tortured path to reforming the retail payments system is there for all to see -- summaries of that story are published in past and recent submissions to various official inquiries – including this one: http://www.rba.gov.au/payments-system/reforms/submissions/review-of-card-payments-regulation/peter-mair.docx
That said one, and many ones, might now hope that with the RBA overseeing the installation of a central clearing hub for retail payments is indicative of the limits of regulatory patience with uncooperative intransigence.
Even so the risk of the major banks taking disruptive side steps is ever present: which major bank is already rippling the waters, playing with different systems – because, payment protocols based on hub and spoke models were "highly susceptible to being broken".

SOME FOREGROUND
My concerns with the tone and content of the presentation made on 21 May are essentially about the history of retail payments regulation being fancifully recast in ways that, by showing the RBA in an unfairly good light, hide important public-policy implications still not taken to heart by the RBA. 
The RBA should face its pastsquarely and not hide inside a contrived confection as it seems to have done – and, unchecked, may do again.
It is not necessary to dissect the 21 May presentation in detail – rather, some illustrative brief extracts can be juxtaposed with the different perspectives outlined above.
The Reserve Bank's role as a regulator of retail payments systems was established following the report of the Wallis Inquiry in 1997 [Apparently no recall of the role, or intended role,  of the APSC for which the RBA had responsibility for the 14 years to 1998]. 
[Previously] banks cross-subsidised payment services effectively as a utility .......... (after deregulation).... cross subsidies were competed away and the different components of banking services had to be separately priced, including payments. [Some $ 1,000 billion – that’s one-trillion -- is held, mostly by the major banks, in transaction accounts on which ‘no’ interest is paid, and earnings on those funds remains a major source of revenue that banks still use to cross subsidize payments services for which, generally, there is no semblance of explicit cost-recovery or cost-related price signals given to customers.]
In implementing the Wallis recommendations, the government's intention was that the policy approach should be co-regulatory. The explanatory memorandum to the law which set up the PSB's powers in 1998 stated that: ...The philosophy of the Bill … is co-regulatory. [Would the RBA entertain an FOI request for access to the drafting advice it gave in 1998 about this ‘explanatory memorandum’.]
Looking back on the work of the PSB since that time, it has very much followed the original Wallis outline and philosophy. [The RBA was well aware, well before Wallis, of the excellent work being done by central banks in Scandinavia that was, eventually, also the basis of the Wallis assessments of the Australian payments system and its recommendations for reforms. The RBA was not interested in it.]
Consistent with the Wallis vision, the PSB has been active in promoting coordinated industry solutions where that was in the public interest. An early example was in encouraging faster cheque clearing – an obvious improvement in system efficiency but one that couldn't have been achieved without effective coordination. [The use of the word ‘efficient’ in relation to ‘cheques’ was never appropriate especially when the nothing-done but pressing-need was always to hasten the demise of cheques. There should also be later and better examples of PSB initiated ‘solutions’ but, promising initiatives nobbled by the major banks, mean there are not.]  
In summary then, the policy work of the PSB has been very much consistent with the philosophy and objectives of the original Wallis reforms. A good deal of that work has been what might be termed ‘co-regulatory’ in nature, in the sense that it involved promoting industry-led solutions rather than using formal regulatory powers. [In summary, then, one could say that Australia now has a retail payments system which bears no resemblance to what may have been envisaged and hoped for by Campbell, or Wallis or anyone else inclined to think a diversified competitive and efficient retail banking environment would be appropriate. What we did get, fairly assessed, was and remains a cartel-like retail banking and payments industry still operating inefficiently, still without any semblance of pricing arrangements likely to foster efficiency, still with every semblance of cartel-like pricing indicative of profiteering with redundant credit-card schemes and more generally gouging the community with excessive penalty fees – in short the retail banking and payment system has the hallmarks of a poorly regulated racket.]  
[There are of course welcome glimmers of hope in what the RBA says it would like to see evolving in the next couple of years – but long experience is to the contrary, these hopes have routinely eventually been dashed -- and may well be again.
It is odds on that the four aces are, individually and collectively, actively looking for ways to preserve their dominance by bypassing or frustrating the infrastructure initiatives the RBA is sponsoring.]

SOME ENDING REMARKS
The community is justly entitled to be concerned about, and to complain about, the way recent reviews and inquiries into the financial system (FSI) have been conducted.
Whatever its prospective merits otherwise, it soon became a forlorn hope that the first ‘independent’ national FSI inquiry for almost 20 years would be inclined to expose, disclose and correct lingering problems and policy mistakes infecting the retail banking system. This inquiry was inappropriately chaired by a former CEO of which major bank – someone once institutionally and personally a major beneficiary of the regulatory incompetence and reluctance that delivered the financial system to the four aces on a platter.
It was all downhill once the interim report of the FSI review team peremptorily declared the financial system to be ‘competitive and well regulated’. It is not and it isn’t.
That inauspicious kick off is now compounded by the Treasurer endorsing the RBA conducting its own internal review of inquiry recommendations relevant to its role. Some semblance of an open and independent mind being engaged might have been preserved.
All up it is just not good enough – and given the RBA’s apparent inclination to re-write history to suit its preferred image, one can only be wary of the prospective publication of an ‘RBA history’ of the 25 years ending 2000. Under construction now for a decade or so already, this history would very sensibly struggle to present an objectively fair narrative about a most unfortunate period in the life of the RBA -- what would best be hung out to dry in public view probably will not be.

Peter Mair
29 June 2015