The Journey Towards a Less Cash Australia

Despite headline currency in circulation at near record levels, A$102.22 billion on issue at the end of July 2022 (that’s 27% higher than the July 2019 level), substantially less cash is being used in Australia. The COVID-19 pandemic has sharply accelerated what was an emerging trend towards lower transactional cash use as Australians enthusiastically embrace other forms of payment methods, most notably debit cards, contactless and faster electronic payments.

Set against this trend of a desire to hold cash as a safeguard and store of wealth, but less enthusiasm to actually use it for day-to-day payments, the Reserve Bank of Australia (RBA) undertook a review of the country’s Banknote Distribution Arrangements (BDA). As part of the review the RBA published an Issues Paper inviting interested parties to comment about the arrangements in place for distributing banknotes around the country. The review sought to identify what changes could make the banknote distribution system more effective, efficient, sustainable and resilient.

In response to the submissions received, the RBA has now published a Conclusions Paper. It summarises the broad range of feedback provided, outlines a series of changes that the RBA intends implementing, but in line with its ‘light touch’ approach to market regulation holds back from some of the more interventionist actions respondents suggested. It acknowledges that its changes ‘will make a positive difference in the current environment’ but, ‘these changes are unlikely to fundamentally reshape the industry’.

That is, however, something that the recently announced proposed merger of the country’s two largest cash management companies is likely to change if they succeed in getting Australian Competition and Consumer Commission (ACCC) regulatory approval, more of which later.

Standardising distribution

Current wholesale banknote distribution arrangements are underpinned by a series of bilateral contracts between the RBA and Australia’s four largest banks. Considerable commentary surrounded the fact that while these confidential agreements are individually negotiated, the cash management companies that operationally execute them are not direct parties to the arrangements.

The RBA has committed, as a priority, to introduce transparent standard arrangements which, save for commercially or security sensitive details, will be publicly available and may facilitate broader participation in the wholesale distribution arrangements.

The transition to the new rules will be undertaken by an RBA-chaired industry forum facilitated by AusPayNet, the Australian payments industry association and self-regulatory body.

Increased incentives

Other concrete proposals from the RBA, within their direct control, are two proposals to modify mechanisms to manage the quality of banknotes in circulation.

First, the RBA proposes a modest (but undisclosed) increase in the maximum annual payment available to sort banknotes to a high quality within the Note Quality Reward Scheme Standards (NQRS). The payments are contingent on participants being able to accurately sort to the updated quality standards that take into account now widespread circulation of ‘Next Generation’ banknotes. The RBA has resisted calls for greater direct intervention. Some participants raised the concern that as NQRS incentive payments go straight to the BDA bank contract holders, payments may not be passed on fully to the (usually cash management company) quality sorter. But the RBA claims more intervention would be ‘too prescriptive’ and involve the Bank in ‘business-level decisions, which are the province of the private sector’.

The other payment incentive is to increase the compensated return of unfit banknotes to the RBA’s sole banknote destruction site near Melbourne. As the older series banknotes are collectively classified as ‘unfit’, and with the value of new NGB saturation still only at around 30% of the total banknotes on issue, there remain substantial challenges and significant cost incentives associated with the refresh of the country’s banknotes.

Industry consolidation

Just before the RBA’s report was published, Australia’s two largest cash management companies announced a proposed merger. Under the terms of agreement – which will require competition authority approval – Prosegur Australia’s cash businesses will be rolled into Linfox Armaguard (part of the Asia Pacific’s largest privately-owned logistics company Linfox). Spanish owned Prosegur Cash (one of the world’s three largest CIT businesses) will retain a 35% share in the new combined business.

Regulators face the complex challenge of whether to approve the deal or not. On the one hand, diminishing cash use and infrastructure underutilisation clearly questions the viability of the current arrangements. In the AusPayNet consolidated response, the view was expressed that ‘the current cash distribution arrangements and commercial infrastructure are under severe strain and that while this RBA review was welcomed, time is of the essence’.

The RBA reported that ‘there was lukewarm support among respondents for greater consolidation in the form of a utility’, yet essentially the proposed merger could create such an entity. The two cash management companies already account for an estimated up to 90% market share, operate all but two of the country’s more than 50 approved cash centre depots (where compensated verified cash holdings can be held), and the proposed merger of their two independent ATM networks (atmx and Precinct brands) brings together many of the country’s previously bank owned remote site ATMs under the one umbrella.

While it is likely that infrastructure consolidation is the only viable way forward, this does present market concentration risks, and support for such a move is not universal.

A part of the challenge the cash management sector faces is that historic fierce competition has resulted in arguably unsustainable pricing, and so reduced competition, and lower transactional volumes are likely to lead to upward unit cost pressure. While Australia has a number of other cash management companies, they are all much smaller and do not have national presence, limiting their capacity to provide credible contingency cover. Equitable participation, for example extending direct RBA access, as contemplated by the BDA changes, will be important regulatory considerations.

It remains to be seen if the RBA’s response is sufficient to meet the continuing challenges of ensuring Australia has an effective, efficient, sustainable and resilient cash system, and it will be essential for the newly created industry forum to have broad representation and determination to drive through the needed changes.

The full report can be viewed at https://banknotes.rba.gov.au/resources/banknote-distribution-consultation/conclusions-paper/.

Paul Blond is Managing Partner of cash and payments consultancy The Blond Group LLP based in Australia and the United Kingdom.