RBNZ Seeks Feedback to Determine Cash System Redesign

As part of our series of articles around the world to assess the growing trend to digital payments and what these countries are doing to ensure ongoing access to cash in a less-cash world, this month it’s the turn of New Zealand.

The Reserve Bank of New Zealand (RBNZ) began investigating cash use and the systems that make cash available in 2017, trends in cash demand and the cost pressures on the commercial supply of cash leading to the conclusion that cash will likely become less widely available and used less in the medium to long term.

The effects of less cash in society would be felt more keenly by certain groups of people who rely on it and for whom no practicable substitute exists. The severity of these impacts would be worsened if the transition to a society with less cash acceptance occurred before mitigating measures could be put in place.

Further, the size of the affected groups might not be large enough to motivate cash providers to ensure future cash availability, but on the other hand the size (of affected groups) might also not be negligible.

This led to a public consultation on cash related issues in 2019 leading, in 2020, to the RBNZ’s creation of a Money and Cash Department with a remit to better deliver on its responsibilities with respect to the smooth functioning of the monetary system.

Last September (2021), the RBNZ initiated a comprehensive public consultation – The Future of Money. The objective of this, the third in a series, is to obtain feedback on issues relating to the cash system and policy options intended to achieve greater efficiency and resilience.

In the first publication - ‘The Future of Money – Stewardship’ - the RBNZ articulated its role in relation to money and cash as one of stewardship and proposed stewardship objectives. The publication outlined the two important roles performed by central bank money - acting as a value anchor for the financial system and contributing to financial and social inclusion. Cash, currently the only generally available form of central bank money, is relied upon to perform these roles. But it can only meet the RBNZ’s stewardship objectives if the cash system is fit for purpose, defined as: 

• The physical capacity and ownership structure of the cash system is appropriate for delivering resilience.

• There is on-going cash acceptance and availability until such time as cash is not needed.

• Subject to these objectives being met, the cash system is an efficient user of resources.

The second publication in the series – ‘The Future of Money – Central Bank Digital Currency’ – explored issues related to CBDCs.

The purpose of the third and current consultation is to introduce the cash system, outline the RBNZ’s objectives for it, explain the external drivers impacting on it, assess whether the system is likely to meet the RBNZ’s objectives, and seek feedback on possible policy options for redesigning the cash system. The paper issued for the consultation has three parts.

1. Introduces and outlines the New Zealand cash system, outlines proposed objectives and external factors impacting the system.

2. Looks at the cash system in more detail, trends in the use of cash in transactions, explores financial and social inclusion outcomes, system costs and value anchor outcomes.

3. Explores possible policy outcomes. Feedback is sought on all policy options identified as well as on any that are not on the list, but that respondent think ought to be.

The RBNZ noted that the cash system is being affected by a number of significant external drivers, both challenging and beneficial, but on balance it regarded these as creating significant issues for the cash system and, in the absence of a policy response, the cash system will face acute resilience issues, cash’s contribution to financial and social inclusion will continue to decline and its role as a trusted value anchor for private money and the wider financial system will be under threat. The cash system would be unable to meet the RBNZ’s objectives.

The RBNZ outlines 16 potential policy responses that, in its view, can help deliver a fit-for-purpose cash system, stating that no single policy appears able to deliver on its own but that different combinations of policies could be effective.

As an illustration, eight policies are identified as having the possibility, in combination, to shape incentives and address the RBNZ’s objectives appropriately. It stresses, however, that there cannot be a trade off between efficiency and resilience – ie. the cash system needs to have capacity that exceeds its business-as-usual demand levels, but as the cost of carrying excess capacity may be significant, a risk assessment decision will be required regarding the level of excess capacity.

The consultation also requires views on who should pay the costs for the cash system - bank customers when they access their accounts to acquire cash, banks that provide accounts, taxpayers on the basis the cash system produces attributes that have the characteristics of a public good, merchants who accept cash, or providers of payment options that compete with cash?

Some of the policies suggest a rebalancing of costs towards banks, but the question also arises regarding the role of banks in the cash system historically, now and in the future, noting that banks may prefer a digital dominant or digital only relationship with customers. This has consequences for cash availability, which affects the value anchor and in turn underpins private money. Also, should the government bear more of the costs?

The potential policies that were identified by the RBNZ and their eight policies chosen as a potential bundle are shown in the table on the previous page.

The deadline for feedback from New Zealand citizens and interested parties is 7 March.

RBNZ's potential policy responses to deliver a fit-for-purpose cash system (eight of which, ticked, being seen as the most appropriate policy bundles).