The Assistant Governor of the Reserve Bank, Karen Silk presented a speech titled 'A regulator’s view of the changing payments landscape in New Zealand and the potential responses to it' at Payments NZ’s The Point conference held yesterday in Auckland.

Karen Silk highlighted the challenges that are impacting New Zealanders’ ability to benefit from reliable and efficient money and payment systems, and the Reserve Bank’s view on the way forward.

We summarise the key points from Karen Silk’s speech and share our thoughts on the Reserve Bank’s views below.

Who needs to read it? Why?

Our summary of Karen Silk’s speech is relevant to anyone who is interested in the place that cash and payment systems play in our economy, and how that may change in the future. Banks, merchants, payment service providers and those involved in the development of digital currency should take particular note of the current landscape Karen Silk describes, and the Reserve Bank’s vision of what is to come.

What does it cover?

Karen Silk’s speech focussed on three key themes – the argument for cash, innovation in digital payments, and central bank digital currency and crypto assets. In particular, she discussed the benefits and challenges they bring, and the work the Reserve Bank is doing to help New Zealanders overcome them.

The Argument for Cash

In her speech, Karen Silk identified that payment systems allow New Zealanders to save and spend their money and manage risks, while central bank money acts as a value anchor for private money, as well as the financial system and economy more generally. Payment systems also serve as an accessible form of payment, contributing to economic inclusion and wellbeing across society. Karen Silk stated that although digital transactions are faster, cheaper and more convenient, there are still those who cannot fully access digitalised money, and there is a risk of them being excluded from important aspects of a society if cash was to be left to languish.

Due to the high uptake of card payments, the cash infrastructure network is being put under significant pressure, but Karen Silk argues that it does not follow that the public no longer values cash. In fact research has affirmed the opposite. New Zealanders believe that cash is the most dependable form of money, but the reality remains that the commercial case for maintaining cash services in today’s primary channels of distribution has weakened due to declining use. As a result, Karen Silk said it could be argued that cash system arrangements “are in a critical state,” and are lacking resilience.

According to Karen Silk, the key benefits of cash is that it provides choice, autonomy, and agency for everyone. As such, the Reserve Bank is still committed to ensuring cash “is available to New Zealanders for as long as people value and use it,-” and its current work on cash focuses on “optimising the efficiency and resilience of cash infrastructure for future demand.”

Both the 2021 Future of Money Cash System Redesign Issues Paper, and the Reserve Bank’s Future of Cash work that began in 2017, found that cash accessibility needs to improve. The Reserve Bank said this points to the value in further exploring the potential benefits of policies which support merchants in having an expanded role in cash distribution.

Innovation in Digital Payments

Karen Silk identified that while digital innovation is happening both on top of, and in competition with, traditional payment rails, New Zealand is still lacking scalable, electronic, instant, peer-to-peer payments. This lack of real time systems for retail payments means we have fallen behind on development compared to other OECD countries. Karen Silk pinned this lag down to a continued reliance on legacy systems, a failure to understand the regulatory regime, and limitations in the co-ordination and provision of regulatory support for innovation.

A trend in the digital payments space is the emergence of key players who offer significant benefits in improving efficiencies and service quality for end users and the economy as a whole. These benefits do not come without challenges, however, including the unwitting introduction of risk to the money and payments system through flawed design, new providers being tempted to avoid regulation for a competitive edge, and the displacement of central bank money as a trusted and stable value anchor.

Karen Silk pointed out that in the face of these challenges, New Zealand’s regulatory payments frameworks are being enhanced, notably through:

• the Financial Market Infrastructures Act 2021, which created a comprehensive regulatory designation regime covering key payments infrastructures;
• the updated RBNZ Act 2021 which has refreshed the Reserve Bank’s role, structure and payments mandate;
• the Retail Payment System Act 2022, which has given the Commerce Commission the mandate to regulate the retail payment system and its participants such as merchants, banks, non-bank merchant acquirers and card schemes; and
• the upcoming Consumer Data Right is anticipated to strengthen and support New Zealand’s open banking regime.

This enhanced regime is coming through against the backdrop of increased cooperation among regulators. The Reserve Bank is also currently taking forward their Future of Money and Payments work programme, which has the objective of creating a “reliable and efficient money and payments systems that support innovation and inclusion” in New Zealand.

In terms of regulating the future payment landscape, the Reserve Bank is conscious that undue restrictions could have the effect of stifling healthy competition, impairing market efficiency and limiting innovation. It was however acknowledged that this should be balanced with the need to ensure the robustness and financial integrity of the system is maintained. The Reserve Bank is therefore in the process of reviewing the extent to which existing criteria is fit for purpose.

Central Bank Digital Currency and Crypto Assets

The Reserve Bank is exploring the shiny new idea of a Central Bank Digital Currency (CBDC). Of the 6,000 responses received on the 2021 CBDC Issues Paper, many expressed concern that there would be an imminent removal of cash, replaced by state control through a CBDC. Karen Silk said the Reserve Bank took this as confirmation that New Zealanders still value cash- in particular the privacy and autonomy it provides. In terms of what a CBDC would look like in New Zealand, the responses expressed the need for it to be privacy centric.

The Reserve Bank is currently in its second stage of CBDC exploration, during which it will explore various design aspects. The intention is to support wider digital financial inclusion and wellbeing to enable an open, innovative and competitive payments ecosystem while maintaining user privacy. The Reserve Bank will also be undertaking proof of concept experiments to “better understand what is possible and feasible.”

The Reserve Bank believes crypto assets may need more regulatory oversight due to the risks innovation in this area poses to consumers. Gaps exist in the regulatory tool kits which were developed for an economy that did not anticipate this method of transacting. As such, the Reserve Bank is publishing an issues paper on private innovations in money early next month, seeking feedback on the content by March 2023.

Our view

It is positive to see that the Reserve Bank is comprehensively engaging with the benefits and challenges of change to payment systems. The rapid pace of this change, involving a drop in the use of cash in favour of digital payments and currencies is being experienced globally. For example, there are currently 100 projects worldwide looking into CBDCs, with the Bahamas being the world’s first nationwide CBDC to launch in late 2020. It is encouraging to see New Zealand’s national bank has taken notice, while still being conscious of those who are vulnerable to being left behind in the march of digital innovation.

Current developments around what money and payments are, and can be, will fundamentally shape what they look like in the future, and it is important that the Reserve Bank balances keeping pace with developments while helping the entities it regulates, and the citizens it serves, respond to that change.

What next?

If you have any questions in relation to what the views expressed by the Reserve Bank may mean for your business, or are wanting further information about the concepts, please contact one of our experts.

This article was co-authored by Elise Plunket, a Law Clerk in our Financial Services Team.