Reserve Bank's Karen Silk says having resilience in, and sovereignty over, critical infrastructure such as payments can be 'really important'

Payments in New Zealand should be considered core economic infrastructure alongside roading, water and electricity, Reserve Bank (RBNZ) Assistant Governor Karen Silk says.

Silk spoke to interest.co.nz about the RBNZ's Modernising New Zealand’s Retail Payment System issues paper. The paper says NZ is the only OECD country without a modern payment system, noting EFTPOS remains the country's only major domestic payment platform. And from later this year, once Canada goes live, we'll be the only OECD country without real-time payments.

"Payments ... should be thought of as a core economic infrastructure for New Zealand," Silk says. "That's the way we should think about it. We should think about it the same way we think about roading, the same way we think about water, the same way we think about electricity."

"It's infrastructure that allows what I call the oil of the economy to flow. So it's the infrastructure that allows money to flow."

Viewing payments as a core economic infrastructure is "certainly the way it has been thought about offshore," Silk says.

"And that's why you've had government, you've had heavy central bank involvement offshore in terms of determining long-term roadmaps around this," Silk says.

Indicative RBNZ analysis suggests payments modernisation could deliver economic benefits of $0.7 billion to $1.3 billion, or around 0.16% to 0.30% of GDP, if performance gains from lower transaction costs, increased productivity and stronger competition were comparable to those estimated in other jurisdictions, such as the United Kingdom.

The paper focuses on retail payments, being payments between individuals, businesses and government. The RBNZ says about $2 trillion of retail payments flow between NZ banks annually.

Visa & Mastercard dominance 'doesn't mean to say that's the way it should look moving forward from here'

Silk says there's a danger of becoming "captive" to services provided from overseas, domiciled offshore, which can come with greater risk, especially in a world of increasing geopolitical risk.

"The concept of having resilience within your own economy and sovereignty over some of your critical infrastructure is really important," says Silk.

"It's fair to say today, that there is dominance via scheme rails [Visa and Mastercard]. That doesn't mean to say that that's the way it should look moving forward from here, because the structures that we have today are not offering real-time settlements. We don't have the ability to connect with other faster payment systems that exist in other jurisdictions."

"It doesn't mean to say that you can't have that domestic competition to that service that is being offered today via scheme rails."

The paper doesn't look at the possibility of upgrading EFTPOS, or building a new modern domestic payments system, or who should do it, own and pay for it.

"But those are the things that will need to be thought about," Silk says.

"This paper is about sharing our view of what we think the issues are, getting feedback on that."

In June the Commerce Commission said 74% of NZ retail payments now use Mastercard and Visa, up from 43% in 2019. 

"Consumer payment preferences have shifted to contactless and online payments which accelerated during COVID‑19 and the rise of mobile wallets has favoured widely accepted and easily integrated payment methods."

"The share of EFTPOS payments is declining as it is unable to support evolving online, contactless and device-based payment preferences," the Commerce Commission said.

The RBNZ paper says Mastercard and Visa provide profits for operators and create significant revenue through interchange fees for banks, reducing incentives to invest in alternatives such as EFTPOS or more open modern platforms, especially if benefits would accrue to competitors. Additionally it says the Government's proposed legislation to ban surcharges on in-person payments could accelerate the move to Visa and Mastercard scheme payments from EFTPOS.

EFTPOS is provided by Australia's Cuscal and the local arm of US company Verifone, EFTPOS New Zealand Ltd.

NZ has lacked government leadership

The issues paper follows Minister of Finance Nicola Willis endorsing the RBNZ to lead efforts to "deliver the strategy for payments modernisation in New Zealand." This includes developing a strategic proposal and coordinating with key agencies and industry participants.

Silk says unlike in comparable countries, NZ has lacked government leadership to drive transformational change.

"What we have is a structure in New Zealand where, with that gap not being filled, you've had an entity like Payments New Zealand take the initiative and try and step in to coordinate that industry activity, if you like, to support modernisation."

"But that's very difficult where you've got a number of different private stakeholders who don't really carry that incentive to coordinate, to deliver something which is going to generate a whole bunch of public benefit. So that's where ... there's a misalignment of incentives in terms of delivering a better set of public outcomes," says Silk.

So where does this leave Payments NZ? Formed in 2010 and owned by eight banks, Payments NZ was primarily designed as a standards and rule-making body for clearing systems. However, with an absence of system-wide strategic leadership, it also coordinates industry activity and modernisation efforts, the RBNZ notes. So is Payments NZ to blame for NZ being a payments laggard?

Silk describes RBNZ's relationship with Payments NZ as collaborative, not adversarial. She sees a need for system-wide strategic leadership. 

"And that is the role of government and public agencies coming together to help support that...though, you want the private sector involved in that [too]. So it's really important that you have that collaboration and you have both public and private sector working together. But if you want that really strategic view of what the roadmap should look like for New Zealand, then that is something that is the role of government to deliver."

CEO Steve Wiggins says Payments NZ welcomes the opportunity to have a national conversation about payments. Payments NZ agrees a modern payment system requires a clear regulatory framework and close collaboration between government, industry and payment system users, Wiggins says.

RBNZ in charge?

Where does the RBNZ fit in, does it want to lead and have more payments oversight?

"We certainly have a strong appetite to see the improvement happen in this area," Silk says.

"And as part of leading that, where that responsibility lies in the future is something that is still to be decided, whether it's a single entity, which could be RBNZ or another, or whether it's a coordinated regulatory framework across multiple entities. Those are things that are open. But, you know, we've raised them in the paper as that's part of what needs to be considered as well in order to make it easy for incumbents and new entrants to engage and create a more competitive environment."

The RBNZ is seeking submissions on its payments issues paper by October 27.

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