There's a simple solution to banks baulking at the RBNZ's proposal for them to provide nationwide cash services for free, but a compromise is the likelier outcome

As the Reserve Bank issued a consultation paper last Wednesday, proposing enforcing a cash service standard on New Zealand banks whereby they must provide cash services across the country for free at an estimated annual cost to the banks of $104 million, it was easy to envisage senior bankers choking on their lattes.

And sure enough, it didn't take long for bankers' anger to manifest itself. 

The Reserve Bank (RBNZ) proposal was "extreme" and "back to the future," Roger Beaumont, chief executive of bank lobby group, the New Zealand Banking Association (NZBA), said. Given most transactions these days are digital, many New Zealanders are now "unable to name the bird on the back of a note or coin," Beaumont said.

The RBNZ's proposal for 3000 more branches and ATMs when there's no need for them "will ultimately increase the cost of banking for all New Zealanders," added Beaumont. (The RBNZ estimates about 1300 "multi-bank" facilities will be needed).

Consultation runs until April 10 and it's a safe bet we'll be hearing more about the RBNZ's proposal before, and after, that date.

There is, however, an obvious but unlikely solution to the impasse. That is the RBNZ providing the cash services itself. By law the RBNZ is the sole supplier of NZ banknotes and coins, with this being a key raison d'être for the central bank. And it's a lucrative one. 

Via seigniorage, cash contributes to government revenue to the tune of $397 million per annum, according to the RBNZ's most recent annual report. Seigniorage is the income the RBNZ gets from investing the funds received from trading banks by selling banknotes and coins to them.

So if the RBNZ cash service standard goes ahead, banks will effectively be paying their key regulator - and NZ cash monopolist - for access to cash, and then also paying to put and maintain the RBNZ's nationwide cash service standard in place.

Given it produces the cash itself, the RBNZ could technically also operate a cash service standard itself. Perhaps it could even run a public competition for the design of RBNZ-branded ATMs to be placed around the country?

However, there's unlikely to be an appetite from the RBNZ, the Government or the banks for this.

The RBNZ prefers to dispense its policies via the middleman of the banking system.

By international central bank standards the RBNZ already has wide-ranging responsibilities through the likes of monetary policy, financial stability, payments and settlements systems, regulation and supervision and its existing cash role. The Government would undoubtedly be unwilling to risk diluting the RBNZ focus on fighting inflation. Not to forget politicians courting the rural vote ahead of the November 7 election.

For the banks, the RBNZ running a cash service standard itself could open a can of worms. For if the RBNZ could do that, what else could it do? Could it also offer members of the public bank accounts, and potentially even other services? 

The RBNZ does also make a good point that banks benefit financially from providing cash services to their customers.

"Banks’ profits are enhanced when a sizeable portion of bank funding is provided at zero, or very low, interest. This funding is provided by the balances held in bank transaction accounts and the amount is substantial, we estimate the retail banking sector to have around $110 billion of this type of funding. Customers’ willingness to hold balances in these accounts reflects their expectation that convertibility exists and their high level of trust in cash, the most trusted form of money," the RBNZ says.

"There is a risk-related benefit for banks from providing cash services to customers too. When banks remove cash service sites from communities, they risk undermining the public’s confidence they can access their money in a non-digital form easily and quickly. Such a loss of confidence could lead to behavioural change such as more frequent emptying of bank accounts, which risks increasing the volatility of bank funding. At the extreme this could result in an entity experiencing a crisis, as seen [overseas] in the Global Financial Crisis of 2007-2009."

The RBNZ also argues providing cash services to customers is part of a bank’s "social licence" to operate in NZ.

"Providing cash services is an essential element of the relationship banks have with their customers because people expect to be able to convert easily, quickly and without cost, digital money, i.e. their positive balances in their bank transaction accounts, into cash and vice versa. This exchange is known as ‘convertibility’. ‘Convertibility’ is a long-established convention in banking, and in many ways the foundation of what it means to be a bank," the RBNZ maintains.

So long as cash is dispensed from the RBNZ via the banks, providing cash services will continue to be viewed as a key part of the relationship between banks and their customers.

The RBNZ also points out bank branches can no longer be relied on by communities, especially rural ones, for cash services. That's because over the past decade about 40% of bank branches have gone, and in some cases where they remain, opening hours have reduced. Beaumont says banks stopped regional branch closures nearly six years ago.

Cash still has its uses

Despite the fact many of us seldom use or carry cash in the days of digital transactions, smartphones, cryptocurrencies, stablecoins, and potentially a digital form of the NZ dollar, cash still has a place. It can be mighty useful during digital outages and extreme weather events such as Cyclone Gabrielle when electronic payment systems crash. It also remains a key payment option for schools, charities and other community groups, even if its popularity with criminals is a major challenge for law enforcement. 

The RBNZ maintains that "80% plus" of people use cash sometimes, and Beaumont says; "banks agree that cash use should be preserved for those customers who need it."

A "multi-bank, full-service cash site" concept is central to the RBNZ's proposed cash service standard. It wants people to be able to deposit cash into bank accounts, withdraw cash, and swap cash for a different range of banknotes and coins, without facing user charges.

It argues people in rural areas shouldn’t need to drive more than 15km one way for cash services, whilst people in really remote areas shouldn’t need to drive more than 30km. It has even provided maps, showing how it proposes this working across the country.

Banks must maintain cash as a meaningful payments option for New Zealanders, but can choose how they provide these services, the RBNZ adds.

By NZ's laissez-faire standards, it's quite a prescriptive recipe from the RBNZ. Albeit it points out the UK, Ireland and the Netherlands already have, or are introducing, rules to enable people to access cash services when they need to. 

The RBNZ argues its estimated $104 million per annum cost for banks is peanuts given it's 1% of the sector's more than $10 billion annual pre-tax profit. It also says if banks are able to recover this cost in full by increasing lending rate margins, the impact would be on average a 1.8 basis-point increase for each year relative to what it would otherwise have been. That would see a lending rate rising from 4.5% to 4.518%, the RBNZ says, "a very modest cost for New Zealand."

You can bet your house, however, that submissions from the NZBA and its member banks will say it's a costlier exercise for them, and thus their customers, than the RBNZ estimates.

Ultimately, I see the most likely scenario being the RBNZ gives a bit of ground, perhaps with banks being allowed to cover their costs for provision of the cash services and the proposal being scaled back a bit, and the banks begrudgingly falling in line.

*This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.