Review of Banknote Distribution Arrangements: Conclusions Paper 1. Executive Summary

This paper presents the conclusions of the Reserve Bank of Australia's Review of Banknote Distribution Arrangements. The Review commenced in November 2021 with the publication of an Issues Paper. The Issues Paper summarised recent trends in the use of cash in Australia with a focus on how the declining use of cash for retail payments, accelerated by the COVID-19 pandemic, has affected participants in the banknote distribution system.

For now, the Australian public has good access to cash and confidence in the quality of banknotes is high. However, a significant reduction in coverage or service levels across the country could make access to cash more difficult, particularly in regional and remote areas. Managing the impact of declining transactional cash use in an orderly way is important to ensuring the stability of the wholesale distribution system and the retail distribution system that relies upon it. Moreover, under the Reserve Bank's current contractual arrangements, the wholesale banknote distribution system and the quality management system are interconnected, with the latter playing a key role in helping ensure Australian banknotes continue to meet the Reserve Bank's quality standards. These standards assist the public in determining whether the banknotes they receive are genuine – and so ultimately reduce the threat of counterfeiting; they also prevent problems in banknote accepting and dispensing machines.

The Review sought to identify what changes could make the banknote distribution system more effective, efficient, sustainable and resilient. To this end, the Reserve Bank will implement a number of specific changes, which are largely focused on areas where it has a direct relationship with the industry – in particular, the arrangements for the purchase and return of wholesale banknotes from/to the Reserve Bank and those for managing the quality of banknotes in circulation. These changes are designed to support the industry to adapt as cash use by the public evolves; while they will make a positive difference in the current environment, these changes are unlikely to fundamentally reshape the industry.

More broadly, the consultation process confirmed that declining volumes of banknotes being transported and processed has put financial pressure on private participants and contributed to significant excess capacity within the distribution network. The Reserve Bank recognises that reducing capacity is necessarily a business decision for the private participants themselves and will be subject to appropriate competition considerations. It also notes that there has recently been some reduction in the number of cash-in-transit (CIT) depots, and there is a proposed merger between two major CIT companies that will be subject to review by the Australian Competition and Consumer Commission (ACCC).

A summary of the specific changes to be implemented by the Reserve Bank is provided below.

1.1 The wholesale distribution system

The Reserve Bank determines that standardising and improving the transparency of its contractual arrangements for banknote distribution has the potential to reduce frictions and promote innovation by enabling changes that benefit the industry as a whole to be implemented more easily. It will therefore be replacing the existing multi-year bilateral contractual arrangements it has in place with the four major commercial banks with a publicly available, standard set of terms and conditions for participants – both current and prospective – to access wholesale banknotes. The Reserve Bank will give priority to completing this work as soon as practicable, noting the intention that the new standard terms and conditions will be largely unchanged from those in the existing contracts that were agreed in 2021. Relevant changes resulting from this Review will be included where feasible, including potentially removing from the new arrangements some impediments to industry-led efficiency gains where these have broad industry support.

An industry forum will be established, chaired by the Reserve Bank and facilitated by the Australian Payments Network (AusPayNet), to provide an avenue for the dissemination of information relating to the translation of the current arrangements into the new standard terms and conditions. Membership of the forum will be determined in consultation with industry and, at a minimum, is envisaged to comprise participants in wholesale banknote distribution, which currently includes the four major commercial banks and their approved CIT companies. Consideration will be given to competition law issues in establishing and operating this forum.

1.2 Managing the quality of Australian banknotes

The Reserve Bank is committed to ensuring that Australia's banknotes provide a secure and reliable means of payment and store of value. Having good-quality banknotes in circulation is important to achieving this objective, as it helps to maintain the public's confidence when using banknotes. The Reserve Bank considers that its current system of support to the industry for maintaining the quality of banknotes in circulation is effective in meeting this objective. However, it also recognises the challenges associated with investing in quality-sorting capabilities, particularly in a declining cash use environment. Consequently, the Reserve Bank intends to:

• make a modest increase to the maximum annual payment pool available to participants for quality sorting under the Note Quality Reward Scheme (NQRS) to assist the industry to invest in new or upgraded equipment that is capable of quality sorting the Next Generation Banknote (NGB) series; this change will occur when the Reserve Bank puts in place the revised NQRS quality standards and payment framework that was agreed with industry participants in 2021 (implementation of these changes was deferred pending the conclusion of this Review)
• increase the unfit banknote transport payment in recognition of the increasing unit cost of banknote transportation associated with the decline in cash use.

The detail and timing for each of these changes will be discussed further with industry participants, with the introduction of any higher payments aligning with the commencement of the new standard terms and conditions for wholesale banknote distribution and the revised NQRS quality standards and payment framework.