Review of Banknote Distribution Arrangements: Conclusions Paper 4. Summary of the Reserve Bank's Response

The Reserve Bank is responding to the issues raised in the Review through a package of changes to support the industry to adapt as cash use by the public evolves.

The current system for banknote distribution is effective in that it enables demand for banknotes across the country to be met and supports the maintenance of good-quality banknotes in circulation. Moreover, the current system has demonstrated its ability to withstand disruptions and shocks to cash demand, such as during the COVID-19 pandemic.

Nevertheless, there is considerable evidence that the cash distribution industry in Australia is under financial pressure. The Reserve Bank's intended changes will make a positive difference in the current environment but, in themselves, are unlikely to fundamentally reshape the economics of the industry. Instead, these measures aim to increase the transparency of the Reserve Bank's contractual arrangements, potentially remove some impediments to industry-led efficiency gains, and ensure that the quality of banknotes in circulation is maintained.

The Reserve Bank will adopt the following package of changes:

1. Introduce transparent, standard arrangements for the distribution of banknotes by the Reserve Bank. As a priority, the Reserve Bank will improve transparency of its arrangements for banknote distribution by replacing the existing multi-year bilateral contractual arrangements with BDA participants with a publicly available, standard set of terms and conditions for accessing wholesale banknotes. The public disclosure of the standard terms and conditions will be implemented subject to the need to protect commercially sensitive and confidential information that is key to the Reserve Bank's ability to conduct its distribution operations securely and effectively. Relevant changes resulting from this Review will be included where feasible, including potentially removing from the arrangements some impediments to industry-led efficiency gains where these have broad industry support.
2. Establish a banknote distribution industry forum. An industry forum, which will be chaired by the Reserve Bank and facilitated by AusPayNet, will be established to provide an avenue for the dissemination of information relating to the translation of the current arrangements into the new standard terms and conditions. It will also enable further consultation on the feasibility of, and industry support for, amending the definition of cash holdings on which interest compensation is paid to better accommodate ‘hub-and-spoke’ style models. 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 existing BDA participants and those CIT companies that have been approved by the Reserve Bank to participate in BDA-related activities. The Reserve Bank will hold a general information session with the industry on the conclusions of the Review, and will prepare the terms of reference and seek to hold an initial meeting of the industry forum in the coming months. Consideration will be given to competition law issues in establishing and operating such a forum.
3. Increase the incentive payments paid by the Reserve Bank to maintain banknote quality. The Reserve Bank intends to modify two of the mechanisms in place to manage the quality of banknotes in circulation – the NQRS and the unfit transport payment. These changes would come into effect when the new standard terms and conditions are in place.
   1. The Reserve Bank intends to make a modest increase to the maximum annual payment pool available to participants for quality sorting under the NQRS. This increase in the maximum available payment pool is designed to incentivise the industry to invest in new or upgraded quality-sorting equipment. The actual payments made would, in line with the NQRS framework, be contingent on participants' ability to quality sort the new features on the NGB series. The Reserve Bank will retain the essential elements of the NQRS framework while confirming its commitment to implement the revisions agreed with BDA participants in 2021, including an updated payment framework, simplified quality standards and incorporation of the new features on the NGB series.
   2. The Reserve Bank intends to increase the unfit banknote transport payment by 30 per cent to recognise the increasing unit cost of banknote transportation associated with the decline in transactional cash use. This should also encourage the removal of the previous polymer series of banknotes from circulation.

In addition, the Reserve Bank will continue to monitor the ability of consumers to access and pay with cash, with a particular focus on regional communities. Any significant changes to cash access in the future could necessitate more fundamental changes. The Reserve Bank will continue to engage with other public sector agencies to inform any further solutions that may need to be developed to support the public's access to cash. The government's response to relevant aspects of the 2021 Review of the Australian Payments System may also help inform further work in this area.