Review of Banknote Distribution Arrangements: Issues Paper 5. Options for Cash Distribution

There are a range of measures that could be taken to address the issues identified in this paper. These measures would require, to varying degrees, actions by the industry, as well as the Reserve Bank and possibly other government agencies. A combination of measures may be required to best support the sustainability of cash distribution and ongoing access to cash across the country. This section provides a brief discussion of some options that could be explored for the future of banknote distribution in Australia. The Reserve Bank is seeking views on these options as well as any other suggestions from respondents for potential changes to make the banknote distribution system more effective, efficient, sustainable and resilient in an environment of declining transactional cash use.

The options that are canvassed in this section seek to, first, address excess capacity in the CIT industry and, second, identify considerations for the structural arrangements that underpin wholesale banknote distribution.

5.1 Options for addressing excess capacity in the CIT industry

Section 4 highlights that the declining transactional use of cash is potentially leading to mounting excess capacity within the CIT sector. While part of this is a result of COVID-19-related lockdowns, it seems unlikely that transactional cash use will recover to its pre-pandemic levels. Accordingly, it is expected that the trend decline in cash use as a means of payment will continue.

The Reserve Bank has identified various courses of action that could help address these issues. Any changes in the CIT industry would need to be implemented in an orderly way so as not to materially disrupt cash access across the country. These potential courses of action include:

1. Participants improve distribution efficiency. Existing industry participants could work to improve the efficiency and viability of their operations. For example, CIT companies could seek to reduce costs by restructuring their depot networks, increasing automation, restructuring pricing, changing the range of vehicle fleets used or changing the mix of services provided. It is also important to consider whether there are any barriers to efficiency gains as a result of the BDA arrangements currently in place. If barriers do exist, changes to the BDA arrangements may be required so that they provide the right incentives to support the provision of cash services and do not preclude efficiency gains or the entry of new participants (see Section 5.2 for more detail).
2. Coordination within the system. CIT firms may wish to engage in some degree of coordination in an attempt to remove excess capacity. This could be achieved in a variety of different ways. For example, CIT companies could explore avenues for coordination between each other in order to reduce duplication and excess capacity in the depot and transport network. This could take the form of sharing or sub-contracting routes, infrastructure, or segments of the market. Coordination between distribution participants risks breaching competition laws, and so may require authorisation from the Australian Competition and Consumer Commission (ACCC). This may be granted, broadly, if the proposed conduct would either not be likely to substantially lessen competition, or the likely public benefit from the conduct outweighs the likely public detriment.
3. Consolidation within the system. There could be a greater degree of consolidation that results in one main entity being responsible for some or the majority of wholesale cash distribution. This could occur via mergers or acquisitions of distribution participants (by existing participants or a new entrant), or the formation of a utility. Establishing a utility model for banknote distribution would involve a number of organisations forming a new single entity to carry out banknote distribution functions. This would require a coordinated response from a range of participants in the cash industry. Therefore, the industry would need to establish a mechanism by which it could come together to explore the option of a utility. Such coordination between participants may require ACCC authorisation, as noted above. Additionally, merger proposals would need to be reviewed or authorised by the ACCC to ensure a potential merger is not likely to substantially lessen competition, or the likely public benefit from the merger outweighs the likely public detriment.

Considerations with respect to these options would be to ensure that there is continued good access to cash across the country and that the competition issues that arise are appropriately managed. This may point to the need for additional policy responses, potentially including action by the Reserve Bank or government.

5.2 Changes to the operation of wholesale distribution

The options outlined in Section 5.1 involve changes to the structure of the banknote distribution industry, but there are also options that focus on the wholesale cash distribution arrangements. Depending on the nature of these arrangements, changes could have flow-on effects that improve efficiency or resilience of the retail cash distribution network. These options include:

1. Changing the nature of public sector involvement. The current distribution system is largely decentralised. The Reserve Bank's involvement currently covers the production, issuance and destruction of banknotes, as well as providing incentive payments to the private sector to encourage efficiency and the removal of poor-quality banknotes from circulation. It may be appropriate to change the structure or nature of some of these payments. Moreover, the Reserve Bank could examine its role in ensuring sufficient contingency stocks are held around the country through the ownership of some banknote stocks at CIT depots. The public sector may also need to have greater involvement in regulating aspects of cash distribution, depending on the path taken in the areas outlined in Section 5.1.
2. Consideration of quality arrangements. Given the reduction in cash use for transactions and the costs associated with quality sorting, the requirements for banknote quality standards – and the Reserve Bank's involvement in setting these standards – could be scaled back. On the other hand, if poor-quality banknotes remain in circulation, it could be difficult for these banknotes to be used in some machines, increase counterfeit risk and lower confidence in the use of physical cash.
3. Segmenting the BDA. The current BDA system requires a signatory to the agreement to participate in all (or most) aspects of wholesale distribution. This encompasses the purchase and return of banknotes to and from the Reserve Bank, as well as storage and quality sorting. This may be a barrier to entry. A potential change would be to have standalone banknote purchase arrangements accessible by a wide range of entities, with other aspects addressed separately in arrangements with a subset of those entities. This would facilitate greater access to banknotes at the wholesale level for any entity.

5.3 Final remarks

These options are not intended to be an exhaustive list, and alternative suggestions from respondents are welcome. It is also likely that a series of changes to the distribution system are required, rather than there being a single ‘quick fix’. In addition, changes to the structure of the industry – either market driven or via public sector intervention, including regulation – would likely need to be accompanied by changes to the contractual arrangements for distribution. It is also important to note that some changes are complex and would take time to work through, while others could be implemented more quickly. In particular, some of the options listed would involve only bilateral negotiations, while others would require extensive coordination amongst many parties and/or require regulatory involvement and actions.