This article sets out some of the basic

features of the Australian payments system.

It describes the flow of payments in Australia

and identifies the most important payment

mechanisms; it also compares our payments

system to those of other industrial countries.

The article abstracts from the legal and

institutional framework of payments

Payments can be classified as high-value or

low-value. High-value transactions are

typically related to purchases and sales of

financial assets, mainly foreign exchange and

securities. These transactions usually involve

only financial institutions, large companies or

high net-worth individuals.

Payment instruments are either cash or

non-cash. Cash is probably the most important

instrument for low-value transactions and has

many features which are difficult to emulate.

It is typically used for retail transactions and

for transfers of value between individuals.

Non-cash payment instruments can be

classified as either paper or electronic, a critical

distinction for discussion of efficiency and cost

of the payments system.

Payments systems can also be classified

according to where payment processing

begins. In credit systems, such as direct credit,

the processing of the payment starts at the

payer’s financial institution. In debit systems,

such as direct debit and cheques, the

processing of the payment begins with the

payee’s financial institution. For example,

when a cheque is deposited in an account, the

processing for this payment begins with the

recipient’s financial institution, which contacts

the payer’s financial institution for payment.

One final concept worth mentioning is that

of own items, sometimes called on-us items.

Own items are payments made across the

books of a single financial institution, for

example, when the payer and the payee have

accounts at the same institution. For a national

and highly concentrated financial system like

Australia, own items are very significant. If

data on payments flows capture only payments

exchanged or cleared between financial

institutions, the total volume and value of

payments will be understated.

* This article was prepared by Michele Bullock and Luci Ellis of the Bank’s Payments Policy Department.

1. These details can be found in Payment Systems in Australia, the second edition of which will be published by the

Bank for International Settlements (BIS) early in 1999.

The importance of cash in the Australian

payments system is difficult to quantify.

Anecdotal evidence and experience suggest

that cash transactions account for the

dominant share of the number of transactions,

but a very small share of their value. Data to

verify this, however, are not available.

Payments are measured as a flow – the value

or volume during a period – while most

measures of cash are of its stock at a point in

time. A number of proxies are therefore used

to give an indication of the role of cash.

The most commonly used proxy is the stock

of cash in circulation. Graph 1 shows currency

and expenditure per capita over the past

20 years (adjusted for inflation) while Graph 2

shows the ratio of currency to GDP over a

transactions were undertaken using cash in

the late 1990s than in the 1980s. Holdings of

currency moved closely with expenditure

through the 1980s but the two series diverged

in the 1990s; although there still appears to

be some cyclical relationship, currency

increased more sharply than expenditure.

Similarly, the ratio of currency to GDP rose

in the early 1990s and has remained at the

higher level since.

Of course, the stock of cash can vary for

reasons unrelated to the value of transactions.

For example, a proportion of notes on issue

is hoarded as a store of value; if this proportion

rises for some reason, the stock of cash

increases without any increase in the number

of transactions undertaken with cash. An

alternative proxy for changes in cash

transactions is the flow of ATM withdrawals.

ATM withdrawals cannot give any indication

of the number of transactions undertaken

using cash. But to the extent that there is a

stable relationship between cash withdrawals

and transactions, trends in ATM withdrawals

will give some indication of trends in the value

of cash transactions.

Each month, Australians currently make a

little over 30 million withdrawals from bank

ATMs; these average around $150 and have

The number of cash withdrawals has grown

2. The broadest definition of circulating cash is the total value of notes and coin on issue. Around 9 per cent of this

total is held by banks; the rest is in the hands of the non-bank public – households, businesses and NBFIs. Notes

and coin in the hands of the non-bank public, usually called ‘currency’, is considered a good indicator of the

transactions demand for cash.

3. These figures do not include cash withdrawals from non-bank ATMs and EFTPOS ‘cash out’ facilities or

over-the-counter cash withdrawals. Nonetheless, the data should provide a good idea of the trends in cash

withdrawals.

$120 billion are exchanged between banks

each day. Adding 25 per cent as a conservative

estimate for own items suggests non-cash

payments of around $150 billion each day,

equivalent to about 30 per cent of GDP.

Around 90 per cent of the value of non-cash

transactions is accounted for by a small number

of high-value payments. Historically, high-value

payments have been exchanged in one of two ways:

electronically or with non-cash paper instruments

years, there has been a shift away from paper

instruments, a migration which has accelerated

with the introduction of real-time gross settlement

(RTGS) for high-value payments (Graph 4).

Latest data show that around 90 per cent of the

value of all payments are exchanged between banks

electronically, compared with 40 per cent at the

beginning of the 1990s.

fairly slowly over the past few years but the

value of withdrawals has risen by around

40 per cent, implying a significant increase in

the average amount withdrawn. This may

reflect an increase in both the demand for cash

to make payments and in average holdings of

cash. There is anecdotal evidence that

customers are economising on trips to bank

branches and/or the ATM to minimise bank

fees. The current low-inflation environment

may also have induced consumers to hold

larger amounts of cash on average.

Although ATM withdrawals do not give any

indication of the total value of cash

transactions, they do give a lower bound. With

annual withdrawals of just under $60 billion,

withdrawals from bank ATMs still exceed the

value of payments made by EFTPOS and

credit cards combined (see below). The total

value of cash transactions would therefore well

outstrip transactions using these payment

instruments. Cash remains an important

payment instrument in the Australian

economy.

Non-cash payments account for most of the

value of payments in the Australian economy.

On average, non-cash payments worth around

4. A warrant is a paper payment instrument similar to a cheque but mainly used for high-value payments between

banks.

5. Data on non-cash payments are limited; some are compiled annually and released with a lag as long as a year.

These data include own items and exclude warrants.

Low-value non-cash payments may also be

paper or electronic. Table 1 shows the main

cheque is still the most important non-cash

payment instrument, accounting for almost

85 per cent of low-value payments in 1997,

in value terms, down only 5 percentage points

from 1994. The data imply an average cheque

$billion per year

Cheques 6 546 6 168 6 133 6 589

Direct entry credits 510 684 1 066 906

Direct entry debits 346 308 418 424

EFTPOS 13 18 23 25

Credit cards 22 24 28 30

Source: APCA Payments Monitor, March 1998.

value of around $6 500, suggesting that there

are a considerable number of cheques written

may have migrated to the RTGS system, so

the value of cheques could decline in 1998.

The volume data in Table 2 show a different

picture. The cheque is still the most important

non-cash payment instrument in Australia but

its relative importance has declined over the

past two decades. Despite an increase of some

30 per cent in the number of cheques written

since the early 1980s, the share of cheques in

low-value payments, in volume terms, has

declined from around 85 per cent to around

40 per cent. The number of cheques written

Millions per year

Cheques 977 1 022 983 986

Direct entry credits 420 499 434 467

Direct entry debits 86 102 107 114

EFTPOS 247 349 426 470

Credit cards 239 271 295 311

Source: APCA Payments Monitor, March 1998.

6. For example, the data include bank cheques for payments such as residential property settlements.

annually has steadied at around one billion in

recent years.

On the other hand, the use of electronic

payment instruments at the retail level has

been growing rapidly. This is particularly so

for EFTPOS, which has almost doubled in

transactions terms over the three years to

1997. Of the 19 per cent growth in the number

of non-cash transactions in these three years,

over 11 percentage points were accounted for

by growth in EFTPOS; growth in credit card

transactions accounted for a further

4 percentage points (Table 3). As a group,

electronic payment instruments are now more

important than cheques.

Although institutional structures and legal

frameworks differ widely between industrial

countries, payment instruments look much

the same. In nearly all countries, cash plays

an important role and non-cash instruments

such as cheques, credit and debit cards and

direct electronic payments are all available.

What distinguishes the payment systems of

countries is the mix of instruments used. This

section identifies the main features of payment

systems in other industrial countries for which

data are available, and compares these features

with Australia. These comparisons must be

treated with caution: the data are not always

comparable because of inconsistencies in

definitions. Differences in banking structure,

geography and cultural preferences can also

help to explain variations.

Table 4 compares the use of cash in Australia

with other industrial countries, ranked by the

value of cash holdings per head. There is a

wide range on this measure. Switzerland and

Japan have very high average holdings of

cash per person (over US$3 500) while

1994–1997

payments Percentage

Per cent, 1997 points

Cheques 42 0.5

Direct entry credit 20 2.4

Direct entry debit 5 1.4

EFTPOS 20 11.3

Credit cards 13 3.7

Source: APCA Payments Monitor, March 1998.

New Zealand has a very low average (around

US$300). Although currency per head is an

easily understood concept, cross-country

comparisons are problematic. For example,

because of the need to convert to a common

currency, exchange rate fluctuations can affect

the measures.

A preferred measure for cross-country

comparisons is currency to GDP. Although

the ranking is slightly different, countries with

high (low) average cash holdings per person

also tend to have high (low) currency to GDP

ratios. Australia is in the lower to middle half

of the group on both measures, with quite a

few countries around the same level.

There is also substantial variation in the use

of non-cash payment instruments among

countries. Table 4 compares the number of

non-cash transactions per person. At the top

end is the United States where over 300

non-cash transactions were undertaken per

person in 1996. There is a large gap to the

next group of countries (100 to 200

transactions) while Japan, Italy and Spain are

at the lower end (40 transactions). Australia

is again in the middle group of countries.

There also appears to be an inverse

relationship between the number of non-cash

payments and the importance of cash across

countries. Countries with a relatively low

number of non-cash payments per person

tend to have high currency to GDP ratios, and

vice versa for the United States.

One way in which payment flows differ

between countries is in the use of paper-based

payment instruments. The English-speaking

countries, France and Italy are relatively heavy

users of cheques for non-cash payments

(Graph 5). The United States is an outlier

where cheques are especially important,

accounting for almost 80 per cent of the

volume of non-cash payments. The continued

strong preference for cheques there is often

attributed to wide acceptability by retailers

7. In the United States, funds are debited from the payer’s account on the day the cheque is presented to their bank.

This can take anything up to three days. In Australia, the payer’s account is usually debited the day the cheque is

deposited to the payee’s account.

the heavy involvement of the Federal Reserve Graph 5

both in cheque processing and regulation may

also be a factor in keeping the cheque

competitive with other payment instruments.

Graph 5 also shows paper-based credit

transfers, giving a more comprehensive

estimate of the importance of paper payment

instruments. For many countries this makes

little difference. For Italy, Japan and Sweden,

however, these estimates suggest a greater role

for paper payment instruments: in Italy, such

instruments account for around 60 per cent

of non-cash transactions, second only to the

United States.

Credit transfer is a particularly popular

payment instrument in continental Europe

1996

US$ Per cent per person

Switzerland 3 961 9.3 (a) 90

Japan 3 588 9.8 39 (b)

Spain 1 597 10.8 (a) 39

Netherlands 1 462 5.5 (a) 169

Norway 1 411 3.9 (a) 97 (b)

Germany 1 302 4.5 147

Sweden 1 193 4.2 (a) 92

Belgium 1 187 5.3 (a) 115

Italy 1 130 5.3 39

Denmark 1 014 3.0 (a) 89

France 870 3.3 142

Australia 807 3.8 (a) 121

Canada 705 3.5 (a) 151

United States 610 2.1 325

Finland 581 2.3 (a) 146

United Kingdom 549 2.8 137

New Zealand 288 1.7 (a) —

(a) 1997.

(b) 1993.

Note: Currency data for the US and Germany are reduced by 60 per cent and 35 per cent, respectively, for

estimated foreign holdings of currency. For other countries, information on the importance of foreign

holdings of currency was not available.

Sources: IMF International Financial Statistics; Datastream; RBA Bulletin; ABS Cat. Nos 5206.0 and 3101.0;

APCA Payments Monitor, March 1998; UK Central Statistical Office Financial Statistics; BIS Statistics

on Payment Systems in the Group of Ten Countries (1997); European Monetary Institute, Payment

Systems in the European Union; Banque de France Annual Report 1996; Humphrey, D.B., L.B. Pulley

other than France (Graph 6). It accounts for

between 50 and 80 per cent by volume of all

non-cash transactions in these countries, and

is widely used for bulk recurring payments

such as salaries and government benefits and

for one-off payments from individuals to

businesses or between individuals. It has

remained more popular than direct debits for

many consumer payments. Historically, post

offices in these countries – at which individuals

hold accounts – have provided the backbone

of the credit transfer system through giro post.

With its extensive branch network and

government ownership, giro post represents

a convenient and safe way to manage

payments. The anomaly is France which,

having a high cheque usage/low credit transfer

pattern, looks more like the English-speaking

countries.

The Australian payments system most

resembles that of the United Kingdom,

Canada and France. Though all these systems

rely fairly heavily on cheques, electronic

payment methods account for over half of

non-cash payments. There are, nevertheless,

some interesting differences in the

composition of electronic payments. In

Australia, slightly more than half of electronic

payments are attributed to payments by debit

and credit cards. Most of the rest are direct

Values are US$, 1996

Transactions per person 54 22 15 24 6

Value per transaction 4 889 41 72 1 921 3 062

Transactions per person 62 23 45 12 9

Value per transaction 1 581 33 57 499 222

Transactions per person 67 35 24 16

Value per transaction 587 62 1 230 286

Transactions per person 243 10 61 7 4

Value per transaction 1 158 37 61 2 178 5 236

Transactions per person 45 22 18 27 25

Value per transaction 794 46 77 1 340 381

Sources: BIS, Statistics on Payment Systems in the Group of Ten Countries (1997), Banque de France, Annual

Report 1996, APCA and RBA.

• Cash remains an important payment instrument in the Australian economy.

• On average, non-cash payments to the value of around $150 billion are undertaken

every day in Australia.

• The cheque is still the most important non-cash payment instrument in Australia

though the volume of cheques issued has stabilised over recent years.

• Growth in non-cash payments in recent years has been driven mainly by growth

in EFTPOS transactions.

• Australia is around the middle grouping of industrial countries in its use of cash.

• Australia is average among industrial countries in terms of the number of non-cash

payments per person.

• The English-speaking countries, plus France and Italy are relatively heavy users

of cheques for non-cash payments.

• Compared with some ‘high cheque use’ countries, Australia relies less on direct

debit as a payment instrument, particularly for payments by individuals.

credit transfers, with direct debit accounting

for only a very small proportion. Indeed, as

discussed earlier, the growth in electronic

payments in Australia has been largely driven

by debit cards. By contrast, in the

United Kingdom and France direct debits are

at least as important as direct credits.

Table 5 provides some more information on

the use of non-cash payment instruments for

the ‘high cheque use’ countries. With the

necessary caveats about comparability, the

data show that, with the exception of Australia,

use of the direct entry system is evenly

distributed across debits and credits. The

United States and Canada both have fairly

low usage of direct credits and debits while

France and the United Kingdom have a

relatively high usage. In Australia, use of direct

credit is broadly comparable with the latter

two countries but its use of direct debit is

much lower, more in line with the

United States and Canada. The explanation

for this needs to be explored because of its

implications for efficiency.

There are substantial differences across

countries in the average value per transaction,

which may indicate different patterns in the

usage of instruments. The average value per

cheque transaction in Australia is over twice

as high as the next country (Canada). This

probably reflects limited use in Australia of

cheques at the point-of-sale; it also reflects

the inclusion of large-value bank cheques for

purchases such as real estate. Finally, at

around US$3 000, the average value of a

direct debit transaction in Australia is also

much higher than Canada, France or the

United Kingdom, though well below the

United States. This may indicate that the

direct debit system in Australia and the

United States is used mainly by companies

and relatively little by individuals.

In some respects, the Australian payments

system (Box A) looks much like that of the

major industrial countries. Electronic

payment instruments have increased in

popularity but cash payments are still very

important. There is a range of non-cash

payment instruments available, from manual

mechanisms such as writing a cheque to

automated payments such as direct entry.

Where the Australian system differs is in its

unique mix of instruments. Australia is in a

group of countries in which cheques are

heavily used, but even compared with these

countries, Australia’s payment mix is different

– most obviously in the limited use of direct

debit, particularly by individuals. The variety

in the mix of instruments between countries

suggests that institutional, legal and cultural

factors all play a role – together with costs –