De Nederlandsche Bank
RETAIL PAYMENTS – costs and revenues
Carlo Winder
Conference Financial Sector of Macedonia
on Payments and Securities Settlement
Systems
Ohrid
25 June 2008
De Nederlandsche Bank
Eurosysteem
De Nederlandsche Bank
Eurosysteem
AGENDA
CENTRAL QUESTION
 What is the future of cash?
 How to improve efficiency of payment
behaviour?
Specific question
 What are the costs of a transaction?
De Nederlandsche Bank
Eurosysteem
AGENDA
Fact finding on costs/revenues useful
 Understanding of stakeholders´ reactions
 To bridge differences in opinion
Agenda
 Stylized facts – fact finding studies for the
Netherlands
 Central Bank Policy Issues
De Nederlandsche Bank
Eurosysteem
STYLIZED FACTS – debit card
transactions
De Nederlandsche Bank
Eurosysteem
STYLIZED FACTS: Merchants´ report
CASH VS DEBIT CARD USE - 2006
Retail business
Hotel and Catering
Industry
Cash
72%
90%
Debitcard (PIN)
26%
4%
Cash
38%
63%
Debitcard (PIN)
56%
18%
Nr of transactions
Sales
PIN Retail 2002
# tr 15%
Sales 43%
De Nederlandsche Bank
Eurosysteem
STYLIZED FACTS: SUMMARY I
MOST PAYMENTS STILL BY CASH, BUT
 STRONG GROWTH OF DEBIT CARD PAYMENTS
 NUMBER OF CASH PAYMENTS IS LIKELY TO BE
DECREASING
IN TERMS OF SALES VALUE:
 DEBIT CARDS EVEN MORE IMPORTANT
De Nederlandsche Bank
Eurosysteem
STYLIZED FACTS: Banks position
European payments
industry




operational costs € 100
billion
34% of total operational
costs
Revenues: 24% of total
revenues
Profits: 9% of total
profits
De Nederlandsche Bank
Eurosysteem
Murkey Waters
Source: McKinsey&Company (2005)
De Nederlandsche Bank
Eurosysteem
Murkey Waters
Source: McKinsey&Company (2005)
De Nederlandsche Bank
Eurosysteem
Murkey Waters
Source: McKinsey&Company (2005)
De Nederlandsche Bank
Eurosysteem
Murkey Waters
Source: McKinsey&Company (2005)
De Nederlandsche Bank
Eurosysteem
Murkey Waters
Source: McKinsey&Company (2005)
De Nederlandsche Bank
Eurosysteem
STYLIZED FACTS: SUMMARY II
Conclusions ´Murkey Waters´
Differences between countries are big
 Margins of payment activities are thin
and under pressure, because of SEPA:
extra costs, flattening fees
● Cross-subsidization: rule rather than the
exception

De Nederlandsche Bank
Eurosysteem
International Comparison
World Retail Banking Report 2005
De Nederlandsche Bank
Eurosysteem
International Comparison
De Nederlandsche Bank
Eurosysteem
International Comparison – euro area
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Poland
Portugal
Spain
Slovenia
Sweden
UK
62
56
54
36
50
67
110
90
92
48
31
35
54
32
41
73
EUROPE
60
CAP GEMINI, WORLD PAYMENTS REPORT 2007
De Nederlandsche Bank
Eurosysteem
IMPLICATIONS ?

IS THERE A
PROBLEM?

IF YES, WHAT SHOULD
WE DO?
De Nederlandsche Bank
Eurosysteem
Payment Systems Policy
Various payment devices available:
Cash, debit card, e-purse, credit card,
cheques


Instruments are different: costs,
convenience, safety
Question: How Should We Pay?
De Nederlandsche Bank
Eurosysteem
Payment Systems Policy
Main objective
● promote safe and efficient payment and
settlement systems
Other objectives
● e.g. accessibility, effective competition, crime
prevention, consumer protection
De Nederlandsche Bank
Eurosysteem
Efficiency of Retail Payments
Involvement of all stakeholders:
National Forum on the Payment System
DNB in a catalyst role
Fact-finding studies
 Transparency is needed to enhance efficiency


Awareness
Common basis for discussions among stakeholders
De Nederlandsche Bank
Eurosysteem
EFFICIENCY: fact-finding studies
De Nederlandsche Bank
Eurosysteem
No Free Lunch

Which cost concept? Social
costs

Which payment instruments?
 POS
instruments (cash, epurse, debit card, credit card)

Which parties in payment
chain?
 Central
bank, banking sector,
merchants (consumers)
De Nederlandsche Bank
Eurosysteem
No Free Lunch
Differences w.r.t. other cost studies:




Costs of cash are included
Costs of central bank included
Costs of central bank, banking sector and
merchants
 Consistent definitions
 Involvement of sectors´ experts
Distinction between fixed – variable costs:
calculation of break-even transaction amounts
De Nederlandsche Bank
Eurosysteem
EFFICIENCY: No Free Lunch
Main results:
Social costs POS payments 0.65% gdp
 per POS transaction: € 0.35
 per € sales: 2.4%
 per household per annum: € 400

De Nederlandsche Bank
Eurosysteem
EFFICIENCY: No Free Lunch
Variable costs of Cash, Debit Card, E-purse
cost per transaction
0.30
Cash
Debit card
0.25
0.20
0.15
0.10
E-purse
0.05
0.00
0
5
10
11.63
15
20
25
transaction amount
De Nederlandsche Bank
Eurosysteem
EFFICIENCY: No Free Lunch
Cash vs debit card: level playing field?
Central bank´s operational cash costs are 3%
of social costs of cash:
IF there is a distortion, it can only be limited
De Nederlandsche Bank
Eurosysteem
McKinsey Report (2006)
IMMEDIATE CAUSE

Continuing discussions
on tariff structures

SEPA
De Nederlandsche Bank
Eurosysteem
McKinsey Report (2006)
Organisation
Two principals: DNB and Dutch Bankers
Organisation
 Involvement of all stakeholders: merchants,
consumers, competition authorities

De Nederlandsche Bank
Eurosysteem
McKinsey Report (2006)
Role of DNB

Principal
Participant in
 methodological discussions
 Validation


Informing parties in National Platform on the
Payment System
De Nederlandsche Bank
Eurosysteem
McKinsey Report (2006)
Differences with NO FREE LUNCH
Costs and revenues
 All payment system costs (and revenues)


Only the costs of the banking industry
De Nederlandsche Bank
Eurosysteem
McKinsey Report (2006)
Exhibit 1
Total result
€ million
Revenues
3,996
Cost
Result before taxes
4,019
-23
Cost of invested capital
-105
Economic profit
-128
De Nederlandsche Bank
Eurosysteem
EFFICIENCY: McKinsey Report
Exhibit 1
Overview of result for banks from payment services
€ million
Main group
-779
Cash transactions
-101
Debit card transactions
-44
Direct debits
Transfers
-467
-94
Giro slips
-1,215
Current accounts
Balance-related income
-898
-329
Credit transfers
Other*
POS payments
-18
E-purse transactions
Cross-border payments
Result per
main group
Current accounts
-1,215
Balance-related
income
2,641
-159
75
2,641
Result before tax
-23
Cost of invested capital
-105
Economic profit
-128
* Credit cards (+69) and result from other revenues (+6)
Source: Payment Services Analysis
De Nederlandsche Bank
Eurosysteem
EFFICIENCY: McKinsey Report
Exhibit 1
Comparison of results for consumers and business customers*
Business customers
Transaction and management revenues
385
587
Transaction and management costs
1,074
Balance-related income
1,195
Result before tax**
Consumers
2,473
1,445
708
-642
* Excluding fees for use of third party ATMs, cross border and credit cards, including interchanges for debit card
payments, giro slips and direct debits
** Excluding credit cards and cross border payment services (€89 million)
De Nederlandsche Bank
Eurosysteem
EFFICIENCY: Merchants´ report
IMMEDIATE CAUSE
• SEPA
• McKinsey study
Organization:
• Similar to McKinsey
study
De Nederlandsche Bank
Eurosysteem
EFFICIENCY: Merchants´ report
Average costs per transaction
Retail business
Hotel and Catering
Industry
€ 0.18
€ 0.29
Debitcard (PIN)
€ 0.20
€ 0.34
e-Money (Chipknip)
€ 0.14
€ 0.28
Creditcard
€ 2.70
€ 3.72
Retail 2001:
Cash
Cash
€ 0.17
Pinpas
€ 0.27
De Nederlandsche Bank
Eurosysteem
EFFICIENCY: Merchants´ report
COSTS OF ONE ADDITIONAL TRANSACTION
Variable costs
 Average transaction amount

Debit card € 0,16
 Cash € 0,20

De Nederlandsche Bank
Eurosysteem
Costs of POS payments 2006 (EIM)

Conclusions
1.
Decreasing costs payments systems, because of
increasing use of debit card and one stop
shopping
2.
Transaction costs of PIN and cash are
converging
3.
Large savings are still possible (more use of
debit cards instead of cash and better choices
regarding to datacom)
4.
Use of debit cards can be efficient, even for
small amounts
De Nederlandsche Bank
Eurosysteem
SAFETY
SEVERAL ASPECTS
 INNOVATIONS, e.g.
contactless payments,
biometric identification

VULNERABILITY FOR
SHOCKS
CENTRAL BANKS´
OVERSIGHT

ALSO, safety in physical
sense
De Nederlandsche Bank
Eurosysteem
Payment Systems Policy
Main Policy Theme
Reduce Cash Payments (↑ electronic
payments (debit card)),
 no tariffs for small debit card transactions
 debit card payments facilities in small shops

Platform
 National Forum on the Payment System
De Nederlandsche Bank
Eurosysteem
Payment Systems Policy
BIG QUESTION
HOW?
Incentives Discussion: Working Group
De Nederlandsche Bank
Eurosysteem
CASH-LESS SOCIETY?

Condition: debit card should be cheaper for
any transaction size

User convenience and safety

Anonymity
De Nederlandsche Bank
Eurosysteem
CASH-LESS SOCIETY?
LESS-CASH
rather than
CASH-LESS
De Nederlandsche Bank
Eurosysteem
THANK
YOU
De Nederlandsche Bank
Eurosysteem