RETAIL PAYMENTS – costs and revenues

De Nederlandsche Bank Eurosysteem

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

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 questionWhat are the costs of a transaction?

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AGENDA

Fact finding on costs/revenues usefulUnderstanding of stakeholders´ reactionsTo bridge differences in opinion

AgendaStylized facts – fact finding studies for the

Netherlands Central Bank Policy Issues

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STYLIZED FACTS – debit card transactions

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STYLIZED FACTS: Merchants´ report

Retail business Hotel and Catering Industry

Nr of transactionsCash 72% 90%

Debitcard (PIN) 26% 4%

SalesCash 38% 63%

Debitcard (PIN) 56% 18%

CASH VS DEBIT CARD USE - 2006

PIN Retail 2002# tr 15%

Sales 43%

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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

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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

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Murkey Waters

Source: McKinsey&Company (2005)

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Murkey Waters

Source: McKinsey&Company (2005)

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Murkey Waters

Source: McKinsey&Company (2005)

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Murkey Waters

Source: McKinsey&Company (2005)

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Murkey Waters

Source: McKinsey&Company (2005)

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STYLIZED FACTS: SUMMARY II

Conclusions ´Murkey Waters´

Differences between countries are bigMargins of payment activities are thin

and under pressure, because of SEPA:

extra costs, flattening fees

● Cross-subsidization: rule rather than the exception

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International Comparison

World Retail Banking Report 2005

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International Comparison

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International Comparison – euro area

AustriaBelgiumDenmarkFinlandFranceGermanyGreeceIrelandItalyNetherlandsPolandPortugalSpainSloveniaSwedenUK

EUROPE

62 56 54 36 50 67110 90 92 48 31 35 54 32 41 73

60

CAP GEMINI, WORLD PAYMENTS REPORT 2007

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IMPLICATIONS ?

IS THERE A PROBLEM?

IF YES, WHAT SHOULD WE DO?

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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?

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Payment Systems Policy

Main objective

● promote safe and efficient payment and settlement systems

Other objectives

● e.g. accessibility, effective competition, crime prevention, consumer protection

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Efficiency of Retail Payments

Involvement of all stakeholders:National Forum on the Payment System

DNB in a catalyst role

Fact-finding studiesTransparency is needed to enhance efficiency Awareness Common basis for discussions among stakeholders

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EFFICIENCY: fact-finding studies

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No Free Lunch

Which cost concept? Social costs

Which payment instruments? POS instruments (cash, e-

purse, debit card, credit card)

Which parties in payment chain? Central bank, banking sector,

merchants (consumers)

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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

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EFFICIENCY: No Free Lunch

Main results:

Social costs POS payments 0.65% gdpper POS transaction: € 0.35per € sales: 2.4%per household per annum: € 400

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EFFICIENCY: No Free Lunch

Variable costs of Cash, Debit Card, E-purse

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0 5 10 15 20 25

transaction amount

E-purse

cost per transaction

Cash

11.63

Debit card

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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

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McKinsey Report (2006)

IMMEDIATE CAUSE

Continuing discussions on tariff structures

SEPA

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McKinsey Report (2006)

Organisation

Two principals: DNB and Dutch Bankers Organisation

Involvement of all stakeholders: merchants, consumers, competition authorities

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McKinsey Report (2006)

Role of DNB

Principal

Participant in methodological discussions Validation Informing parties in National Platform on the

Payment System

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McKinsey Report (2006)

Differences with NO FREE LUNCH

Costs and revenuesAll payment system costs (and revenues)

Only the costs of the banking industry

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McKinsey Report (2006)

Exhibit 1

Total result€ million

Revenues

Cost

-23Result before taxes

-105Cost of invested capital

-128Economic profit

3,996

4,019

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EFFICIENCY: McKinsey Report

Exhibit 1

Overview of result for banks from payment services€ million

-779Cash transactions

-101Debit card transactions

-18E-purse transactions

-329

75Other*

Balance-related income

-23Result before tax

-105Cost of invested capital

Direct debits

Economic profit

Giro slips

Current accounts

-94

-159Cross-border payments

-44

Credit transfers

-128

Result per main group

POS payments

Transfers

Balance-related income

Current accounts

Main group

-898

-467

-1,215

* Credit cards (+69) and result from other revenues (+6)Source: Payment Services Analysis

2,6412,641

-1,215

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EFFICIENCY: McKinsey Report

Exhibit 1

Comparison of results for consumers and business customers*

587Transaction and management revenues

Transaction and management costs

Balance-related income

708Result before tax**

Business customers Consumers

385

-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)

2,473

1,445

1,074

1,195

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EFFICIENCY: Merchants´ report

IMMEDIATE CAUSE

• SEPA

• McKinsey study

Organization:

• Similar to McKinsey study

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EFFICIENCY: Merchants´ report

Retail business Hotel and Catering Industry

Cash € 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 € 0.17

Pinpas € 0.27

Average costs per transaction

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EFFICIENCY: Merchants´ report

COSTS OF ONE ADDITIONAL TRANSACTION

Variable costsAverage transaction amount

Debit card € 0,16Cash € 0,20

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Costs of POS payments 2006 (EIM)

Conclusions1. 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

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SAFETY

SEVERAL ASPECTS INNOVATIONS, e.g.

contactless payments, biometric identification

VULNERABILITY FOR SHOCKS

CENTRAL BANKS´ OVERSIGHT

ALSO, safety in physical sense

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Payment Systems Policy

Main Policy ThemeReduce Cash Payments (↑ electronic

payments (debit card)), no tariffs for small debit card transactions debit card payments facilities in small shops

PlatformNational Forum on the Payment System

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Payment Systems Policy

BIG QUESTION

HOW?

Incentives Discussion: Working Group

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CASH-LESS SOCIETY?

Condition: debit card should be cheaper for any transaction size

User convenience and safety

Anonymity

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CASH-LESS SOCIETY?

LESS-CASH

rather than

CASH-LESS

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THANK

YOU