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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. AGENDA. CENTRAL QUESTION What is the future of cash? How to improve efficiency of payment behaviour? - PowerPoint PPT Presentation
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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?
De Nederlandsche Bank Eurosysteem
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
De Nederlandsche Bank Eurosysteem
STYLIZED FACTS – debit card transactions
De Nederlandsche Bank Eurosysteem
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%
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 bigMargins 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
AustriaBelgiumDenmarkFinlandFranceGermanyGreeceIrelandItalyNetherlandsPolandPortugalSpainSloveniaSwedenUK
EUROPE
62 56 54 36 50 67110 90 92 48 31 35 54 32 41 73
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 studiesTransparency 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, e-
purse, 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% gdpper POS transaction: € 0.35per € sales: 2.4%per household per annum: € 400
De Nederlandsche Bank Eurosysteem
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
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 revenuesAll 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
Cost
-23Result before taxes
-105Cost of invested capital
-128Economic profit
3,996
4,019
De Nederlandsche Bank Eurosysteem
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
De Nederlandsche Bank Eurosysteem
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
De Nederlandsche Bank Eurosysteem
EFFICIENCY: Merchants´ report
IMMEDIATE CAUSE
• SEPA
• McKinsey study
Organization:
• Similar to McKinsey study
De Nederlandsche Bank Eurosysteem
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
De Nederlandsche Bank Eurosysteem
EFFICIENCY: Merchants´ report
COSTS OF ONE ADDITIONAL TRANSACTION
Variable costsAverage transaction amount
Debit card € 0,16Cash € 0,20
De Nederlandsche Bank Eurosysteem
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
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 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
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