Efficiency gains through increased debit card usage: data and evidence from the Netherlands ECB-MNB conference ‘Cost and efficiency of retail payments: evidence, policy actions and role of central banks’ 15 – 16 November 2012, Budapest Nicole Jonker De Nederlandsche Bank

2 1. Motivation 1.Update “Payments are no free lunch study”: 2002 results to Participation in Eurosystem cost study

3 2. Definitions (1) Social costs reflect the use of resources in the production of payment services; that is the total costs of production to society. Social costs can be divided into fixed and variable costs: SC j = F j + V j, tr + V j, s.. F j : costs associated with payments with instrument j, that do not vary with the number and value of the transactions; V tr :costs associated with payments with instrument j, that vary with the number of the transactions N j.  j = extra costs per trx; V s.: costs associated with payments with instrument j, that vary with the value of the transactions S j. β j :extra costs per 1 euro sales

4 2. Definitions (2) Criterion 1 Social costs per transaction: SC j /N j = F j /N j +  j +  j S j /N j with S j /N j representing the average value of a transaction generated with instrument j. Criterion 2 Social costs per euro of sales: SC j /S j = F j /S j +  j N j /S j +  j with SC j /S j (F j /S j ) as the total costs (fixed costs) of each euro in sales, and N j /S j representing the number of transactions needed to generate EUR 1 in sales. Criterion 3 The costs of one single additional transaction of size s:  j +  j s Criterion 3 focuses on the marginal costs of a transaction, consisting of a component that depends on the fact that the transaction is carried out and a component that depends on the value of the transaction.

3. Data Sources NMa: average level merchant service fee Currence: debit card usage DNB: cash usage and cost information from cash department Costs retailers: 2002: Brits & Winder (2005) & EIM (2002) 2009: EIM (2011) Costs banks: 2002: Brits & Winder (2005) 2009: Debit card - McKinsey & Company (2006) Cash - Boer & Croon (2009)

6 4.Results (1) Between 2002 and 2009 cash usage declined considerably, whereas debit card usage almost doubled. Diagram 1: Number and value of POS payments in 2002 and 2009

7 4.Results (2) Diagram 2: Share of cash and debit card payments on all POS payments, 2002 – 2009

8 4.Results (3) Table 1 Social costs cash and debit card payments, In EUR millions Difference Cash Debit card Cash Debit card Cash Debit card Social costs incurred by agents Costs to DNB Costs to banks Costs to retailers a 1, Total costs2, , Total costs cash and debit card2,6422, Total costs per household per year (in EUR) % of GDP0.57% GDP0.42% GDP-0.15% GDP

9 4.Results (4) Diagram 3: Social costs cash and debit card payments, 2002 – 2009

10 4.Results (5) Diagram 4: Social costs cash and debit card payments, 02 –09 In EUR millions

11 4.Results (6)

12 4.Results (7)

13 4.Results (8)

14 5.Scenario (1) Scenario: What would the costs have been if all POS payments below EUR 3.62 would have been paid with cash and above EUR 3.62 with the debit card?

15 5.Scenario (2)

16 6. International comparison (1) Diagram 7: Costs as a % of GDP, NL and avg. EU, 2009

17 6. International comparison (2) Diagram 8: Unit costs cash and debit card payment, NL and avg. EU, 2009

18 7. Summary 1.Between 02 – 09 debit card usage almost doubled, cash usage droppped; 2.Increased debit card usage led to a reduction in social costs from EUR 2.6 bn to EUR 2.4 bn, i.e. 9% cost reduction; 3. NL is one of the most efficient countries in the EU wrt cash and debit card payments; 4.On average a debit card payment costs less (EUR 0.32) than a cash payment (EUR 0.39); 5. Debit card payments are less costly to society for payments above EUR 3.62 (2002: EUR 11.63);

19 Thank you very much for your attention! Any questions or comments?