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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
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Eurosysteem
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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?
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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
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De Nederlandsche Bank Eurosysteem STYLIZED FACTS – debit card transactions
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De Nederlandsche Bank Eurosysteem STYLIZED FACTS: Merchants´ report Retail businessHotel and Catering Industry Nr of transactions Cash 72%90% Debitcard (PIN)26%4% Sales Cash 38%63% Debitcard (PIN)56%18% CASH VS DEBIT CARD USE - 2006 PIN Retail 2002 # tr 15% Sales 43%
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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
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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
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De Nederlandsche Bank Eurosysteem Murkey Waters Source: McKinsey&Company (2005)
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De Nederlandsche Bank Eurosysteem Murkey Waters Source: McKinsey&Company (2005)
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De Nederlandsche Bank Eurosysteem Murkey Waters Source: McKinsey&Company (2005)
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De Nederlandsche Bank Eurosysteem Murkey Waters Source: McKinsey&Company (2005)
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De Nederlandsche Bank Eurosysteem Murkey Waters Source: McKinsey&Company (2005)
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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
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De Nederlandsche Bank Eurosysteem International Comparison World Retail Banking Report 2005
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De Nederlandsche Bank Eurosysteem International Comparison
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De Nederlandsche Bank Eurosysteem International Comparison – euro area Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Poland Portugal Spain Slovenia Sweden UK EUROPE 62 56 54 36 50 67 110 90 92 48 31 35 54 32 41 73 60 CAP GEMINI, WORLD PAYMENTS REPORT 2007
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De Nederlandsche Bank Eurosysteem IMPLICATIONS ? IS THERE A PROBLEM? IF YES, WHAT SHOULD WE DO?
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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?
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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
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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
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De Nederlandsche Bank Eurosysteem EFFICIENCY: fact-finding studies
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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)
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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
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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
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De Nederlandsche Bank Eurosysteem EFFICIENCY: No Free Lunch Variable costs of Cash, Debit Card, E-purse
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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
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De Nederlandsche Bank Eurosysteem McKinsey Report (2006) IMMEDIATE CAUSE Continuing discussions on tariff structures SEPA
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De Nederlandsche Bank Eurosysteem McKinsey Report (2006) Organisation Two principals: DNB and Dutch Bankers Organisation Involvement of all stakeholders: merchants, consumers, competition authorities
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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
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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
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De Nederlandsche Bank Eurosysteem McKinsey Report (2006)
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De Nederlandsche Bank Eurosysteem EFFICIENCY: McKinsey Report
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De Nederlandsche Bank Eurosysteem EFFICIENCY: McKinsey Report
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De Nederlandsche Bank Eurosysteem EFFICIENCY: Merchants´ report IMMEDIATE CAUSE SEPA McKinsey study Organization: Similar to McKinsey study
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De Nederlandsche Bank Eurosysteem EFFICIENCY: Merchants´ report Retail businessHotel 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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De Nederlandsche Bank Eurosysteem EFFICIENCY: Merchants´ report COSTS OF ONE ADDITIONAL TRANSACTION Variable costs Average transaction amount Debit card € 0,16 Cash € 0,20
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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
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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
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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
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De Nederlandsche Bank Eurosysteem Payment Systems Policy BIG QUESTION HOW? Incentives Discussion: Working Group
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De Nederlandsche Bank Eurosysteem CASH-LESS SOCIETY? Condition: debit card should be cheaper for any transaction size User convenience and safety Anonymity
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De Nederlandsche Bank Eurosysteem CASH-LESS SOCIETY? LESS-CASH rather than CASH-LESS
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De Nederlandsche Bank Eurosysteem THANK YOU
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