Comment on Ferrari / Verboven / Degryse Malte Krueger Conference „Economics of Payment Systems“

Comment on Ferrari / Verboven / DegryseMalte Krueger

Conference „Economics of Payment Systems“

Paris, October 25, 2007

Topic and data

Krueger: Comment on Ferrari / Verboven / Degryse

Looking at the shared no-fee Belgium ATM system.

Focus on the cost saving motive

Data provided by Banksys (the central processor of the system)

- ATM withdrawals at shared ATMs

- Value value per cash withdrawal

- Number of shared ATMs

In addition

- Number of branches per bank per market

- Population, surface and a number of population characteristics

Per ‚market‘

Investment and demand


Banks investment:

Invest until (CB – CA)dQA < F

‘Install ATMs until the costs savings of the next ATM would be less than the fixed costs of installing this ATM.’

From a social point of view, this is suboptimal because banks do not take consumer surplus into account.

Demand:

Demand is a function of the number of ATMs and fees.

Specified as :

Intrinsic utility of withdrawing cash at ATMs and branches

minus the typical shoe leather costs

Investment (1)


Modeled as choice between branch and ‘open’ ATM (Banksys ATM).

But banks also deployed ‘limited’ ATMs.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Open access ATMs Limited access ATMs

Branches Open + Limited

Source: Blue Book, various issues

So, there were three alternatives:- Branch- Limited ATM- Open ATM

The increasing numberof limited ATMs shouldeffect usage of openATMs.

Investment (2)


Transactions at open and limited ATMs

Source: Blue Book, various issues, Banksys, Annual Report, various issues, own calculations

0

20

40

60

80

100

120

140

160

180

200

1997

1998

1999

2000

2001

2002

2003

2004

2005

mill

ion

tx

Limited ATMs tx

Banksys-tx excl. B/F

Investment (3)


Banks investment:


ATM: Variable and fixed costs

Branch: variable costs – but no fixed costs

We saw: declining branch network.

So, banks managed to reduce fixed costs of branching.

If fixed costs are included, we get a comparison of total costs:

TCB – TCA <=> 0 ? In fact, given the high costs of branch withdrawals this

may lead to reduction of branch withdrawal points to zero.

Why don’t we observe this?

One possible explanation: Banks do take consumer surplus into account.

Investment (4)


Banksys ATMs:

Each bank pays for its ATMs (fixed + variable costs)

Each bank receives a cost-based interchange.

Consequence:

For each bank, an open ATM installed in its branch costs little because it earns interchange.

For each bank, an ATM installed somewhere else costs interchange (variable cost).

Will joint decision making lead to a rule like:


The total demand for cash withdrawals


The data set only includes tx at open ATMs.Data on limited ATMs are not used.Branch withdrawals are unknown.So, the authors make the assumption that the total volume is constant.


0

5

10

15

20

25

30

35

40

45

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Card tx (EUR bill.)

ATM tx (EUR bill.) Since POS volumes strongly increased inthe period analysed it wwould seem plausible to assume falling volumes.

The social optimum


1. Why can a social optimum not be achieved via fees only?

2. ‘Social’ has to be interpreted in a very limited sense:

Looking only at cash – substitution cash-cards not included.

Looking only at payments – feedback in deposit markets not included.

A proposal for our profession


Please include in any paper:

Warning: The Surgeon General Has Determined that Optimal Solutions May be Dangerous to the Health of the Economy.

PaySys Consultancy GmbHIm Uhrig 7D-60433 Frankfurt am MainTel.: +49 69 95 11 77 -12E-Mail: [email protected]: www.paysys.de

Thank you!

Universität Karlsruhe (TH)IWW, Sektion Geld und Währung Postfach 69 80 D-76128 KarlsruheTel.: +49 721 608-6329E-Mail: [email protected]: http://www.iww.uni-karlsruhe.de/

Malte Krueger

PaySys is German member of the Euro-pean Payments Consulting Association


y


Data set:ATM withdrawals at shared ATMs

Value value per cash withdrawal

Number of shared ATMs

Number of branches per bank per market

Population

Surface

Number of enterprises

Fraction of foreigners in the population

Fraction of population under 18

Fraction of population over 65

Unemployment rate

Flanders indicator

Limited ATMs not included?

Proxy for income or other?

What about POS transactions?

Effect on the total demand for cash withdrawals?

Foreign visitors would be more interesting

Changes in the Belgium Payment Landscape


Changes in the Belgium Payment Landscape:


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Open access ATMs Limited access ATMs

Branches Open + Limited

y


Banks investment:


‘Install ATMs until the costs savings of the next ATM would be less than the fixed costs of installing this ATM.’

Why no fixed costs of branch withdrawal included?

Assuming that the amount of tellers is constant?

Properly stated we should have (TCB – TCA)dQA < 0

This may well hold up to QA = Q

In this case the questions arises why do banks not shut tellers down?

The obvious answer is that they do take customer valuations into account.

y


Data set:ATM withdrawals at shared ATMs

Value value per cash withdrawal

Number of shared ATMs

Number of branches per bank per market

Population

Surface

Number of enterprises

Fraction of foreigners in the population

Fraction of population under 18

Fraction of population over 65

Unemployment rate

Flanders indicator

Limited ATMs not included?

Proxy for income or other?

What about POS transactions?

Effect on the total demand for cash withdrawals?

Comment on Ferrari / Verboven / Degryse Malte Krueger Conference „Economics of Payment Systems“

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