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

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1. Motivation

1. Update “Payments are no free lunch study”:

2002 results to 2009

2. Participation in Eurosystem cost study

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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 = Fj + Vj, tr + Vj,s..

Fj : costs associated with payments with instrument j, that do not vary with the number and value of the transactions;

Vtr :costs associated with payments with instrument j, that vary with the number of the transactions Nj. j = extra costs per trx;

Vs.:costs associated with payments with instrument j, that vary with the value of the transactions Sj. βj :extra costs per 1 euro sales

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2. Definitions (2)Criterion 1 Social costs per transaction: SCj/Nj = Fj/Nj + j + jSj/Nj

with Sj/Nj representing the average value of a transaction generated with instrument j. Criterion 2 Social costs per euro of sales: SCj/Sj = Fj/Sj + jNj/Sj + j

with SCj/Sj (Fj/Sj) as the total costs (fixed costs) of each euro in sales, and Nj/Sj 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 2002-2009

SourcesNMa: 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)

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4. Results (1)

Between 2002 and 2009 cash usage declined considerably,

whereas debit card usage almost doubled.

7.1

1.10.1 0.03

4.6

1.9

0.2 0.04

0

2

4

6

8

Cash Debit card Prepaid card Credit card

In b

illio

ns

2002 2009

66

47

3

76

40.2

58

0.5

0

20

40

60

80

Cash Debit card Prepaid card Credit card

In b

illio

ns

of e

uro

s

2002 2009

Diagram 1: Number and value of POS payments in 2002 and 2009

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4. Results (2)

Diagram 2: Share of cash and debit card payments on all POS payments, 2002 – 2009

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4. Results (3)

Table 1 Social costs cash and debit card payments, 2002-2009In EUR millions

2002 2009 Difference

Cash Debit card

Cash Debit card

Cash Debit card

Social costs incurred by agents

Costs to DNB 70 - 73 - 3 -

Costs to banks 895 268 865 322 -30 54

Costs to retailersa 1,157 252 850 295 -307 30

Total costs 2,122 520 1,788 617 -334 97

Total costs cash and debit card 2,642 2,405 -237

Total costs per household per year (in EUR)

380 330 -50

% of GDP 0.57% GDP 0.42% GDP -0.15% GDP

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4. Results (4)

Diagram 3: Social costs cash and debit card payments, 2002 – 2009

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4. Results (5)

Diagram 4: Social costs cash and debit card payments, 02 –09 In EUR millions

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4. Results (6)

Diagram 5 Part of the social costs borne by different agents, 2002-2009 Cash 2002 Cash 2009

Debit card 2002 Debit card 2009

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4. Results (7)

Table 5 Cost measures, 2002-2009 In EUR

2002 2009 Cash Debit

card Cash Debit

card Social costs per transaction DNB/KNM 0.01 - 0.03 - Banks 0.13 0.25 0.19 0.17 Retailers 0.16 0.24 0.19 0.15 Total 0.30 0.49 0.39 0.32 Social costs per EUR in sales DNB/KNM 0.001 - 0.001 - Banks 0.014 0.006 0.015 0.004 Retailers 0.018 0.005 0.015 0.004 Total 0.032 0.011 0.031 0.008 Variable social costs per average transactiona 0.176 0.197 0.266 0.190 Costs of 1 additional transaction ( 0.112 0.190 0.148 0.181 Costs for EUR 1 in additional sales (, %/100) 0.007 0.00014 0.009 0.00023 Break-even point 11.63 3.62

a where s is the average transaction amount, viz EUR 9.37 (cash 2002), EUR 44.13 (debit card 2002), EUR 12.69 (cash 2009), EUR 39.07 (debit card 2009).

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4. Results (8)

Diagram 6 Variable cost of cash and debit card payments, 2002 – 2009

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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?

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5. Scenario (2)

Table 6 Social cost cash and debit card payments, 2009 and under alternative scenario Cash Debit

card Total

2009 No. of transactions (billions) 4.6 1.9 6.5 Amount (EUR millions) 58.1 76.1 134.2 Avg. transaction amount (EUR) 12.69 39.11 20.57 Social cost (EUR millions) 1.8 0.6 2.4 2009 – alternative scenario No. of transactions (millions) 1.9 4.6 6.5 Amount (EUR millions) 5.2 129.0 134.2 Avg. transaction amount (EUR) 2.72 27.92 20.57 Social cost (EUR millions) 0.9 1.1 2.0 Difference social cost 2009 and 2009 alternative scenario

-0.9 0.5 -0.4

As % of total cost in 2009 -50% +80% -16%

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6. International comparison (1)

Diagram 7: Costs as a % of GDP, NL and avg. EU, 2009

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

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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);

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Thank you very much for your attention!

Any questions or comments?