RETAIL PAYMENTS – costs and revenues

1. De Nederlandsche Bank RETAIL PAYMENTS – costs and revenues Carlo WinderConference Financial Sector of Macedonia on Payments and Securities Settlement Systems Ohrid 25 June 2008

3. 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?

4. 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

5. STYLIZED FACTS – debit card transactions

6. STYLIZED FACTS: Merchants´ report CASH VS DEBIT CARD USE - 2006 PIN Retail 2002 # tr 15% Sales 43%

7. 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

8. 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

9. Murkey Waters Source:McKinsey&Company (2005)

10. Murkey Waters Source: McKinsey&Company (2005)

11. Murkey Waters Source:McKinsey&Company (2005)

12. Murkey Waters Source:McKinsey&Company (2005)

13. Murkey Waters Source: McKinsey&Company (2005)

14. 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

15. International Comparison World Retail Banking Report 2005

16. International Comparison

17. 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

18. IMPLICATIONS ? • IS THERE A PROBLEM? • IF YES, WHAT SHOULD WE DO?

19. 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?

20. Payment Systems Policy Main objective ●promote safe and efficient payment and settlement systems Other objectives ●e.g. accessibility, effective competition, crime prevention, consumer protection

21. 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

22. EFFICIENCY: fact-finding studies

23. 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)

24. 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

25. 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

26. EFFICIENCY: No Free Lunch Variable costs of Cash, Debit Card, E-purse

27. 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

28. McKinsey Report (2006) IMMEDIATE CAUSE • Continuing discussions on tariff structures • SEPA

29. McKinsey Report (2006) Organisation • Two principals: DNB and Dutch Bankers Organisation • Involvement of all stakeholders: merchants, consumers, competition authorities

30. McKinsey Report (2006) Role of DNB • Principal • Participant in • methodological discussions • Validation • Informing parties in National Platform on the Payment System

31. McKinsey Report (2006) Differences with NO FREE LUNCH • Costs and revenues • All payment system costs (and revenues) • Only the costs of the banking industry

32. McKinsey Report (2006)

33. EFFICIENCY: McKinsey Report

34. EFFICIENCY: McKinsey Report

35. EFFICIENCY: Merchants´ report • IMMEDIATE CAUSE • • SEPA • • McKinsey study • Organization: • Similar to McKinsey study

36. EFFICIENCY: Merchants´ report Average costs per transaction Retail 2001: Cash € 0.17 Pinpas € 0.27

37. EFFICIENCY: Merchants´ report COSTS OF ONE ADDITIONAL TRANSACTION • Variable costs • Average transaction amount • Debit card € 0,16 • Cash € 0,20

38. Costs of POS payments 2006 (EIM) • Conclusions • Decreasing costs payments systems, because of increasing use of debit card and one stop shopping • Transaction costs of PIN and cash are converging • Large savings are still possible (more use of debit cards instead of cash and better choices regarding to datacom) • Use of debit cards can be efficient, even for small amounts

39. SAFETY SEVERAL ASPECTS • INNOVATIONS, e.g. contactless payments, biometric identification • VULNERABILITY FOR SHOCKS CENTRAL BANKS´ OVERSIGHT • ALSO, safety in physical sense

40. 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

41. Payment Systems Policy BIG QUESTION HOW? Incentives Discussion: Working Group

42. CASH-LESS SOCIETY? • Condition: debit card should be cheaper for any transaction size • User convenience and safety • Anonymity

43. CASH-LESS SOCIETY? LESS-CASH rather than CASH-LESS

44. THANK YOU