Download Comparison of efficiency and costs of payments: Some new

Comparison of efficiency and
costs of payments:
Some new evidence from Finland
Kari Takala and Matti Viren
Bank of Finland
We intend do the following things:
• Discuss some principal and conceptual
issues of payment media
• Illustrate the Finnish system of payment
media, institutions and recent trends
• Provide some new Finnish estimates of
costs of cash & cards, and the social costs
of payment media
Efficiency of the payment system
• Social costs vs costs of different market
players: the Central Bank, banks,
merchants and the consumers
• Costs vs net benefits: more appealing
measures create progressively more
measurement problems (without making
huge difference in basic results).
• Still, the const side is somewhat
controversial (consider the role ATMs)
Comments on previous results
• Even on the cost side, there are large
differences between different
countries/studies
• In terms of unit costs for different payment
media, they follow the same pattern
• On the top, we have David Humphrey’s
claim of something like 1 % gain form
more efficient payment system
Caveat 1: Efficiency gap
Caveat 2: Economies of scale
MC
G
volume
How the Finnish cash cycle differs from other
euro countries?
•
1. Banknotes put into circulation is low with respect to GDP or private
consumption, which points out that cash is not anymore the dominant
means of payment (by value) in retail payments.
•
2. The number of bank branches and ATMs is low in comparison to
population and the amount of cash in circulation. ATM distribution of cash
is the dominant channel for consumers to receive banknotes. About 80 %
of cash is distributed out of ATMs, but only 20 and 50 euro banknotes
available in ATMs.
•
3. The Finnish cash supply system is extremely concentrated, NCB has 5
branches, one company (Automatia Ltd.) is governing the united single
ATM network, 2 CIT companies operate in 23 cash centres. BoF has only
two clients in cash services.
•
4. Even though the banknotes put into circulation in Finland has doubled
after the euro changeover, it has been estimated that about a third of the
value of these banknotes have been migrated outside Finland, and mainly
into euro area.
Additional features of the Finnish cash cycle system
• The frequency of ATM withdraws per machine and by population is very
high, but the average amount of cash withdrawn is not among the highest
(below 90 euros per withdrawal).
• The amount of cash held in bank branch offices is currently very small due
to dominance of ATM distribution of cash and improved logistics within
the cash service network.
• The key element in the concentration of the Finnish cash supply system is
also that as a small country only 3-4 bigger deposit banking groups govern
the money market, and they noticed quite early the savings in cooperation.
• Automatia is owned by 3 largest commercial banks, but BOF and
competition authorities forced them to allow other banks in joining the cash
distribution network. Later on also ATM network has been merged into one
single network.
Rough outline of the Finnish cash distribution
system
Central bank
Automatia
CIT centres
Retailers
Commercial Banks
Consumer
Circulation of euro banknotes by value in Finland
(2004, billion €)
13.244
Bank of Finland
(5 branches)
.050
0.733
Rekla Oy
(2 centres;
Lohja & Kuopio)
11.529
Automatia
CIT centres
(Falck & Securitas)
(19 centres)
18.576
2.470
Otto. ATMs
(1723 cash points)
2.819
2.659
14.551
Bank branches
(Nordea, SHB, Sp, Op, ÅAB, Samlink)
1585 bank branches
Larger 100-500 € notes
over-the-counter, net
withdraws 0.299 bill. €,
gross withdraws 2.175
bill. €
(Not known)
Net withdraws 16.106
(20 & 50 € banknotes)
Cash payments
Households
(2.4 million units)
0.733
(20 – 40 bill. €)
Mainly 5 &10 €
notes and coins)
Retail shops and corporates
The number of bank branches in EU15-countries in 1995 – 2005
1 200
Bank branch / million inhabitants
1 000
Postgiros added to
bank branches
800
600
400
200
0
BE
DK
DE
GR
ES
FR
Source: European Central Bank.
IE
IT
LU
NL
AT
PT
FI
SE
UK
EU
15
The number of ATMs in EU15-countries in 1995 – 2005
1 400
Number/ million inhabitants
1 200
1 000
800
600
400
200
0
BE
DK
DE
GR
ES
FR
IE
Source: European Central Bank.
IT
LU
NL
AT
PT
FI
SE
UK
EU
15
Bank branches and ATMs per million inhabitants in 1995 and 2005 in EU 15
1400
Number per million inhabitants
1200
1000
800
600
400
200
0
BE
DK
DE
GR
ES
FR
IE
IT
Bank branches/million inhabitants 1995
Number of ATMs/million inhabitants 1995
LU
NL
AT
PT
FI
SE
Bank branches/million inhabitants 2005
Number of ATMs/million inhabitants 2005
UK
EU 15
Number and value of ATM withdrawals in Finland, 1985 - 2006
Amount of cash withdrawn from ATM, billion euro
Number of cash withdrawals from ATMs, million
300
Number of withdrawals in millions
Value of withdrawals, billion euro
20
18
250
16
14
200
12
10
150
8
100
6
4
50
2
0
0
1985
1990
1995
2000
2005
Sources: Federation of Finnish Financial Services and Automatia.
ATM banknotes in Euro area countries from the start of changeover
500 €
Austria
200 €
100 €
50 €
x
x(2004)
20 €
10 €
5€
x
Belgium
x
x
Finland
x
x
France
x
x
x
x
x
x
Greece
x
x
Ireland
x
x
x
Italy
x
x
x
x
x
x
x
Netherlands
x
x
x
x
Portugal
x
x
x
x
Spain
x
x
x
x
Germany
Luxembourg
x
x
x
x
4
Median of ATM networks
3
2
1
0
1988 1990 1992 1994 1996 1998 2000 2002 2004
Most common means of payment in daily goods purchases
% of respondents
80
1999
71
2001
70
January 2003
65
October 2003
60
58
April 2004
October 2004
50
49 48
April 2005
48
46 45
45
43
39
40
February 2006
43 43
41 41
May 2007
30
30
21
20
17
10
7
9 8
7
8
4 5
2 2 3
3 3 3 3 3 3 3 4 3
Visa Electron -card
Credit cards
2 2 1 1 2 1 1 1 1
3 3 3 2 2 2
0
Cash
Bank cards
Source: Federation of Finnish Financial Services, Saving and use of credit, May 2007
Retail shop card
Account
Banknotes put into circulation ratio to GDP in Finland, %
%
9
8
7
6
5
4
3
2
1
0
1947
1952
1957
1962
1967
1972
1977
1982
Sources: Statistics Finland and Bank of Finland.
1987
1992
1997
2002
2007
Finland continued
• Most retail payments are currently made with cards
according the Finnish Bankers’Association
questionnaire. However, no exact figures about cash
payments by transaction or value exist. Finland has
the highest number of card payments per inhabitant in
EU15.
• Retailers also prefer debit card payments (national
bank cards) instead of cash payments. Debit card
commissions are low in comparison to credit card
commissions. One company (Luottokunta Ltd.)
owned by banks and retailers) takes care of the card
services.
Payment card transactions in Finland 1997 – 2006,
million
1000
Retail Cards
878
900
68
800
Credit and
Charge Cards
Online Debit
Cards
Bank Cards
740
700
640
577
600
502
60
73
412
59
61
55
68
14
70
33
500
370
400
300
200
100
273
40
54
178
297
48
58
324
49
58
53
62
1
191
255
66
76
151
100
65
2
567
362
217
62
91
415
445
498
291
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Value of Payment card transactions in Finland 1997 – 2006, 1000
Million
35
31,1
30
Retail Cards
24,4
25
Credit and
Charge Cards
22,3
20,7
18,6
20
16,4
Online Debit
Cards
Bank Cards
14,2
15
11,9
10
1,9
2,7
5
12,9
2,5
1,7
3
2,9
5,6
4,5
2,5
4,3
2,5
2,4
4,0
2,6
27,2
4,1
0,3
4,2
0,7
2,9
2,0
1,3
3,7
1,7
3,5
3,4
7,3
7,8
9,1
1997
1998
1999
0,0
10,3
12,2
13,8
14,8
2002
2003
16,2
17,8
19,6
0
2000
2001
2004
2005
2006
Trends in cash and card payments in Finland
Typical cash and electronic payment expenditure items
Typical cash payment items (food and beverages, leisure and culture)
Typical electronic payment items (housing rents, household bills, traffic and health etc.)
50000
Million euro
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
1975
1980
1985
Source: Statistics Finland.
1990
1995
2000
2005
Computing the costs: cash
• Very few market players which provide
relatively accurate data
• Both banks and merchant have delegated
most cash-related tasks (counting and
sorting, transportation, ATM operations) to
professional cash handlers (Automatia)
• Cash is used relatively little in Finland
Computing the costs: cards
• Again, very few market players. Bank’s
own company, Luottokunta Ltd., takes
care of most of card-related operations
• At the level of fees and commissions, we
know things pretty well but in terms of
resource costs it much difficult to get
reliable data
Table 8
Total costs of cash in Finland 2000 – 2005
Agent\Year
2000
2001
2002
2003
2004
2005
Central Bank
50.534
68191
31.265
14.549
13.633
15.657
ATM company
(Automatia Ltd)
42.745
63.151
59.070
56.789
50.907
51.338
-Falck services Ltd
24.351
27.997
35.452
29.853
30.340
26.695
- Securitas Ltd
5.500
6.387
14.911
14.039
14.332
14.474
- Rekla Ltd
0
0
0
0.611
3.165
3.345
Cost of professional
cash handlers
123.2
165.8
140.7
115.8
112.4
111.5
Bank branches
23.0
25.0
36.0
25.0
21.6
27.0
Retail sector
40.7
55.6
53.8
48.2
46.9
46.6
Total costs
186.9
246.3
224.5
189.0
185.3
185.1
Total costs/GDP, %
0.141
0.176
0.156
0.129
0.122
0.117
Cash transit
companies
Total costs of payment cards in Finland 2002 – 2005
Table 11. Total costs of card payments in Finland 2002-2006, million euro
Costs of card payments for card users (transaction fees, provisions and annual fees) in Finland
Year
2002
2003
2004
2005
2006
Transaction
Provisions paid
costs of
by merchants
merchants
12.6
14.3
15.2
16.9
19.1
37.8
40.0
42.7
46.7
59.4
Annual fees of
card holders
93.2
106.6
117.9
131.0
150.3
Total costs of
payment cards
GDP annual value,
million euro
Total cost of card
payments vs. GDP,
%
143.7
160.8
175.8
194.6
228.8
143974
145938
152345
157162
167062
0.100
0.110
0.115
0.124
0.137
Some estimates of social costs
• Total costs of cash and cards is around 0.3 % of
the GDP
• Employment share of payment related workforce
0.12 - 0.20 per cent
• Unit costs of cash and cards are not terribly
different 0.30 vs 0.26 €
• Altogether costs seem to be much smaller than
e.g. in the Netherlands and Belgium (but close to
recent Swedish estimates 0.36 – 0.40 %)
Further policy implications
• Moreover, on an average unit costs for
different payment media do not seem to
differ very much, not so much that the
difference would require some government
intervention.
• It seems that we arrive at the same result
if net benefits instead of costs were used
as a point of reference
Pricing the use of payment media
• Cash is seemingly free consumers and for
cards, typically a fixed fee has to paid
• Merchants pay the costs of cards (fees
and commissions) and the also partly the
cash operations.
• Introducing a complete set of tariffs seems
a remote possibility; it is also analytically
much difficult than it seems at the first
sight.
Competition policy
• If we have only one payment instrument
we may face competition problems
especially in a monopolistic set-up
(maybe, we too often model the banking
sector in a perfect competition world).