comparison of efficiency and costs of payments: some new evidence from finland kari takala and matti...
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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
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• The frequency of ATM withdraws per machine and by population is very high, but the average amount of cash withdrawn is not among the highest (below 90 euros per withdrawal).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.
Central bank
Automatia CIT centres
Consumer
Retailers Commercial Banks
Rough outline of the Finnish cash distribution Rough outline of the Finnish cash distribution systemsystem
Circulation of euro banknotes by value in Finland (2004, billion €)
Bank of Finland(5 branches)
Automatia CIT centres
(Falck & Securitas)(19 centres)
Bank branches (Nordea, SHB, Sp, Op, ÅAB, Samlink)
1585 bank branches
Otto. ATMs(1723 cash points)
13.244
11.529
2.819
2.659
18.576 2.470
Households (2.4 million units)
Net withdraws 16.106(20 & 50 € banknotes)
Retail shops and corporates
Mainly 5 &10 € notes and coins)
Larger 100-500 € notes over-the-counter, net withdraws 0.299 bill. €,gross withdraws 2.175 bill. €
(20 – 40 bill. €)
Rekla Oy(2 centres;
Lohja & Kuopio)
Cash payments
0.733
0.733.05014.551
(Not known)
The number of bank branches in EU15-countries in 1995 – 2005
0
200
400
600
800
1 000
1 200
BE DK DE GR ES FR IE IT LU NL AT PT FI SE UK EU15
Bank branch / million inhabitants
Source: European Central Bank.
Postgiros added to bank branches
The number of ATMs in EU15-countries in 1995 – 2005
0
200
400
600
800
1 000
1 200
1 400
BE DK DE GR ES FR IE IT LU NL AT PT FI SE UK EU15
Number/ million inhabitants
Source: European Central Bank.
Bank branches and ATMs per million inhabitants in 1995 and 2005 in EU 15
0
200
400
600
800
1000
1200
1400
BE DK DE GR ES FR IE IT LU NL AT PT FI SE UK EU 15
Bank branches/million inhabitants 1995 Bank branches/million inhabitants 2005
Number of ATMs/million inhabitants 1995 Number of ATMs/million inhabitants 2005
Number per million inhabitants
0
50
100
150
200
250
300
1985 1990 1995 2000 2005
0
2
4
6
8
10
12
14
16
18
20
Amount of cash withdrawn from ATM, billion euro
Number of cash withdrawals from ATMs, million
Sources: Federation of Finnish Financial Services and Automatia.
Number and value of ATM withdrawals in Finland, 1985 - 2006
Number of withdrawals in millions Value of withdrawals, billion euro
ATM banknotes in Euro area countries from the start of changeover
500 € 200 € 100 € 50 € 20 € 10 € 5 €
Austria x x(2004) x
Belgium x x x
Finland x x
France x x x
Germany x x x x x
Greece x x
Ireland x x x
Italy x x x
Luxembourg x x x x x
Netherlands x x x x
Portugal x x x x
Spain x x x x
Most common means of payment in daily goods purchases
71
17
3 2
9
65
21
3 2
8
58
30
2 31
7
49
41
2 31
3
48
41
3 3 2 3
46
43
4 31
3
4543
53
1 2
4345
7
4
1 2
39
48
8
31 2
0
10
20
30
40
50
60
70
80
Cash Bank cards Visa Electron -card Credit cards Retail shop card Account
1999
2001
January 2003
October 2003
April 2004
October 2004
April 2005
February 2006
May 2007
Source: Federation of Finnish Financial Services, Saving and use of credit, May 2007
% of respondents
0
1
2
3
4
5
6
7
8
9
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
Sources: Statistics Finland and Bank of Finland.
Banknotes put into circulation ratio to GDP in Finland, %
%
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
178 191 217255 291
362415 445
498567
12
14
3361
100
151
54 5858
6265
68
70
73
76
91
4048
4953
55
59
60
62
66
68
273297
324370
412
502
577
640
740
878
0
100
200
300
400
500
600
700
800
900
1000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Retail Cards
Credit and Charge Cards
Online Debit Cards
Bank Cards
7,3 7,8 9,1 10,312,2
13,8 14,816,2
17,819,60,0
2,0
2,9
2,73,4
3,53,7
4,0
4,14,2
4,3
4,5
5,6
1,91,7
1,7
2,5
2,4
2,52,5
2,6
2,9
3
0,71,3
0,311,912,9
14,2
16,4
18,6
20,722,3
24,4
27,2
31,1
0
5
10
15
20
25
30
35
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Retail Cards
Credit and Charge Cards
Online Debit Cards
Bank Cards
Value of Payment card transactions in Finland 1997 – 2006, 1000 Million
Trends in cash and card payments in Finland
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
1975 1980 1985 1990 1995 2000 2005
Typical cash payment items (food and beverages, leisure and culture)
Typical electronic payment items (housing rents, household bills, traffic and health etc.)
Source: Statistics Finland.
Typical cash and electronic payment expenditure items
Million euro
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
Cash transit companies
-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
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
YearTransaction
costs of merchants
Provisions paid by merchants
Annual fees of card holders
Total costs of payment cards
GDP annual value, million euro
Total cost of card payments vs. GDP,
%
2002 12.6 37.8 93.2 143.7 143974 0.1002003 14.3 40.0 106.6 160.8 145938 0.1102004 15.2 42.7 117.9 175.8 152345 0.1152005 16.9 46.7 131.0 194.6 157162 0.1242006 19.1 59.4 150.3 228.8 167062 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.