[Dave Birch] In this month’s excellent SPEED magazine, there is an article by Harry Leinonen. I know Harry from the conference circuit, where we occasionally fetch up together, but you probably know him as an advisor to the Bank of Finland and the Finnish representative on the Payment and Settlement System Committee with the Eurosystem. I always pay attention to his well-informed and well-thought out points. In the article he looks over the last decade’s worth of statistics to highlight six main trends in European payments. I’ll get on to those in a moment, but what I wanted to first draw attention to was this paragraph in Harry’s piece:

Payment developments seem to be quite slow. Major changes in payment habits need five to ten years to be implemented. One reasons for the slow pace is probably the lack of transparent price and cost information.

I realise that I sound like a broken recordscratched CD on this topic, but it seems to me to be a question of rudimentary economics: no price information, no working market. If the European Commission wants to make the European payment market work better, they could do worse than start by actually turning it into a market in the first place by insisting on better price signaling. One inevitable consequence: the cost of cash will go up, the cost of cards will go down.

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The six key trends that Harry outlines are

  1. Non-cash payments are steadily replacing cash payments. A few days ago I was working with a bank in Iceland where more than nine in ten retail payments are non-cash (in the U.K. it’s one in four).
  2. Electronic payments are taking over from paper payments. One particular form of paper payment, the personal cheque, will likely vanish in my lifetime.
  3. Within electronic payments, direct debits are losing market share. It’s possible that this may change once the SEPA transition kicks in. As the potential for pan-European payments is realised then perhaps the market may begin to use them. The pieces are coming into place here. For example, several big processors (Equens, Iberpay, Seceti Stet and VocaLink — who together handled 18 billion direct credit and debit transfers last year) have agreed to establish bilateral interoperability using the European Automated Clearing House Association (Eacha) Technical Interoperability Framework over SwiftNet FileAct for the exchange of SEPA payments. I’m not so sure though: will Finnish consumers give direct debit mandates to Greek utilities? If I had to guess I would think that pushed e-billing triggering a credit transfer will become the consumer’s preferred mechanism.
  4. Self-service is replacing branch banking. Oddly, the number of bank employees has been surprisingly stable (and surprisingly invariant when normalised). I don’t know what this implies, but presumably call centres, IT, marketing and so on have all grown even as the number of “front line” staff has declined.
  5. Debit cards usage is growing faster than credit card usage, both in terms of payment volumes and values. In several countries, credit card payments are less than a fifth of all card payments.
  6. ATM withdrawals are getting steadily more expensive. The average number of withdrawals per ATM per month has fallen by a third in recent years.

In all of these statistics, new “alternative” online payment mechanisms and mobile payments are essentially still invisible. I doubt this will be true a decade from now.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


  1. “These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public”
    I think you need to add to this disclaimer. Can I suggest
    “I earn 90%+ of my income consulting on the card schemes and thus my views are somewhat prejudiced”
    Ode that you’d post something more balanced –

  2. Point 6 on the 1/3rd decline in ATM yields in entirely misleading.
    You neglected to point out that ATM volumes in fact rose 14% in the same period. Yields per ATM only fell because there are almost twice as many ATM units. These figures are freely available on the LINK website.
    If your theory is correct, pray tell why are banks and other financial players increasing, not decreasing their ATM estate? Is it perhaps that an ATM is considerably cheaper than a branch teller? I do not have branch stats to hand but I’m pretty sure they have declined in number over the same time frame.
    The market does not agree with your prognosis.
    Sweden, Finland and Iceland are all great countries but I’m not sure they are great reference cases for the UK, German, Spanish or Italian markets.

  3. Liam,
    Thanks for taking the time to respond.
    “Yields per ATM only fell because there are almost twice as many ATM units. These figures are freely available on the LINK website.”
    I know, that’s where I got them from.
    “Is it perhaps that an ATM is considerably cheaper than a branch teller?”
    I agree — and so does Harry. That’s point no. 4 in the post.
    “The market does not agree with your prognosis.”
    If you mean that the cost to a bank of the average ATM withdrawal is going up, I disagree (and so do the figures that you have provided).
    If you mean my forecast that the cost of cash will go up and the cost of cards will go down, you may well be right but I would love to continue the debate. Could you point to some more specific figures or forecasts that show a different trajectory? For example, if there is someone out there forecasting that, say, card interchange is going up in the long term, I would be very interested to read more.

  4. David,
    UK Bank ATM yields have increased from 6,800 transactions per ATM in Dec 2002 to 6,900 per ATM in Dec 2006. This plus increased average withdrawal amounts and declining ATM technology costs has seen a significant reduction in Bank costs per ATM withdrawal. These are the relevant ATM stats and not the headline “fallen by a third”. Do you concede this?
    Free ATM’s
    Dec-02 Dec-06
    Withrawals (m) 218.0 240.0
    ATM units (‘000) 32.0 35.0
    Monthly Yield (‘000) 6.8 6.9
    Charge ATM’s
    Withrawals (m) 4.8 9.4
    ATM units (‘000) 10.0 26.0
    Monthly Yield (‘000) 0.5 0.4
    The yield for charging ATM’s operated by independents have fallen over the same period predominately because this market has bypassed saturation point. These independents over extended unit placement in a land grab for market share but a cursory look at annual reports for Cardpoint, PayPoint etc sees them now focusing on decommissioning non-performing units. That said it will take time to see a reduction in IAD ATM units as LINK still reports month on month growth in these units. Consolidation in this sector will see unit shrinkage and restoration of yields.
    If I spend £200 at Tesco. Payment costs to Tesco are £1.80 if I pay by credit card (assuming high volume 0.9% rate) and 10p if I pay by debit card. If I pay by cash, they earn a 25p interchange revenue, not cost. They take my cash out of the till and into their ATM where they earn an interchange fee when someone withdraws it. Otherwise they just bank it and pay 1p bank charge for so doing. Tesco earns better margin if the customer pays by cash.
    If I set up a new high street store selling Nintendo DS games – average ticket price £25. I will pay 50p on credit card sales (if I’m lucky to get a 2% rate) and 20p on debit card sales. If the punter pays in cash I’ll pay 1p in bank charges to lodge that but I wouldn’t pay that for the first two years of free business banking (but note this does not extend to card processing fees). To get my business off the ground I just need a second hand cash register to start accepting cash. I will definitely also accept card payment but will find the acquirer application process daunting. Their “welcome pack” will consist of 3 pages of marketing blurb and 20 pages of card scheme rules which are totally incomprehensibly to even the most hardened payment professional. In my small business, cash is value enhancing and card payment chews into my profits.
    Your clarion call I guess is that card payment subsidises cash payment and some clarity on the implicit costs is required for an efficient market. Another view point is that banks make margin on cash, better margins on debit card payment and outrageous margins on credit card payment. You want the cost of cash placed on the agenda. I would add two further items which are of far more relevance to retailers (who bear these costs)
    1. What is the rational behind the wildly different interchange on credit cards and debit cards. The cost to Tesco is dramatically different if I pay with my Barclays credit card vs. my Barclays debit card. Why? They are effectively both the same instrument, an electronic payment authorised against a credit facility (card limit or overdraft).
    2. Interchange might have made sense in the 50’s when the card schemes were building up there acceptance networks but what is the rationale for it today. Why should a card issuer receive half of the transaction fee? It’s crazy.
    Final titbits. Card payment volumes have risen dramatically as you say but the US interchange rates increased (not decreased) in the same time frame. The two major card schemes are now quoted companies, not associations. Their mandate is to maximise shareholder returns (as with all companies) and that does not bode well for competitive interchange rates. Cash will always be cheaper because cash is sovereign and thus the banks cannot control it. If they over price it, this business will simply walk to the supermarkets, PayPoints and Travelex of this world who all seem to make good margin on cash. A bank without cash is a Northern Rock.
    I rest my case as I have hogged too much of your blog space.

  5. This is all good stuff. Can we clarify a few points for my benefit?
    How much does it cost the likes of Tesco to count, bag and deliver cash? Electronic transactions? Any other hidden costs (shrinkage) here? Is this significant and if so what is the true cost of each payment method per transaction? Per £100 spend? Why do supermarkets offer cashback?
    Is a debit and credit card the same instrument? Debit cards deal with real money whereas credit cards are a means of lending. As such, credit cards provide protection to the cardholder in the form of the Credit Consumer Act. Is this at no cost to the issuer? Since the risk must be a function of the value this argues for maintaining the percentage MSC. If the issuers are making excessive profits then there is a case to answer (MSC too high), certainly, but maybe not this one.
    I wonder about the functioning of the interchange market too. It is all too easily distorted, as has been demonstrated by various cardholder incentive schemes (the merchant pays, the cardholder benefits, driving up fees). There are a lot of documents about interchange on the web…
    Ultimately, it is about convenience to the customer and will he/she make that purchase if only cash is accepted? That is for the merchant to decide and best wishes to him. I don’t believe we would just carry around more cash if there were no cards. On a macro scale it would be bad news for the economy if we return to cash-based payments.
    Tesco’s as a bank. Control of so much of what we eat and our money too. I shudder to think of it.
    Love the word play on cash at the end though. I doubt that it was lack of notes and coins that gave NR the trouble, just too much borrowing compared to deposits.

  6. Hi Phil
    All good questions. I’ll have a bash at some answers.
    What is the true cost of each payment method? Who knows as it depends on what’s included and academia tends to deliver totally unreadable reports here. That cash is more expensive is not in doubt, as with all that counting and stacking, its got to be more expensive than electronic payment.
    Fraud costs though go the other way. Fraud on cards is way more expensive than counterfeit cash.
    Why do supermarkets off cashback? To get cash out of their till on a zero fee basis. They only offer cashback on debit cards where a fixed (10p) charge already applies. There is no additional charge for the cashback element of the transaction. MSC on a credit card transaction is a percentage of the whole transaction, say 2%, and hence retailers cannot offer cashback on credit cards.
    Debit cards relate to your bank account including your overdraft = lending (I have a bigger overdraft than credit card limit). Credit protection is paid for by retailers not issuers. If you dispute your purchase, your issuer institutes a chargeback against the retailer who carrys the can. If you lose your purchase, this is covered by credit insurance which is also offered by many different debit card issuers.
    Credit protection does justify a wildly different MSC/interchange. Your risk profile with Barclays is not dramatically different between a debit card and credit card. The margin play though is hugely different.
    A successful retailer will always offer all payment options, cash and cards including contactless options. I don’t think Tesco will get to control cash money supply as the banks know cash is the foundation of their business. They will not over-price it.
    I see the market moving more towards card payment which I’m absolutely fine with but I don’t see a meaningful reduction in MSC happens. That is the real problem and the cost of cash is just a red herring. I think the clarity is required on the vastly different bank pricing on 1) Direct Debit, 2) Debit Cards and 3) Credit Cards.

  7. Fascinating discussion.
    First of all, Liam is right about the “fallen by a third”. This was for U.S. ATMs, not U.K. ATMs. In the U.K., the transactions per charge ATM have fallen only 20 per cent as his figures show, whereas the transactions per “free” ATM have remained essentially stable. Apologies for dashing off an argument without double-checking my figures first.
    Second, banks do not make money on cash. They lose considerable amounts of money on it because they simply (politically) cannot charge for it at cost.
    Three, and this is related, cash appears cheaper to retailers because banks and customers pay for it.
    Four, I agree that MSCs have to fall unless the card issuers can deliver more value to the retailers.
    As an aside, I don’t agree that successful retailers have to accept all payment mechanisms. Trying paying at Boots with a cheque or buying an iPhone with cash.

  8. “Second, banks do not make money on cash. They lose considerable amounts of money on it because they simply (politically) cannot charge for it at cost.”
    I’m quite prepared to believe this but would like to see the proof. UK Banks charges retailers 55p per £100 to process cash lodgements/withdrawals, so 0.55%. What rate should it should be?
    Where do you stand on the disparity between debit card MSC and credit card MSC? Is this not as big if not bigger issue?
    “Four, I agree that MSCs have to fall unless the card issuers can deliver more value to the retailers.” I think both need to happen.
    We basically agree (I think) but just wave different flags.

  9. Game on.
    “Retail bosses call on EU to crack down on card fee fixing
    The bosses of 14 major retail companies have signed a letter to the European Commission (EC) calling for a crackdown on card transaction charges
    The retailers, who together have 250 million customers a week and include Asda/Walmart, IKEA, Kingfisher, M&S and Tesco say the Commission must order cuts in the fees card companies charge retailers for each transaction when it makes its, long awaited, ruling on the legality of the so called interchange fees.
    The retail chiefs say the success of the Single Euro Payments Area (SEPA), to be launched in January 2008 and intended to create a Europe-wide system for efficient, low cost money transfers between EU countries, depends on the EC taking action to end MasterCard and Visa’s price-fixing.
    Their letter argues if SEPA is launched with card companies allowed to continue the existing secretive and excessive charging regime; it could fail because the potential benefits to customers and businesses will be lost.
    British Retail Consortium (BRC), has led the fight against the charges, and long argued they are an unjustifiable tax on customers.
    BRC Director General Kevin Hawkins said: “The Commission’s decision on these cross-border card charges has huge implications for individual and businesses throughout Europe. MasterCard has clearly been abusing its position to boost profits at massive cost to customers and retailers.
    “The Commission claims its Single Euro Payments Area will do for card payments what the euro has done for cash but it will only deliver the cheap, easy system promised if MasterCard and Visa’s price fixing is ended.
    “Retailers big and small are simply looking for a fair deal. With the new Area starting in less than two months the Commission must recognise now is the time.”
    The EC decision on the charges currently levied by MasterCard on cross border transactions within the EU is expected in mid to late November.”

  10. What I like from the european is habit trend number 5. That kind of habit is certainly trend to make a difference from the Americans as they prefer credits and loans instead. The only thing that troubles me is the fact that debit card is somewhat less safe than credit card. Behind credit card is real cash and money you actually own.

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