[Dave Birch] You may have gone for fifty shades or the new JK, but I’ve been tucked up with “The Social and Private Costs of Retail Payment Instruments — A European Perspective” by Heiko Schmiedel, Gergana Kostova and Wiebe Ruttenberg (European Central Bank Occasional Paper Series no.137). You probably saw the headline results.

Cash payments account for nearly half of the total costs but, as the most commonly used payment instrument, has on average, the lowest social costs per transaction, at €0,42, closely followed by debit cards with costs of €0,70 to society. Cheques are the most expensive form of payment, with unit costs of €3,55.

[From Finextra: ECB explores the social costs of payments]

The report is actually a very detailed exposition of the study work that has been done by the ECB, which is important because it is a serious attempt to introduce harmonised methodology and comparable measurements to obtain realistic and useful figures for the social and private costs of cash. In its own executive summary, it says that:

The European Central Bank (ECB) carried out a study of the social and private costs of different payment instruments with the participation of 13 national central banks in the European System of Central Banks (ESCB). It shows that the costs to society of providing retail payment services are substantial. On average, they amount to almost 1% of GDP for the sample of participating EU countries. Half of the social costs are incurred by banks and infrastructures, while the other half of all costs are incurred by retailers. The social costs of cash payments represent nearly half of the total social costs, while cash payments have on average the lowest costs per transaction, followed closely by debit card payments. However, in some countries, cash does not always yield the lowest unit costs.

Just to be clear what is being discussed here, these are the costs that are used in the model of the payments value chain.

  • External costs are the fees, tariffs and other payments made to other participants for services;
  • Internal costs are for the resources used by the participants themselves, including services bought from other participants but not considered separately;
  • Private costs are the costs incurred by the individual participants. (Note: Private costs = Internal costs + External costs);
  • Social costs are the sum of all internal costs incurred by all of the participants.

There’s no need to reproduce the entire report here, but if I might paraphrase the details of these findings, I think that they tell us that:

  1. Payments are too expensive. The total cost to society of payments in the 13 EU countries surveyed is around 1% of GDP. Cash payments account for about half of this. In other words, cash is a dead weight of 0.5% of European GDP. These figures exclude the social costs for households, which might addd another 0.2% of GDP.
  2. Cash payments have, on average, the lowest cost per transaction, closely followed by debit cards.
  3. In some countries, cash does not always yield the lowest unit costs. In a third of the countries surveyed, debit cards have a lower unit costs. Economics of scale are crucial here.

In section six of the report I noticed an interesting observation on the distribution of costs, which is that retailers have higher private costs than banks. Their external cost ratio is high and their overall social-to-private costs ratio is 75%, because a quarter of their costs are fees paid to third parties. (Therefore, it seems to me, there is business pressure for retailers to develop their own payment solutions.)

So we do we learn from the report? I think it’s an important addition to the cannon. Measuring the social costs of payments is, as the authors note, “a very complex task, entailing certain difficulties and a significant number of uncertainties and simplifications”. They have opted to use the Activity Based Costing (ABC) methodology to get an accurate measure of private costs and then used these to calculate the social costs. Hopefully, this means that their social cost figures are far more useful than some of the previous estimates.

The clustering that the ECB use in their Table 13 is a very handy way of dividing up the markets for discussion and planning purposes, so I’ve made a new version of the payments “weather map” that I use at conferences, but this time re-colouring the continent according to the ECB’s breakdown.

ECB Clusters Birch

Please note that the cluster labels are mine and not the ECBs. One of the most noticeable differences between my old version of the map and this new version is that France has been re-labelled. Looking at the ECB tables, I think France’s overall social costs score is damaged by the continued high use of cheques. Since cheques are considerably more expensive than alternatives, high cheque use has a major impact on the total score, so France has ended up being clustered with Italy, Greece and Russia.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers


  1. Do these reports take into account shutting all High Street retail banks? Because after doing away with cheques, then it’ll be cash and money supply will surely just be determined by “Skynet”?

    Does point of singularity not have a moral dimension in the future of money discussions? 2020 really is a appreciably near time frame, and HFT is already causing a lot of head scratching given the indebtedness of the fiat money we currently exist in?

  2. And next week we’ll be talking to Philip Morris about some new research implying smoking doesn’t lead to lung cancer.

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