Price point

[Dave Birch] At the New Payment Channels conference in London, Julian Niblett gave a presentation about contactless from the major retailer perspective. He is head of cash for Boots, one of the U.K.’s largest retailers. They are a good case study, I think, because there are parts of their operation where contactless would work, but other parts where it would not. Therefore, they have to develop a sophisticated strategy and understand carefully where to make investment.

Their average transaction size is under £10, but that disguises a wide range range (from, say, cosmetics to snacks). So it’s not a simple case of converting big stores or small stores, high street or out of town. Within a store, some departments might benefit but in other departments it would be a waste of money. But how confusing would it be for customers to try and figure out where they could use contactless or not? And how much would it cost to train staff to handle customers properly in these circumstances.

The key figure that Julian gave that will be of interest to people here was that Boots banks £2.5 billion in cash every year and it costs them £1.5 million whereas they bank £2 billion in card transactions and it costs them £14 million. Hence he asks, quite reasonably from his point of view, why cards (that should be electronic and efficient) cost ten times as much as cash. He also gave an excellent insight into the way that retailers think when he said, and I quote, “we’ve had our fingers burned with chip and PIN”. I’m going to do what I can to persuade Julian to make a Digital Money podcast to explore his perspective further.

Retail weak

[Dave Birch] The drive by UK banks to “replace cash usage with cards” came under heavy attack from the British Retail Consortium (BRC). In a strongly worded statement toward the end of last year, the trade association accused card companies of exaggerating the extent to which cards have replaced cash. A BRC survey of 10,000 stores, which together account for a third of U.K. retail sales, showed that cash is still the most popular payment method, accounting for 54 percent of all UK transactions by volume and 32 per cent by value. Their spokesperson said

The card companies, in their publicity campaigns for their products, are giving the impression that cash is on the way out… For example, they are trying to present contactless cards as the ‘new cash,’ because contactless transactions below £10 do not require a PIN.

Well, whether card companies are giving the impression that cash is on the way out or not, European cash payments are declining. They now account for only a third of total European household expenditure, according Datamonitor. The value of cash payments in Europe was €1,787 billion (US$2,651 billion) in 2006, accounting for 34 percent of total household expenditure, down from 38 percent in 2002. And, as APACS pointed out at the time, the vast majority of cash transactions are under £5, whilst the average credit card transaction at a retailer is over £50 for credit. Anyway, the BRC’s point is that cash costs retailers less than cards. Their figures are that on average, a £20 cash transaction costs a retailer less than four UK pence, while a £20 credit card transaction costs at least 17 pence. I’m sure these are accurate: the costs of cash fall on consumers (and society) rather than retailers, so naturally retailers are in favour of it. There’s nothing wrong with that, but it seemed a little a over the top for the BRC director general Kevin Hawkins to say that

Banks have long abused their position by imposing much higher charges on retailers for processing card payments than cash… Clearly, the banks have spotted that replacing cash with cards would mean a further boost to their profits.

The BRC says it is asking the Office of Fair Trading (OFT) “to force the banks to reduce their (card processing) charges.” Surely the way to make a market work properly isn’t to ask regulators to fix prices but to increase competition. If retailers feel that cards cost too much, then they should develop alternatives, shouldn’t they? All they have to do is call…

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