1

The social and private costs of retail payment instruments in Italy (*)

Guerino ArdizziMarket and Payment System Oversight Department

Banca d’Italia

The social and private costs of retail payment instruments in Italy (*)

Guerino ArdizziMarket and Payment System Oversight Department

Banca d’Italia

Budapest, 15 November 2012ECB-MNB Conference on retail payments

confidentialconfidential

(*) The presentation shows preliminary results of a research conducted by Guerino Ardizzi and (*) The presentation shows preliminary results of a research conducted by Guerino Ardizzi and Paola Giucca through the information from the survey on the cost of payment services in Italy. Paola Giucca through the information from the survey on the cost of payment services in Italy. The views expressed are those of the authors and do not involve the responsibility of the Bank The views expressed are those of the authors and do not involve the responsibility of the Bank

of Italy.of Italy.

(*) The presentation shows preliminary results of a research conducted by Guerino Ardizzi and (*) The presentation shows preliminary results of a research conducted by Guerino Ardizzi and Paola Giucca through the information from the survey on the cost of payment services in Italy. Paola Giucca through the information from the survey on the cost of payment services in Italy. The views expressed are those of the authors and do not involve the responsibility of the Bank The views expressed are those of the authors and do not involve the responsibility of the Bank

of Italy.of Italy.

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The Italian payment market in the international context

Survey on the costs of retail payments in Italy

Results: social cost, private cost, potential benefits

Recent developments in Italy

Follow up

2SIA Expo 2012 Milan - 9 October 2012

Key issues

3

The Italian payment market in the international context

4

Non-cash payments: still a relevant gap

IT = 66

Non cash payments per inhabitant 2011

Note: ECB blue book statistics

(*) estimated value excluding PayPal

5Source: ECB – Blue Book statistics

Note: LU data is estimated without Paypal

Non-cash payments:

inefficient use of the payment infrastructure

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

branch / atm average ATMwithdrawal

average P OSpayment

N of P OS per100 thousand

payments

% cash on totpayments

Italia

EU 27

6Source: ECB and NCB available study on the social costs of retail payments

Social costs of payments and percentage of cash transactions

Social costs and cash relative importance

DN 2009

SE 2009

NO 2002

BE 2003

NL 2002

HU 2009

ITALY 2009

y = 0.0057x + 0.0024R2 = 0.6577

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00%

cash share on total retail payments

So

cial

Co

sts

on

GD

P

7

The Survey in Italy

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Stakeholders

• Merchant Survey• About 500 firms, over 2000 shops• Bank of Italy local branches and retailers’ associations

collaboration

• Bank and infrastructures Survey• 65 per cent of payment market• Banks, post offices, credit card companies

• EU Methodology, but• “front office” costs and households internal costs, not

included

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Results

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social cost per payment instrument

* Italy: costs net of ‘front office costs’* Italy: costs net of ‘front office costs’

Italy (*)€ unit cost € 0.33 € 3.54 € 1.44 € 0.74 € 1.91 € 0.94 € 2.21 € 0.82per 1 € sale 0.019 0.002 0.015 0.011 0.019 0.002 0.003 0.000percentage trx 83% 1% 6% 4% 2% 3% 5% 2%

percentage trx 69% 1% 14% 11% 3% 6% 8%

cardscheque paper CT STP-CTdirect debitDescription cash debit card credit card

ECB 2012ECB 2012

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social cost composition by stakeholder

- A large share of tot social cost are incurred by ‘retailers’ (over 52% for cash and checks). - For ‘retailers’: internal costs (excluding bank charges) are high also for credit transfers and direct debit (accounting, reconciliations, item collection, etc.).

- A large share of tot social cost are incurred by ‘retailers’ (over 52% for cash and checks). - For ‘retailers’: internal costs (excluding bank charges) are high also for credit transfers and direct debit (accounting, reconciliations, item collection, etc.).

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social cost composition by fixed vs variable costs(medium term time horizon of 3-5 years for the variable costs)

Cash fixed costs 36.5 %; debit card fixed costs 63.4 % Cash fixed costs 36.5 %; debit card fixed costs 63.4 %

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social cost: preliminary break even analysis in Italy – cash vs cards

€ 0.00

€ 0.20

€ 0.40

€ 0.60

€ 0.80

€ 1.00

€ 1.20

€ 1.40

value of transaction

un

it c

os

ts

Cash Debit card POS Credit card POS

CriterionCriterion::

the costs of one the costs of one single additionalsingle additional transaction of size transaction of size s: s: ααjj + β + βjj s, s, the the variablevariable costs costs of a of a transaction with the transaction with the payment payment instrument instrument ii, , consists of a consists of a component that component that depends only on depends only on the fact that the the fact that the transaction is transaction is carried out (αcarried out (αjj ) ) and a component and a component (β(βjj ) related to the ) related to the value of the value of the transaction s transaction s

(see also Brits-Winder (see also Brits-Winder 2005; Ten Raa 2005; Ten Raa Schestalova, 2004)Schestalova, 2004)

CriterionCriterion::

the costs of one the costs of one single additionalsingle additional transaction of size transaction of size s: s: ααjj + β + βjj s, s, the the variablevariable costs costs of a of a transaction with the transaction with the payment payment instrument instrument ii, , consists of a consists of a component that component that depends only on depends only on the fact that the the fact that the transaction is transaction is carried out (αcarried out (αjj ) ) and a component and a component (β(βjj ) related to the ) related to the value of the value of the transaction s transaction s

(see also Brits-Winder (see also Brits-Winder 2005; Ten Raa 2005; Ten Raa Schestalova, 2004)Schestalova, 2004)

WarningWarning: : static analysisstatic analysis with no scale efficiency effects with no scale efficiency effectsWarningWarning: : static analysisstatic analysis with no scale efficiency effects with no scale efficiency effects

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Results: Private Costs

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‘Retailers’ private costs (B2C)

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‘Bank and infrastructures’ private costs

Unit private cost per payment instrumentsUnit private cost per payment instruments

The cost component not recovered through pricing is particularly significant for ‘cash’ and ‘checks’. ‘cash’ is largely subsidized by net

gains on payment cards

The cost component not recovered through pricing is particularly significant for ‘cash’ and ‘checks’. ‘cash’ is largely subsidized by net

gains on payment cards

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‘Bank and infrastructure’ private costs the cost to a bank of supplying cash OTC is seven or eight times greater than via ATM

the cost of a paper based transfer is three/four times higher than the cost of an electronic transfer

the relative lack of process automation is one of the main obstacles to improve efficiency

technology development in payment instruments would overall affect bank efficiency :

the cost to a bank of supplying cash OTC is seven or eight times greater than via ATM

the cost of a paper based transfer is three/four times higher than the cost of an electronic transfer

the relative lack of process automation is one of the main obstacles to improve efficiency

technology development in payment instruments would overall affect bank efficiency :

n. 543 commercial

banks (2009)

n. 543 commercial

banks (2009)

Source: Bank of Italy, banking statistics

Source: Bank of Italy, banking statistics

(Operating Costs / Total Asset) = α0 + E-PAG RATIO Zε

E-PAG RATIOE-PAG RATIO = = share of electronic share of electronic payments on total payments on total paymentspayments

E-PAG RATIOE-PAG RATIO = = share of electronic share of electronic payments on total payments on total paymentspayments

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Potential benefits from shifting to innovation

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Potential savings from reducing cash and paper based procedures: preliminary results from the Survey in Italy

savings due to electronic payments migration: about 0,30 % GDP for Italy savings decomposition

o great effect from e-payment substitutiono cash is not the only problem

savings due to electronic payments migration: about 0,30 % GDP for Italy savings decomposition

o great effect from e-payment substitutiono cash is not the only problem

Those savings, however, underestimate the potential social economic benefits associated to the virtuos innovation

process

Those savings, however, underestimate the potential social economic benefits associated to the virtuos innovation

process

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..electronic payments and economic development: a positive correlation

– countries with a higher proportion of cashless payments are characterized by a better performance of the total factor productivity (technical progress).

– innovation in payments facilitates the access to new markets (eg e-commerce)

– .. and electronic payment diffusion may reduce area of shadow economy

Source: ECB,OECD

AT

BE

DK

EU

FI

FR

DE

GR

HU

IE

ITALIA

NLNO

PO

PT

SR

ES

SE

UK

-

50

100

150

200

250

300

350

0.0 5.0 10.0 15.0 20.0 25.0

Non cash payments /e-commerce 2009-

- % e

ATBE

DK

FI

FRDE

IE

ITALIA

NL

PTES

SE

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

0 100 200 300 400

Non cash payments and TFP

TFP var% (2001-2009)

Non cash payment per inhabitant -commerce on retail sector

non cash.

payments. per inhab

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Recent developments

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– Decree “SalvaItalia” 6/12/2011• limiting use of cash over 1000 euro• basic current account • agreement on merchant fees (forthcoming)

– Decree for “growth”: ‘Sviluppo bis’ (forthcoming)• Accepting electronic payments in thepublic and private sectors

22SIA Expo 2012 Milan - 9 October 2012

Financial inclusion

Reducing the cost of retail payments

Enhancing e-payments

Reducing cash usage

Traceability

Efficiency

Safety

Recent developments: national regulation

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Recent development: cash trend in Italy 2012

Legend:

cash card ratio = atm withdrawal/total card turnover;

ATMRATIO = atm withdrawal on total cash withdrawal;

cash-gdp = total cashwithdrawal on GDP

Legend:

cash card ratio = atm withdrawal/total card turnover;

ATMRATIO = atm withdrawal on total cash withdrawal;

cash-gdp = total cashwithdrawal on GDP

cash limits EUR1000

cash limits EUR1000

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24SIA Expo 2012 Milan - 9 October 2012

Follow up

1) Efficiency is a relevant issue in the Italian payment market; results of the survey give important indications:• Cash vs more efficient payment services• Paper vs STP

2) ‘Out of the survey’ relevant ongoing developmentso New payment instruments for low value

payments (eg. mobile, c-less) not covered by the survey.

o Improvement of the pricing schemes Limiting blending practicesReduction of the fees taking into account the

returns to scale effects and the low value payments

o The role of the Public Administration (e.g. “digital agenda”)

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Thanks for the attention!