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

Caveat 1: Efficiency gap

Caveat 2: Economies of scale G MC volume

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cycle system The frequency of ATM withdraws per machine and by population is very high, but the average amount of cash withdrawn is not among the highest (below 90 euros per withdrawal).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 RetailersCommercial Banks Rough outline of the Finnish cash distribution system

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) Households (2.4 million units) Net withdraws (20 & 50 € banknotes) Retail shops and corporates Mainly 5 &10 € notes and coins) Larger € notes over-the-counter, net withdraws bill. €, gross withdraws bill. € (20 – 40 bill. €) Rekla Oy (2 centres; Lohja & Kuopio) Cash payments (Not known)

ATM banknotes in Euro area countries from the start of changeover 500 €200 €100 €50 €20 €10 €5 € Austriaxx (2004) x Belgiumxxx Finlandxx Francexxx Germanyxxxxx Greecexx Irelandxxx Italyxxx Luxembourgxxxxx Netherlandsxxxx Portugalxxxx Spainxxxx

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

Value of Payment card transactions in Finland 1997 – 2006, 1000 Million

Trends in cash and card payments in Finland

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 Central Bank ATM company (Automatia Ltd) Cash transit companies -Falck services Ltd Securitas Ltd Rekla Ltd Cost of professional cash handlers Bank branches Retail sector Total costs Total costs/GDP, %

Total costs of payment cards in Finland 2002 – 2005

Some estimates of social costs Total costs of cash and cards is around 0.3 % of the GDP Employment share of payment related workforce 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.

Competition policy If we have only one payment instrument we may face competition problems especially in a monopolistic set-up (maybe, we too often model the banking sector in a perfect competition world).