4th Conference on Payments and Securities Settlement Systems Ohrid, Republic of Macedonia, 21 June 2011 Innovations, Security and Efficiency of Retail Payments Ayse Zoodsma

Agenda  Electronic Payments and Innovations At the counter Remote Person to person  iDEAL  Cybercrime and Secuirity  Efficiency of Retail Payments

Role of DNB  Catalyst and facilitator of national discussions  Active contribution in European discussions  Research on payment patterns and underlying motives

At the counter  Cash  Magstripe  EMV chip  Contactless / mobile Contactless/mobile: Mobile NFC - pilots - roll-outs Standardization Europe/worldwide

Remote  Credit transfer and direct debit  Internetbanking Online payment iDEAL Digital billing Standaard digitale nota  Mobile phone Mobile e-banking P2p payments 2009: figures  1,481 mln  1,272 mln The Netherlands  > 90% internet 78% banking 74% shopping  iDEAL 28 mln (2008) 45 mln (2009)  Digital billing: 2 mln (2008) 10 mln (2009)

Adoption e-commerce in Europe, 2009 Source: Europe B2C E-Commerce Report 2010, Ystats

Adoption e-commerce in Europe, 2009 Source: Online Payments 2010, Innopay

Internet and broadband in Europe, 2009 Source: Online Payments 2010, Innopay

E-commerce turnover in Europe, 2009 Source: Online Payments 2010, Innopay

E-commerce turnover in Europe, 2009 Country per capita, in EUR United Kingdom910 France453 The Netherlands382 Germany354 Sweden222 Italy100 Poland97 Russia22 Romania10 Source: Online Payments 2010, Innopay

Payment methods web merchants NL ( ) Source: Online Payments 2010, Innopay

Forward, ~ 5 years New developments:  Social networks  Virtual worlds  Mobile internet  Cloud computing P2P, B2C New parties

Innovations: Flying V model Apple iPhone/iPad: Appstore  apps, 5 billion downloads in 2 yrs! Blackberry: App World Google Android: Android Market Windows Mobile: Marketplace  Hardware is not the issue  It is the software that counts!  Mobile internet  micropayments

Mobile internet  E-books and tablet success Amazon.com Kindle Sony e-reader iPhone iPad ´As with iTunes, people are happy to pay once it is made easy´ (The Economist, Feb 14th 2009)  Not just books…  … also newspapers and magazines!  Holy grail of paid media? New business models

Internet & mobile : our cyberworld

Questions 1.What hypes in payments do you see in your country? 2.What is beyond hype and becoming real?

iDEAL: Dutch standard for online banking based electronic payments  Launched in October 2005  Ten major banks in the Netherlands (market share > 98%)  Existing internet banking interfaces used for authentication and authorization  Additional banks

iDEAL: advantages  Customer: Easy to use (pre-filled transaction form; familiarity with electronic banking and security) Safe and trusted payments  Merchant: Guaranteed payment (no charge-backs) Low cost Large potential customer base  Bank: Further usage of electronic banking systems Further reduction of “paper based payments”

iDEAL: transactions

Electronic Bill Presentment and Payment  New way of receiving and paying bills Step 1:Customer receives a link to new bill by or in internet banking environment Step 2:After review, customer can click “I want to pay” button Step 3:Customer is directed to internet banking application of “his” bank Remainder of the process is similar to iDEAL  Estimation: potentially € 50 - € 100 billion yearly efficiency gains in European Union

Cybercrime: building blocks Network structures have developed … and marketplaces for criminal services Money making machine … cybercrime is advancing ICT has become more user friendly … for users … and criminals!

Threats  Cybercrime  Malware is growing exponentially  Botnets =Networks of hacked PCs Spam Phishing DDoS attacks Identity fraud  > 50 % PCs contain malware  > % are part of botnet  Invisible

Cybercrime: Impact & uncertainty Impact Uncertainty Digitalization Internationalization Ease of use ICT applications Networked structure High pay-offs Scale of cybercrime Complexity of attacks 0 10

Two major trends Cybercrime:  is becoming large-scale  complexity increases use of advanced techniques organized attacks

Questions Cybercrime has a very strong international dimension. Currently, national law enforcement authorities and other organisations still have a strong national orientation. Questions: In what ways can authorities improve international cooperation? How can your country´s central bank contribute to improving security internationally?

Retail payments statistics - NL 2009Volume (millions) Value (EUR billions) Credit transfers1,4775,142 Direct debits1, Total remote2,7495,419 Debit card (PIN)1,94676 E-purse (Chipknip) Credit card344.5 Cash± 5,500± 60 Total POS7, Total retail10,4065,560 72% cash 25% debit 43% cash 54% debit

Development POS payments - NL Share of POS payment instruments As percentage of total sales

Development remote payments - NL Share of paper based funds transfers Transactions as percentage of total volume

Trends in Retail Payments in the EU Source: ECB Payment transactions in the euro area (billions)

Development card usage – Worldwide Number of POS terminals Per million inhabitants Source: Websites Central Banks, ECB

Development card usage – Worldwide Number of card payments As percentage of national payments Source: Websites Central Banks, ECB

Efficiency: different concepts  Productive efficiency (e.g. reduction of processing costs)  Allocative efficiency (e.g. change payment behaviour)  Dynamic efficiency (e.g. product innovation)

Social vs. private costs External costs = fees paid to others in payment chain Internal costs = all other costs = own production costs Private costs = external + internal costs for each party individually + Social costs = sum of internal costs of all parties together Consumers Retailers / Businesses Banks Central bank

Efficiency: how to measure it? Step 1: Estimate the total yearly costs per payment instrument, and distinguish between fixed and variable costs. Step 2: Estimate the total yearly volume and value of transactions per payment instrument. Step 3: Determine total, fixed and variable costs per transaction per payment instrument.

Step 1: Estimate total costs Main ingredients of a cost study:  Determine what payment instruments to look at.  Determine what parties in the payment chain to include.  Determine what cost (and revenue) items to include.  Set up a questionnaire & desk research.  Distribute questionnaire among representative sample. Plus:  Involve all relevant stakeholders.  Be realistic about the planning: ± 1 year.

What cost items to include? Possible cost items for commercial and central banks CashDebitcardsE-purseCredit cards Production money Transportation Cash centres: staff, buildings, equipment Back office: Fraud & control Front office: Branch offices: staff, buildings, equipment ATM maintenance Overhead Armoured car services Production cards Transportation Telecommunication Back office: Fraud & control Front office: Branch offices: staff, buildings, equipment ATM maintenance Overhead Production cards Transportation Telecommunication Back office: Fraud & control Front office: Branch offices: staff, buildings, equipment ATM maintenance Overhead Production cards Transportation Telecommunication Back office: Fraud & control Front office: Branch offices: staff, buildings, equipment E-purse charge terminal maintenance Overhead

What cost items to include? Possible revenue items for commercial and central banks Revenues Transaction fees Subscription fees Balance revenues Interchange fees …

Possible cost items for retailers Cash Till shortages, fraud Theft insurance Money purchase Back office: Prepare cash registers Front office: Transaction time Deposit, storage, transport: Time own transport Counting daily receipts Filling /emptying cash register during the day Deposit fees, safe rental Fees prof. transport Terminals/devices: Authentication devices Depreciation, rental, maintenance tills Bank fees Fraud Printing daily overview Back office: Account keeping Front office: Transaction time Telecom fees Terminals/tills: Depreciation, rental, maintenance Debitcards Telecommunication: Credit cardsE-purse Bank fees Printing daily overview Back office: Account keeping Front office: Transaction time Telecom fees Terminals/tills: Depreciation, rental, maintenance Telecommunication: Bank fees Printing daily overview Back office: Account keeping Front office: Transaction time Telecom fees Terminals/tills: Depreciation, rental, maintenance Telecommunication: What cost items to include?

Possible revenue items for retailers/businesses Revenues Surcharges …

Step 2: Estimate transactions Card payments, credit transfers, direct debits and other electronic payments:  Banks  Payment processor(s)  Blue Book (ECB)  Red Book (BIS) Cash:  Not centrally registered  Occur at a wide variety of places  Person-to-person (P2P)

Step 2: Estimate transactions What is the best methodology to measure the number of cash payments?

Measuring cash usage Retail approach: + High number of observations + Availability of ‘true’ transaction records - Difficult to draw a representative sample of points of sale - Availability of ‘true’ transaction records biased - Exclusion of P2P transactions Consumer approach: + Inclusion of P2P transactions + Less difficult to draw a representative sample - Measurement error (omission, invention, behavioural change …)

Measuring cash usage Research design matters a lot! Most important challenge: minimise omission of low value cash transactions Conclusions DNB research:  Omission is smallest with a 1-day transaction diary …  … and highest with a questionnaire or a 1-week transaction diary  Internet panels do not introduce ‘electronic’ biases 1-day transaction diary among consumers

Measuring cash usage

Efficiency: no free lunch Main results:  Social costs POS payments 0.65% GDP  Per POS transaction: € 0.35  Per € sales: 2.4%  Per household per annum: € 400

Efficiency: no free lunch Update Cash€ 0,30€ 0,38 Debitcard€ 0,49€ 0,45 E-purse€ 0,93n/a Credit cards€ 3,59n/a Average total costs per transaction Cash€ 0,18€ 0,27 Debitcard€ 0,20€ 0,17 E-purse€ 0,03n/a Credit cards€ 1,09n/a Average variable costs per transaction

Efficiency: the banking sector Main results:  Costs & revenues in balance  Net costs € 23 million  Losses on all payment instruments, except credit cards  Losses made up by balance related revenues  Loss on debitcards: € 0,08 per transaction  Loss on cash: € 0,12 per transaction

Efficiency: costs for retailers Cash€ 0,17€ 0,18 Debitcard€ 0,27€ 0,20 E-pursen/a€ 0,14 Credit cardsn/a€ 2,70 Average total costs per transaction Average variable costs per transaction 2006 Cash€ 0,21 Debitcard€ 0,16

Main policy theme Substitution paper-based by electronic payments  POS payments: cash → debit card  Remote payments: paper transfers → internet banking, e-invoicing, direct debit

International cost studies POS paymentsSocial costs (% GDP) Cash share (% sales) Debitcard share (% sales) Share of other instruments (% sales) Belgium (2003)0.74%63%32%5% Australia (2006/07)0.67%38%14%48% The Netherlands (2002)0.65%56%40%4% Sweden (2002)0.40%39%50%11% Norway (2007)0.39%39%61% Conclusion: social costs ↓ with cash & creditcard usage ↓ and debitcard usage ↑

Development cash usage – Worldwide Value of banknotes and coins As percentage of GDP Source: Websites Central Bank, IMF, ECB

Development cash usage – Worldwide Number of ATM’s Per million inhabitants Source: Websites Central Banks, ECB

How to stimulate efficiency? Positive incentives Negative incentives Non-financial incentives Financial incentives  Discounts  Loyalties  …  Transaction fees  Surcharges  …  Public campaigns  ∆ perceptions  Acceptance  Innovation  …  Acceptance  …