Steady decline in costs of payments in the Netherlands

Steady decline in costs of payments in the Netherlands

The costs of the payment system in the Netherlands have come down considerably, research by De Nederlandsche Bank shows. Retailers, in particular, have been successful in saving costs.

Between 2002 and 2009, the costs of banks, retailers and DNB associated with debit card and cash payments dropped by 9%: from EUR 2,642 billion in 2002 to EUR 2,405 billion in 2009 (see Chart 1). In terms of GDP, expenses decreased from 0.57% to 0.42% of GDP. Banks’ and retailers’ pass their costs associated with payments on to consumers, as a mark-up on prices. Thus reductions in those costs are reflected in check-out prices. For the average household, the cost reduction realised between 2002 and 2009 has made a difference in the order of EUR 50 per year. A rough approximation of the social costs of payments in 2012 suggests that the declining trend has continued since 2009. This is apparent from research by DNB into the social costs of cash and debit card payments in the Netherlands.

Cost savings from increased debit card use and technological progress
The main driver of declining costs is the fact that Dutch consumers increasingly use their cost-efficient debit cards to pay with rather than cash. In 2009 an average debit card payment cost 32 cents, 7 cents less than an average cash payment. Technological developments including faster and inexpensive Internet connections have also contributed to cost saving. And other cost-saving factors were the decrease of the number of bank branches and a slow decline in the total number of payments in shops.

The social cost components attributable to banks and to retailers have developed differently. Retailers have been able to achieve sizeable savings – not only through increased debit card use, but also by reducing their checkout time and because of more affordable payment terminals became available. Social costs of banking activities have risen somewhat, however. This is because banks are responsible for the payment infrastructure. This heavy cost component is affected only slightly by consumer behaviour, but more strongly by general cost-raising factors such as wages or security. On the cash front, DNB and the banking industry have meanwhile launched several actions to increase the efficiency of the cash cycle, as by reducing the number of locations where cash can be withdrawn, and to make the banknote circulation more efficient. Benefits of scale further reduced the cost of debit card payment processing.

Paying with a debit card costs less than paying with cash almost regardless of the transaction amount. Considering that Dutch consumers still pay for most of their purchases in cash, there is room for further cost reductions. A scenario analysis shows, for instance, that if consumers had used their debit card for one in every two, rather than the actual one in three, purchases in 2009, the social costs of the payment system would have been almost EUR 200 million lower (EUR 2.2 bn instead of EUR 2.4 bn).

Scenario analysis has also been used to estimate the social costs of payments in 2012. The analysis took account of the increased number of debit card payments, the decline in cash usage and wage cost developments between 2009 and 2012. The outcome shows a further decline of social costs by EUR 19 million to about EUR 2,386 billion (or 0.40% of GDP). The cost benefit of debit cards over cash increased to EUR 0.14 per payment between 2009 and 2012 (see Chart 2). Scale benefits caused a drop in average costs to EUR 0.30 per debit card payment, whereas the costs of a cash payment rose, to about EUR 0.44.

Social costs set to decline further
Cash will continue to play an important role for many years to come. Given the widespread popularity of the debit card among consumers and the increasing rate of debit card acceptance in smaller shops, in hospitality establishments and by street vendors, the use of the efficient debit card looks set to increase further in the coming years, while cash use will gradually decline. The costs of cash and debit card use to banks, retailers and DNB are therefore expected to decline further.

Read more about the social costs of the payment system in the Netherlands in the DNB Occasional Study entitled “Social costs of POS payments in the Netherlands, 2002–2012: Efficiency gains from increased debit card usage”.

Source: De Nederlandsche Bank

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