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Costs of retail payments and payment habits of the public sector
Dr. Anikó Turján
1 April 2011.
2
Starting points• Implementing
payments involves costs
• Network market• Market mechanisms
alone are not enough to achieve the maximal social benefits
• Costs studies by a number of NCBs
• Excessive use of cash in Hungary
• Market share of the public sector in the „retail” payments is about 30%
STARTING POINTS AND OBJECTIVES
Objectives of MNB• Estimating the number of
„retail” payments and their costs
• Overhauling payment habits of the public sector and identifying the most in-effective areas
• Investigating the options for the increase in efficiency
• Outlining the ways for achieving greater efficiency
Costs - dr. Anikó Turján
3
SCOPE OF THE TWO PROJECTS
Costs - dr. Anikó Turján
Costs of payments (CoP) Payment habits of public sector (PHP)
Whole economy (basically legal
economy)
Incoming and outgoing payments
related to public sector
Costs, revenues, fees Motivations
Reporting periodNumber of payment instruments 6+4 7
therof debit card transactionsthereof credit card transactions
thereof paper based
electronic
Business to business (B2B) direct debits
Core (business to consumer, B2C)
direct debits
Postal outpayment money order for
social benefits and other purposes
joint aspect
Payment card transactions
Direct debts
Legend: code of colour
Covered payment instruments
Coverage
Ideas for policy measures
2009
Number and values of domestic retail payment transactions
Potential cost savings stemming from changes in the use of payment
instruments
Cash transactions
Postal inpayment money orderPostal outpayment money order for pension
Credit transfers
Domestic (Ft) retail payment transactions
4
DATACOLLECTIONin CoP
Costs - dr. Anikó Turján
Hungarian Post: 1/100%
MNB: 1/100%
Households:921/ : 0,024%300/: 0,008%
Creditinstitutions:9-12/ : 61-97%
Public sector
ALTOGETHER: PAYMENT SERVIECE PROVIDERS
ACH1/100%
Companies : 334/ : 0,31%15/ : 0,84%
Questionnaire-self-filling in
- Activity based costing, direct indirect costs, allocation keys, paid fees, revenues
- Elasticity of changes in total costs and costs for activities forestimating the fix and variable costs
- Turnover data
- Institutional information
Cash-in-transit companies:3/ : 100%
Diary for 2 weeks - self-filling in + 2 questionnaires via interview- Time consumptions- Number and values of transactions- Social and demographic data
Questionnaire - self-filling in and interview- Labour input- Paid fees- Number and values of transactions- Institutional information
- Importing cost data from survey of companies - Importing turnover data from project related to payment habits of public sector
DATA COLLECTION IN PHP
Costs - dr. Anikó Turján 5
CR(105)90%
Dec. financial funds
Social security system
Central government
Local governments
CR(26)85%*
* Based on data supplied by credit institutions
- Number and values of transactions,
- Motivations
6
DEFINITIONS
1. PRIVATE COSTS• Total used resources, including the fees paid within
the payment chain
2. SOCIAL COSTS• Total used resources, excluding the fees paid within
the payment chain • the costs of MNB, PSP-s, CiT-s, households,
companies and public sector(excluding the fees paid within the payment chain)
3. PAID AND RECEIVED FEES • within the payment chain • e.g. CiT, banking, interchange, merchant fees, etc.
4. NET PRIVATE COSTS: RETURN ON COSTS • Private costs less received fees.
Costs - dr. Anikó Turján
7
OVERALL RETAIL PAYMENTS IN HUNGARY IN 2009
Costs - dr. Anikó Turján
Volume Value (in millions)(in Ft billions) volume value
1. Cash transactions 2 834,82 51 454,18 76,08% 12,20%
2. Debit card transactions 150,25 1 050,35 4,03% 0,25%
3. Credit card transactions 24,57 200,42 0,66% 0,05%
4. Credit transfers, thereof 277,23 362 772,29 7,44% 86,02%
paper based credit transfers 47,13 61 671,29 1,26% 14,62%
electronic credit transfers 230,10 301 101,00 6,18% 71,40%
5. Business to business (B2B) direct debits 0,86 507,43 0,02% 0,12%
6. Core (bussines to consumer, B2C) direct
debits
77,00 639,97 2,07% 0,15%
7. Postal inpayment money orders 271,48 2 990,43 7,29% 0,71%
8. Postal outpayment money orders for
pension
22,00 1 541,93 0,59% 0,37%
9. Postal outpayment money orders for
social benefits and other purposes
15,98 440,80 0,43% 0,10%
10. Prepaid (food and recreation) vouchers 52,08 118,35 1,40% 0,03%
3 726,26 421 716,15 100,00% 100,00%
involving cash paper based
Legend: code of colours
Share based on (%)
Total
Payment instruments
8
• Cash related payments 17 % of GDP
• Each third payment involved the use of cash
RETAIL PAYMENTS IN CASE OF PULIC SECTOR
Costs - dr. Anikó Turján
Incoming payments
Outgoing payments
Total
Number (in millions) 45 55 100Value (in Ft billions) 1000 3400 4400
Retail payments involving cash in case of public sector
9
CASH: SOCIAL COSTS AND FLOW OF FEES IN THE PAYMENT CHAIN (TOTAL IN FT BILLIONS)
Costs - dr. Anikó Turján
MNB7,16
0,20
Households19,97
0,01
Payment service providers (PSP): 66,86
9,79 Cash -in-transit companies (CiTs):
16,01
17,42
Public sector1,42
0,52
4,96
41,79
Companies 97,39
10
CURRENT SOCIAL COSTS
Costs - dr. Anikó Turján
Volume Value Social costs
(in millions)
transaction 100 Ft value of transaction
1. Cash transactions 2 835 51 454 208,82 74 0,412. Debit card transactions 150 1 050 30,22 201 2,883. Credit card transactions 25 200 19,56 796 9,76
4. Credit transfers, thereof 277 362 772 75,08 271 0,02
paper based credit transfers 47 61 671 35,01 743 0,06
electronic credit transfers 230 301 101 40,07 174 0,015. Business to business (B2B) direct
debits1 507 0,79 919 0,16
6. Core (bussines to consumer, B2C) direct debits
77 640 7,73 100 1,21
7. Postal inpayment money orders 271 2 990 38,96 144 1,308. Postal outpayment money
orders for pension22 1 542 6,65 302 0,43
3 658 421 157 387,81 106,01 0,09Social costs in % to GDP 1,49%
Payment instruments Unit social costs per (Ft)
(in Ft billions)
Total
11
TYPES OF COSTS
Costs - dr. Anikó Turján
Type of costs Cash transactions
Debit card transactions
Electronic credit transfers
Core (B2C) direct debits
Postal inpayment money orders
Paper based credit transfers
Postal outpayment money orders for pension
Credit card transactions
Total
1. Fix 33,5% 62,3% 52,5% 63,2% 17,0% 8,6% 23,0% 73,9% 32,9%2. Variable: linear to value
8,8% 0,4% 1,5% 12,6% 4,2% 0,4% 0,0% 0,1% 9,0%
3. Variable: degressive to value
8,8% 2,0% 0,0% 0,0% 0,4% 0,0% 1,0% 2,0% 10,0%
4. Variable: linear to number
19,5% 5,0% 0,0% 0,0% 62,3% 83,7% 41,9% 5,9% 23,3%
5. Variable: degressive to number
29,4% 30,4% 46,0% 24,2% 16,1% 7,4% 34,2% 18,1% 24,7%
6. Fix and degressive elements together
71,7% 94,6% 98,5% 87,4% 33,5% 15,9% 58,1% 94,0% 67,6%
7. Total social costs (Ft billion)
209 30 40 8 39 35 7 20 387
HIGH (Relatively)
LOW
Legend: code of colours in terms of the share of fix and degressive cost elements
12
HYPOTHETICAL SOCIAL COSTS
Costs - dr. Anikó Turján
Volume Value Social costs(in
millions)transaction 100 Ft value
of transaction
1. Cash transactions 1 885 15 322 166 88 1,08
2. Debit card transactions 1 000 11 050 46 46 0,41
3. Credit card transactions 25 200 20 796 9,76
4. Credit transfers, thereof 530 391 946 43 80 0,01
paper based credit transfers 0 0 0 n.a. n.a.
electronic credit transfers 530 391 946 43 80 0
5. Business to business (B2B) direct
debits
1 507 1 919 0,16
6. Core (bussines to consumer, B2C)
direct debits
217 2 130 10 48 0,49
7. Postal inpayment money orders 0 0 0 n.a. n.a.
8. Postal outpayment money orders
for pension
0 0 0 n.a. n.a.
3 658 421 156 285 78 0,071,09%
Legend: code of colours in terms of the changes in the number of transactions
DECREASED INCRESASED UNCHANGED
Social costs in % to GDP
Payment instruments Unit social costs per (Ft)(in Ft billions)
Total
13
SAVINGS IN THE CONTEXT OF CoP
Costs - dr. Anikó Turján
In the current situation
In hypothetical situation
Absolute saving*
Relative saving* %
Social costs (Ft billion) 388 285 -103 -27%Social costs in % to GDP 1,49% 1,09% -0,40%n.a.Unit costs per
Cash transactions 74 88 14 19%Debit card transactions 201 46 -155 -77%Electronic credit transfers 174 80 -94 -54%Core (B2C) direct debits 100 48 -53 -53%
Total payment transactions
106 78 -28 -27%
Note
* - sign: decrease in costs w/ o sign: increase in costs
SAVINGS IN THE CONTEXT OF PHP
Note:• in case of full electronisation
• non-payment related aspects/factors should be also considered
Actual size of saving depends on a.m. factors
Állami fizetési szokások - Lajos Brigitta 14
Cash withdrawals from/ cash deposits to
payment accounts 6 million
Postal payments 60 million
Payments from/to own cashier‘s office 34
million
Annual saving at the
level of society 21 Ft billion
15
COMBINED SAVINGS
After excluding the overlaps
the potential annual saving:
about 107 Ft billion (0,41% of GDP)
Costs - dr. Anikó Turján
16
RETURN ON COSTS, I.E. NET PRIVATE COSTS IN CASE OF CASH TRANSACTIONS AND POSTAL
INPAYMENT MONEY ORDERS W/O SEIGNIORAGE (FT BILLIONS)
Costs - dr. Anikó Turján
Cash transactions
Debit card transactions
Credit transfers total
Paper based credit transfers
Electronic credit transfers
B2B direct debits
Core (B2C) direct debits
Postal inpayment money orders
Total
MNB 6,95 0,00 0,00 0,00 0,00 0,00 0,40 7,36Cash-in-transit companies
1,28 -1,05 0,23
Payment service providers* +**
17,12 -3,81 -17,50 1,29 -18,79 -0,47 1,38 -6,95 -10,23
Companies*+** 144,14 17,76 67,58 13,89 53,70 1,26 4,66 34,32 269,73
Households* 37,39 16,27 25,00 19,84 5,17 1,69 8,58 88,93
Government** 1,94 3,65 5,59Total 208,82 30,22 75,08 35,01 40,07 0,79 7,73 38,96 361,60Note: * Total value excludes the net private costs related to credit cards transactions. ** The net private of costs of the companies and the government are separated only in case of cash transactions and postal inpayment money
orders. In case of the remaining payment instruments the net private costs of the goverment are included in the net private costs of the
companies.
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INTERNATIONAL EXPERIENCES
• Cautious, sporadic measures, no clear trend or best practice• Fight on cheques
Cost/transaction-based pricing (Norway) Plans (Ireland, Malta, UK)
• Payment cards Regulation on interchanges fees (Spain, Australia, US) Subsidy, VAT reduction (the Netherlands, Argentina, South-Korea) Surcharges allowed (the Netherlands) or forbidden/limited (Sweden)
• Administrative intervention against cash above a value limit and related to fight on money laundering
(Belgium, Italy, the Netherlands, Bulgaria)
• More ambitious and stronger regulation affecting retail payments from/to the public sector Payroll payment for Govt. officials exclusively in scriptural money
(Belgium, Latvia, Denmark) Tax payments exclusively in scriptural money (Belgium, Greece) Paying pensions almost exclusively in scriptural money (Lithuania)
Costs - dr. Anikó Turján
18
SOME IDEAS FOR HUNGARIAN POLICY MEASURES AT VARIOUS TIME HORIZONS• to create an incentive system for encouraging the use of non-
cash payment instruments from/to public sector, and thus prompting changes in payment habits
• to establish a joint fund for setting up POS terminals at SME retailers (in the undersupplied sectors and regions)
• to introduce Govt control above the size of interchange fees• to further electronise the voucher market (via incentive system)
and to implement the turnover at the POS terminals• to charge the payer for the use of postal inpayment money order
or at least to make its costs transparent for the payer • to establish an overall EBPP open to all users and service
providers• to further improve the access to payment services in the
countryside: full electronisation of the postal payment services• to make unambiguous to all that cash payments may be rejected
• to improve the overall infrastructure • to centralise the liquidity management in the entire Govt. sector
Costs - dr. Anikó Turján
The primary objective of the MNB shall be to achieve and maintain price stability.
CONCLUSIONS
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• Strong cross-subsidisation between payment instruments at payment service providers
• Annual potential savings: Ft billion 107 (0,41% of GDP)
• Modernisation is worthwhile• Actual savings depends on the changes in
the use of payment instruments• Enough input to launch war on cash• Social dialogue: underway
20
THE IMPORTANCE OF DIALOGUE
With public sentiment, nothing can fail;without it nothing can succeed.
(Abraham Lincoln)
Costs - dr. Anikó Turján
21
Costs of payments • Anikó Turján• Éva Divéki• Éva Keszy-Harmath• Gergely Kóczán• Kristóf Takács
AUTHORS
Payment habits of public sector
• Éva Divéki• Brigitta Lajos• Miklós Luspay
Costs - dr. Anikó Turján