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Study on the social costs of retail payment instruments in 2017

Today Banco de Portugal publishes its fourth study on the social costs of retail payment instruments (in Portuguese only), with data for 2017. 

The provision of retail payment instruments in 2017 incurred estimated social costs of €1,909 million, equating to 0.99% of GDP, and a per capita cost of €185.50. Over 90% of that value was borne by merchants and the banking system (48.7% and 41.6% respectively), with consumers bearing the remaining 9.7%. 

From the social point of view, direct debits were the most efficient instrument for making payments, costing 27 cents per transaction. Cash, debit cards and credit transfers had similar unit social costs (at 34, 38 and 39 cents respectively). In contrast, the least efficient instruments were cheques and credit cards, with a per-payment cost of €3.54 and €1.88 respectively.

However, the social perspective is not always aligned with the individual perspectives of consumers, merchants and the banking system. In reality, these participants make their decisions based on their own costs and incentives.

From the consumers' perspective, using payment instruments incurred a cost of €789 million in 2017. Around 93% of the costs are from payment instruments generally used at points of sale (cash, cheques and payment cards), mainly debit, credit and prepaid cards, the total value of which came to €478 million, while costs from cash totalled €212 million.

The costs borne by consumers include those related to the time needed to make the payment, estimated at €185 million, and the commissions paid to banks, coming to €604 million. 

For consumers, cash and direct debit were the most economical instruments in unit terms (6 cents per payment for each option). Cheques had the highest charges per transaction (€3.42).

From the point of view of merchants, acceptance of payments brought a cost of €1,206.4 million (0.62% of GDP). Fees paid to the banking system and to cash-in-transit companies are the most significant cost component for merchants when accepting the different payment instruments, accounting for 25.3% of the total cost borne.

Credit transfers and direct debits incurred the lowest unit costs for merchants (10 and 16 cents per payment respectively). The most expensive options are credit cards (92 cents), followed by cheques (45 cents).

From the perspective of the banking system, the total cost of providing retail payment instruments was €793.3 million (0.44% of GDP) and the revenues came to €925.4 million (0.5% of GDP). For the first time since these studies began, payment instruments made an overall positive net contribution to the banking system in 2017, of €132.1 million. Revenues exceeded costs, resulting in a coverage rate of 116.7%. The main driver was the inclusion of fees charged through account maintenance and product packages (€265.5 million), which reflects general practice in the banking system in 2017 and represents a methodological change from the 2013 study. 

The banking system has improved its efficiency in retail payment instrument provision, with a 10% reduction in total costs from 2013 to 2017, and in the cost per bank customer, which fell to €98. 

In overall terms, cash still represents the highest cost to banks, accounting for 32% of the total. However, in unit terms, cash was the most efficient instrument (8 cents), as a result of the high number of payments made in banknotes and coins. Credit transfers were the second most efficient instrument per transaction. 

Cards generated the most revenue for the banking system, with a share of 50% and a value of €474.1 million, as a result of the commissions charged to cardholders and the application of the price list to merchants. The means of payment with the lowest revenues were cheques (€87.4 million or 9%), cash (€73.2 million or 8%) and direct debits (€63.8 million or 7%). 

In unit terms, credit cards and cheques were the payment instruments creating the most revenue, at €2.50 and €2.87 respectively. Cash was the instrument creating the lowest per-transaction revenue (2 cents).

The study on the social costs of retail payment instruments in Portugal aims to raise awareness and provide useful information, so that all stakeholders – the banking system, merchants and consumers – can define efficiency-optimising strategies in this market.