Efficiency and innovations in retail payment systems Thijs Kettenis

De Nederlandsche Bank Eurosysteem

Efficiency and innovations in retail payment systems

Thijs Kettenis

Third Macedonian Conference on Payment and Securities

Settlement Systems

Ohrid, 29 June 2010

De Nederlandsche Bank


Agenda

Efficiency and costs of retail payments: Dutch example and European perspective

Incentives to enhance efficiency

Innovations: POS

Innovations: remote


Efficiency?

Confusing efficiency debates

Users’ perspective: mainly low prices

Banks’ perspective: low costs

Society’s perspective: low social costs,

but also focus on security and accessibility


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


Variable costs of cash, debit card, e-purse

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0 5 10 15 20 25

transaction amount

E-purse

cost per transaction

Cash

11.63

Debit card


Efficiency: the banking sector

Exhibit 1

Overview of result for banks from payment services€ million

-779Cash transactions

-101Debit card transactions

-18E-purse transactions

-329

75Other*

Balance-related income

-23Result before tax

-105Cost of invested capital

Direct debits

Economic profit

Giro slips

Current accounts

-94

-159Cross-border payments

-44

Credit transfers

-128

Result per main group

POS payments

Transfers

Balance-related income

Current accounts

Main group

-898

-467

-1,215

* Credit cards (+69) and result from other revenues (+6)Source: Payment Services Analysis

2,6412,641

-1,215


Efficiency: Merchants’ report

Retail business

Cash € 0.18

Debitcard (PIN)

€ 0.20

e-Money (Chipknip)

€ 0.14

Creditcard € 2.70

Retail 2001:

Cash € 0.17

Debitcard € 0.27

Average costs per transaction


Main policy theme

Substitution paper-based by electronic payments

POS payments: cash → debit card

Remote payments: paper transfers →

internet banking, e-invoicing, direct debit


Trends in payments in the EU

Source: ECB

Payment transactions in the euro area (billions)

0

2

4

6

8

10

12

14

16

18

20

2000 2001 2002 2003 2004 2005 2006 2007 2008

debit and credit cards credit transfers direct debits cheques E-money cards


Efficiency: Room for improvement?

Value of banknotes and coins as a % of GDP

Source ECB SDW,NBU,IMF,HNB

0

2

4

6

8

10

12

14

16

18

20

Euro area Euro area(excl. 200 &

500 euro)

Bulgaria CzechRepulic

Macedonia Romenia Ukraine Albania Croatia

2003 2004 2005 2006 2007 2008



Number of card payments as a % of national payments

Source: ECB SDW

0

5

10

15

20

25

30

35

40

Euro Area Bulgaria CzechRepublic

Hungary Romania Slovenia Poland TheNetherlands

2003 2004 2005 2006 2007 2008



Number of POS terminals per million inhabitants

Source ECB SDW,NBU Note: Data Ukraine and Macedonia excl imprinters

0

5,000

10,000

15,000

20,000

25,000

Euro area Bulgaria Hungary Macedonia Romenia Ukraine Slovenia Poland TheNetherlands

2003 2004 2005 2006 2007 2008


Agenda



Innovations: POS

Innovations: remote


Incentives to stimulate efficiency

Financial incentives

Non-financial incentives

Positive incentives

Negative incentives


Financial incentives (1)

Currently costs are covered via:

• Retailers (direct and related to actual use)

• Consumers (indirect, hidden, not linked to actual use)

Overuse of inefficient payment instruments

NEED FOR TRANSPARANT TARIFF STRUCTURE


Financial incentives (2)

+ Rewarding efficient behaviour

- Penalising inefficient behaviour

by transaction tariff or merchant surcharge First-mover dilemma Competition dilemma Ensuring accessibility


Non-financial incentives (1)

1) Changing consumer perception

and creating trust

→ 1 clear message needed!



2) Increasing acceptance of efficient instruments

• Increasing number of POS-terminals

• Improving visibility of POS-terminals

• Increasing coverage of e-invoicing, iDEAL etc.



3) Innovation and competition


Role of DNB

Role of DNBCatalyst and facilitator of national discussionsActive contribution in European discussions Research on payment patterns and

underlying motives


Agenda



Innovations: POS

Innovations: remote


Overview of innovations: POS

Time

Technology

Cash

Mag-stripe

EMV-chip

Contactless

Mobile/NFCBiometrics ?


Mag-stripe cards

Number of transactions and acceptance network development per inhabitant, 2001-2006

(Source: World Payments Report 2008, CapGemini)


EMV-chip

EMV compliance progress December 2009

0%10%20%

30%40%50%60%70%

80%90%

100%

FR IE LU BE AT FI CY IT SI NL PT DE EL MT ES SK Euroarea

Debitcards POS ATM

(Source: European Payments Council)


Contactless card Payments

EU: public transport• London (Oyster card)• Netherlands (“OV

Chipcard)


Mobile Payments

Expected number of NFC mobiles: 2010: 300 million 2013: 600 million


Biometrics Security


Agenda



Innovations: POS

Innovations: remote


Overview of innovations

Technology

Paper-based

Online payments& EBPP

2-factor Authentication

Mobile/ SMS

TV?

Time


Internet banking (1)

Percentage of households having internet access (Eurostat, Dec. 2009)



Percentage of households having internet access (Eurostat, Dec. 2009)

0

10

20

30

40

50

60

70

80

90

100

EU27

Albania

Bulgaria

Croatia

Czech Rep.

Hungary

Macedonia

Montenegro

Netherlands

Poland

Romania

Serbia

Slovakia

Slovenia

Srpska

Turkey

2007 2008 2009



Individuals using the internet for internet banking in the last three months (Eurostat, Dec. 2009)


Individuals using the internet for internet banking in the last three months (Eurostat, Dec. 2009)


0

10

20

30

40

50

60

70

80

EU27

Albania

Bulgaria

Croatia

Czech Rep.

Hungary

Macedonia

Montenegro

Netherlands

Poland

Romania

Serbia

Slovakia

Slovenia

Srpska

Turkey

2007 2008 2009


Online shopping (1)

Individuals having bought goods online in the last three months (Eurostat, Dec. 2009)


Online shopping (2)

Individuals having bought goods online in the last three months (Eurostat, Dec. 2009)

0

10

20

30

40

50

60

EU27Bulgaria

Czech Rep.

Hungary

Netherlands

Romania

Slovenia

Croatia

Macedonia

Serbia

Albania

Poland

Montenegro

Srpska

Slovakia

Turkey

2007 2008 2009


iDEAL: Dutch standard for online banking based electronic payments

Launched in October 2005

Three major banks in the

Netherlands (market share > 90%)

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

iDEAL transactions

0

1,000

2,000

3,000

4,000

5,000

6,000

Oct

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Month Cumulative 12 months sliding cum.


Electronic Bill Presentment and Payment

New way of receiving and paying bills

Step 1:Customer receives a link to new billby e-mail 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


Questions?

Documents

Efficiency and innovations in retail payment systems Thijs Kettenis