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16 Jan 2010
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The Costs of Paying – Private and Social Costs of Cash and Card Payments
The Costs of Paying – Private and Social Costs of Cash and Card Payments
A new working paper from the Riksbank’s research division (by Mats Bergman, Gabriela Guibourg and Björn Segendorf) looks into the costs of making payments. The study focuses on payments at the point-of-sale and estimates the private and social costs of making cash and card payments. According to the study, the average unit cost of a cash payment is around SEK 5, while the average unit cost of a debit card payment is around SEK 3. The total costs of point-of-sales payments amount to approximately SEK 8.5 billion, for a total transaction value of around SEK 600 billion. Even though the average cost of paying with cash is higher, cash is actually less costly for payments of around SEK 70 or less; for higher values card is less costly. However, the private cost of paying with cash is lower than the cost of paying with cards for payments of around SEK 125 or less. Actual usage indicates that the probability of paying with a card increases with the transaction amount. For an average individual, the probability of paying with a card reaches 50 per cent at SEK 150-200. A 20-year-old tends to prefer card over cash also for very small payments, while a 60-year-old has an equal probability of cash and card payments at SEK 450, and even higher for people with a low level of formal education. There are some incentives to over-use “credit cards” (deferred-debit cards), while merchants have some incentives not to accept credit cards.
Taken together, banks subsidise cash payments and earn an equally large profit on processing card payments. The under-use of cards and the fact that private incentives are not aligned with social costs suggest that modifications of the fee structure may be warranted. One possibility is to introduce ATM withdrawal fees; this would also allow the banks to lower (merchant) card fees without reducing their overall profits.
Read more in Working paper No 212

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