The Costs of Payment Methods in the Retail Sector
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Deutsche Bundesbank Monthly Report June 2019 65 The costs of payment methods in the retail sector Recent years have seen both academics and the public at large taking a greater interest in the costs associated with means of payment. As part of its statutory mandate, the Bundesbank seeks to hone its understanding of the costs of different payment instruments, and thereby contribute to an objective discussion of their advantages and drawbacks. In 2014, the Bundesbank therefore published an overview as well as initial estimates of the costs and benefits of cash and cashless payment instruments. This approach was built upon to produce the present study, “The costs of payment methods in the retail sector”. Focusing on the retail sector, the study looks at a portion of the costs generated in the economy by the use of payment media. The German retail sector processes roughly 20 billion transactions per year, of which just over 76% were cash payments in 2018. As a percentage of sales, cash payments still account for just under 50%. Innovations in the field of payments, and the new payment procedures that they are ushering in, are giving consumers an increasing variety of payment instruments to choose from. One area in which this is being reflected is the growing number of cashless transactions. Against this backdrop, the question of how much cash and cashless payments cost the retail sector is becoming increasingly important – because whatever means of payment consumers decide to use, they all generate costs. A large part of these costs is borne by retailers. According to the present study, the total costs of payment procedures to German retailers in the narrower sense amount to €5.7 billion per year. Cash payments account for some three- quarters of all transactions and generate roughly €3.8 billion in costs. Taken together, card- based pay- ment methods (such as girocard, direct debit and credit card) cost around €1.7 billion per year. The costs incurred for payments by invoice, finance purchases and voucher payments add up to about €0.3 billion. Cash payments cost just under €0.24 per transaction, making them currently the most cost- efficient means of payment for retailers from a transaction perspective. According to the study’s findings, girocard payments cost €0.33 per transaction, while SEPA direct debit payments cost €0.34. On account of higher transaction costs, credit card payments work out more expensive than cash or girocard payments from every perspective and generate costs of just under €1 per transaction. In terms of sales, however, card payments and, in particular, girocard payments prove cheaper for the retail sector than cash payments. When interpreting the figures, it should also be borne in mind that the costs presented are based on average values and that different payment structures have to be taken into account. The present survey from 2017 was only able to capture a small number of contactless payments. Broader uptake of this relatively new form of payment could see the costs of card payments, in particular, change. This underlines the fact that the costs associated with means of payment are in constant flux. Deutsche Bundesbank Monthly Report June 2019 66 Introduction Bundesbank collaborated with the EHI Retail Institute to conduct a study for 2017 on the Payment habits, How do Germans pay for their purchases, what costs of means of payment in the retail sector.3 costs and costs does this generate and how are payment The work focused on ascertaining precisely changes habits changing? Through regular surveys such which factors determine costs. Three cost com- as its payment behaviour study,1 the Bundes- ponents were identified for cash payments, bank helps provide answers to these questions. and four for cashless payments. The first cost With the costs of payment media having fig- component represents the outlay for cashier ured more prominently in discussions over past time. Cashier time refers to the length of time years, in 2014 the Bundesbank published an spent on a payment process at the POS and the overview and initial estimates of the costs and portion of staff costs arising from the employ- benefits of cash and cashless payment instru- ee’s time spent working at the POS. The second ments.2 That study described the evolution of cost component comprises POS background cash and cashless payment transactions in Ger- costs, which cover expenses relating to all many and abroad, and provided a critical over- background activities, such as cashing up, sort- view of previous cost studies at that time. The ing receipts for card payments, and depositing study also estimated the economic importance and re- counting change. In the case of cash of payment instruments. The authors of the payments, cash removal and supply costs con- 2014 study highlighted that employees’ time is stitute the third cost component. For card pay- also a key cost factor, with a large share of the ments, the third cost component is transaction costs in the retail sector found to be attribut- able to the payment process at the point of 1 See Deutsche Bundesbank (2018). sale (POS). Only a survey would be able to pro- 2 See Krüger and Seitz (2014). vide the data needed to assess this time aspect 3 The study looked at the costs for the stationary retail sec- tor in the narrower sense. That includes, for example, food in precise terms and put a price on it, however. retailers, furniture stores and drugstores (see the chart on p. 68). Stationary retail trade in the broader sense comprises establishments with retail elements such as pharmacies, With a view to analysing these points in greater automotive accessories suppliers, cash- and- carry supermar- depth and, in particular, to delivering more kets, hair salons, motor vehicle traders and petrol station shops as well as trade businesses in the form of bakeries granular answers to the questions regarding and butchers’ shops. However, stationary retail trade in the the costs per transaction as well as the cost vol- broader sense is typically not deemed to be part of the re- tail sector and is not taken into account in the analyses umes arising for the economy as a whole, the which follow. See Cabinakova, Horst and Knümann (2019). Transactions in the retail sector, by payment method (%) 20 billion transactions Invoice/ Store card 0.3% finance purchases Maestro / V Pay / Debit Mastercard 0.4% 0.6% Other Credit card 2.9% 0.5% Cash payment 1 76.1% Direct debit 4.9% Card payment 22.8% Girocard 14.3% Source: EHI Retail Institute (2019). 1 Electronic direct debit (SEPA direct debit). Deutsche Bundesbank Deutsche Bundesbank Monthly Report June 2019 67 Sales in the retail sector, by payment method (%) €430 billion in total Invoice / Other Store card 0.6% finance purchases 0.6% Maestro / V Pay / Debit Mastercard 1.0% 2.5% Credit card 6.9% Cash payment 48.3% Direct debit 1 10.0% Card payment 48.6% Girocard 30.1% Source: EHI Retail Institute (2019). 1 Electronic direct debit (SEPA direct debit). Deutsche Bundesbank costs. The fourth cost component, reflecting is far from straightforward, however. Informa- the specificities of cashless payments, covers tion on time outlay and other expenditure in- terminal costs, including those for maintenance curred by all actors would need to be broadly and updates to software. available, and this is not yet the case. Examin- ation of the costs arising in the retail sector is In order to estimate the economic dimensions therefore a first step towards ascertaining part of these costs, the study took account of vol- of the economic costs and shows that calculat- ume data from the retail sector, measured the ing specific costs is a difficult and very much duration of payment transactions at retail POS assumption- based exercise. The Bundesbank is and employed findings from in- depth inter- committed to ensuring that citizens remain free views with retailers. The costs paying by cash to choose how they wish to pay and maintains as determined were then compared against a neutral stance on specific means of payment. those of the most common cashless methods. Breaking costs down into fixed and variable costs, running scenarios with altered average The structure of the German variables and estimating cost functions and de- retail sector velopments also made it possible to analyse changes in payment behaviour. This is particu- Germany’s retail sector encompasses around Highest volume larly relevant considering the growing use of 355,000 stores, which in 2018 recorded gross of sales in the organised food contactless card payments. sales of €430 billion.4 Just under 12% of stores retail sector fall into the organised food retail category. It should be noted that the following remarks With a sales share of just under 42%, this offer a partial insight into the costs of payment group has by far the highest sales in the retail methods. Payment instruments generate costs sector.5 Relative to the number of stores, drug- not just for retailers but also for other agents stores and perfumeries as well as furniture and within an economy, such as the central bank, furnishings stores also have disproportionately cash- in- transit (CIT) companies, credit institu- high shares of sales. One of the reasons for this tions and households. A portion of these costs is already accounted for by determining the costs borne by retailers. Precisely calculating 4 See EHI Retail Institute (2019). the costs incurred at the macroeconomic level 5 See Cabinakova, Horst and Knümann (2019). Deutsche Bundesbank Monthly Report June 2019 68 Cash sales and sales using card-based payment methods as well as other cashless transactions in the retail sector €410 billion in total Food (organised) 1 Cash sales Cashless sales 1.6% 3.7% Other 6.0% 4.3% 6.6% Clothing, footwear and 13.8% sports shops 6.7% 50.3% 32.3% Food (other) 2 DIY and gardening 7.5% stores 8.6% Furniture and furnishings stores 1.7% 9.0% Drugstores and perfumeries 13.4% Other points of sale 12.3% 22.1% 1 Including supermarkets and discounters in the food retail sector.