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Costs of Retail Payments in Finland

Categories : Cash ensures competition among payment instruments
November 14, 2022
Tags : Central Bank, cost of cash, Costs of payments, Finland
The Bank of Finland estimates that the social costs of retail payments amount to 0.3% of GDP. Card payments represent 39%; credit transfers 38% and cash 23%. In terms of the cost per transaction, a card payments costs 15 cents versus 22 cents for a cash payment. Banks have increased their payments revenue, but merchants have not benefitted from the digitalization of payments.
Guillaume Lepecq

Chair, CashEssentials

This post is also available in: Spanish

The Bank of Finland has conducted a new study authored by Meri Sintonen and Kari Takala to comprehensively investigate the private and social costs of retail payments (i.e., costs incurred by various parties involved in processing payments) society as a whole). The study analyses the costs of Finland’s most commonly used payment methods, i.e., payment cards, credit transfers, and cash. The results are mainly based on data from commercial banks and merchants, with 2018 as the reference year. The questionnaires and calculation methods followed the agreed-upon methodologies in the Eurosystem.

Payments Cost 0.3% of GDP

Based on the results, the social costs of retail payments, namely the overall costs to society, were an estimated EUR 646 million in 2018, 0.3% of Finland’s GDP. Of the social costs, 39% was accounted for by card payments, 38% by credit transfers, and 23% by cash.

In terms of cost per transaction, cards proved to be the least expensive payment method in 2018, with a single card payment costing society, on average, 15 cents. A cash payment costs 22 cents, and a credit transfer costs 25 cents. Although the costs associated with individual payment transactions are relatively small, large payment volumes make them a significant cost element in the national economy.

The Cost of Cash Has Been Halved Since 2009

Most of the social costs are incurred by the commercial banks’ production costs of payment services. Based on data provided by banks and comparing them to the previous study carried out in Finland, costs related to cash nearly halved between 2009 and 2018 due to a decline in the use of cash and a reduction in cash services. Although the use of cash as payment has decreased significantly over the years, the banks’ average unit cost of cash withdrawals has remained almost unchanged. In 2018, cash was, however, the only payment service that still generated losses for banks, but the losses arising from cash also more than halved in ten years.

Bank Payment Revenues Have Increased

The digitalisation of payments has had a significant impact on banks’ costs. Banks have been able to automate the processing of payments and take advantage of the economies of scale associated with electronic payments, which has significantly reduced the unit costs of card payments and credit transfers. As a result, banks’ overall costs of retail payments have declined, despite an increase in payment transactions. At the same time, banks’ revenues from payment services have increased. In 2018, credit card payments were banks’ most profitable payment instrument.

Merchants Have Not Benefitted from the Digitalisation of Payments

The total cost to merchants for accepting different payment methods was an estimated EUR 194 million in 2018, which was approximately 0.5% of total retail sales. Most of this arose from card payments, but in terms of unit costs, accepting them was cheaper for merchants than cash payments. Merchants have, however, raised concerns about increases in fees related to card payments services, which is why they were still studied separately about the most influential retail groups for 2019 and 2020. Based on the results, the benefits of digitalisation do not appear to have benefited the retailers in recent years to the same extent as banks. Therefore their concerns would appear to be justified.

The cost-efficiency of retail payments is essential, as rising overall costs are eventually also passed on to consumers. A comparison of the results with similar studies carried out in other countries suggests that, in terms of payments, Finland is among the most cost-efficient countries in Europe.

The comparison with other countries demonstrates that in cash-intensive countries such as Italy, Germany, or Poland, the unit cost of a cash payment is lower than that of a card payment. In contrast, in card-intensive countries such as Finland, the Netherlands, Denmark, and Norway, the unit cost of a card payment is lower.

“Comparing the results across countries and drawing conclusion about the cost-efficiency of different countries is not straightforward, however, as the studies differ in many ways, e.g. the level of digitalisation, the structure and concentration of the retail payments market and the scope of the analysis. The improvement of European retail payments and their competitiveness has been made one of the key priorities at EU level for the coming years.” conclude the authors.

This post is also available in: Spanish