This guest post is written by Ronnie O’Toole, who is Project Manager for the National Payments Plan in the Central Bank
While the focus of policymakers continues to be fiscal and monetary policy, the need for further micro-economic reforms was highlighted by Richard Tol in the recent Het Financieel Dagblad article. Richard identified legal services, energy and transport as some of the ‘molehills’ that when added together can help tackle the national competitiveness ‘mountain’. The payments industry should be added to this list.
Quite simply, making a payment costs money. A recent ECB study estimates that the cost of payments among EU countries is spread within a range of 0.61%-1.43% of GDP, based on a common methodology. The most efficient countries are intensive users of electronic payments such as debit cards and EFT, while the least efficient remain dependent on paper-based payments such as cash and cheques. There are also non-financial costs linked to a high culture and cheque usage. Cash as a bearer instrument will always pose a physical security threat which is not as prevalent in other forms of payment crime such as card skimming. Further, there is a clear association between cash usage and tax avoidance, with studies showing that around one-third of all cash used in Scandinavia is in the shadow economy.
Ireland is one of the most inefficient users of payments in Europe. We withdraw more from an ATM in a month than a Dane does in a year, and are one of the few countries remaining who still use cheques. The National Payments Plan (NPP) was developed as a response, and launched last Wednesday by Stefan Gerlach in the Central Bank.
The challenge of promoting electronic payments is to a significant extent one of technology lock-in. This occurs when a particular technology is dominant because of scale economies, not because of its inherent qualities. You may want to use no cheques, and prefer e-banking. However If I send you payment by cheque you won’t decline it. What’s more, since I don’t give you my bank account number you can’t pay me electronically.
Technology lock-in can be overcome if a co-ordinator signals a change in behaviour. For cheques the NPP envisages the Government playing this role, ending all B2G and G2B payment by cheque from next year. This will be a powerful signal – all businesses have at least some payment transactions with Government.
Price incentives are also likely to be critical. As my paper in the last Central Bank Quarterly Bulletin showed, the banking sector is currently typified by a huge cross-subsidisation of cash/cheques by electronic payments. Only 46% of all cash related costs are covered by fees, with the shortfall being made up on the highly profitable card side of the business. The fees banks earn relating to card payments are two-fold – not just the consumer fees we all pay, but also the ‘swipe’ charges the merchant must pay.
The way we pay Social Welfare is in sharp contrast with practice on the continent. In Ireland around half of all social transfers are paid over in cash from post offices, while paying into a bank account is the norm elsewhere. This antiquated practice has led to Ireland retaining a high rate of financial exclusion. According to the 2011 CSO SILC data 17% of Irish households don’t have a current account, compared to less than 1% in most other northern European countries. This creates an unnecessary barrier to the world of work which operates largely with electronic payments. It also closes off options for people such as the ability to pay online or to access an appropriate level of credit from formal sources rather than moneylenders. Not only do cash payments result in this negative societal outcome, it is also more expensive for the public service to provide than the electronic alternative – a clear lose-lose situation.
Behavioural economics also has a role in promoting migration – can we ‘nudge’ people to use electronic payments? For example, if we want to lower the average ATM withdrawal then only smaller amounts should be presented as the default options on ATMs, and preferably on the right hand side. Smaller denominations in ATMs can also play a role. Further, when you are down to the last 5 cheques, the insert on the chequebook shouldn’t read “Don’t do anything, we’ll send you a new cheque book even if you don’t want one” (I’m paraphrasing) but instead “If you want a replacement cheque book then ring this number, though we won’t send you one if we don’t hear from you”.
While behavioural change using existing technologies represents the thrust of the NPP, there are also new technologies emerging that can greatly assist. Contactless debit cards are currently being rolled out by the banks, which will greatly speed up the time to serve in retail outlets. Further P2P payments using mobile telephones can act as a useful alternative in a number of circumstances to cash and cheques.
However, the NPP didn’t (and shouldn’t) pick winners when it comes to payments. The world of a single European market for payments (SEPA) is almost upon us, which could greatly increase the level of competition and choice in electronic payments. Already there are many firms based in Ireland – both indigenous and multinational – that are very successful in this space.
Research shows that different electronic forms of payments are ‘friends’ – countries that have adopted one form of electronic payment are far more likely to try out new innovations when they arise. For us, that means that we need to reduce our cash and cheque usage if we want to join the innovation revolution that is transforming payments globally.