Measuring the Costs of Retail Payment Methods
Hayashi, Fumiko, Keeton, William R., Economic Review (Kansas City, MO)
Information on the costs of retail payment methods is more critical than ever to central banks concerned with the efficiency of their nations payments systems. The last two decades have witnessed a dramatic shift in retail payments--all those other than large-dollar payments by wire--from paper-based methods to electronic-based payment methods. However, paper-based payment methods are still widely used in many countries, including the United States. Accurate and up-to-date information about the relative costs of paper-based and electronic payment methods would help central banks decide how hard to push for complete transition to electronic payment methods. Better cost information would also help central banks decide which electronic methods to promote, whether in the banks' roles as providers of payments services or their roles as regulators or catalysts for change.
To obtain such information, a number of central banks have recently conducted comprehensive studies of the costs of retail payment methods. These studies have reached some common conclusions, such as that debit cards are less costly than credit cards. However, the studies have reached different conclusions about the relative costs of other payment methods, suggesting that cost rankings can depend on the specific characteristics of a country's payments system and the scale at which a payment method is used in the country. Estimates of the aggregate costs of making retail payments have also varied across the studies, from 0.5 percent to 0.9 percent of GDP.
These differences suggest a need for each central bank to conduct its own cost study. The danger of relying on other countries' cost studies is particularly apparent for the United States, where checks and credit cards are used on a larger scale and more parties are involved in the payments process. Nevertheless, the cost studies of other central banks can serve as useful models for a central bank undertaking its own study. For example, the earlier studies can provide ideas on whether to distinguish fixed and variable costs, whether to scale costs by the number or value of transactions, and how to allocate shared costs among payment methods.
This article reviews the methodology and results of previous cost studies with an eye to helping central banks decide whether and how to conduct their own cost studies. The first section discusses the benefits and limitations of cost studies to central banks in meeting their payments-related policy goals. The second section explains the key cost concepts involved in comparing the costs to society of different payment instruments and the key decisions that must be made in gathering cost data. The third section reviews four recent cost studies by central banks, comparing their key features and findings. The fourth section discusses the lessons to be learned from these studies by a central bank contemplating its own study of retail payment costs.
I. BENEFITS AND LIMITATIONS OF COST STUDIES TO CENTRAL BANKS
Information on the costs of different retail payment methods can be very useful to a central bank in assessing the efficiency of the nation's payments system. However, information on costs is not all that is needed for such an assessment. Information on the benefits of different payment methods is also important. This section first describes how central banks can use cost information to help meet their policy goals and then explains why cost information alone is not sufficient to meet those goals.
How cost information can help central banks meet their policy goals
In most developed countries, the efficiency and safety of retail payments are viewed as appropriate policy objectives of the central bank (Bank for International Settlements 2003). Retail payments are all payments other than large-dollar payments, which consist of wire transfers among businesses and financial institutions that can run into hundreds of millions of dollars. …