Malcolm Edey, RBA Assistant Governor (Financial System) spoke at the Australian Financial Review Retail Summit and discussed the changing face of payments, including the relative volume and costs of various payment methods. Cheques are well out of favour.
A good place to start is an observation that will not be lost on anyone here. That is that the nature of the payments we use is changing, and changing quite rapidly at the moment. Probably the clearest example to most people has been the take-up of contactless, or tap-and-go, card payments. These have taken off extraordinarily quickly in Australia, to the point where Australia is thought of as the leading contactless market in the world. This is a technology that offers a benefit to both consumers and merchants in terms of the time taken to process a payment, and as a result it has been embraced – but many merchants might also notice that their payments costs have risen because of the resulting change in their payments mix. This is a good example of the complex dynamics of competition in the retail payments system.
But the rise of contactless payments is only one of a range of changes that have been occurring to the payments system over time – some of which you might have noticed, some of which you have probably never thought about.
Possibly the most important trend we are seeing is the steady decline in the use of traditionally paper-based payments. Think of when was the last time you wrote or received a cheque. In 2000 the average Australian wrote around 35 cheques per year. In 2015/16 that was down to six. What is more, while cheque use has been declining for two decades, the decline if anything is accelerating; after falling by an average of about 13 per cent per year in the preceding five years, the number of cheques written fell by 17 per cent in 2015/16.
We have been observing the decline in cheques for many years, but more recently it has been a decline in the use of that other traditionally paper instrument – cash – that has been attracting attention. The only real way to adequately measure the use of cash is to survey the users – something the Reserve Bank does via a consumer diary once every three years. We ran the first of these surveys in 2007, when a large majority of consumer payments – 69 per cent – were made with cash. By 2010, that percentage had fallen to 62 per cent and by 2013, 47 per cent, with the decline occurring across all payment values. We will run the survey again this year, but it seems a safe bet that there will be a further, probably quite large, decline in cash use.
This trend is not all about people falling out of love with cash; a significant factor is the rapid rise in online commerce, where of course cash is not an option.
So what has filled the gap left by our paper instruments? In the retail space it is largely cards, which have grown by an average of 11 per cent per year over the past five years. This reflects cards’ large share in online commerce, as well as their having gained ground at the retail point of sale. Based on the Bank’s consumer survey, card payments made up 43 per cent of all consumer payments in 2013, and 55 per cent of those over 50 dollars. The ubiquity of card payments is one reason we care a lot about how those systems operate, as I will discuss more a bit later.
It is also worth noting that in the period measured by our survey, BPAY also gained an increasing share of the market, while the relative newcomer, PayPal showed strong growth from a low base.
The Cost of Payments
Of equal interest to these broader trends in payments usage is the cost of payments. The retail sector clearly has a strong interest in the cost of payments to merchants, and while the Reserve Bank is also interested in this, its principal focus when evaluating the efficiency of the payments system is the resource cost of payments – that is, how much it costs the economy in total to produce a payment – abstracting from the various fees that determine the cost to any single party or sector. Determining resource costs is a large job, requiring detailed information on financial institutions’ costs and things like the cost of processing time for merchants.
The Reserve Bank last went through this exercise in 2014. The most comforting news from that study was that the resource cost of consumer to business payments had declined as a percentage of GDP since the previous cost study in 2006, from 0.80 per cent to 0.54 per cent, even though the number of transactions had risen. Despite the favourable trend overall, the mix of payments within the total acted in the direction of increasing costs.
Looking across the main non-cash retail systems, we see that, unsurprisingly, the highest per-transaction resource costs were generated by the cheque system, with each cheque written costing the economy about $5.12, if account overheads are ignored. This is not surprising given the cost of shipping and processing physical cheques, although there have been some efficiency improvements in the cheque system since the time of the study.
Perhaps of more current interest to the retail sector is the cost of our card systems. Credit cards are quite costly at around 94 cents for the average sized transaction, while MasterCard and Visa debit are less costly and eftpos uses the fewest resources of any of the card systems, at around 45 cents per transaction.
The broad relativities between the resource costs of these systems is similar to those faced by merchants. Another way to think about that is that it is merchants who, by and large, bear the cost of payments. This is largely achieved by the way fees are used in these systems. I think the most telling illustration of that is to compare the actual costs faced by merchants to the costs faced by consumers once fees and benefits to consumers, like interest-free periods and reward points, are taken into account. What you will see is that, despite being more expensive to produce and more costly to merchants, on average a credit card transaction costs a consumer slightly less than a debit card transaction. These are the incentives that shape payment choices by consumers.
