In an unprecedented move of openness and transparancy, the Dutch banks have today published the results of a revolutionary study into the cost-benefit of payments business. 5 large banks (ABN AMRO, ING, Rabobank, Fortis and SNS) have opened their books to a team consisting of experts from McKinsey and the central bank (De Nederlandsche Bank). Based on actual data, McKinsey produced a generic report on the revenue/costs in Dutch payments in 2005. You can download the (Dutch) press release and report here.
Not only the openness is revolutionary but also the stakeholder-buy in. Before starting the actua data collection at banks, the central bank and McKinsey set out to discuss the methodology of cost-benefit calculation with large representatives of the Consumer Union, Point-of-Sale Merchans (Platform Detailhandel) and Utilities (Gebruikersplatform Betalingsverkeer). When all agreed on the methodology, the data processing and calculations started.
Background of the exercise is formed by the general desire of banks, retailers and regulators to move towards cost-based transaction fees in payments, most notably for consumers (which are now hardly confronted with the real/direct fees). This will contribute to more efficiency and lower private and social costs of the payment system. Which is completely in line with the European policy outlook of the Commission.
The results of the cost/benefit study are (briefly) that in 2005:
- the gross revenue in payments for Dutch banks amounted to € 3.996 million, based on interest margins and direct fees,
- the gross costs of payments were € 4.019 million, leaving a € 23 million loss (and a € 128 million loss when including the cost of capital),
- generally speaking there is little congruence between nature of revenue (consequence of the interest margin) and nature of costs (consequence of the number of transactions),
- businesses sponsor the consumer: the business segment accounts for net revenue of € 708 million while consumers generate a net loss of € 642 million
- credit-card payments earn € 89 million euro while cross-border payments cost about € 150 million.
And the real bleeders are:
- account maintainance with a cost of € 1215 million,
- cash with a cost of € 779 million,
- paper based credit-transfers: € 329 million.
Next steps are that all involved representative organisations of banks, retailers, consumers and what have you, discuss ways of improving efficiency in the socalled National Platform on Payment Systems. And some ideas have already made the news:
- using internet-banking instead of paper based credit-transfers or inpayments,
- stimulating debit-card use at the point of sale rather than cash by not penalizing the use of the debit-card (some retailers still demand a processing fee for payments lower than € 10),
- developing easy-to-use retailer POS-merchant kits/offers, allowing them to easily start accepting debit-cards.
As for the further future, the outlook is varied. The report contains a sensitivity analysis that demonstrates that increases in interest rate help profitability while improved cash management by clients reduce it. Furthermore the future move to SEPA may cost a bit. Nevertheless, the main conclusion that stands out is that a further change in the payment mix (more electronic, less paper) will be the way forward.