White Paper
The Hidden Cost of Cash and the True Cost
of Electronic Payments in Australia, Europe,
New Zealand and the UK - Addendum
Sam Stewart, Jean Dobbeni, Federico Folch
August 2024
1
In May 2024, BCG conducted a survey on the cost of acceptance to merchants in Australia
and New Zealand, based on previous studies in European countries and the UK. The survey
data now covers 15 markets with more than 100 merchants surveyed in each market.
Key messages
The key findings for Australia and New Zealand are consistent with the previous European
research:
•
Indirect and back-office costs account for the bulk of merchants' payment
acceptance costs.
•
Cash acceptance is more expensive than most electronic payment instruments.
•
Electronic payments continue to gain in popularity among merchants.
•
The proliferation of payment solutions has led to a broad range of value propositions
with distinct cost positions.
•
Large merchants benefit from substantial volume discounts which are unavailable to
smaller merchants.
•
Country-level differences result largely from local payment behaviours.
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August 2024
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Indirect and Back-office Costs Account for the Bulk of Merchants'
Payment Acceptance Costs
Payment instruments come with multiple direct fees, associated services, and a broad range
of indirect costs to merchants. To obtain a realistic, end-to-end view, we looked at three
components:
•
Direct costs: For digital instruments, these costs comprise the amount paid to
payment service providers (fees are linked to transactions and are invoiced as a
percentage, fixed fee, or combination of both). For cash, we defined direct costs as
the cost of depositing cash at the bank, or the cost of having the cash collected
(cash-in-transit (CIT) cost). For card (four-party) schemes, a merchant service charge
(MSC) is applicable.
•
Indirect costs: All instruments carry a broad range of costs that are either required
to enable the transaction (such as a payment terminal or cash register), or result
from the transaction (for example, fraud, theft, or keying errors during the check-out
process).
•
Back-office costs: These stem from the work required to reconcile payments (such as
invoice reconciliation and cash register preparation).
To obtain market-level averages we weighted survey results by the mix of merchants in the
country, expressed as a percentage of the average value of a transaction (€60 in the EEA and
the UK, AUD$68 in Australia and NZD$64 in New Zealand). We present the European results
on a consolidated basis, to avoid a skew to the largest countries. Results for Australia and
New Zealand are presented separately.
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August 2024
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Cash is More Expensive than Most Electronic Payment Instruments
For the merchant, cash may appear to be free, due to the absence of a cost per transaction.
However, based on a comprehensive end-to-end view, cash is among the most expensive
instruments, with a cost of 3.9% and 3.6% for Australia and New Zealand respectively, and
an average cost of 3.1% in the EEA & the UK (see Exhibits A(i) and A(ii)).
While the direct cost of cash is low, merchant costs emanate from indirect and back-office
costs associated with cash handling:
•
The direct cost of cash is approximately 0.3% and 0.1% in Australia and New
Zealand respectively, and 0.4% in the EEA & the UK. Many merchants pay for
secure transportation to the bank and/or banking fees in order to deposit cash.
Deposit costs in Australia and New Zealand are typically fixed sums that could be
as high as 0.2% of cash turnover on average, as compared to European deposits
costs, which can range from zero to as high as 1.5%. CIT costs can reach 0.7% in
Australia and New Zealand, as compared to 2% in Europe. In markets with low
cash levels and therefore with minimal scale, we observed higher costs for
depositing cash and/or CIT.
•
Indirect costs are the second largest cost item, totalling approximately 1.1% and
1.2% in Australia and New Zealand respectively, and 1.1% in the EEA and the UK.
In Australia and New Zealand, this can be broken down into under 0.1% for
equipment costs (such as relating to the register, safe and teller), and around
1.1% for shrinkage (employee theft, cash handling errors, and other crime), while
in the EEA and the UK, this is broken down into 0.2% for equipment costs and
0.9% for shrinkage.
•
Back-office costs are the most expensive item, reaching approximately 2.5% and
2.3% for Australia and New Zealand respectively, and 1.6% in the EEA and the
UK. These result from labour costs to reconcile values, prepare tills and (for some
merchants) to take cash to the bank.
•
In Australia and New Zealand (but not EEA and the UK), we included an
examination of the consumer costs associated with cash usage (such as ATM
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August 2024
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withdrawals fees) relative to card usage costs. The analysis shows that it costs
consumers approximately 0.4% to use cash, which is incremental to the
merchant's cost of acceptance for cash. This contrasts with the consumer's
average card usage surcharge of approximately 1%, which shifts part of the cost
burden from the merchant to the consumer, thereby reducing the merchant's
net cost of card acceptance (see Exhibit A(iii)).
Exhibit A(i) - Cost of acceptance by payment instrument - Australia & New Zealand (2024)
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Exhibit A(ii) - Cost of acceptance by payment instrument - EEA & the UK (2022-2023)
Exhibit A(iii) - Consumer cost of usage (cards and cash) - Australia & New Zealand (2024)
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Electronic Payments Continue to Gain Popularity Among
Merchants
The adoption of electronic payments has accelerated not only through the growth of
ecommerce but also in store, where the Covid-19 pandemic has been a major catalyst for
contactless card transactions in Australia, New Zealand, and Europe. Additionally, in Europe,
there has been a similar rise in alternative payment methods based on account-to-account
rails (APMs) at point of sale (POS).
Survey participants confirmed their preference for accepting electronic payments. Around 80%
said they would like to use electronic payment instruments either more than they do now, or
to the same extent. Moreover, 44% of merchants in Australia, 42% in New Zealand and 53%
in Europe said they would like to reduce the proportion of cash in their payments mix further.
In overall percentage terms, merchants' preference for various digital instruments - cards,
APMs or the buy-now-pay-later (BNPL) method - is roughly even. However, the reasons a
particular merchant might prefer any one of those instruments differ significantly:
•
The main reasons across all markets for favouring cards (four-party schemes) and
APMs (in European markets) are merchant convenience, and security and fraud
protection. These are far more important than consumer preference (ranked fourth
or fifth in the list of drivers), with the exception of New Zealand where merchants
rank consumer preference as the second most important reason to accept debit
cards (see Exhibits B(i) to B(iii)).
•
Any preference for BNPL, however, appears to be influenced by consumer
preference (ranked first or second).
•
When considering cash, merchants attach more importance to the speed of
receiving funds (ranked first or second) than they do to consumer preference (or to
legal mandates). This is because cash entails immediate settlement.
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Drilling down into the specific features offered by digital payments, merchants identify
different positive elements for each instrument:
•
Over 60% of merchants see accepting cards as a way to increase their turnover,
while an even larger number value the convenience of being able to accept
payments at any time (70-75%), the protection against fraud (~65%) and associated
convenience, such as being able to take recurring payments or initiate refunds
(~65%).
•
Between 55-60% of merchants across markets see more value in international
schemes than domestic schemes. This disparity could be explained, among other
factors, by higher online acceptance rates for international schemes than for
domestic schemes.
•
Around 65% of merchants in Europe believe BNPL increases both basket size and the
number of new and repeat customers.
Exhibit B(i) - Value of electronic payment instruments - Australia (2024)
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Exhibit B(ii) - Value of electronic payment instruments - New Zealand (2024)
Exhibit B(iii) - Value of electronic payment instruments - EEA & the UK (2022-2023)
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The Proliferation of Electronic Payment Solutions has led to a
Broad Range of Value Propositions with Distinct Cost Positions
Overall, our survey reveals a high variability in cost depending on the instrument. The range
is from 1.8% to 5.3% in Australia, 2.1% to 4.9% in New Zealand (a multiple of 2 to 3 times from
lowest to highest), and from 1.8% to 3.5% in the EEA and the UK (see Exhibits A(i) and A(ii)).
Still, each instrument has its own value proposition.
•
BNPL is the most expensive solution (5.3% to accept payments instore in Australia, 4.9%
in New Zealand and 3.5% in the EEA and the UK) as a result of the higher direct cost
for merchants. However, it offers a differentiated consumer experience. Indeed, the
growth of BNPL highlights the willingness of merchants to adopt this solution due to
the benefits that it offers (see Exhibit B(i) to B(iii)).
•
Cards (four-party schemes) are in the middle of the range (1.8% to accept payments
instore in Australia, 2.1% in New Zealand and 2.3% in the EEA and the UK). Cards also
offer distinct advantages that merchants value, such as consumer and merchant
protection (most fraud costs are paid by card issuers), chargeback mechanisms, cardon-file payment, and pre-authorisation. Significantly, our survey reveals that
merchants do not always have a good grasp of the MSC breakdown. In Australia and
New Zealand, approximately one-third of merchants believe scheme fees make up
more than 15% of their cost to accept cards. Actual scheme fees account for
approximately 7% and 5% of total costs in Australia and New Zealand respectively (or
10% and 15% of direct costs) for the average merchant. Scheme fees approximately
account for 3% of total costs for small merchants, and 6% for medium sized merchants.
Interchange fees account for approximately 8% of total costs for small merchants and
12% for medium-sized merchants in Australia, and 10% and 18% respectively in New
Zealand. In the EEA and the UK, 50% of merchants believe scheme fees make up more
than 25% of the cost of acceptance while the approximate average scheme fee is
actually 4% of total costs.
•
APMs are associated with the lowest cost (around 1.8% in the EEA), but do not at this
stage enjoy the same level of merchant or consumer protection (such as for fraud). In
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Australia and New Zealand, APMs address a subsegment of comparable use cases
and/or have low single digit penetrations.
Large Merchants Benefit from Significant Discounts Linked to
Scale
Merchant size is the most important contributing factor in the variability of payment
acceptance costs, with an approximate twofold disparity between small and large merchants.
(see Exhibits C(i) and C(ii)).
•
Direct costs are heavily influenced by size due to volume-based discounts.
Interviewees revealed discounts of up to 70%, indicating that the cost to serve those
clients is generally correlated with their payment volume.
•
Indirect costs are also affected by merchant size. In particular, small merchants
surveyed reported that losses from keying errors represent up to ~50% of the total
cost of acceptance in Australia and New Zealand, with errors more frequent among
those that have not integrated payments with the register.
Exhibit C(i) - Cost of acceptance by merchant size (in-store use case) - Australia & New
Zealand
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Exhibit C(ii) - Cost of acceptance by merchant size (in-store use case) - EEA & the UK
Country-level Differences Result from Local Behaviours and
Regulations
Country-level differences are a relevant factor in the cost variation, with a cost ranging from
1.5% to 2.6% for card payments in the sample, 1.1% to 3.1% for APMs, 1.8% to 4.2% for cash
and 2.2% to 5.3% for BNPL (note that cost of acceptance data was captured in 2022 and 2023
for Europe and the UK, and 2024 for Australia & New Zealand) (see Exhibit D). Moreover,
caution is warranted before drawing conclusions on country comparisons. The results are
influenced by a number of local factors, including consumer behaviour and preferences (such
as high credit users), regulation (e.g., legal requirement to accept cash in store), and mix of
instruments (domestic card scheme, country specific APM, cash usage). We focused on the
most prominent payment methods for each market. At market level, merchants have more
options than presented on the exhibit (e.g., three-party schemes, online payment platforms,
cryptocurrencies, loyalty points).
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Exhibit D - Cost of acceptance by country
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Implications for the Industry: It’s all About the Value Created for
Consumers and Merchants
Technological innovations and regulatory change have led to increasingly dynamic payments
markets in the surveyed countries. Today, merchants and consumers have access to a broad
range of payment options, each with their own proposition and price point. We see three
key takeaways:
For payment instrument providers, continued innovation is essential
•
Payment instrument providers need to continue innovating if they are to thrive in this
increasingly competitive environment. The winners will not necessarily be the
cheapest providers, but those that manage to meet the needs of consumers and
merchants with the right balance of cost and features. Some examples of pain points
that need to be managed include:
o Online - The checkout process can still be very cumbersome. Winners will
reduce friction during authentication, manage fraud levels and reduce dropout rates.
o Instore: Queuing at checkout remains a large friction for consumers. Winners
will help merchants by enabling a wide range of new customer journeys. These
will include buying online and then picking up in store, in-app payment in store,
and a check-in rather than a check-out payment process.
Merchant service providers have a role to play in helping merchants navigate the increasingly
complex environment, and to integrate payments into business processes
•
In this increasingly competitive landscape, payment providers will fulfill an important
role by facilitating merchant adoption of a broad range of instruments, and by advising
them on how best to manage the complex balance between cost and features.
•
Payment providers will also be instrumental in integrating payments into merchant
business processes, helping merchants tackle the challenge of indirect and back-office
costs.
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Banks contribute to the growth of digital payments - to their own advantage
•
Banks have a role to play in the growth of digital payments because they control part
of the user experience, especially for online payments (for example, the
authentication process is linked with the card issuer and banks can assist in the
management of subscriptions and cards on file, or in reducing fraud).
•
The benefits for banks of digital payment growth are twofold: a) Banks will benefit
from a decrease in cash usage, as it will enable them to reduce costs (for example, less
cash counters and fewer ATMs); and, b) Banks can build brand preference, as payment
is the most frequent activity performed by customers.
* * *
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Sam Stewart
Jean Dobbeni
Federico Folch
About the authors
Sam Stewart is a Managing Director and Senior Partner in the Sydney office of The
Boston Consulting Group. stewart.sam@bcg.com
Jean Dobbeni is a Managing Director and Partner in the Brussels office of The
Boston Consulting Group. dobbeni.jean@bcg.com
Federico Folch is a Principal in the Sydney office of The Boston Consulting Group.
folch.federico@bcg.com
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