Innovations, Security and Efficiency of Retail
Payments
Ayse Zoodsma
4th Conference on Payments and Securities Settlement Systems
Ohrid, Republic of Macedonia, 21 June 2011
Agenda
 Electronic Payments and Innovations
• At the counter
• Remote
• Person to person
 iDEAL
 Cybercrime and Secuirity
 Efficiency of Retail Payments
Role of DNB
Role of DNB
 Catalyst and facilitator of national discussions
 Active contribution in European discussions
 Research on payment patterns and
underlying motives
At the counter




Cash
Magstripe
EMV chip
Contactless / mobile
•
•
•
Contactless/mobile:
Mobile NFC
- pilots
- roll-outs
Standardization
Europe/worldwide
Remote
 Credit transfer and direct
debit
 Internetbanking
• Online payment
iDEAL
• Digital billing
Standaard digitale
nota
 Mobile phone
• Mobile e-banking
• P2p payments
2009: figures
 1,481 mln
 1,272 mln
The Netherlands
 > 90% internet
• 78% banking
• 74% shopping
 iDEAL 28 mln (2008) 45 mln (2009)
 Digital billing: 2 mln (2008) 10 mln (2009)
w
ay
70
60
50
40
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Adoption e-commerce in Europe, 2009
Percentage of individuals
80
70
66
64 63 63
58
56 54
45 44
41
37 37 36
34
30
28
24 24 23 23
20
19 17
16 16
10
Source: Europe B2C E-Commerce Report 2010, Ystats
13 12
10 10
8
5
5
3
0
2
Adoption e-commerce in Europe, 2009
Source: Online Payments 2010, Innopay
Internet and broadband in Europe, 2009
Source: Online Payments 2010, Innopay
E-commerce turnover in Europe, 2009
Source: Online Payments 2010, Innopay
E-commerce turnover in Europe, 2009
Country
per capita,
in EUR
United Kingdom
910
France
453
The Netherlands
382
Germany
354
Sweden
222
Italy
100
Poland
97
Russia
22
Romania
10
Source: Online Payments 2010, Innopay
Payment methods web merchants NL
(2008-2009)
Source: Online Payments 2010, Innopay
Forward, ~ 5 years
New developments:
 Social networks
 Virtual worlds
 Mobile internet
 Cloud computing
• P2P, B2C
• New parties
Innovations: Flying V model
 Hardware is not the issue
 It is the software that counts!
 Mobile internet  micropayments
Apple iPhone/iPad: Appstore
225.000 apps, 5 billion downloads in 2 yrs!
Blackberry: App World
Google Android: Android Market
Windows Mobile: Marketplace
Mobile internet
 E-books and tablet success
•
•
•
•
Amazon.com Kindle
Sony e-reader
iPhone
iPad
´As with iTunes, people are happy to pay once it is
made easy´
(The Economist, Feb 14th 2009)
 Not just books…
 … also newspapers and magazines!

Holy grail of paid media? New business models
Internet & mobile : our cyberworld
Questions
1.
2.
What hypes in payments do you see in your country?
What is beyond hype and becoming real?
iDEAL: Dutch standard for online
banking based electronic payments
 Launched in October 2005
 Ten major banks in the
Netherlands (market share > 98%)
 Existing internet banking interfaces used for
authentication and authorization
 Additional banks
iDEAL: advantages
 Customer:
• Easy to use (pre-filled transaction form; familiarity with electronic
banking and security)
• Safe and trusted payments
 Merchant:
• Guaranteed payment (no charge-backs)
• Low cost
• Large potential customer base
 Bank:
• Further usage of electronic banking systems
• Further reduction of “paper based payments”
iDEAL: transactions
180
7.000
160
140
6.000
120
5.000
100
4.000
80
3.000
60
2.000
40
1.000
0
20
M aand
Cumulatief
Voortschrijdend cum. (12 mnd)
Trend (M aand)
0
Cumulatief (x miljoen)
8.000
jan
feb
mrt
apr
mei
jun
jul
aug
sep
okt
nov
dec
jan
feb
mrt
apr
mei
jun
jul
aug
sep
okt
nov
dec
jan
feb
mrt
apr
mei
jun
jul
aug
sep
okt
nov
dec
jan
Maand (x 1.000)
iDEAL transacties
Electronic Bill Presentment and Payment
 New way of receiving and paying bills
Step 1:
Customer receives a link to new bill
by e-mail or in internet banking environment
Step 2: After review, customer can click
“I want to pay” button
Step 3: Customer is directed to internet
banking application of “his” bank
Remainder of the process is similar to iDEAL
 Estimation: potentially € 50 - € 100 billion yearly
efficiency gains in European Union
Cybercrime: building blocks
Network structures have developed
… and marketplaces for criminal services
Money making machine
… cybercrime is advancing
ICT has become
more user friendly
… for users
… and criminals!
Threats



Cybercrime
Malware is growing exponentially
Botnets
=Networks of hacked PCs
•
•
•
•
Spam
Phishing
DDoS attacks
Identity fraud


> 50 % PCs contain malware
> 10 - 25% are part of botnet

Invisible
Cybercrime: Impact & uncertainty
10
Scale of cybercrime
Complexity of attacks
High pay-offs
Impact
Networked structure
Ease of use ICT applications
Internationalization
Digitalization
0
Uncertainty
10
Two major trends
Cybercrime:
 is becoming large-scale
 complexity increases
• use of advanced techniques
• organized attacks
Questions
Cybercrime has a very strong international dimension.
Currently, national law enforcement authorities and other organisations
still have a strong national orientation.
Questions:
•
In what ways can authorities improve international cooperation?
•
How can your country´s central bank contribute to improving
security internationally?
Retail payments statistics - NL
2009
Volume
(millions)
Value
(EUR billions)
Credit transfers
1,477
5,142
Direct debits
1,272
277
Total remote
2,749
5,419
Debit card (PIN)
1,946
76
177
0.5
34
4.5
± 5,500
± 60
7,657
141
10,406
5,560
72%
E-purse (Chipknip)
cash
Credit card
Cash
25%
Total POSdebit
Total retail
43% cash
54% debit
Development POS payments - NL
Share of POS payment instruments
As percentage of total sales
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
19 8 7
19 8 8
19 8 9
19 9 0
19 9 1
19 9 2
Cash
19 9 3
19 9 4
19 9 5
Cheques
19 9 6
19 9 7
E-purse
19 9 8
19 9 9
2000
Debitcard
2001 2002 2003 2004 2005
Rest
Creditcard
2006 2007 2008
Development remote payments - NL
Share of paper based funds transfers
Transactions as percentage of total volume
100%
95%
90%
85%
80%
75%
70%
65%
60%
55%
50%
1999
2000
Electronic
2001
2002
Paper based
2003
2004
2005
2006
2007
2008
2009
Trends in Retail Payments in the EU
Payment transactions in the euro area (billions)
22
20
18
16
debit and credit cards
14
credit transfers
12
direct debits
10
cheques
8
E-money purchases
6
4
2
0
2000
2001
Source: ECB
2002
2003
2004
2005
2006
2007
2008
2009
Development card usage – Worldwide
Number of POS terminals
Per million inhabitants
25,000
20,000
15,000
10,000
5,000
0
Euro area
Bulgaria
Czech
Republic
Source: Websites Central Banks, ECB
Hungary
Macedonia
Romenia
2003
2004
Ukraine
2005
2006
Slovenia
2007
Poland
2008
The
Netherlands
Croatia
Azerbaijan
Brasil
Development card usage – Worldwide
Number of card payments
As percentage of national payments
40
35
30
25
20
15
10
5
0
Euro Area
Bulgaria
Source: Websites Central Banks, ECB
Czech
Republic
Hungary
2003
Romania
2004
2005
Slovenia
2006
Poland
2007
2008
The
Netherlands
Brasil
Azerbaijan
Efficiency: different concepts
 Productive efficiency
(e.g. reduction of processing costs)
 Allocative efficiency
(e.g. change payment behaviour)
 Dynamic efficiency
(e.g. product innovation)
Social vs. private costs
External costs = fees paid to
others in payment chain
Central bank
Internal costs = all other costs =
own production costs
Private costs = external + internal
costs for each party individually
+
Social costs = sum of internal
costs of all parties together
+
+
+
Banks
Consumers
Retailers /
Businesses
Efficiency: how to measure it?
Step 1:
Estimate the total yearly costs per
payment instrument, and distinguish
between fixed and variable costs.
Step 2:
Estimate the total yearly volume
and value of transactions per
payment instrument.
Step 3:
Determine total, fixed and variable
costs per transaction per payment
instrument.
Step 1: Estimate total costs
Main ingredients of a cost study:
 Determine what payment instruments to look at.
 Determine what parties in the payment chain to include.
 Determine what cost (and revenue) items to include.
 Set up a questionnaire & desk research.
 Distribute questionnaire among representative sample.
Plus:
 Involve all relevant stakeholders.
 Be realistic about the planning: ± 1 year.
What cost items to include?
Possible cost items for commercial and central banks
Cash
Back office:
Production money
Transportation
Cash centres: staff,
buildings, equipment
Debitcards
E-purse
Credit cards
Back office:
Production cards
Transportation
Telecommunication
Back office:
Production cards
Transportation
Telecommunication
Back office:
Production cards
Transportation
Telecommunication
Fraud & control
Fraud & control
Fraud & control
Front office:
Branch offices: staff,
buildings, equipment
Front office:
Branch offices: staff,
buildings, equipment
Front office:
Branch offices: staff,
buildings, equipment
ATM maintenance
E-purse charge
terminal maintenance
ATM maintenance
Overhead
Overhead
Overhead
Fraud & control
Front office:
Branch offices: staff,
buildings, equipment
ATM maintenance
Overhead
Armoured car
services
What cost items to include?
Possible revenue items for commercial and central banks
Revenues
Transaction fees
Subscription
fees
Balance
revenues
Interchange fees
…
…
What cost items to include?
Possible cost items for retailers
Cash
Back office:
Till shortages, fraud
Theft insurance
Money purchase
Prepare cash registers
Counting daily receipts
Front office:
Transaction time
Filling /emptying cash
register during the day
Deposit, storage,
transport:
Deposit fees, safe rental
Fees prof. transport
Time own transport
Terminals/devices:
Authentication
devices
Depreciation, rental,
maintenance tills
Debitcards
Credit cards
E-purse
Back office:
Bank fees
Fraud
Printing daily overview
Account keeping
Back office:
Bank fees
Back office:
Bank fees
Printing daily overview
Account keeping
Printing daily overview
Account keeping
Front office:
Front office:
Front office:
Transaction time
Transaction time
Transaction time
Telecommunication:
Telecommunication:
Telecommunication:
Telecom fees
Telecom fees
Telecom fees
Terminals/tills:
Depreciation, rental,
maintenance
Terminals/tills:
Depreciation, rental,
maintenance
Terminals/tills:
Depreciation, rental,
maintenance
What cost items to include?
Possible revenue items for retailers/businesses
Revenues
Surcharges
…
…
Step 2: Estimate transactions
Card payments, credit transfers,
direct debits and other electronic payments:
 Banks
 Payment processor(s)
 Blue Book (ECB)
 Red Book (BIS)
Cash:
 Not centrally registered
 Occur at a wide variety of places
 Person-to-person (P2P)
Step 2: Estimate transactions
What is the best methodology to measure
the number of cash payments?
Measuring cash usage
Retail approach:
+ High number of observations
+ Availability of ‘true’ transaction records
- Difficult to draw a representative sample of points of sale
- Availability of ‘true’ transaction records biased
- Exclusion of P2P transactions
Consumer approach:
+ Inclusion of P2P transactions
+ Less difficult to draw a representative sample
- Measurement error
(omission, invention, behavioural change …)
Measuring cash usage
Research design matters a lot!
Most important challenge: minimise omission of low
value cash transactions
Conclusions DNB research:
 Omission is smallest with a 1-day transaction diary …
 … and highest with a questionnaire or a 1-week
transaction diary
 Internet panels do not introduce ‘electronic’ biases
1-day transaction diary among consumers
Measuring cash usage
Efficiency: no free lunch
Main results:
 Social costs POS
payments 0.65% GDP
 Per POS transaction:
€ 0.35
 Per € sales: 2.4%
 Per household per annum:
€ 400
Efficiency: no free lunch
Average total costs per transaction
2002
2006
Cash
€ 0,30
€ 0,38
Debitcard
€ 0,49
€ 0,45
E-purse
€ 0,93
n/a
Credit cards
€ 3,59
n/a
Average variable costs per transaction
2002
2006
Cash
€ 0,18
€ 0,27
Debitcard
€ 0,20
€ 0,17
E-purse
€ 0,03
n/a
Credit cards
€ 1,09
n/a
Efficiency: the banking sector
Main results:
 Costs & revenues in balance
 Net costs € 23 million
 Losses on all payment
instruments, except credit cards
 Losses made up by balance
related revenues
 Loss on debitcards: € 0,08 per
transaction
 Loss on cash: € 0,12 per
transaction
Efficiency: costs for retailers
Average total costs per transaction
2001
2006
Cash
€ 0,17
€ 0,18
Debitcard
€ 0,27
€ 0,20
E-purse
n/a
€ 0,14
Credit cards
n/a
€ 2,70
Average variable costs per transaction
2006
Cash
€ 0,21
Debitcard
€ 0,16
Main policy theme
Substitution paper-based by electronic payments
 POS payments: cash → debit card
 Remote payments: paper transfers → internet
banking, e-invoicing, direct debit
International cost studies
POS payments
Social
costs
(% GDP)
Cash
share
(% sales)
Debitcard
share
(% sales)
Share of other
instruments
(% sales)
Belgium (2003)
0.74%
63%
32%
5%
Australia (2006/07)
0.67%
38%
14%
48%
The Netherlands (2002)
0.65%
56%
40%
4%
Sweden (2002)
0.40%
39%
50%
11%
Norway (2007)
0.39%
39%
61%
Conclusion: social costs ↓ with cash & creditcard
usage ↓ and debitcard usage ↑
Development cash usage – Worldwide
Value of banknotes and coins
As percentage of GDP
20
18
16
14
12
10
8
6
4
2
0
Euro area
Czech
Repulic
Poland
Albania
Source: Websites Central Bank, IMF, ECB
Croatia
Oman
2004
Russia
2005
2006
Lithuania
2007
Brazil
2008
2009
Azerbaijan Philippines Indonesia
Bulgaria
Ukraine
Development cash usage – Worldwide
Number of ATM’s
Per million inhabitants
1,200
1,000
800
600
400
200
0
Euro area
Bulgaria
Czech
Republic
Source: Websites Central Banks, ECB
Hungary
Macedonia
Romenia
2003
2004
Ukraine
2005
2006
Slovenia
2007
Poland
2008
The
Netherlands
Croatia
Azerbaijan
Brasil
How to stimulate efficiency?
Financial
incentives
Positive
incentives





Discounts
Loyalties
…
…
…
 Transaction fees
 Surcharges
 …
 …
 …





Public campaigns
∆ perceptions
Acceptance
Innovation
…
 Acceptance
…
…
…
…
Non-financial
incentives
Negative
incentives