Issue 2 - April 2009
Opinion and Editorial
Overcoming the Homer Simpson in usHow to create a less-cash society
24.04.09 By Leo Van Hove and Leonor Machado
Consumers continue to have a great affection for cash payments. It is estimated that today four out of five face-to-face transactions are made with notes and coins in the EU. However, cash payments are costly for society: the total expense per year to the EU economies has been estimated at between 50 billion and 75 billion euro.* Various players in the payments market are therefore pondering means to incentivise increased use of electronic payment instruments, while reducing the costs of wholesale cash distribution. Leo Van Hove finds that "libertarian paternalism" - a theory promoted by behavioural economists to "nudge" people towards making rational choices - might contribute to reform cash users. Leonor Machado reports on the concept of the "Single Euro Cash Area" (SECA) designed to increase the efficiency of cash distribution and collection.
*The estimate is based on data provided by the EPC Cash Working Group and ECB data as analysed by PSE Consulting.
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Cash payments: a costly love affair
Essentially, the problem with cash is its relative inefficiency if used for transactions above a certain amount. This inefficiency is reflected by its high social cost. The social cost of a payment service refers to the resources that all market participants consume in providing and using it. It is computed by adding up the private costs of all stakeholders (consumers, merchants, commercial banks, the central bank, etc.) and eliminating any transfer payments, in order to avoid double counting.
The latest findings show: first, in many countries the social cost of cash is substantial; second, the level clearly depends on the state of development of the retail payment system. In EU countries such as Austria, the Netherlands and Belgium, the cost of cash for society (excluding consumers) would, respectively, amount to 0.47 per cent, 0.48 per cent
In comparison, in Scandinavia, where card usage is higher, cash related social costs are lower: the estimate for Sweden is 0.28-0.33 per cent of GDP (2002), Norway comes in at 0.15 per cent of GDP (2007), and in Finland - the country with the highest number of card payments per capita in the EU - the social cost of cash amounts to only 0.12 per cent of GDP (2005).
The question at this point therefore is how to persuade consumers to reconsider the choice they make when reaching for their purse at the check-out to pay for their goods and services.
Could "nudges" steer us towards a "less-cash society"?
In their popular book "Nudge - Improving decisions about health, wealth and happiness" (2008), behavioural economist Richard Thaler and law professor Cass Sunstein, both of the University of Chicago, argue that "libertarian paternalism" might have massive effects on people's behaviour. This theory holds that by setting certain conditions people could be "nudged" towards making more rational choices.
The authors point out that people make bad choices quite often; choices they should not make, and do not really want to make, either. Fact is, we all have a bit of the impulsive and weak-willed Homer Simpson in us. The paternalistic aspect of Thaler and Sunstein's policy recipe lies in the claim that it is legitimate for "choice architects" - that is, anybody who has the responsibility for organising the context in which people make choices - to try "to influence people's behaviour in order to make their lives longer, healthier, and better". The libertarian aspect lies in the insistence that people must not be coerced into a particular decision, but should be free to choose.
Since, after all, payment behaviour is behaviour; this theory might contribute to changing payment habits. Appropriate nudges designed by choice architects active in the payments market - including policy makers, central banks, commercial banks and merchants - could incentivise consumers to use their debit card to make a payment rather than to withdraw cash from the ATM. Such measures might include the following:
- Policy makers: make electronic payment instruments the default legal tender
- Central banks: make cash payments less convenient, for example by withdrawing high-value notes from circulation
- Commercial banks: lower the default amounts for ATM cash withdrawals; decrease the availability of cash by reducing the number of ATMs
- Merchants: increase the visibility of POS terminals; train shop assistants to actively inform customers that card payment is possible; increase the number of "card payments only"-check outs
Richard Thaler, one of the promoters of "libertarian paternalism", admits: "I don't think we're going to nudge Osama Bin Laden. But maybe we can make progress on litter." Not wishing to equate cash users with terrorists, the analogy, however, lies in the assumption that nudging alone might not suffice to significantly impact the deep-rooted devotion to cash payments.
The most straightforward way to discourage cash usage would obviously be to introduce or increase ATM fees. Gradually, more and more policy makers and central bankers are becoming convinced of the merits of cost-based pricing. However, in practice, policy makers have been loath to take any action. Part of the reason is probably that making cash more expensive will not be popular with consumers.
Yet there exists a rationale which allows policy makers to justify cost-based pricing of payment instruments: cash users de facto impose the social costs of cash, which are part of the overall cost of goods and services, on all payers – including those who resort to electronic payment instruments. Just as governments make the social costs of environmentally damaging attitudes visible and realign people's behaviour by imposing taxes or penalties on those who pollute, the purpose of cost-based pricing of payment instruments would be to make the social costs induced by cash users visible by means of explicit, direct fees.
EPC promotes the Single Euro Cash Area (SECA)
Besides changing the behaviour of consumers and merchants, it will be necessary to reform the complex wholesale cash distribution and collection infrastructures needed to circulate notes and coins. The EPC believes that actions by all stakeholders within the euro area could contribute to reduce the high cost of processing and handling cash. To this end, the EPC decided to create the Single Euro Cash Area (SECA), which led to the EPC policy document "The SECA (Single Euro Cash Area) Framework", published in March 2006 (see below).
The plans for the SECA are developed in dialogue with the Eurosystem Banknote Committee (BANCO), banks and other key players such as cash-in-transit companies (CITs). The objective of SECA is to create a level playing field whereby the basic cash functions (supply of banknotes - genuine and fit-for-purpose - according to the demands of those involved in the cash cycle) performed by each of the National Central Banks (NCBs) in the euro area reflect a common level of service and processes which are recognised by all euro area NCBs.
A main objective of the SECA is to increase efficiencies in the cash handling cycle in order to reduce costs to society as a whole. The key principles of SECA are summarised as follows:
- Consistent customer experience at all euro area ATMs
- Consistent quality and features of notes and coins
- Homogenous wholesale and retail cash handling standards and processes in all national markets
- Improved services to merchants and increased competition among CITs
- Removal of legal barriers and harmonisation of National Central Bank conditions
- More competitiveness through the use of alternative cash distribution models
- Access by banks to any National Central Banks in any national market and a cash supply network that ensures optimal reach
- Effective and efficient cash distribution management information systems for National Central Banks, banks and cash-in transit providers
- Harmonised NCB responsibilities and service level agreements as regards debiting or crediting, deposits and withdrawals, opening hours, authenticity and quality control; common rules for National Central Bank fees and charges
- Stability of services and operational conditions to enable long term investment
In addition, the EPC developed recommendations with a view to creating a common euro area-wide infrastructure for wholesale cash based on the following principles: the development of common security requirements for euro note transportation including standards for banknote neutralisation systems and the identification of best practice standards for coin and bank note packaging.
The main development since the inception of the SECA has been that cash is no longer "forbidden topic" and cash-related issues are now routinely on the agenda of many industry forums. Many of the SECA objectives related to NCB processes and efficiencies have been recognised and included in the Eurosystem "roadmap" (measures for more convergence of NCB cash services) published in 2007. The EPC is monitoring adoption of these measures in European countries.
Other aspects of the SECA will support a major goal of the SEPA initiative: the provision of information enabling consumers and merchants to better understand the cost benefits which could accrue from the selection of the appropriate means of payment when faced with the selection of cash, payment cards and other electronic payment instruments. This represents a focal point for the next steps in EPC's work on the cash front.
Leo Van Hove is Professor of Economics at Vrije Universiteit Brussel. Leonor Machado is the Chair of the EPC Cash Working Group.
Other articles in this issue
24.04.09 Update EPC Plenary Meetings - Main decisions taken in March 2009 By Herman Segers 24.04.09 The Preview - Rulebook Release Management 2009 By Christian Westerhaus 24.04.09 SEPA only: the EPC Vision - EPC recommendations on end date for SEPA migration By Gerard Hartsink 24.04.09 New EPC Publications now online - Everything you need to know about SEPA By Meral Ruesing 24.04.09 Going global - The new ISO Creditor Reference By Olli Kähkönen 24.04.09 A mixed Bag - European Parliament approves revised Regulation 2560/2001 on cross-border payments By Séverine Anciberro 24.04.09 PSD Implementation: six Months to go - Will Member States meet the deadline? By Ruth Wandhöfer 24.04.09 New Kids on the Block - An introduction to payment institutions By Ruth Wandhöfer 24.04.09 Every Road has got to end somewhere: the Need for a SEPA Migration End Date - Re-emphasised by the European Central Bank By Wiebe Ruttenberg and Monika Hempel 24.04.09 Great Expectations - E-invoicing: time to seize the opportunity By Charles Bryant 24.04.09 Facing the Facts in April 2009 - EPC tracks progress of SEPA implementation By Herman Segers 24.04.09 Missing in Action, mostly - Public sector lags behind in SEPA implementation By Gerard Hartsink 24.04.09 On Bananas and the Integration of Euro Payments - The SEPA commitment of EU governments By Herman Segers 24.04.09 ECOFIN Council Conclusions: Annual Progress Report on the State of SEPA Migration - European Commission reports on migration by public authorities By Zuzana Kalivodova 24.04.09 SEPA at your Fingertips - The EPC Roadmap for Mobile Payments By Dag-Inge Flatraaker 24.04.09 SEPA Direct Debit: the Green Light - EPC launches SEPA Direct Debit Schemes in November 2009 By Gerard Hartsink 24.04.09 The Doors are open - Guidelines for adherence to the SEPA Direct Debit Schemes are now available By Gerhard Singer 24.04.09 Creditors: Help is here - EPC introduces rules on the use of legacy mandates under the SDD Scheme By Kevin Brown 24.04.09 SEPA B2B Direct Debit: the E-Mandate - Public consultation is going on now By Christian Westerhaus 24.04.09 Think ahead - The SEPA Scheme change management By Christian Westerhaus 24.04.09 More is More - EPC Newsletter for Scheme Participants Herman Segers
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