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Efficiency and costs of payments: some new evidence from Finland

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  • Takala, Kari

    () (Bank of Finland)

  • Viren, Matti

    () (Bank of Finland Research and University of Turku)

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    Abstract

    This paper deals with optimal payment systems. The issue boils down to how large are the costs of different payment media, which can be interpreted as a question of the efficiency of the means of payment. However, there are other qualifications related to the choice of payment media. Here, at least three issues can be distinguished. First is the question of optimal payment medium for each individual payment (size, location, EFTPOS etc.). This choice is not independent of the individual characteristics of the payer and payee. Secondly, there is the question of cost effectiveness of payments for different institutions and sectors. The final issue concerns the social optimum for each payment medium. These issues have been particularly controversial in the case of cash, which is still the dominant payment medium in most euro countries. Part of the controversy arises from the fact that the costs and benefits of different payment media affect different market participants in quite different ways, so that a possible social optimum might not correspond eg to the optima for different firms. The paper contains a short review of calculation methods and empirical results for a sample of countries. It also provides new evidence from Finland, which is to an extent one of the front-runners in payment technology and institutional design in payment systems. This shows up in relatively low overall costs of payments. Our estimate of total costs of payment media is 0.3 per cent of GDP, which is very low by international standards.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0811netti.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 11/2008.

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    Length: 50 pages
    Date of creation: 07 May 2008
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2008_011

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Keywords: payment media; cash; payment systems; costs of payments;

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    References

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    1. Daniel D. Garcia-Swartz & Robert W. Hahn & Anne Layne-Farrar, 2006. "The Move Toward a Cashless Society: A Closer Look at Payment Instrument Economics," Review of Network Economics, De Gruyter, vol. 5(2), pages 1.
    2. Nicole Jonker, 2005. "Payment Instruments as Perceived by Consumers - a Public Survey," DNB Working Papers 053, Netherlands Central Bank, Research Department.
    3. Daniel Garcia-Swartz & Robert W. Hahn & Anne Layne-Farrar, 2007. "Further Thoughts on the Cashless Society: A Reply to Dr. Shampine," Review of Network Economics, De Gruyter, vol. 6(4), pages 5.
    4. James Bohn & Diana Hancock & Paul Bauer, 2001. "Estimates of scale and cost efficiency for Federal Reserve currency operations," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 2-26.
    5. Wilko Bolt & David Humphrey, 2007. "Payment Network Scale Economies, SEPA, and Cash Replacement," Review of Network Economics, De Gruyter, vol. 6(4), pages 2.
    6. Humphrey, David & Willesson, Magnus & Bergendahl, Goran & Lindblom, Ted, 2006. "Benefits from a changing payment technology in European banking," Journal of Banking & Finance, Elsevier, vol. 30(6), pages 1631-1652, June.
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    Cited by:
    1. Humphrey, David B., 2010. "Retail payments: New contributions, empirical results, and unanswered questions," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1729-1737, August.
    2. Segendorf, Björn & Jansson, Thomas, 2012. "The Cost of Consumer Payments in Sweden," Working Paper Series 262, Sveriges Riksbank (Central Bank of Sweden).

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