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Payments are no free lunch

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  • Hans Brits
  • Carlo Winder

Abstract

Total costs of the payments system to society are considerable. These costs can be higher or lower depending on the use of payment instruments that are less or more cost efficient. Empirical evidence is provided by a survey on the costs of POS payment instruments in the Netherlands. The overall costs involved in POS payments amount to 0.65% of gdp or, equivalently EUR 0.35 per transaction. The e-purse is most cost-efficient, irrespective of the size of a transaction, while if the choice is between cash and the debit card, the former is most economical for purchases below EUR 11.63 and the debit card is to be preferred for larges purchases. From a cost perspective, credit cards should not be used at all. The distorting effects caused by the use of public resources to finance the expenses made by central bank to maintain the cash circulation is found to be limited. It is argued that a less-cash society has better chances of success than a cashless one, at least in the medium term.

Suggested Citation

  • Hans Brits & Carlo Winder, 2005. "Payments are no free lunch," DNB Occasional Studies 302, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbocs:302
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    References listed on IDEAS

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    1. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
    2. W. Bolt & A.F. Tieman, 2003. "Pricing Debit Card Payments Services: An IO approach," WO Research Memoranda (discontinued) 735, Netherlands Central Bank, Research Department.
    3. Leo Van Hove, 2004. "Cost-based Pricing of Payment Instruments: the State of the Debate," De Economist, Springer, vol. 152(1), pages 79-100, March.
    4. ten Raa, Thijs & Shestalova, Victoria, 2004. "Empirical evidence on payment media costs and switch points," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 203-213, January.
    5. Humphrey David & Willesson Magnus & Lindblom Ted & Bergendahl Göran, 2003. "What Does it Cost to Make a Payment?," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-16, June.
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