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.
Introduction: The payment industry is in a constant flux. New technological innovations change the supply side but also the demand patterns change due to urbanization, education and an increase in income and wealth. Payment habits are also subject to change over time as payment habits have strong individual persistence. Currently heavy cash users are mostly elderly people and as these cohorts will gradually pass away, the number of cash users will diminish. The change in payment patterns in Finland is illustrated in Figure 3.1 below. The key issue from the economic of point of view is, of course, the question whether the current system is somehow optimal for each user group: whether it is the most efficient from the social point of view as a whole. That is obviously not the only relevant question: we might also be interested in the distribution of costs and benefits between different market players. Even if some system is socially optimal it might not be operative if the key market players had no incentive to support it. In the payments industry, it is not exactly clear what the exact costs for different payment media are and how different fees or royalties cover them.
Author: Kari Takala,Matti Viren
Source: Research Discussion Papers, Bank of Finland
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