RDP 2014-14: The Evolution of Payment Costs in Australia Appendix C: Costs for Consumers in Making Payments

Following Schwartz et al (2008), the resource cost incurred by consumers in making payments is the cost of consumers time. The fees paid by consumers to financial institutions and the surcharges paid to merchants are not resource costs, but transfers in the system (and discussed in Section 5).

C.1 Payment Time

There are two aspects to the time devoted by consumers to undertake payments – the time used to actually make a payment, the tender time, as well as the time for payments-related activities. The tender time results are discussed in Section 4.1. These figures were obtained from a number of large merchants that were able to capture this information automatically through their point-of-sale payment devices or through their own time-use studies by process engineers.[41] Consumers' time costs for non-point of sale payments are based on the time estimates used in Schwartz et al (2008).

The time associated with other payment-related activities are harder to measure but are unlikely to be as important as tender time.[42] Activities can include, for example, the time taken to obtain cash from an ATM or branch before making a cash payment to a merchant, as well as the time taken to monitor payments, such as the time used in reconciling debit and credit card statements with purchases.

The current study follows Schwartz et al (2008) in modelling the time devoted to other payment-related activities. In particular, only one-third of ATM trips are considered to require a special trip. This is supported by more recent research suggesting that consumers change their preferred payment instrument as the amount of cash in their possession changes (Eschelbach and Schmidt 2013), and withdraw precautionary amounts of cash when uncertain about future transactions (Alvarez and Lippi 2009). Data from Ossolinski et al (2014) also indicate that consumers who make more cash payments have higher cash withdrawal amounts with only a small increase in the number of withdrawals. Combined with an estimate that the average ATM withdrawal supports about seven cash transactions, the average time associated with obtaining cash for each cash payment is estimated to be about 11 to 20 seconds.

In line with the 2007 study, the time taken to perform other payment-related tasks, such as checking account statements and paying credit card bills, remains the same; at either 5 or 10 seconds per payment based on the instrument. Other time costs, such as establishing accounts and interacting with financial institutions to deal with billing, fraudulent transactions, etc are not modelled. In these cases, few interactions may be recorded per person, but each interaction would have a high time cost.[43]

C.2 Value of Time Devoted to Payments

Following Schwartz et al (2008), the cost attributed to consumers' time is set at $17.50 per hour, essentially half the average hourly wage rate. This helps improve the consistency of consumer cost estimates between the 2007 and 2014 studies although, as discussed in the 2007 study, it is recognised that there is no consensus on how to value consumers' time. Segendorf and Jansson (2012), for example, use an inventory model to calculate the value of consumers' time, but note that their results are sensitive to the level of interest rates, while Nevo and Wong (2014) find that the value people place on their time varies significantly over the business cycle.

C.3 Overall Consumer Costs

Combining the total time consumers use to make payments with estimates of the value of this time suggest that the opportunity cost for consumers in making payments is about $2.6 billion per annum. Per transaction, BPAY and cheque payments are estimated to be the most expensive payment instruments, at $0.60 per transaction. At the other end of the spectrum, the relative speed of contactless debit transactions mean that MasterCard & Visa debit transactions are only estimated to impose a cost of $0.13 per transaction on consumers. Cash and credit card transactions are estimated to cost $0.18 and $0.19 per transaction. The ranking of payment instrument resource costs for financial institutions, merchants and consumers is robust to plausible assumptions.


A number of the study's broader merchant sample also provided tender time figures based on the judgement of their payment or treasury professionals. These numbers were not used. [41]

At a broad level, the American Time Use Survey (Bureau of Labor Statistics 2014) suggests that American consumers spent less than 20 minutes a month on banking- and insurance-related activities in 2013. Only a fraction of this time will be devoted to payments, with the rest devoted to a wider range of financial activities, such as arranging loans, insurance and superannuation. This estimate could, however, understate the amount of time devoted to payments issues given it only captures the ‘main’ activities in which the consumer engages; a consumer that undertakes some banking activities while focusing primarily on non-banking activities will not be counted as having done any banking. [42]

These costs may be higher for card-based systems given higher fraud levels (and hence procedures) and the greater variety of potential queries, such as late payment fees. [43]