RDP 2014-14: The Evolution of Payment Costs in Australia 8. Conclusion

In 1997, the Wallis Inquiry noted that the Australian payments system was characterised by relatively high overall costs and that there was scope for substantial efficiency gains, including greater use of electronic payments (Financial System Inquiry 1997, pp 223–233). One of the recommendations stemming from the Inquiry was the creation of the Payments System Board with a mandate to promote efficiency in the payments system. This study represents part of the Reserve Bank's work on assessing the efficiency of the payments system, focusing on the cost of providing payment services to households.

Our results suggest that the costs involved in providing payment services to households have fallen from 0.80 per cent of GDP in 2006 to 0.54 per cent of GDP in 2013. Based on the most recent estimate, it appears that Australia now has a relatively low cost payments system by international standards. With greater choice in payment methods, including wider access to, and acceptance of, electronic payment methods, today's payments system also serves its users better than it did at the time of the Wallis Inquiry.

The decline in costs between 2006 and 2013 has been due to cost savings across most payment instruments. In particular, overhead cost savings have been realised through greater use of new technology, and tender times have been reduced through the adoption of PIN and contactless technology. Economies of scale are also likely to have reduced the per transaction cost of electronic payment methods that rely on networks with large fixed costs.

Measured on a per transaction basis and at the average transaction size for each payment instrument, the ranking across instruments by resource costs is mostly unchanged from 2006. BPAY and direct debit, which are electronic payment methods typically used for remote bill payments, remain the least resource intensive. Debit cards remain cheaper than credit cards, and cheques remain more expensive to society than any other payment method. However, cash has become slightly more expensive as its use has declined, while eftpos has become less expensive; these two methods are estimated to be the least costly of the methods available at the point of sale, with very similar per transaction costs. While cash has traditionally been the least costly payment method available for small payment values, developments since the previous study indicate that electronic payments are increasingly able to offer a low-cost alternative to cash. The point at which cash is no longer lower cost than eftpos has fallen from about $60 in 2006 to about $20 in 2013. Contactless debit transactions are also relatively low cost at very low payment values.

Decision-making by consumers and merchants, however, is not driven by the costs to society, but rather the private costs and benefits that these groups face. Regulation recommended in the Wallis Report and put in place since 2001 by the Reserve Bank has worked to reduce the incentives for consumers to use high-cost options such as credit cards (RBA 2008). However, consumers continue to receive incentives in the form of rewards and interest-free periods to use credit cards, so that the private cost to consumers of credit cards is no different from debit card payments despite their higher social cost. Merchants continue to bear higher costs for credit card payments than debit card payments, and small merchants face significantly higher costs than large merchants.

The coming years will see further innovation – boosted by the current initiative for real-time payments – and ongoing change in consumer preferences. In such a climate, it may be worth considering whether relatively frequent updates of payment cost estimates might be useful to policymakers and the payments industry. Future studies will also need to consider carefully the scope of their investigation; cost estimates may be required for an even broader set of payment instruments or for other segments of the payments system, such as person-to-person payments.