RDP 2014-14: The Evolution of Payment Costs in Australia 6. Influence of Payment Size

The preceding sections have compared resource and private costs across payment instruments at the average transaction size for each instrument. It is also useful to compare the resource costs of different payment instruments at different transaction sizes. Across instruments there will be differences in the proportion of costs that are fixed (and, therefore, independent of the size of the payment) and those that vary with transaction size.

This section considers how resource costs vary by transaction size across the most common payment methods used at the point of sale – cash, debit cards and credit cards. Higher value cash transactions, for example, generally require a greater quantity of notes and coins to be exchanged; accordingly, the cost of handling and safeguarding cash is likely to be higher for these transactions. Card costs often do not depend on transaction size, but some costs, such as credit risk and scheme fees, increase as transaction values rise.

The estimates that follow focus on the resource costs incurred by financial institutions for the payment function of each payment method (i.e. excluding account maintenance, and the credit and rewards functions of credit cards), together with the resource costs of merchants. Costs have been classified as either fixed, variable by number of transactions or variable by transaction value based on the cost component and information provided by financial institutions and merchants. This classification is most uncertain in the case of the costs of cash.[33] Varying the assumption about which components are sensitive to transaction size provides a range of cost estimates for cash (Figure 7).[34]

Figure 7: Resource Costs by Transaction Value

The analysis suggests that cash, eftpos and contactless MasterCard & Visa debit transactions have broadly similar costs under about $20. To the extent to which they differ, cash appears to be the lowest-cost instrument up to this point. Above about $20, eftpos transactions involve the lowest resource costs. This ‘cross-over point’ between cash and eftpos has fallen from about $60 in 2006, primarily due to the continued decline in the cost per transaction of eftpos payments, although the cost of cash payments has also increased (Section 4).[35]

At low transaction values, the cost differential between cash, eftpos and contactless MasterCard & Visa debit transactions is sensitive to tender time assumptions. The cost estimates for cash are based on a tender time of about 25 seconds per transaction (Figure 3). In reality, cash transactions not requiring change may be quicker and potentially cheaper than eftpos even beyond $20, while those that involve change may be slower and more expensive than eftpos for all transaction values. As a 2 second change in tender time implies a one cent ($0.01) change in merchant costs, small efficiency gains or delays can make a large difference to the total resource cost of the instrument.

As transaction size increases, MasterCard & Visa debit and credit card (including contactless) transactions incur increasingly higher resource costs than eftpos transactions. This is mainly because, as reported by participants, scheme fees (which are used to approximate scheme costs) in the MasterCard & Visa systems increase with transaction size, but eftpos scheme fees do not.

Including the costs of the credit and reward functions of credit cards in addition to the cost of the payment function (not shown in Figure 7), the cost of a credit card transaction increases and the rate at which the cost varies with transaction size also increases. The costs of the credit and rewards functions are not only large but also vary almost proportionately with transaction values. These additional features are estimated to add $0.15 in variable costs for every $10 spent.


Certain costs were consistently identified by responding financial institutions as fixed or variable with respect to the size of the transaction. For example, the costs associated with float and fraud are reported to be largely variable, while site rental costs for bank branches are reported to be fixed. Respondents provided differing views as to how other costs – such as cash handling, storage and transaction processing – behave as transaction size changes. [33]

The range of cost estimates are the same at the average value of a cash transaction ($26). [34]

The 2007 study reported this ‘cross-over point’ to be $50. Using the data from that study, but modifying the treatment of consumer deposit and business withdrawal costs of cash (as outlined in Section 4.3) results in a cross-over point of around $60. [35]