RDP 2014-14: The Evolution of Payment Costs in Australia 3. Methodology

This study estimates the resource cost of consumer payments in the Australian economy in a manner similar to the Bank's 2007 study and international studies. Financial institution and merchant costs were directly surveyed by the Bank and consumer costs are estimated based on the cost of a consumer's time to make payments. This study focuses on average costs, which take into account the cost of infrastructure supporting payment instruments. The results shown are for weighted-average costs across entities, although the use of median costs leads to the same conclusions about the relative cost of instruments.

3.1 Data Collection and Sample

Consistent with previous studies, the current study focuses on payments by individuals to merchants rather than on business-to-business payments and/or person-to-person payments. The payment instruments covered by the study are estimated to account for nearly all of the number and more than 95 per cent of the value of consumer payments to businesses (Ossolinski, Lam and Emery 2014).

The majority of costs are measured directly by surveying financial institutions, merchants and, in the case of the costs of currency production, the Reserve Bank and the Royal Australian Mint. In a few cases, costs are estimated indirectly based on publicly available information or the fees that survey participants pay (non-surveyed) third parties for payment-related services. For example, the resource costs of transporting cash was not directly collected from cash-in-transit companies but instead proxied by the fees paid for this service. While estimating some costs based on fees will overstate the cost of these payment services given that the profit margins of these third parties will also be captured, the size of these indirectly estimated costs is generally small in both absolute size and relative to other payment costs.

The detailed study included participation by 16 financial institutions and 17 large merchants, with around another 260 small merchants answering a separate small-and medium-sized business survey.[5]

  • Financial institutions ranged in size from large banks to specialist service organisations. In aggregate, they reported nearly 30 million transaction accounts and 10 million personal credit card accounts, capturing the vast majority of all such accounts in Australia.
  • Merchants were selected to cover a wide range of consumer expenditure categories. Ten large merchants were retailers predominantly collecting payments at the point of sale, whether in a supermarket, department store or general retail environment. Over the twelve-month sample period, these retailers reported total sales of $109 billion, about a third of the value of retail sales in Australia over 2013. The other seven merchants were billers that predominantly receive payments remotely – with little point-of-sale activity – for insurance, telecommunications and utilities. These billers reported total sales of $46 billion during the sample period, which represents a significant share of total household consumption on insurance, telecommunications and utilities of about $120 billion.
  • Small merchants were recruited through a number of merchant associations, with more details provided in Section 7 and Appendix D.

Survey forms were distributed in April 2014. To reduce reporting burden, respondents were given flexibility in selecting the twelve-month period for which they reported costs. Financial institutions typically provided figures for the year to September 2013, while merchants provided somewhat more recent figures. The data were subjected to a number of validation checks following submission, including internal consistency checks, querying responses with participants, benchmarking against responses from other participants and comparison with other sources such as the Reserve Bank's Retail Payments Statistics and responses to the 2007 study.

For financial institutions' costs, personal and business transactions were identified separately. This allowed the estimation of costs per transaction to account for potential economies of scale and common costs across both personal and business transactions.

To obtain economy-wide estimates of the cost of consumer-to-business payments, estimates of costs per transaction for non-cash payments were scaled up by the number of these payments measured in the Retail Payments Statistics and information on the share of consumer-to-business transactions from the study. The per transaction cost estimates for cash transactions were scaled up by the number of consumer cash payments per person (Ossolinski et al 2014) and the population estimate for 2013. Following the 2007 study, minors between 9 and 17 years of age were assumed to make half the number of transactions of adults.

3.2 Caveats

A number of the caveats are worth bearing in mind. Like all such studies, the focus is on measuring resource costs (and some financial flows between parties). The study does not measure the benefits associated with different payment instruments nor whether the structure of the market promotes innovation. Both these factors need to be considered when drawing policy implications from these numbers; increased use of the lowest-cost payment system or less use of the higher-cost systems does not necessarily imply better outcomes.

A second issue is that while a comprehensive approach to identifying costs and the number of transactions has been used, coverage is not exhaustive. The study does not attempt to measure, for example, any costs arising from: the ‘cash’, ‘informal’ or ‘black’ economies; arguments that costs that might arise if cash is less hygienic than cards (MasterCard 2014); or the costs to individuals experiencing credit stress from credit cards. These costs, by their very nature, are difficult to quantify.[6]

A third issue is the ability of financial institutions and merchants to separately identify costs and transactions across payment instruments. A number of financial institutions reported difficulty identifying subcomponents of costs, particularly overhead costs and the amortised share of previous investment expenditure. Further, some financial institutions reported that it was difficult to allocate costs across the different types of card payments. Similarly, some merchants were unable to distinguish between the costs of different types of card payments in the information provided to them by their acquirers. However, in most cases respondents were able to provide an estimate of total costs which were then apportioned across different cost items or instruments using the Reserve Bank's understanding of the Australian payments industry and the costs incurred by similar institutions in the sample.

The final issue involves the choice of costs that are included when measuring the resource costs used in making credit card payments. Credit cards generally have three aspects – a mechanism by which consumers can pay a merchant, an interest-free loan for up to 60 days, and reward points tied to the value of the purchase. While each of these aspects is measured, the main results of this study focus on the payment aspects, and do not include the costs associated with the interest-free period or rewards. Including the costs of providing the rewards or the interest-free period would increase the cost of credit cards, particularly to financial institutions, although they remain less expensive than cheques.


Around half of financial institutions and merchants that were asked to participate in the study accepted. Those that declined cited competing demands on their time or an inability to provide sufficiently detailed payment cost information. [5]

For example, there is no reliable way to estimate the number of informal or black economy transactions that would cease if different payment options, particularly cash, were not available. In addition, the tax revenue forgone because of undocumented income and sales, which Chakravorti and Mazzotta (2013) identify as a large cost associated with the informal economy, could generally be considered – in the framework of cost studies as – an (illegal) transfer. [6]