23 September 2008

MLex Comment: SEPA– overcoming the cash obstacle

While Europe's SEPA project stumbles amid industry squabbles and implementation delays, the key question is how to move consumers away from their over-dependence on cash towards cheaper and more efficient electronic payments.

While Europe's project to construct a single payments area (SEPA) stumbles amid industry squabbles and implementation delays, one key question remains unanswered: how to move consumers away from their over-dependence on cash towards cheaper and more efficient electronic payments. 

 

The scale of the challenge facing banks and authorities becomes apparent when one considers that even today between sixty and seventy percent of all transactions are cash-based.

 

One suggestion is to impose a fee on all withdrawals at ATM cash machines so as to engineer a drastic reduction in society’s over-dependence on cash. Another school of thought sees value in a pause in the migration process of national schemes to SEPA schemes and the intervention of the European Commission to address specific flaws from the technical and industry side. 

 

However, a far more consensual solution would be to get all parties - banks, merchants, public bodies and government - to work more diligently at achieving full SEPA compliance.

 

- The cost of cash -

 

The economic aspect of cash transactions can be summarised by the phrase: "cash is too cheap". Essentially, some argue - controversially - that a fee should be applied to all ATM cash withdrawals to create a disincentive for consumers, and reduce the vast costs involved in excessive cash usage: these include, for example, handling costs, transportation and 'social costs'.

 

Research by several central banks on the 'social costs' of cash have placed a value of 0.4 to 0.6 percent of GDP. Putting this in more concrete terms, it amounts to 300 euro per year per family in the Netherlands, according to one study. Therefore, a debit card payments system would reduce the substantial resources used when society provides and uses cash.

 

There is general consensus on the many advantages of SEPA, such as lower costs for retailers and consumers, efficiency gains and convenience. Various studies have looked at both the cost of cash - around 50 billion euros per annum (representing the 360 billion cash transactions in the EU) - and the potential savings from SEPA: a figure of 123 billion euros (over a six-year period, assuming full implementation).

 

Some have also pointed to potential gains from an increase in tax revenues, since reducing the 'anonymity' of cash dismantles the underground economy.

 

- The way forward - 

 

The answer to the current impasse, some have suggested, might be to introduce greater transparency through a concept called "cost-based pricing". Here, an explicit fee per transaction proportional to the cost is levied at source. 

 

In practice, banks will need to incentivise the movement towards electronic payments by either upping the interest rates on deposit accounts or by lowering the fees on debit cards. To some this concept is anathema, considering it nothing more than yet another social wrong perpetrated by banks, although the idea has been successful in certain Scandinavian countries.

 

Overall, the most practicable and sensible method of introducing ATM fees would be to lower other bank charges at the same time, and to communicate this clearly to consumers.

 

An alternative view is to freeze the migration over the coming months and ask the European Commission to intervene. Seemingly, this would facilitate the smoothing out of existing flaws which include industrial and technical questions (still a sizable deterrent in some countries), plus how best to achieve a better balance in cash versus SEPA payments. 

 

This may not be the optimal approach, however, since it may only serve in stalling the project in mid-flight, with precious little guarantee of any real progress ensuing.

 

Instead, the public sector and governments have a prominent role to play in changing the habits of consumers. Public sector bodies do not always have electronic payments methods available; governments could promote the benefits of an e-payment society.

 

In tandem with such a move, banks should push the agenda of the clear, tangible benefits of SEPA to consumers. A discernible lack of understanding on the part of the average consumer was borne out by a 2004 study in Belgium. 

 

The main obstacles in the way remain consumer habits, the anonymity of cash, lack of consumer awareness and sub-optimum leadership from banks on this issue.

 

In short, possible solutions could include the following: more effective communication strategies from banks to their consumers; better consumer education provision - including the role of the public sector and government; publication of national cash plans; and due consideration of ATM fees at source (assuming it is offset by a reduction in other bank charges).

 

By Kevin Newman

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