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Beyond the Transaction: Every Transaction Has a Story

What Makes Cash so Costly

Dr Christian Koboldt is co-founder and partner of economic consultancy DotEcon Ltd.

For many economic activities – including payments – one way to drive down costs is to achieve significant economies of scale. In other words: as a certain way of paying becomes more widely used – unit costs fall.

This drives the headline findings presented in a recent report from the European Central Bank (ECB) on the “social and private costs of retail payment instruments”. Since cash is currently the most widely used payment method in the EU it’s not surprising that cash in some instances has the lowest per-transaction costs.

But when we took a closer look at this report we found something really interesting: for comparable levels of usage, the unit cost of card payments are substantially lower than the unit cost of cash payments. And they fall more rapidly as usage increases. Therefore, electronic commerce (credit, debit or prepaid) benefits from greater economies of scale than cash.

In fact, cash is rather expensive – because many of the costs of the cash system vary with the total value of transactions (e.g. the cost of distributing and collecting cash increases the more cash is involved) while the cost of card-based payments are largely unaffected by the number of payments made or by the value of purchases.

The fact that cash is a costly payment instrument would be even more apparent if the cost to consumers were included – just think of all the time spent on looking for an ATM. Various studies suggest that these costs can be substantial (adding another 0.3% of GDP), and that they fall disproportionately on cash users.

Overall, this suggests that moving from cash to cashless could save society a lot of money.