Last week the Danish government proposed a set of measures to make it easier to do business in the country. One proposed measure is getting rid of the obligation of certain shops to accept cash as a means of payment. This would open the doors to a cash-free society if gas stations or restaurants would only accept card-based or mobile payments. The official reason is to reduce the huge cost of cash for the Danish economy… maybe there are also one or two side benefits that the Danish government does not want to talk about too explicitly (two key words: tax, possible negative interest rates). Personally, I think there’s a huge benefit if payment cards are widely accepted for all types of transactions as not having to carry cash just makes our lives so much easier. Would I want to lose the option to pay with cash when I want to? Hmm…. not entirely convinced.
Now, Denmark is already one of the countries in Europe with the highest number of card transaction per capita, so for many others there still a lot to gain just by moving up to the Danish levels.
As you can see in the above chart, Denmark rates very high in terms of number of transactions and also considerably high comparing the total amount of card transaction volumes to the country’s GDP. I always find it puzzling to look at these figures – why is it that Danes use their credit or debit card more than five times as often as Germans? One possible explanation is the culture: maybe Scandinavians are more open to new technologies and less conservative than some of the southern neighbors who prefer to stick to cash.
Another explanation could be on the supply side – card acceptance could be more wide-spread amongst merchants in some countries and therefore it could be easier for cardholder to make transactions. The truth is I don’t know the exact answer, but I did find the following interesting chart on the website of the French Competition Authority (Autorité de la Concurrence).
The numbers are somewhat outdated, but still they do tell a story. Countries with high card usage are those where the cost of accepting card payments is low (strictly speaking, the Interchange is what card acquirers and issuers pay to each other, but it does have a pretty direct influence on the level of merchant commissions). So maybe the biggest detriment to card usage in a country is not preferences of cardholders but the tactics of the financial institutions who try to keep price levels as high as possible and thus make merchants prefer good old cash.
What will happen next? About two months ago, the European Commission decided on a new interchange regulation which will eventually bring the cost of card payments in all of Europe down to levels similar to Denmark. So the good news is that we should all see increasing levels of card acceptance over the coming years as it becomes cheaper for merchants to accept card payments.
In the short-term this will be an expensive adjustment for banks in countries like Germany or Austria as the annual profit contribution per card will go down by several Euros in absolute terms. However, in the medium to long term there’s also a huge opportunity to increase the size of the pie and eventually have a market bigger than today. But card issuers will need to adjust and build the right capabilities to efficiently handle larger volumes of smaller transactions. Issuers will also need to educate cardholders to change their behavior at the point of sale.
With the increasing transaction volume and more sophisticated data analytics, there will also be potential to find new streams of income, e.g. through loyalty management or new forms of merchant partnerships. And, last but not least, mobile payments might finally take off…