Comment on Ferrari / Verboven / Degryse Malte Krueger Conference „Economics of Payment Systems“

1. Comment on Ferrari / Verboven / Degryse Malte Krueger Conference „Economics of Payment Systems“ Paris, October 25, 2007

2. Krueger: Comment on Ferrari / Verboven / Degryse Topic and data Looking at the shared no-fee Belgium ATM system. Focus on the cost saving motive Data provided by Banksys (the central processor of the system) - ATM withdrawals at shared ATMs - Value value per cash withdrawal - Number of shared ATMs In addition - Number of branches per bank per market - Population, surface and a number of population characteristics Per ‚market‘

3. Krueger: Comment on Ferrari / Verboven / Degryse Investment and demand Banks investment: Invest until (CB – CA)dQA < F ‘Install ATMs until the costs savings of the next ATM would be less than the fixed costs of installing this ATM.’ From a social point of view, this is suboptimal because banks do not take consumer surplus into account. Demand: Demand is a function of the number of ATMs and fees. Specified as : Intrinsic utility of withdrawing cash at ATMs and branches minus the typical shoe leather costs

4. Krueger: Comment on Ferrari / Verboven / Degryse Investment (1) Modeled as choice between branch and ‘open’ ATM (Banksys ATM). But banks also deployed ‘limited’ ATMs. So, there were three alternatives: - Branch - Limited ATM - Open ATM The increasing numberof limited ATMs shouldeffect usage of openATMs. Source: Blue Book, various issues

5. Krueger: Comment on Ferrari / Verboven / Degryse Investment (2) Transactions at open and limited ATMs Source: Blue Book, various issues, Banksys, Annual Report, various issues, own calculations

6. Krueger: Comment on Ferrari / Verboven / Degryse Investment (3) Banks investment: Invest until (CB – CA)dQA < F ATM: Variable and fixed costs Branch: variable costs – but no fixed costs We saw: declining branch network. So, banks managed to reduce fixed costs of branching. If fixed costs are included, we get a comparison of total costs: TCB – TCA <=> 0 ? In fact, given the high costs of branch withdrawals this may lead to reduction of branch withdrawal points to zero. Why don’t we observe this? One possible explanation: Banks do take consumer surplus into account.

7. Krueger: Comment on Ferrari / Verboven / Degryse Investment (4) Banksys ATMs: Each bank pays for its ATMs (fixed + variable costs) Each bank receives a cost-based interchange. Consequence: For each bank, an open ATM installed in its branch costs little because it earns interchange. For each bank, an ATM installed somewhere else costs interchange (variable cost). Will joint decision making lead to a rule like: Invest until (CB – CA)dQA < F

8. Krueger: Comment on Ferrari / Verboven / Degryse The total demand for cash withdrawals The data set only includes tx at open ATMs. Data on limited ATMs are not used. Branch withdrawals are unknown. So, the authors make the assumption that the total volume is constant. Since POS volumes strongly increased inthe period analysed it wwould seem plausible to assume falling volumes. Source: Blue Book, various issues

9. Krueger: Comment on Ferrari / Verboven / Degryse The social optimum • Why can a social optimum not be achieved via fees only? • ‘Social’ has to be interpreted in a very limited sense: • Looking only at cash – substitution cash-cards not included. • Looking only at payments – feedback in deposit markets not included.

10. Krueger: Comment on Ferrari / Verboven / Degryse A proposal for our profession Please include in any paper: Warning: The Surgeon General Has Determined that Optimal Solutions May be Dangerous to the Health of the Economy.

11. Krueger: Comment on Ferrari / Verboven / Degryse Thank you! Malte Krueger PaySys Consultancy GmbHIm Uhrig 7D-60433 Frankfurt am MainTel.: +49 69 95 11 77 -12E-Mail: mkrueger@paysys.deURL: www.paysys.de Universität Karlsruhe (TH) IWW, Sektion Geld und Währung Postfach 69 80 D-76128 Karlsruhe Tel.: +49 721 608-6329 E-Mail: krueger@iww.uni-karlsruhe.de URL: http://www.iww.uni-karlsruhe.de/ PaySys is German member of the Euro-pean Payments Consulting Association

12. Krueger: Comment on Ferrari / Verboven / Degryse y Data set: ATM withdrawals at shared ATMs Value value per cash withdrawal Number of shared ATMs Number of branches per bank per market Population Surface Number of enterprises Fraction of foreigners in the population Fraction of population under 18 Fraction of population over 65 Unemployment rate Flanders indicator Limited ATMs not included? Foreign visitors would be more interesting Proxy for income or other? What about POS transactions? Effect on the total demand for cash withdrawals?

13. Krueger: Comment on Ferrari / Verboven / Degryse Changes in the Belgium Payment Landscape Changes in the Belgium Payment Landscape: Source: Blue Book, various issues

14. Krueger: Comment on Ferrari / Verboven / Degryse y Banks investment: Invest until (CB – CA)dQA < F ‘Install ATMs until the costs savings of the next ATM would be less than the fixed costs of installing this ATM.’ Why no fixed costs of branch withdrawal included? Assuming that the amount of tellers is constant? Properly stated we should have(TCB – TCA)dQA < 0 This may well hold up to QA = Q In this case the questions arises why do banks not shut tellers down? The obvious answer is that they do take customer valuations into account.

15. Krueger: Comment on Ferrari / Verboven / Degryse y Data set: ATM withdrawals at shared ATMs Value value per cash withdrawal Number of shared ATMs Number of branches per bank per market Population Surface Number of enterprises Fraction of foreigners in the population Fraction of population under 18 Fraction of population over 65 Unemployment rate Flanders indicator Limited ATMs not included? Proxy for income or other? What about POS transactions? Effect on the total demand for cash withdrawals?