Marginal costs are usually difficult to compute, but can be approximated by estimates of variable costs. Data on variable costs and prices would in that case have been sufficient for the purpose of our study. There are, however, economies of scale in the production of payment services. Under these circumstances, it is consistent with efficient pricing to use a two-part tariff structure - transaction fees that cover variable costs and fixed fees that cover fixed costs. Thus we collected data on both fixed and variable fees and costs. However, in the comparison between prices and costs, we focused on the variable part. After having paid a certain annual fee for the provision of a bank account, Internet services, or a payment card, transaction fees are the fees most likely to affect the users’ day-to-day choice of payment instrument. We also collected data on transaction volumes for the different payment instruments. We used the banks’ transaction volumes as weights to compute costs and prices of a hypothetical average bank. As regards the relative cost efficiency of the different payment instruments, our cost estimates gave the expected results. Variable costs appear to decline as the degree of payment automation increases. Variable costs for electronic credit transfers are lower than for paper-based credit transfers. Transfers initiated at the bank branch-office are the most expensive to produce. A comparison of the relative cost efficiency of payment instruments used in transactions at the point of sale shows that debit card transactions have the lowest costs for the issuing bank.
If you plot the share of electronic payments for a number of countries against the share of cash to GDP you get a broad measure of the cost efficiency of the different payment systems. The further to the northwest corner of such a diagram, the more automated the payment system is. According to these measures, the Swedish payment market seems to be performing very well, as are the payment markets in the other Nordic countries. Swedes, however, seem to be using more cash than other Nordic countries. The Swedish M0/GDP ratio lies 1-2 per centage points higher than the other Nordic countries. As cash and card payments are close substitutes - in fact the only alternatives available for transactions at the point of sale2 - we would expect that the more widespread use of cash in Sweden would be reflected in a lower use of card payments. Payments data support this. Swedes use more cash and make fewer card payments per capita than other Nordic citizens. Why do we observe these differences in the use of cash and the use of card payments in countries that otherwise have very similar payment systems? What variables influence the users’ choice of payment instruments? Given that users’ choice is sensitive to prices, the price that consumers face for the use of different payment instruments is one such important variable. Indeed, there is a growing body of evidence that the choice of payment instrument is influenced by pricing.